Tempur Sealy International Inc (TPX) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tempur Sealy second-quarter 2016 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to your host for today, Barry Hytinen, Chief Financial Officer. You may begin.

Thanks, Sonja. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters is Scott Thompson, Chairman, President and CEO. 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 forward-looking statements, including the Company's expectations regarding sales, earnings, adjusted EBITDA, or net income, and anticipated performance for 2016 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, the annual report on Form 10-K and the Company's quarterly reports on 10-Q under the headings special note regarding forward-looking statements and/or risk factors, as well as the Company's press releases.

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 include non-GAAP financial measures. The press release contains reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures as well as information regarding the methodology used for constant currency presentation.

We have posted the press release on the Company's website at 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 is my pleasure to turn the call over to Scott.

Thank you, Barry.

In the second quarter net sales increased 5.2%, adjusted EBITDA increased 38%, and adjusted EPS increased 74%. This is Temper Sealy's best second quarter in the Company's history for sales, adjusted EBITDA and adjusted EPS.

Additionally, our use of capital continued to improve. Our return on invested capital over the last 12 months on a GAAP basis improved to 16.4% and on an adjusted basis 18.3%. Our focused execution has driven this improvement through a combination of increased revenues and cost reductions while holding invested capital essentially flat. I think it's noteworthy the team achieved this in a worldwide economy that I would describe is just okay. I'm personally very pleased with the strong performance by the entire worldwide team as they focused on what matters and passionately attacked a broad array of issues and opportunities.

The quality of earnings is very high, with strong conversion to cash and no unusual adjustments. Despite this initial progress, I can comfortably say, we all feel we can do more and we are engaged in the areas that are underperforming. The organization continues to focus on our key initiatives.

Let me highlight just a few of our initiatives. First, our ability to develop the best bedding products in all the markets we serve. In the first quarter we launched the new TEMPUR-Breeze in the Stearns & Foster product line in North America -- the new Stearns & Foster line, including 19 models, with an average retail price that's up significantly over the old line.

Both the new TEMPUR-Breeze and Stearns & Foster product line are driving traffic into our retailer stores by targeting specific needs that are resonating with consumers. For those who sleep hot we offer new and improved cooling technology with the TEMPUR-Breeze. For those seeking high-quality innerspring mattresses we offer the craftsmanship of Stearns & Foster. These products are being supported by creative and impactful marketing.

Internationally, where we roughly get 25% of our EBITDA, the TEMPUR-Hybrid is being launched, and has been performing above our expectations. I should foreshadow that the international team has a full plate of launches over the next 18 months and I'm looking forward to updating you on those products as they hit the market.

The second initiative I'd like to highlight, our ability to expand North American margins without sacrificing market share. North American adjusted operating margin improved a robust 430 basis points as compared to the second quarter last year, the third consecutive quarterly increase.

During the quarter we benefited from operational improvements, price increases, positive merchandising mix and operating leverage on SG&A, expanding margins even as we continue to invest in marketing and advertising as well as new products and innovation. Both the Tempur and Sealy brands drove price and mix benefits, with Stearns & Foster performing exceptionally well. Stearns & Foster is comping positive over last year at a higher price point and it is not completely rolled out to all customers.

As many of you know, we've been focused on gaining efficiencies from our Sealy assembly plants, and this quarter we are pleased to report we made another step forward in what we call four-wall margin. This is a measure that takes out the impact of commodity changes and focuses on what is controllable at the plant.

To quickly refresh, in the third quarter of 2015 we reported a 100 basis point decline in four-wall profitability. In the fourth quarter it was flat. In the first quarter of this year we reported a 100 basis point improvement. and I'm pleased to report that we realized a 200 basis point improvement this quarter. There's still a lot of work to do and opportunity to go after but I think you can clearly see we are on the right track.

Another key initiative I would like to highlight is grow market share internationally. Our international business net sales increased 7.6% on a constant currency basis, slightly below our expectation but understandable considering the global events and markets.

