Tempur Sealy International Inc (TPX) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tempur Sealy Second Quarter 2017 Earnings Conference Call.

(Operator Instructions).

I would now like to turn the call over to Barry Hytinen, CFO.

Please go ahead.

Thank you, operator.

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 these forward-looking statements, including the company's expectations regarding sales, earnings, net income and adjusted EBITDA and anticipated performance for 2017 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 headings Special Note [Regarding] Forward-looking Statements and/or Risk Factors.

Any forward-looking statements 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 most directly comparable GAAP measures, 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 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.

Good morning, and thank you for joining us on our 2017 second quarter earnings call.

Today, before taking you through some highlights of our second quarter, I want to step back for a minute and talk to you about the significant and positive transformation that is underway at Tempur Sealy.

Almost 2 years ago when I joined the company, I was attracted to Tempur Sealy because I saw numerous opportunities for a talented team to turn a good business into a great one and, of course, create significant shareholder value in the process.

Our most immediate task in this journey started with our improving manufacturing and operating performance, particularly at Sealy plants.

As you know from our reports over the past 1.5 years, the team has made major strides in improving manufacturing, logistics and worldwide corporate overhead.

These improvements have been evident in our reported operating margins.

For example, since third quarter of 2015, the Sealy four-wall manufacturing margin has improved over 300 basis points and our cash overhead expenses have been reduced by 10%.

As Barry will discuss later in his prepared remarks, the improvements in manufacturing and operations are continuing this year even though those achievements are obscured by the short-term operating deleverage associated with the Matt Firm termination.

As you know, Mattress Firm's volume represented over 20% of the company's sales last year.

But the long-term business strategy of the 2 companies simply did not align, and we respectfully went our separate ways.

We knew it would be a challenge to offset the loss of approximately 20% of our worldwide sales, but our belief was that, one; our brands are strong and highly desired by consumers; two, our numerous retail partners would seize the opportunity to lean into our brands and work with our talented sales force to capture the business Mattress Firm was giving up; and three, our own direct sales efforts could recapture a portion of the lost business.

Just like improving our manufacturing operations took some time, repositioning our distribution network will also take time.

But today, I am pleased to tell you that we're off to a promising start on this journey, and I believe that Tempur Sealy is setting the foundation to fully recover the lost earnings associated with Mattress Firm.

I'd like to take a few minutes to highlight what I believe are some of the key takeaways from the second quarter.

First, let's talk about sales performance in North America.

I think most of you will be more interested in comparisons without Mattress Firm being included in prior year period, so my comments on North American sales will be excluding Mattress Firm.

As a reminder, our business with Mattress Firm ended April 3. And for context, in the second quarter of last year, they represented 24% of our overall company sales and 29% of our North American sales.

This represents the high watermark of our concentration with Mattress Firm in 2016.

In the second half of 2016, the concentration decreases, with Mattress Firm sales representing 20% of company sales and 25% of North America sales.

Sales in North America, excluding Mattress Firm, grew by 10% in the second quarter.

This was slightly ahead of our expected sales growth, driven by many retailers doing an outstanding job representing our brands, combined with growth from our direct-to-customer initiative.

But what is most interesting was the difference in order trends in April compared to May and June.

Throughout the month of April and, to a lesser extent, in May, Mattress Firm conducted a large nationwide liquidation event of Tempur Sealy branded inventory, which included advertising, a 70% off clearance sale.

Other retailers could not match this advertising as it violated our guidelines.

The heavy advertising of our brands at clearance prices by Mattress Firm was unexpected because it also was in direct violation of our written termination agreement.

We believe that this liquidation activity had significant adverse impact on our performance in April.

This is the subject of litigation in federal court, so I therefore will not be making any more comments on this subject.

As this liquidation activity eased in May, we observed a significant improvement in the second quarter -- second half of the quarter, with orders in May and June growing 17%.

Orders for Tempur-Pedic brand products grew 29%, and Sealy branded products grew 10%.

These early green shoots could not have happened without, first and foremost, our sales force doing a great job supporting our world-class retail partners.

