Thank you. Barry Hytinen, you may begin your conference.
Thank you, Matthew. 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 ks and the company's quarterly reports on 10 Q under the headings. Special note regarding forward looking statements and or risk factors. Any forward looking statement speaks as only as of the date on which it is made. The company undertakes no obligations 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, 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 temperssealy.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. Good morning, everyone, and thank you for joining us on our Q1 earnings call. Today, I'd like to take you through the highlights of our Q1 results and discuss the team's progress against our worldwide initiatives. For the Q1 2017, adjusted EPS was $0.96 per share, a robust increase of 41%, driven by a 16% increase in adjusted EBITDA and benefiting from our share repurchase program. We are proud to report this is the company's 8th consecutive quarter of double digit adjusted EPS growth quarter over quarter.
I'm pleased with the overall performance of the team this quarter, especially considering the United States' Q1 GDP was meek at less than 1%, making a less than robust environment. And we dealt with the unexpected termination of our largest quarter our largest customer early in the quarter. Let me take a minute and highlight a few items. First, we demonstrated the ability to mitigate the declining sales from Mattress Firm sales in North America. The North America sales 1st, we demonstrated the ability to mitigate the declining sales from Mattress Firm.
Sales in North America were up versus prior year, even though sales to Mattress Firm declined nearly 40% during the quarter. Another way to think about this is that while our largest customer went from 21% of overall sales in the Q1 last year to only 13% in the Q1 this year, our worldwide sales and adjusted EBITDA were both up versus Q1 2016. In North America, sales from non Mattress Firm customers grew by 13% during the quarter, which I expect was more than the growth rate in the overall North American bedding market. This is a testament to the strength of our market leading brands and also the talent of our North American retail firms. 2nd highlight, we continue to drive operating efficiencies.
Overall, adjusted operating margin increased by 60 basis points, including 100 basis point increase in North America segment. This is after fully absorbing headwinds from commodity cost increase and unfavorable FX. While we've made solid progress over the last year and a half, we are still pursuing many opportunities to drive efficiencies over the long term. 3rd highlight, our quality and on time delivery statistics continue to be outstanding, especially in North America. Last highlight, 2 items, North American pillows and sales in Germany, both issues in the past we've called out as needing attention, are both now growing in sales.
This is consistent with our management approach to find problems and address them quickly. Looking ahead, the organization continues to focus on its long term initiatives. These long term initiatives include the following: 1st, develop the most innovative bedding products in all the markets we serve. We are currently in the midst of one of the largest new product launches in the company's history. In North America, the new Sealy Master Band products begin shipping in March and floor models of the new Tempur Legacy product begin shipping in April.
Both product lines are expected to complete their launch in the Q2 on time and on budget. Internationally, new Tempur Pedic products are in the early stage of rolling out. Markets that have the new product are performing well. The worldwide rollout is expected to be completed by year end on time and on budget. We continue to receive positive feedback from our retailers around the world about all the new product lines, especially our new Sealy product line in North America, which many retailers have called the best new product launch in years.
2nd long term initiative is to invest significant marketing dollars to promote our brands worldwide. In the Q1, we increased our direct advertising spend in North America. And more importantly, starting next week, we will accelerate our advertising spend even further with the launch of our new Tempur marketing campaign that we feel very good about. You should note that we will be investing very heavily in advertising during the next couple of quarters as we support our retail partners and their efforts to drive sales of Tempur Pedic products. 3rd long term initiative, expand North America margins while maintaining market share.
You can see margins are clearly expanding, driven by our ongoing efforts to improve our operations, including continuing improvement in Sealy manufacturing, lower source costing, reduced corporate overhead. Regarding market share, we have some work to do post Mattress Firm termination, which is why you will see us heavy up on North American advertising spending during this revenue growth period, resulting in margin decline. The last long term initiative is to optimize worldwide distribution to make sure our products are properly represented in all channels in which our customers want to shop. As we discussed in the past, we don't determine which channel a customer shops. We strive to have our products wherever they want to shop.
Our primary distribution starts with our retailers. We are working to broaden our network of retail partners where our brands are underrepresented. In addition, to complement our brick and mortar retail network, we are also optimizing our online distribution. This quarter, we experienced robust growth in our Internet business. In fact, it grew over 100% worldwide and over 200% in North America.
We are now one of the top Internet betting brand companies in the world, and we believe one of the most profitable by a good bit. I'd also like to point out that we are not over investing in customer acquisition cost. As our EBITDA on our Internet business is growing faster than our sales. Additionally, I should mention that we view our relationship with our retailers as a true partnership. And in that spirit, we are actively sharing our Internet learnings with hundreds of Kemper Sealy retailers to help them sell more of their products online.
I'll discuss our sales growth strategy in a minute. But first, now I'd like to hand the call over to Barry to give you the details of our record quarter.
Thanks, Scott. First, let me take you through our record Q1 performance. Worldwide net sales for the Q1 were $722,000,000 unchanged from last year and on a constant currency basis up 1%. Adjusted gross margin improved 90 basis points to 41.3 percent and adjusted operating margin was 11.8 percent of sales. Consolidated adjusted EBITDA was $121,000,000 up $17,000,000 or 16%.