These are truly interesting times we live. The world is full of change for sure -- Brexit, the recent tragic events in France and Germany being just a few examples of the challenges our international team has had to deal with in the last three months. High-performance companies learn to accept change and rapidly adapt.

We expect to continue to grow our international sales despite these uncontrollable issues by focusing on new product innovation, expanded distribution, and compelling marketing programs. I'm proud of the progress the entire team has made on all of our initiatives to service our customers, drive innovation and expand profitability.

People from many different areas of the Company have worked together to deliver this quarter. This continues to be a journey that the team is passionate about and I feel fortunate to lead.

Before turning the call over to Barry I would like to make a few comments about our share repurchase program. We continue to believe the best way to deploy excess capital is to give it back to the shareholders in the form of share repurchase activity. As we said in February, we see this as a long-term strategy that is consistent with the outstanding earnings and cash flow attributes of our business. Thus, today we announced that our Board of Directors has again authorized another $200 million share repurchase.

Barry, will you please give the details of the financials for the quarter?

Thanks, Scott.

Net sales for the second quarter were $804 million, up 5.2% versus the second quarter last year, and on a constant currency basis they were up 6.6%. Adjusted gross margin improved 250 basis points to 41.9% and adjusted operating margin improved 340 basis points to 12.6%.

On a segment basis, North America net sales increased 6% and were up 6.4% in constant currency. Both the Tempur and Sealy US businesses grew mid single digits. Sales in Canada's were strong, increasing 15% on a constant currency basis and high single digits at reported rates.

North America bedding product sales increased 5.2% and 6% at constant currency. Bedding units were up 2% in total. However, excluding floor models, they were up 3% as our launches last year had more floor model units.

Sales growth was driven by higher demand for our Tempur products, particularly our new Breeze mattresses. Our Sealy Posturepedic and new Stearns & Foster products were also key drivers of growth.

National accounts were below fleet performance. While that was a headwind to our revenue it was a tailwind to our gross margin. Year over year average selling price was positively impacted by pricing actions taken earlier this year and positive merchandising mix for both Tempur-Pedic and our Sealy brand products.

Our North American other channel grew 70% in the quarter. This channel is predominantly made up of our hospitality and high-margin Tempur direct-to-consumer business. As I look at our results, a personal highlight for me is that our internet sales increased over 40% as compared to the second quarter last year.

Other product sales were up 25%, primarily driven by our joint venture, and offset by lower sales of Tempur-Pedic pillows. The decline in pillows' sales is an area that the team is looking at very closely and may have some upside in 2017.

I would like to briefly mention our new Cocoon by Sealy product line which was not material to sales but has been ramping. As the global bedding leader we're always trying to leverage our assets, so I am pleased that we're launching Cocoon into a couple of European markets in the third quarter with more to follow.

In North America, Cocoon was about a $1.5 million drag on EBITDA in the second quarter, which was consistent with our plans. We feel confident that our product is by far the best in its class, and we continue to learn and fine tune our approach.

We view Bed in a Box online as a niche market in a relatively small segment of the broader bedding industry, with some companies overspending on customer acquisition cost. With the global trend to higher quality bedding, the vast majority of consumers continue to prefer testing beds in store and buying from retailers. We have positioned our Company to be able to effectively respond if this is the way consumers want to purchase beds in the future.

North American adjusted gross margin improved 340 basis points to 40%. Both Tempur and Sealy improved and were primarily driven by operational efficiencies, pricing actions and product mix. This was slightly offset by increased launch costs associated with new products.

Sealy US gross margins improved a little over 200 basis points, primarily driven by the four-wall improvement. As new products continue to roll out through the back half of the year, we will have some additional launch costs of approximately $5 million to $10 million incremental to last year to complete our North American rollouts. But all of this will set us up very well for 2017.

North America adjusted operating margin improved a robust 430 basis points to 15.5%, driven by the improvement in gross margin and operating expense leverage. Operating expenses were up about $300 million year over year, primarily due to new product launch costs.

Turning to international, net sales increased 1.6%, and on a constant currency basis they were up 7.6%. Bedding product sales increased 1.9% and on a constant currency basis increased 9.4%. Units increased 2%.