In addition, I was very pleased with our execution in the following areas: one, launching new products; two, optimizing our manufacturing and logistics; and three, improving our marketing efficiency and effectiveness.

Our early progress is partly due to many retailers deciding to lean into our brands.

They immediately recognized the significant opportunity for them presented by Mattress Firm termination.

And some of these first movers were rewarded with the strongest, highest ASP Tempur-Pedic sales in their history.

Based on our ongoing discussions with the broader retail community, we believe that our growth rate can improve further as more retailers recognize the success of these first movers.

Seasoned retailers understand that our brands are especially valuable in an environment in which consumer traffic is somewhat sluggish, making higher ASP essential for retailers' success.

Another bright spot in the quarter was our success at growing direct-to-customer sales in North America, which increased a robust 137% in the quarter, led by a 190% increase in our web business.

While the vast majority of customers prefer to purchase beds in retail stores, we believe that Tempur Sealy should earn its fair share of this niche online market.

And unlike the vast majority of the players in this segment, we are positioned to grow profitably because of our brand strength, our enormous scale advantage in manufacturing, marketing and overhead.

Regarding our North American Tempur-Pedic flagship retail program, we continue to make steady progress towards opening new stores, and we anticipate opening a few new stores later this year.

While our preference in North America is to partner with existing third-party retailers, in certain underserved markets, it makes sense at times for us to establish a few stores in targeted locations.

Turning to our International sales performance in the quarter.

Our Asia and Latin American markets grew nearly double digit on a constant currency basis, which was in line with our expectation.

European market performed slightly below our expectation, with sales down low single digit.

We believe the overall bedding market in that region was weak due to macroeconomic issues.

The U.K., which is a big market for us, was weak and may be dealing with a little Brexit angst.

Additionally, across Europe, there were several distracting elections, and we're hearing about low footfall.

I'm glad to report that Germany continues to show year-over-year growth.

One quick call out.

I recently attended business reviews for our Asia and Australian markets, toured plants, distribution centers, spoke to key retailers, employees and I left feeling even better about our long-term growth potential of our businesses in that region.

Our joint venture partner in Asia and our operating team are doing a great job.

Before I hand the call off to Barry, I'd like to make a comment on the trends post quarter-end.

Based on everything we see to date, our expectation is that the third quarter growth in sales, excluding Mattress Firm, will be greater than the 17% growth we achieved in May and June period.

Finally, regarding our full year outlook.

While worldwide industry trends are a bit sluggish, and we're still in the very early innings of our North American sales channel realignment, we are very pleased with our results thus far in 2017.

Through the first half of the year, we have outperformed our internal expectations, and we are raising the low end of our adjusted EBITDA guidance from $400 million to $425 million and maintaining the high end of $450 million.

Now I'll turn the call over to Barry to discuss the quarterly numbers in more detail.

Thank you, Scott.

First, let me take you through our second quarter performance.

Worldwide net sales for the second quarter were $659 million.

Gross margin declined 120 basis points to 40.7%.

Operating margin was 8.6%.

Consolidated EBITDA was $86 million.

Earnings per share for the quarter was $0.45.

Our debt to EBITDA was 3.74x, slightly over our long-term target of 3.5x.

Sales in our wholesale channel decreased 21% to $604 million.

However, excluding Mattress Firm, this channel was up 5%.

Sales in our direct channel increased 43% to $55 million driven by growth across all portions of this channel.

On a segment basis.

North America net sales were $525 million, a decrease of $143 million as compared to the second quarter of 2016.

Excluding Mattress Firm, North America net sales increased 10% driven by growth across all of our brands.

Sales in Canada were up 5% on a constant currency basis.

Our North American wholesale channel declined 24% to $496 million.

However, excluding Mattress Firm, this channel was up 7%.

We felt this was very solid performance given Mattress Firm's aggressive inventory liquidation activities in the beginning of the quarter.

Since our contract with Mattress Firm terminated on April 3, our sales to them were $1 million in the quarter.

Now they represented $191 million or 24% of consolidated net sales in the second quarter of 2016.

And of that $191 million, 2/3 of the sales were Tempur-Pedic, and 1/3 were from our Sealy brands.

The North American direct channel increased 137% in the quarter, with exceptional performance in our web business.