GAAP earnings per share for the quarter was $0.62 Adjusted earnings per share for the quarter was $0.96 up 41% from the same period last year. I will discuss in a minute the adjustments, which all relate to the Mattress Firm termination. Free cash flow in the Q1 was a robust $54,000,000 versus a negative in the same quarter last year. With strong operating and cash performance, our debt to EBITDA reduced to 3.46 times. While this is slightly below our target, we expect to be in debt reduction mode for a few quarters as we move through the transition away from our largest customer.
Before we discuss the results by segment, I would like to touch briefly on an improvement in our reporting that better aligns with the fundamentals of the market. Historically, we have reported our business into 2 sales channels, retail and other. We are updating sales channels to wholesale and direct. Wholesale is primarily 3rd party retailers as well as 3rd party distribution, hospitality and health care. Our direct channel includes company owned stores, e commerce and call centers.
We believe this change better aligns to the marketplace and the different margin characteristics of our business. For ease of comparison, we have recast historical channel data and made it available on our Investor Relations website. Our wholesale channel decreased 2% to $672,000,000 However, excluding Mattress Firm, this channel was up 8%. The direct channel increased 39% to $50,000,000 driven by growth across all portions of this channel with particular strength in our web business, which was up over 100%, as Scott mentioned. On a segment basis, North America net sales were consistent with the Q1 of 2016.
Excluding Mattress Firm, North American net sales increased 13%, driven by growth in Stearns and Foster and Tempur Pedic. Our sales to Mattress Firm declined 37 percent to $94,500,000 Sales in Canada were up 10% on a constant currency basis. Our North American wholesale channel declined 2% to $558,000,000 However, excluding Mattress Firm, this channel was up 11%. We felt this was very solid performance given Mattress Firm's aggressive inventory liquidation activities. The North American direct channel increased 130% in the quarter with strength in our web business, which was up over 200% and represents over half of this channel.
We drove growth from a broad selection of products across our web business, both traditional and new offerings. Tempur Pedic mattresses, pillows and accessory products, together with our bed in a box Cocoon offerings, were all strong performers. Now regarding Cocoon, we are pleased with the initial success, particularly given its profitability targets and our limited advertising dollars allocated to it. We credit this to its superior product quality based on our manufacturing know how versus competitive offerings that are often outsourced to 3rd party contract manufacturers, many of whom make product for multiple bed in a box players. Now even with competitors overspending on customer acquisition cost, we are seeing indications that growth in this niche segment has slowed.
North American adjusted gross margin improved 180 basis points to 38.8 percent as compared to the prior year. The primary drivers of improvement were productivity across our operations, lower floor model discounts and channel mix, which were offset by brand mix. North American adjusted operating margin improved 100 basis points to 14.4% as compared to the prior year and was driven by the improvement in gross margin, partially offset by increased investments in our brand advertising campaign. Turning to our International segment. On a reported basis, net sales decreased 1%.
On a constant currency basis, sales were up 3% with the wholesale channel up 3% and direct up 4%. In the wholesale channel, retailers were transitioning out of our old product line in preparation for the launch of our new Tempur line. Our direct business was driven by continued strength in web sales. I would like to highlight that we experienced solid growth in Germany and believe that portion of the business is positioned for long term success. We did feel some softness in the U.
K. And a few other smaller European markets, which we think is just general macro trends. International adjusted gross margin decreased 2 70 basis points to 51.6% compared to adjusted gross margin of 54.3% in the Q1 of 2016. The gross margin decrease was due to the rollout of new products and foreign exchange headwinds, partially offset by positive channel mix. International adjusted operating margin was slightly down to 19.1%.
Now turning back to the company's worldwide performance. Adjusted operating income increased to $85,400,000 as compared to $80,600,000 in the Q1 of 2016, and our adjusted operating margin improved 60 basis points. Interest expense was $22,000,000 up 3% from last year. Other income was $9,000,000 as compared to last year's 1,000,000 dollars Other income includes about $9,500,000 due to a onetime payment by Mattress Firm related to the transition agreements we signed with them in the Q1. Now as a reminder, we spent approximately $13,000,000 in the Q4 to support Mattress Firm with its massive store transitions and Stearns and Foster product launch.
So the $9,500,000 payment from Mattress Firm was intended to partially offset that prior investment. If you are normalizing, you might remove it from this quarter's operations and move it to the Q4 of 2016. Consolidated adjusted EBITDA was $121,000,000 up $17,000,000 from last year. Adjusted EBITDA growth was driven by lower launch expenses, favorable channel mix, operational improvements and other income, partially offset by volume and our brand advertising campaign. In addition, unfavorable foreign exchange rates and higher commodity costs together were about $5,000,000 of headwinds to EBITDA.