Net sales increased as a result of growth across all of our major regions, with particular strength from our TEMPUR-Hybrid launch, direct sales in Asia, and Sealy branded sales in Latin America. This was partially offset by unfavorable foreign exchange rates, particularly in Latin America. While we don't normally break out this level of detail, given global attention to Brexit I would like to note that the UK is only about 2% of sales and so far it is holding up well.

Other channel sales were up 16.5% on a constant currency basis, driven by strong internet sales and positive double-digit comps in our Company-owned stores. International adjusted gross margin decreased 120 basis points to 51.1% compared to the prior year 52.3%.

Our gross margin decline was driven by costs associated with new product launches and product mix. Offsetting these factors, we continue to see benefit from those incremental sales through the more profitable direct distribution channels.

International adjusted operating margin decreased 110 basis points to 17%, driven by adjusted gross margin. Operating expenses were flat year on year.

Consolidated unadjusted EBITDA was $124 million, up $47 million or 62% from last year. Consolidated adjusted EBITDA was $125 million, up $34 million or 38%. Adjusted EBITDA growth was driven by operational improvements, increased sales, and pricing. These were partially offset by launch associated costs, foreign exchange, and variable compensation.

Adjustments to EBITDA decreased to $1 million from $14 million in the same quarter last year. In the second quarter we recorded a one-time $47 million loss on extinguishment of a debt associated with the completion of our new credit facility and senior notes offering. The loss included $23.6 million premium associated with the prepayment of the 2020 bond, $15.8 million non-cash write off of deferred financing costs, and $7.8 million of lender fees. As you recall these transactions greatly improved our capital structure and flexibility.

GAAP operating income, including debt extinguishment costs, increased for the third consecutive quarter. Without these costs GAAP earnings were robust. GAAP earnings per share were $0.35, up from $0.34 in the second quarter of 2015.

Adjusted EPS, a much better measure of our operating performance, were $0.92, up from $0.53 last year or a 74% increase. We realized about $0.03 of benefit from our share repurchases so far this year. For the 12 months ending June 30, 2016, our adjusted EBITDA was $504 million, an increase of $87 million or 21% over the same period last year.

Now moving on to the balance sheet and cash flow items, at the end of the second quarter net debt was $1.6 billion. Our leverage ratio on a trailing 12-month basis was 3.2 times as the end of the second quarter, stable with the level at the end of the prior quarter even after big launch costs and share repurchase. Again, highlighting the Company in the industry with great cash flow attributes. This is down from 3.8 times in the same period last year.

As you know, we have established a target leverage ratio of approximately 3.5 times, and will continue to monitor our leverage. Operating cash flow in the second quarter was $71 million versus $8 million in the second quarter last year, driven by EBITDA growth and improved cash cycle.

As previously reported, we had a lot of capital structure activity. We replaced our senior credit facility, we issued $600 million of 10-year senior notes, and called our notes that were due in 2020. These transactions significantly extended the maturities of our long-term debt, lowered our interest costs, mitigated exposure to increases in future interest rates, and increased our flexibility to return capital to shareholders. Overall, we clearly reduced enterprise risk and feel great about our balance sheet.

During the second quarter the Company repurchased approximately 2.1 million shares for a total cost of approximately $122 million. We ended the quarter with 59.7 million shares outstanding after giving effect to dilution. In July, through yesterday, we have bought about 600,000 shares for a total cost of approximately $4 million.

After giving effect for the additional authorization that Scott mentioned, we have $344 million available for future share repurchases. After quarter end in July, our 8% PIC notes matured, which we funded primarily through a delay draw on our term loan in the new credit facility. This resulted, based on today's interest rate, in an additional $6 million in annual interest savings.

I would like to provide a brief update on the situation with the Danish tax authority. We continue to work through our negotiations with all parties. We anticipate making a payment in the third quarter consistent with our reserve position. We feel we have fully accounted for the exposure based on what we know at this point and expect to have more information on this issue on the next earnings call.