We continue to operate the web business with a focus on profitability as opposed to growth.

Thus, we are not overinvesting in customer acquisition cost, and in fact, the operating margin in this channel has improved year-over-year.

North American gross margin decreased 210 basis points to 37.9% as compared to the prior year.

This was driven primarily by the termination of the supply agreement with Mattress Firm, which resulted in; one, fixed cost deleverage on lower unit volume; and two, the loss of revenues that skew toward higher-margin Tempur-Pedic products.

These negative factors were partially offset by productivity improvements across our operations, improved channel mix and lower floor model discounts.

Despite the impact from lower revenues and operational deleverage, our Tempur gross margins were up slightly versus the second quarter last year.

Now this highlights the skill of our team in dealing with the unexpected volume decline.

In addition to the items I previously mentioned that positively impacted North American gross margin, our Tempur gross margin was further benefited by favorable product mix and pricing actions.

Despite the loss of the Mattress Firm business, the company significantly increased its investment in direct advertising on an absolute dollar basis compared to prior year.

This increased advertising investment, together with the North American gross margin decline and operating expense deleverage, resulted in a 490 basis point reduction in operating margin to 10.6% as compared to the prior year.

Now we expect to continue to aggressively invest in marketing and advertising as we regain our North American market share.

We expect to effectively grow into our advertising budget as we regain share over time.

Now turning to our International segment.

On a reported basis, net sales decreased 2%.

On a constant currency basis, sales were up 2% with both the wholesale and direct channels up 2%.

As we previously disclosed, we believe European bedding markets turned weaker, and this impacted our results in the second quarter.

That said, based on our review of the markets, we believe we have held or gained share across most of Europe, including in the U.K.

International gross margin increased 100 basis points to 52.1% compared to the second quarter of 2016.

The gross margin increase was due to favorable mix, partially offset by product launch.

International operating margin increased 260 basis points to 19.6%.

This was primarily driven by the improvement in gross margin, expense management and growth from our Asian joint venture.

This improvement in operating margin includes a double digit increase in our direct advertising in the quarter.

Since it does not particularly stand out in our income statement as it is in unconsolidated affiliate, let me take a moment to address our Sealy Asian joint venture.

We continue to see very strong performance from the business with market share gains and improvements in profitability.

Now turning back to the company's worldwide performance.

Operating income was $57 million.

Interest expense was $22 million, down 4% from last year.

Our tax rate in the second quarter was at an elevated level, principally due to 2 factors: first, we resolved the tax matter in Latin America; and second, we repatriated some cash from our Canadian subsidiary.

Consolidated EBITDA was $86 million, down $38 million from last year.

EBITDA was impacted by lower volume resulting in fixed cost deleverage and our increased investment in our brand advertising campaign.

This was partially offset by favorable channel mix, lower launch expenses and operational improvements.

Unfavorable foreign exchange rates and higher commodity costs together were about $6 million of headwinds to EBITDA.

Now moving on to the balance sheet and cash flow items.

We generated operating cash flow of $75 million in the first half of 2017 versus $52 million in the same period last year.

The increase in operating cash flow was primarily driven by improvements in net working capital.

For the first half of the year, we generated $49 million of free cash flow, nearly doubling the $28 million we generated in the same period last year.

Cash cycle improved 1 day from the same period last year, driven by payables days.

In the second quarter, our top 5 accounts represented 22% of net sales, down significantly from last year when they were 40%.

During the quarter, our largest account was 6.5% of sales.

At the end of the second quarter, net debt was $1.9 billion.

Our leverage ratio on a trailing 12-month basis was 3.74x.

With our leverage target at 3.5, we still are leaning towards debt reduction.

Turning to our guidance.

Today, we are raising the low end of our adjusted EBITDA guidance from $400 million to $425 million and maintaining the high end at $450 million.

Our updated guidance includes an additional $10 million headwind from a combination of commodities and in foreign exchange compared to our prior expectation.

As disclosed in May, we expect depreciation and amortization to be $105 million for the full year.

Consistent with our first quarter results, this projection does not include the $8.4 million net benefit for stock-based compensation expense we incurred in the first quarter.

On tax rate, with the elevated level we incurred in the second quarter, we expect the tax rate for the full year to be about 32%.

And now I'll turn the call back over to Scott.

Thank you, Barry.

Great job.

Most of our comments today have been focused on our performance in recent months.

Before I open the call for questions, I want to remind you about the progress we've made within the framework of our 4 long-term initiatives that our global team is focused on.

Our first goal is to develop the most innovative bedding products in all of the markets we serve.

Our launches all around the world continue to be on time and on quality.

Internationally, our large Tempur launch is ongoing with expectations to be completed by year-end.

Domestically, we launched the entirely new Sealy line during the quarter, with 95% plus of our accounts having the new product by Memorial Day period.

The new Sealy line is performing well, and we feel the market is rewarding us for the quality and the innovation in that line.

We also believe that listening to consumer research has paid off as we've simplified the brand structure and made it easier to understand and shop.

The second long-term initiative is to invest significant marketing dollars to promote our worldwide brands.

Direct advertising spend in North America was up as a percentage of sales compared to the second quarter last year and was also up in terms of total dollars.

We are all in supporting our retailers, and we believe that those that have leaned in are taking share in the marketplace.

For the third quarter, we will once again step up our direct advertising dollar spend to drive share gain.

The third long-term initiative is to expand North American margins while executing our sales growth strategy.

As we previously mentioned, we expected the second quarter to be the most challenging as we aggressively invested in advertising to fuel sales growth strategy while facing a large and disruptive liquidation of Tempur Sealy inventory by our former largest customer.

But as I highlighted before, our four-wall margin is up and our SG&A is down on a dollar basis.

The last long-term initiative is to optimize worldwide distribution to make sure our products are properly represented in all channels where our end customers want to shop.

Our primary focus is on expanding our relationship with third-party retailers, and we have reported the growth in that area.

Additionally, we've made significant progress towards expanding direct-to-consumer businesses.

Our second quarter results demonstrated strength of our business model and our iconic brands.

The quarter also highlighted our variable cost structure and the skill our team has in dealing with unforeseen situations.

While we're adapting to our new environment, our long-term initiatives remain unchanged.

Operator, you may open the call for questions.

(Operator Instructions) Our first question is from Seth Basham with Wedbush.

My first question is to -- or only question is to understand a little bit better some of the moving pieces of the North America division between Sealy and Tempur-Pedic in terms of sales?

And then secondly, in terms of gross margins, as you talked about gross margins being slightly up for Tempur but down 210 basis points for the entire division.

Sure.

Seth, we saw a strong performance, excluding Mattress Firm, from both brands.

And I would note, excluding floor models, both brands grew considerably faster.

As you'll recall that last year, we had much more significant launches ongoing particularly on Tempur, and from a dollar value, also on our Sealy brands.

And as it relates to North American gross margin, it was down 210 basis points.

Now if you think about our fixed costs, as we previously disclosed, that's about 15% on prior revenues.

And so if you work through the model, I think you'd find that deleverage was several hundred basis points of that.

And then together with that, with brand mix, I noted that in light of the way that Mattress Firm's revenues previously skewed to more Tempur, particularly in the second quarter of last year since they didn't had Stearns & Foster, as you'll recall, we had more of a decline on our Tempur business all in.

And as a result, we had some brand mix that was negative as well.

Now those factors were partially offset by the fact that our productivity was up in across our operations, net of the deleverage.

Our channel mix was quite favorable, and we had, as I mentioned at the start, fewer floor models and less launch.

I would note that we -- and I didn't call it out specifically, but certainly, a headwind to gross margin also was FX and commodities.

So we felt the performance in light of the revenue was quite good.

Thank you.

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

Scott, I was hoping you could talk a little bit more about the outlook for North America in the second half and what it is that you're seeing that gives you confidence that revenue growth trends will continue to accelerate.

And then, Barry or Scott, if you could comment on the decremental margins that you were seeing here in this quarter in terms of the underlying sales loss that you had?

And what those decremental margins might look like going forward?

Sure.

Great question.

I'm going to break it up into kind of 2 parts because there's things we can control and things we can't control.