Now, turning to our financial guidance, today we are raising the low end of our adjusted EBITDA guidance from $500 million to $525 million, and maintaining the high end at $550 million. The midpoint of the new range of EBITDA guidance, which increased from $525 million to $538 million, represents an increase of $82 million or 18% versus prior year.

We expect to experience some sales headwinds from a noisy US election cycle, continued uncontrollable events internationally, and some unfavorable FX. This, combined with our first-half sales performance, of 1.4% net sales growth, we anticipate low single-digit growth for the full year.

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

Thank you, Barry. Great job.

While the quarterly financial numbers were solid, delivering several financial records for the second quarter, I also want to highlight the improvements in several non-financial internal metrics.

Operational -- the Sealy US assembly group had the lowest staff turnover in the last two years. It was a record quarter for plant safety, something I feel very strongly about. And we set a record for on time deliveries to our retailers, something we're all very proud of.

From a corporate standpoint, the corporate turnover has been cut in half. Another important observation is that, although we certainly are proud of the progress that we are reporting today, there's still areas in the Company that are clearly underperforming. Three that come to mind include national accounts, Germany, and pillows. The team has already developed plans to re-energize these areas.

Lastly, I get asked about our 2017 aspirational plan in almost every investor meeting. I'm not going to give 2017 guidance in 2016 no matter how many times you ask me. But I can say, the team is working hard on what we control or influence, and what is out of our control currently looks very manageable. I can also say that I feel better today about our ability to achieve the aspirational target than I have at any time since joining the Company.

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

(Operator Instructions)

John Baugh, Stifel.

Thank you. Good morning. Congratulations on a nice quarter. A couple of things quickly. Could you roughly break out what the like-for-like product pricing influenced Q2 revenues, update us on what ad spend was in Q2 and the plan for 2016. And then per the $650 million, any update on accruing any of that, when, and why would you begin doing that? Thank you.

You take the first part and I'll take the accruing.

Sure. Pricing, John, was very strong. We had about, call it, $10 million of benefit at EBITDA. And the way I would think about that is that, sequentially that was more benefit than we had in the first quarter.

As you know, we took some pricing on Tempur and Sealy in the first quarter. On the Tempur side that started rolling in, in January, and the little bit that we took on Sealy started in March. So, we had the full benefit of that in the second quarter and will have that benefit likely through the balance of the year and into 2017, at least just for those price increases. See what we do go forward.

And as it relates to advertising, it was essentially -- I think you're asking about the direct advertising. The way to think about the direct advertising, it was essentially flat on a dollar basis year on year.

Great. And on the accrual of the aspirational plan -- now, I'm going to give the layman version and so I might not be perfect on this -- but the way I understand it, and I did have a face-to-face with the auditors to make sure I understood the accounting, is the threshold for accrual is that it has to be probable. Improbable, in their terminology, as I work through that, sounds like it has to be like a 75% kind of probable.

So, what I would tell you is that the bar is pretty high before there would be any accrual. And I can't tell you exactly when that would be, but it would be -- it seems to me like it's probably be a 2017 kind of item when the threshold is probable. That's my best guess but it's a judgment call at the time.

Thanks. I will defer to others. Good luck.

Jessica Mace, Nomura Securities.

Hi, good morning, and congratulations on the quarter. My question is about North American market share. I was wondering if you could give any color about how you think your North America sales increased compared to the general market.

Sure. As you probably know, the information is not precise, so I'm going to give you my general feel. I think, from what we can tell, if you go back to the first quarter, now that we've been able to look at all the data for people who report after us and the information we get after our earnings call, I think we feel very confident that we took market share in North America in the first quarter.

We don't have a lot of data yet on the second quarter but my perception, from talking to retailers, that the numbers we reported today, that we probably clearly took market share in the second quarter. I will take you that, that we always like market share and we always like revenues, but the way we look at it is the strength of the products and the advertising will drive market share as opposed to from a pricing standpoint going after share.

Great. Thanks very much.

Mark Rupe, Longbow Research.