When I look at the things that we can control and the execution, it looks very strong to me.

And let me point out a couple of things.

I think one of the big concerns for some people were things like our share of voice, when you lose a strong advertiser like Mattress Firm.

But when you look at our share of voice in the second quarter, our share of voice actually did not go down.

And another way to say it is: the all other retailers stepped into the void created by Mattress Firm's lack of advertising our products and quite frankly, it's flat.

So we're seeing evidence of the other retailers clearly doing their part to help support us.

I think I look at our own store, same-store sales are up 7% post quarter end, and we continue to hear nothing but great things about our products, particularly master brand.

So execution's strong.

And as we said on the prepared remarks, the quarter built.

Obviously, April, quite frankly, internally, we call that a mulligan; April was tough.

But as soon as we got through the inappropriate use of our brand in advertising that they were doing, look, it's been growing.

So we feel good about going into the quarter, and as we mentioned, obviously, we've got some information post quarter end.

So confident on execution.

When you look at the overall economy, and again, we're talking North America, I mean, you're bullish about 4.4% unemployment, wage growth at 2.5% is okay, inflation continues to be low at 1.7%, and certainly, gas prices are under control, and consumer confidence at 121 and up feels good.

But the other side of the equation is consumer sentiment is down at 93.1.

Durable goods have been down.

Retail sales have been down.

Auto production is down.

And so I call it kind of a so-so sluggish retail economy.

And I think as the quarter goes and other people report, I think we'll continue to see that but feel very good about our internal execution.

I guess, Brad, I'd add to the second part of your question on margins.

Look, we expect the gross margins to sequentially improve as we move through the year from this level, and we expect the EBITDA margins obviously implied in the guidance also to improve.

And I'll note that in light of the strong performance we're seeing in the Tempur margin from things like channel mix and product mix, despite deleverage will -- which we will be incurring in the back half, we would expect the Tempur margins to continue to be up year-on-year in the back half.

And our Sealy margins, as I noted, too, improve sequentially.

So we -- and that both of those statements are inclusive of about $10 million of incremental commodities in the back half.

So we're feeling good about performance, as Scott noted.

Yes, I guess, the only other stat that I'm sitting here looking at my paper that I should probably throw out is, we're seeing a 30% increase in our web traffic and we're seeing a 30%-plus increase in our dealer locator, which has certainly always been a key indicator that we keep an eye on.

Thanks for your question.

Our next question is from Budd Bugatch with Raymond James.

You talked a little bit about advertising.

I wonder if we can get some more color or quantification of what the delta was in direct?

And maybe how much you saved from the co-op -- less co-op that you paid to your former largest customer or net what you might have paid to others?

And if you would also talk a little bit about maybe you're seeing some slight population increase in some of the brand, particularly Tempur, and retailers who are leaning into your product?

I'll start with a little bit of that, and then I'll give it off to Barry to either correct it or give you some more details.

Let me give you a little bit of color on what we're seeing.

If you -- you got to go into the detail and look at particular markets.

And if you go in and look at like New York and Philly, if you look at that market in particular, which, of course, is a hotbed for bed-in-a-box, we're seeing our Tempur sales up 70% in the New York, Philly market as other retailers lean in and take the share the Mattress Firm has left over.

If we look at our direct-to-customers, we also -- our direct-to-customer business, we're also seeing that it's over-indexing in the New York and Philly area.

If you go to Phoenix, which is again another hotbed for bed-in-a-box, our Tempur sales were up 50% in Phoenix.

And again, our direct-to-customer business is over-indexing in Phoenix.

Of course, there's other markets like Houston, and Houston has been particularly weak, I think some of that's oil and gas, I think some of that might be where Mattress Firm is concentrating still some liquidation activities, but Houston is down 25%.

So that gives you a little bit of color of what we're seeing as far as allocations of advertising stuff.

We normally don't get into that kind of detail.

Yes.

The only thing I'd add there to that last point is, look, it was a multimillion dollar increase in our brand advertising campaign.

We are going to continue to aggressively advertise as you move through the back half.

And as I noted in the prepared remarks, we expect to kind of grow into that advertising budget because it's clearly at, as compared to prior years, an elevated level in terms of dollar and rate.

And -- but we're thrilled with the way the business is performing and those all other statistics that Scott just mentioned are a testament to that.

But it's fair to say that integrated market, the co-op advertising is down significantly, and the direct advertising is up significantly, yes.

And for obvious competitive reasons, we do not break out that level of subsidy by customer.

Thank you for the question.

Our next question is from Peter Keith with Piper Jaffray.

Scott, you had mentioned in the script that you now expect to fully recover, I guess, the Mattress Firm, it was either revenue or EBITDA presumably, maybe both.

I guess now that you're a couple months into this termination, can you give us a sense on timing?

Maybe -- and maybe another way to ask, what would be deemed unacceptable to you in how long to get all that back?

Yes.

I think if you remember when we originally had our first call about this topic, I asked, kind of if you all could give me a hall pass until we get to the end of the third quarter.

And I'm going to go back to that and say, look, this is in the very early stages.

We've got several months of data.

But I think in this situation, we need some more data before I start putting internal guidelines or goals in place.

But it's very clear that we're ahead of our original projection and feeling pretty good about things, but I'm not in a position yet to tell you what that glide path looks like.

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

So just a quick question.

So thinking about the markets where you have the most overlap with Firm, how are you guys thinking about potential implications of your largest competitor really ramping up with Firm?

And, I guess, what that could do to recapture efforts with all your other accounts?

I mean, have you seen any impact from this?

Or too early to tell?

Do you think that could be a tailwind?

Well, I mean, I think -- I mean, my -- our largest competitor is servicing Mattress Firm.

They have been servicing Mattress Firm.

And Mattress Firm has ramped up the advertising during the second quarter and continues, so we continue to see that activity.

And while that activity is in the marketplace, I think we reported our numbers, and we feel pretty good about things.

I mean, it's really the other retailers have been very supportive.

And some of the growth that the other retailers are having in Tempur particularly is just outstanding.

I mean, when you're talking about 60% and 70% increases in Tempur sales in a marketplace, there are some retailers that quite -- other retailers that quite frankly, are doing very well.

So it's going to be -- it's a long journey, but it's started out pretty well.

And Curt, I guess I would add, we've talked a lot about Tempur, that our Sealy performance is I think really quite strong against a macro bedding backdrop that appears to be weaker.

I'm sure as the next few days and weeks go by, we'll have more industry data come out.

And I don't think that the rest of the industry is anywhere close to the plus 10% that we indicated our Sealy business is up in that May, June period, excluding Mattress Firm.

And I just know we're seeing great performance from our new Sealy launch.

That's at the lower to mid-priced products across all technologies.

Our Stearns & Foster line is continuing to grow double digits, and that's on the back of having been launched last year with just great performance.

So we feel very, very good about the May, June performance and, as Scott mentioned, that continuation as we move here into the third quarter.

Our next question is from Laura Champine with Roe Equity Research.

You did a good job of controlling the absolute dollars in SG&A expense and moving those lower year-on-year.

Is that sustainable in the back half as well given the ramp-up that you're making in advertising expense?

Laura, you should expect us to seasonally be a little bit higher in terms of sales, as you know, as you've followed the industry and the business for a long time.

And with that, we naturally have a little bit more of the cooperative advertising that goes along with sales.

However, excluding variable items, I think the management team and leadership team here is very focused on expense management so the fixed items are quite fixed here.

And we are working on continuing to improve our expense structure.

So bottom line, yes, ex-variable items.

Our next question is from Keith Hughes with SunTrust.

Just going back to gross margin.

Your comments on the Tempur gross margin in the quarter -- Tempur-Pedic brand gross margin in the quarter.

Did that include any International sales, or was it just domestic?

And did that -- does that include all sales Mattress Firm and for other retailers?

Good follow-up question, Keith, and thanks for the questions.

Yes, my comments there were about North America, so specifically, our North American Tempur margins were up slightly, and that is all-in.

So that reflects the significant amount of deleverage we incurred on the Tempur-Pedic brand and kind of speaks to the underlying strength from productivity improvements.

Our team in the factories and logistics are doing a great job.