Hi, guys, great quarter. Scott, you had called out three items of areas of weakness in the core national accounts and Germany and pillows. But Germany, I know, has been under pressure for a few years, and national accounts at least for the second quarter in a row. Is there any new developments there that cause you to be concerned?

No. I wouldn't say there any new developments that cause me concern. I think what I was pointing out is sometimes you report a quarter and you look at it and you say -- gee's we hit on all eight cylinders, and we're peak earnings or something. I think what I wanted to make sure I pointed out clearly on the call is there are some pretty major buckets that are within the companies that are still underperforming.

Now, we've got action plans around those items and we are optimistic that in 2017 we'll begin to have good news. But there's nothing new that I would say in those particular buckets. You're right, they been underperforming for a few quarters.

Perfect. Thank you.

(Operator Instructions)

Curtis Nagle, Bank of America Merrill Lynch.

Thanks very much for taking the call. Just if you guys could, I'd be very curious to hear your thoughts in terms of where you guys see the best opportunities in terms of expanding your retail footprint and where that stands now after three quarters under the new management team.

I think you're talking about our direct stores kind of retail footprint. Clearly, overseas, where some of the retail infrastructure is not as well developed as in the US, we are expanding stores. What is that, Barry, a couple hundred, give or take?

Yes.

Give or take a couple hundred stores internationally. And I expect that we will grow those short of double digits, but will continue a very consistent program of growth internationally.

I should point out that those stores are comping close to double digit -- or double digit?

Double digit.

So, internationally, the stores we open comping double digit. As you might guess, the return there is very good when you go direct and comp double digit. But we're in those markets because the retail infrastructure is either not developed or there are barriers to entry for us from a product standpoint.

If you are coming back over to North America, we've got three, four stores. I will open up a few stores. And when I mean a few, I'm talking about two or three stores, maybe a year, is the plan. And that's really just to keep us close to the customer. They're kind of an advertising asset. We make good money in the stores and they are comping very well, but, quite frankly, our retail partners are doing a great job and we just need a few stores so that we are close to the customers.

We also, as I think we've talked about numerous times, is that we are investing a little bit more in the Tempur webpage, and we're doing some more direct sales. I think Barry mentioned web sales were up 42%, and a lot of that, in fact most of that, is really growth in Tempur as opposed to the Cocoon, which we are still learning. And as we've mentioned before, we continue to see that as more of a niche market. Hopefully that helps.

It does. Thanks very much. And then just a quick housekeeping question. It looks like inventory was up a little bit so I'm assuming that is built into the next quarters. But maybe just a little more detail in terms of where you're seeing some build across products in the two segments.

What I would tell you, Curt, is from a cash cycle basis, year on year, it's actually improvement in days. So, if you're looking at it on a dollar basis, it's up; but on a cash cycle basis, it's actually improvement. If you're looking at it from year end, then normally seasonally we're up because with launches and with the seasonal cadence of sales.

Yes. And I would tell you, in this industry I think there's minimal in inventory.

Okay. That's great. Thanks very much.

(Operator Instructions)

Keith Hughes, SunTrust.

Thank you. We're working off rough numbers here but it looks like the Tempur-Pedic business put out one of the best gross margins we've seen, well in excess of 50%, four or five years. You've highlighted generally some things that have helped margins out in the quarter. But specific to that, what were the biggest drivers for such a good result?

Let me frame some of that for you. First of all, I would say that Tempur margins are near record. I would also point out, though, that the Sealy margins are 400 basis points off historical numbers. So, to put things in historical perspective, the Tempur plants are running close to a record, and Sealy is still running 400 basis points behind what would be their historical peak margin from an opportunity standpoint.

On the Tempur side some of that is volume. And obviously we're happy about the volume and the people in the plant have been doing a very good job. I also tell you -- and, Barry, you can correct me because I don't think we've talked about this specifically -- but from everything I've seen in the Tempur area, that I don't think we think we are at peak margins in the Tempur plant. Although right now we're having record ones, we do think there some more upside in the Tempur margins.

Thank you.