We've obviously had some very favorable channel mix.

We had less launch activity, as I mentioned.

And we had very good product mix within the Tempur-Pedic brand within North America.

And we did have a little bit of pricing, so it's -- and as I mentioned, also, I anticipate the Tempur-Pedic margins to continue to improve and be up year-on-year in the back half.

Our next question is from John Baugh with Stifel.

I just had 2 kind of detail questions.

One you may not answer, but I was curious if you could at least ballpark us roughly on the gross margin of the direct business versus the wholesale.

And then secondly, just remind us, as we think about '18, and I know you're not guiding, but how much earnings, if you will, were in '17 relating to Matt Firm that obviously won't repeat?

Let me see if I can answer part of that question.

I think what I would say about the direct businesses margin, maybe as it compares to wholesale, I think the important point there is the direct margin is increasing.

And the reason I make that point is we're not buying sales online, and we're not trying to push a customer to any particular channel.

And like I said, in fact, the direct margin is increasing because we don't want to overinvest in customer acquisition cost in that area.

For competitively sensitive reasons, John, we don't really break out earnings by customer, but nice try again, I think you tried that last quarter too.

We did disclose that we had roughly $95 million of sales to Mattress Firm in the first quarter, and we broke out a little bit of detail.

It's too early to comment on 2018, but we certainly will have, as Scott mentioned earlier, anticipate that on the next call, we'll talk a little bit more about our view as it relates to how we're doing on a relative recapture.

But as a -- I would just point out that comments that Scott made about regional performance in, for example, New York, where [our] all other Tempur business is up 70%, that is for the entire second quarter, I might add, that's April to June.

And Phoenix, being up 50%, and that's a wholesale all other for Tempur, is early good indication.

We've got a lot more to do, but we are feeling good about where we are in what will be a long journey.

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

You made the comment that you're pretty certain that the 10% growth ex-Mattress Firm was in excess of the market in the quarter, and I'm sure you're right on that.

I was wondering if you could talk about what you expect the domestic market to grow at in 2017 as a whole on a dollar and unit basis?

Yes, I don't think I could give you an expectation.

Clearly, we have some internal forecast, but we run the business with a flexible business model so that we can ramp up and down.

Obviously, in the next 30, 45 days, there will be a lot more information that comes out.

I guess, I'd really like to look at that before I get locked down too much on a forecast because we're into the heavy summer season.

But as I mentioned to you before, I mean there are some factors you look at that you can get very optimistic about, and then there is some sluggishness that you feel.

And some of that may be the -- what I'll call the Washington effect so as not to get in any kind of political discussion, it may be a little bit of hangover from the Great Recession, it may be student loans or auto loans, I'm not sure.

So I would say we're getting mixed signals as we sit here today, some really good news, and then really some softer news domestically.

So we're going to need a little while longer before we get out there making those projections.

Our next question is from Carla Casella with JPMorgan.

You talked about the great business you've done outside of Mattress Firm, the sales up 10% overall in the U.S. How much of that is actual new retailers?

Or are you just adding floor space at existing?

Or is it purely just turns at existing?

Yes.

It's really not very many new retailers, and it's also not really that many new slots.

It is really greater velocity of the slots that are in the installed base.

That is, by far, the lion's share, wouldn't you say, Barry?

Yes, definitely.

If you look at the performance that we're talking about, Carla, and thank you for the question, I would say it's clearly velocity.

Our world-class retailers are leaning in and directing traffic along with us to their stores to find Tempur-Pedic and Sealy brands.

And I mean, take those just couple of regional quotes we gave, I mean we are very kind of nearly flat as it relates to doors in those locations.

And we are seeing great performance in how those markets are performing.

So yes, it's velocity.

Yes, and that's really the most productive way to grow revenues.

We -- I think it's a testament to the fact that these are consumer-preferred brands, and they want to -- consumers want to find them, and it's our job and our retailers' together to direct them to places where they can find them.

Our next question is from Michael Lasser with UBS.

So across the entire wholesale business, what was the growth in -- can you quantify the growth in Tempur slot, in Sealy slot as of the end of the second quarter?