Keith, I would just add that we've seen benefit, obviously, from pricing. We've seen the operational improvements that Scott mentioned. And we're seeing continued improvement from product mix and brand mix within Tempur. The Breeze has been improvement.

So, there's a lot of opportunity within Tempur. But, to Scott's point, there's a lot of opportunity within our Sealy business just from operational improvements, but also within mix. We talked a lot about the fact that our Stearns & Foster collection, last year we needed to turn that business around and we're seeing just really great performance from Stearns & Foster. Those accounts that have taken it on the floor, it's comping really well, and that helps both their margins and ours.

And probably to put that in perspective, what are we? -- about 75% rolled out in Stearns & Foster?

That was the largest portion of the back half incremental launches that we expect. So, there's more to go there.

And just a clarification on your earlier answer. You talked about your internet sales being up 40%. The majority of that increase is Tempur-Pedic sales, is that correct?

That's correct, Keith, yes.

Those a very high-margin sales, I would assume, right?

They are.

That's right.

Seth Basham, Wedbush.

Thanks a lot and good morning. Can you give us a little more insight on to Sealy North American revenue growth breakdown between price versus units? And as a follow-up to that, if you talk about some of the areas of weakness and what you are doing to address those.

Both Tempur and Sealy had positive units. Tempur was actually a little bit stronger on a unit performance. But, as you know, Seth, Sealy units are a much larger percent, so even with them just slightly below in total, I feel was good unit performance, especially as compared to the market. And pricing was firmer, so there was benefit on positive price.

As we said on the prepared remarks, both Tempur and Sealy were up mid single digits in aggregate. And it was positive for price and mix for Sealy, since you're asking that, and positive price and mix for Tempur.

And I think you asked to expand on the areas that were underperforming and some actions around them. The three I called out were national accounts, Germany, and pillows.

If you look at national accounts, we're working with each of the national accounts, the sales teams, working with them individually. And I think that's going to be fruitful.

If you're talking about Germany, that was a complete redo of our distribution strategy in Germany. It's taken us about six months to roll that out and we're going to see the results of that, really, we're not going to see the real results of that until you get to the fourth quarter of this year and starting the first quarter of next year. But that plan is well along from an execution standpoint.

From a pillows standpoint there is a lot of R&D activity on our product. And we are relooking at our pricing strategy and our marketing strategy throughout the pillow industry. And we are working very closely with some large retailers to make sure that we're going to service them in a way that they need to be serviced.

Got you, that's helpful. But I was referring to Sealy, and just the Sealy lines area of weakness with Optimum was soft in the quarter.

You want to go into the detail of Sealy, Stearns & Foster, as we said, robust. Posturepedic, very strong. Optimum, we continue to see some weakness in that product. That product has got some age on it. As I think you know, it's been in the marketplace for quite a while. And until we get the new Optimum out we would expect to see some deterioration in the Optimum sales, although they are not material to the overall Sealy revenues.

Thank you very much.

(Operator Instructions)

Peter Keith, Piper Jaffray.

Hi, guys, thanks, good morning, good results. I was wondering if you guys could just give us directionally the trend through the quarter, particularly because it sounded like April started so strong. It seems like there's been some mixed signals out of the retail environment, maybe some peakish sales around the holiday, so, the general trend.

And then, as a follow-up, could you help us understand how TEMPUR-Flex is now performing in its second year since you've lapped that rollout? Thank you.

In general, I'm not crazy about giving monthly sales numbers but I do need to reconcile because we gave some of them in the second quarter. In the second quarter, as I remember, we were flat in the first quarter from a revenue standpoint. So, we did call out the second quarter started strong.

I thought that was important because it was such a big trend change from what we were reporting. So, you are correct, the first part of the quarter started out strong and then what I would say is, it leveled off some.

I think, as we talked about in the first quarter when there were some concerns about sales being flat, we thought there were some inventory build or some sellout of inventory in the first quarter and we probably benefited a little bit on inventory build in April. But I'd say after an initial very robust start in April it leveled out from a positive standpoint.

Budd Bugatch, Raymond James

Hi, guys. This is Bobby filling in for Budd. Congrats on a good quarter and thanks for taking my questions. Quickly, on the Sealy plants, are you seeing the improvement broad-based across all the plants -- as in, is the top-performing plants improving as well as the bottom-performing plants?

Yes. But having said that, like always, when you have a large number of units, you're trying to bring the bottom up more. But I would say, yes, the plants that have been performing well continue to do better, but where the real opportunity is, is in what I will call the bottom quartile.

Okay, I appreciate that detail. And then real quickly, Barry, can you maybe just update us on your view on raw materials for the back half of the year?

Yes, sure, Bobby. It is fairly consistent with what we thought for the full year at the beginning of the year. We thought that the full year we'd see roughly, I think we said about a $20 million tailwind for commodities for the full year and through the first half we're right on track with that expectation.

Incidentally, we also said that we thought we would see about a head wind of $10 million from FX and we're probably running a little bit more than that. In the first quarter was saw on FX about a $2 million head wind for EBITDA on FX. And we saw about a $4 million head wind, a little bit more than that, to EBITDA from FX in the second quarter. And in light of where rates are it's probably a little bit beyond that. That's all embedded in the updated guidance.

I appreciate the detail. And best of luck going forward.

Bradley Thomas, KeyBanc Capital Markets.

Thanks. Good morning, Scott and Barry. And let me add my congratulations, as well, on a great quarter here. I wanted to ask about the outlook for North America revenue in the second half of the year. And if you could just give us a little bit more color on your underlying assumptions for the outlook.

And then just a quick follow-up on that strong internet performance, maybe anything that you think may be driving that or new steps or initiatives that you have in place to take advantage of opportunities in that channel. Thank you.

Sure. Let me take a stab at it and then Barry will fix it after I talk. When we talk about detailed revenue forecast for the back half of the year, probably not going to go too granular on that. I would tell you that North America feels pretty good. It doesn't feel great.

As I've talked about it over the last really six months it's really the same story. It feels good, then it feels weak, then it feels good, then it feels weak. I think that's just the reflection of a sputtering economy that may have a GDP of 1.5% to 2%. So, that's what we continue to expect, and we may be a little conservative.

We are nervous, I guess is the word, about what we think is going to be a noisy election cycle in North America and with the Olympics. And it's been, at least my experience, that kind of noise can crowd out your message. That's a call out. That's really the only thing we're seeing in North America that I would say we are concerned about.

You asked specifically about the internet sales. I always hesitate to give growth percentages because it is a smaller base. We're not a dot-com company trying to raise capital so I don't like to quote off of numbers that really aren't going to be material to the overall consolidated numbers. But I did want to point out that it is growing, and it is growing specifically because of initiatives that we've taken, both investments in technology and changes in our marketing program in that area. And the team is doing a very good job.

Carla Casella, JPMorgan.

Hello, this is Mei on for Carla. A quick question about the Fourth of July. Typically it's an important promotional season for bedding. So, can you give us some insight into how you were positioned for this holiday versus last year, and if any of that benefited Q2?

Sure. Hi, Mae. Thanks for the question. I would say that from a promotional standpoint we were fairly consistent, even a little bit less promotional. The industry has been, I'd say, fairly stable to less promotional over the last several years, and has generally been a little less promotional. Not that there aren't promotions. Obviously, there are always consumer promotions to drive traffic, but I think as an industry it has been a little bit less so.

I think I'd just add on a little bit from that point that Barry is making, from a strategy standpoint we will be promotional at times and will certainly compete in the marketplace. But I don't see any reason to be overly promotional because, again, there's not a share grab strategy here. It really is a disciplined strategy to get our proper share that our products should get in the marketplace based on their quality and the advertising, and drive cash flow.

(Operator Instructions)

William Reuter, Bank of America Merrill Lynch.

Good morning, guys. I just have a question in terms of whether you guys see any acquisition targets. Obviously, you have your Cocoon product but I didn't now whether there could be any bed-in-a-box competitors that would ever be someone who you would consider buying. That's it, thanks.