And then just a detailed question on the sales and marketing spend.

Was the entirety of the about $20 million decline due to lower co-op advertising?

Or were there other factors that drove the decline?

So on slots, as we were just kind of, Michael, mentioning to Carla, it's a pretty small increase, and we did see a little bit of slot improvement with our Sealy launch, but not much, and that was as planned.

And then on the Tempur side, I would say it's fairly flat year-on-year.

If you look at the total selling and marketing, there's a few things there.

Obviously, we've been very tight on expense management.

Clearly, the first one -- first item resulting in a decline would have been the lower subsidies or cooperative advertising, offset by the significant multimillion dollar increase in brand advertising as well as expense management elsewhere.

So thank you for the question.

Our next question is from Bob Drbul with Guggenheim Securities.

This is Kevin Heenan on for Bob.

As you think about the sales recapture in North America, can you just comment on the channels you are most excited about sort of over the next couple of years and particularly maybe the opportunity that you see in department stores?

And just separately, with the number of leading brands beginning to embrace Amazon a little bit more, just your general views on that platform as well.

Sure.

Look I mean, the lion's share of the business and where our focus is, is supporting our third-party retailers, and quite frankly, how we manage that channel will probably determine our success.

If you're talking about individuals -- [can't really] talk about individual customers, I guess, groups, some department stores are going to be a headwind and there's probably some opportunities in some other emerging department stores in the bedding area.

If you're talking about growth rate, from a growth rate standpoint, I imagine direct-to-consumer will have the highest growth rate the next couple of years.

A lot of that is catching up with the marketplace and all we're trying to do is get our fair share of that market, but that's probably going to have a higher growth rate.

We are doing a little bit of business on Amazon.

Sealy has been on Amazon since 2016.

We do have some Tempur products on there.

Tempur was already on Amazon through resellers.

We kept shutting them down and they kept popping back up, and our product kept showing up on Amazon, so much like Nike, we wanted to be able to control our brand and message to our customers on that side and so we're doing a little bit of business there, but I don't expect that distribution to be significant at all.

Anything else, Barry, that you think about from a...

I think that was a good summary.

I guess, the other thing, look, we're going to open a few stores, as we mentioned in the prepared remarks.

Those stores will not be significant to 2017.

I doubt they'll be significant to 2018.

But it is something that we feel strongly about that we need a few stores in the marketplace aiming to fill in some holes from a distribution standpoint.

And we have a follow-up question from Keith Hughes with SunTrust.

A question for Barry on raising the low end of the guidance range.

Particularly, given you have the extra raw material and FX headwind you discussed in the prepared comments, can you give any kind of indication of what things have gone right to kind of -- 1, 2, 3 -- what has gone right to lift the lower end of that range?

Sure, Keith.

I think first and foremost, in the first half, we outperformed our expectations, albeit at the beginning of the year, we gave ourselves a fairly wide amount of latitude for the full year as we were just getting started on this recapture effort, and weren't sure how long it would take or how quickly it would generate improvement.

And so the first point would be the outperformance in the first half.

What drove that?

One, the May, June period was a quick improvement from the impact we saw in April and early May from those liquidation activities we referenced before.

The margins have continued to improve despite the deleverage, and that's a testament to the operational and productivity improvements I mentioned earlier as well as channel and product mix have come in very well.

We feel very good about where we are with those items going forward and in light of the recent trends.

Scott, is there anything else you'd add?

Yes.

If you think back to the budgeting process, Barry, I mean, it would be the productivity in the plants and the deleveraging, how they handled that.

It certainly would be the direct-to-consumer.

And then it would be the favorable channel mix probably for where the sales have come through, I think if you just (inaudible).

Anyway, good -- great question.

And I am showing no further questions.

I would now like to turn the call back over to management for any further remarks.

Thank you.

To 7,000-plus employees worldwide, thank you for what you do every day to make this company successful.

To our retail partners, thank you for your outstanding representation of our brands.

To our shareholders and lenders, thank you for the confidence in Tempur Sealy management's leadership and its Board of Directors.

Ladies and gentlemen, thank you for participating in today's conference.

You may all disconnect.

Everyone, have a good day.