You never say never so I always start with that. Two, we aren't supposed to comment on any future acquisition activity or the lawyers send me a nasty gram afterwards. But, having said those two things, I'll still talk about it.

Look, we got return on invested capital of 18%. I don't know what we would be buying if we were buying an internet company that has a webpage. So, I would say that I think we've got plenty of assets, we've got plenty of brand quality, and I don't think we need any help in that area.

Karru Martinson, Jefferies.

Good morning. You guys have gotten some great traction with Stearns & Foster in the higher price points. When you look at those entry levels and midpoints outside of Optimum, where are you seeing that market going? Are you seeing the same robustness there? And how does that factor into the guidance you've given for the year?

You're right. Look, we've moved the Stearns & Foster product line up. And, quite frankly, we've got some of it that is bumping into some of the Tempur market. So, to be fair and balanced, there's probably a little bit of cannibalization, that we are also cannibalizing ourselves with the Stearns product with some Tempur products. So, we've got a little cannibalization there.

If you go down the price grid, for lack of a better way of saying it, I think we're doing okay there. But I think we've got some issues there that we need to work through, and I think that's really more of a 2017 discussion. In the current market, Posturepedic is performing very well. But I do think there's some more opportunity there that we're not capturing. But that's going to be a 2017 issue.

Laura Champine, Roe Equity Research.

Good morning. I wanted to chat a little bit about the Sealy margins, which are obviously improving. You mentioned, Scott, that they are down 400 basis points from the historical peak. Can you give us more insight into what exactly drove that decline and what's driving the improvement? I know you mentioned that turnover is down and safety is up, but what is driving the improvement? And what happened to reduce profitability so much in that Sealy segment?

Staying pretty high level, one of it's going to be product mix, both as a historical, when you reconcile the historical margins to today and as part of the turnaround, product mix, merchandising mix. Certainly labor and the efficiency within the plant has been an issue. Scrap has certainly been an issue and we've improved on that.

And I think the other thing I should call out is global sourcing. Global sourcing, one of the advantages of the merger is we have been able to negotiate better global sourcing for our material. And I think materials are 75% of the bed, Barry? Give or take, so, it's a big COG. And we've done a reasonably good job in negotiating those contracts.

And that's ex commodities, when I talk about that, just to be clear. But I've also got to say I think there's more opportunity in global sourcing, and I don't think we're finished there. I don't think your inning -- pick your inning -- fourth inning, fifth inning of a nine-inning game, maybe. So, I think we will continue to do better there.

Carla Casella, JPMorgan.

Hi, this is Mei on again for Carla. Just a quick question about your other products category. It seemed very strong in 2Q both for North America and international. Was there a timing issue here or did you pull some sales forward from 3Q? And how should we think about that business for 3Q in the back half?

Mae, I mentioned on the first-quarter call that other products line in North America can be lumpy. That's our joint venture in North America. It was actually down quite a few million in the first quarter. But we said -- hey, look, it's lumpy, there's some timing there -- and that it would be up in the second quarter meaningfully; and obviously it was despite the Tempur-Pedic pillows that Scott mentioned as an opportunity that we are working on, and the team is focused on.

I would look at that as a first half kind of number. But in the second half we continue to see opportunity there but it's a lumpy kind of number.

Yes, I think the [crunch] there is hospitality, right?

On the other products line, it's mostly the JV. On the other channel, would be hospitality, Mae, that you were also asking about, on the other channel line that was up 70%. And that's where the hospitality line is, as well as the internet sales and the direct-to-consumer. And that line, I would say, is a line that we are clearly very focused on and trying to ramp with our high-margin Tempur to consumer line of business, as well as hospitality where the team's been very focused on and we see a long-term secular opportunity to grow those lines of business.

Thank you. That does conclude our question-and-answer session. I would now like to turn the call back over to you, Scott Thompson, for any further remarks.

Thank you. To the 7,000-plus employees worldwide, thank you for what you do everyday 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 our call today. Thank you, operator.

Ladies and gentlemen thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.