Now as we have talked about before, we are trying to get away from making pro form a adjustments. However, as we noted on the year end earnings call, the unexpected contract termination with Mattress Firm resulted in a series of adjustments in the Q1. I would like to spend a moment going through the detail of this, most of which is noncash. In total, we had $25,900,000 of net pro form a adjustments, of which $5,500,000 were cash items. There were $11,500,000 of cost of sale items, all were noncash.
These included potential future product obligations and the write down of some customers' unique inventory. There were $14,400,000 of net pro form a adjustments to operating expenses as shown on the income statement as customer termination charges. On a gross basis, there were $23,700,000 operating expense items. This included a non cash write off of $17,200,000 for incentives and marketing assets, which would have been expensed over their useful life. The remaining $6,500,000 was driven by employee related costs such as severance.
These charges were offset by a $9,300,000 noncash benefit for adjustments made to our performance based stock compensation as a result of the reduced expectations for 2017. Now moving on to the balance sheet and cash flow items. We generated operating cash flow of $67,000,000 in the Q1 versus $19,000,000 used in the same period last year, driven by improvements in net working capital. We invested $13,000,000 in capital expenditures and generated over $54,000,000 in free cash flow. In January, the company repurchased about 600,000 shares for a total cost of approximately $40,000,000 and we have $227,000,000 available for future share repurchases.
Cash cycle improved 12 days from the same period last year, primarily driven by improvement in days sales outstanding and inventory days. At the end of the Q1, net debt was 1,900,000,000 dollars Our leverage ratio on a trailing 12 month basis was 3.46 times, down from 3.6 times at year end. Now turning to our financial guidance. Today, we reaffirmed our 2017 adjusted EBITDA to be in a range of $400,000,000 to $450,000,000 As noted on our last earnings call, we continue to believe the 2nd quarter will be the most challenged as we overinvest in advertising to fuel recapture plans and with Mattress Firm continuing to aggressively advertise as they wind down inventory. And now I'll turn it back over to Scott.
Thank you, Barry. Great job. As I mentioned last quarter, we need to make up some sales in North America. Our sales growth strategy consists of 3 key components. The first component is to keep our brands top of mind with our customers.
We've increased our advertising investment in absolute dollars as a percentage of sales. Our new advertising campaign, Tempur Pedic IS Power, features real Tempur Pedic customers telling the story of why sleeping on Tempur has dramatically improved their lives. In addition to this campaign, we're excited about a new partnership with an avid Tempur Pedic owner and worldwide champion athlete who will speak to the unique power of Tempur Pedic sleep. We've also committed significant incremental advertising dollars to our Sealy and Stearns and Foster brands, which we will start deploying as the lead up to Memorial Day. The combination of our larger advertising spend and exciting new content should drive demand for our products and facilitate directing customers' traffic to our retail partners.
The second component to our plan is to work closely with our retail partners. Our sales team has developed detailed market specific plans by retailer to facilitate revenue recapture. Retailers can lean into Tempur Sealy in a variety of ways, from subtle changes like modifying their sales strategy or training process up to more dramatic adjustments like changes to their advertising focus and or adding incremental Tempur Pedic products to their floor. In certain cases, to capitalize on market opportunities created by our well regarded brands no longer being available at Mattress Firm, certain retailers are planning new stores in markets where Mattress Firm has a large presence. The 3rd component of our plan is to continue to optimize our distribution system in North America.
Our preference is always to partner with existing retailers that demonstrate a long term commitment to brands and betting customers. Consistent with our past practice, in certain underserved markets, we expect to open a handful of company owned stores under our successful Tempur Pedic flagship program. As a reminder, we now operate 6 flagship stores in North America that are high touch, low pressure retail environments that allow our customers to engage with our iconic Tempur Pedic brand. Over the last 5 years in markets where we've had open flagship stores, our retailers in those markets have benefited from the presence of these stores as these stores enhance brand awareness and image. We don't expect this program to be significant in 2017 or in 2018, but we believe it strengthens our overall distribution network.
Lastly, we will also continue to work on making sure our brands are getting their fair share of Internet bedding business, both through our retailers and the company. Turning to outlook. Consistent with what we explained last quarter, with all the moving parts and noise in North America bedding, we'll need several quarters before we will have the data necessary to communicate a fully informed opinion on sales growth, amount and pace. I can say the team did get out of the gate quickly and as the Q1 results demonstrate had some early successes, but the big challenges and opportunities are still ahead of us. And as good as we feel about this quarter, we all know this is going to take some time.
As Barry has discussed, we expect to prime the pump with advertising in the first in the second quarter, and we're holding our manufacturing capacity. This will result in next quarter's earnings to be down versus the same period last year. It will be a few quarters before we get back to an earnings growth trend. We've made minimal adjustments to our budgeted cost for this year and have in fact increased our budget for advertising to drive the North America market. This level of investment has been fully reflected in our 2017 guidance.
Once we see where sales settle out, we'll be able to recalibrate our expense structure and fine tune our cost structure if needed. Operator, you can now open the call up for questions.
Your first question comes from the line of Budd Bugatch from Raymond James. Your line is open.
Good morning, guys. This is Bobby filling in for Budd. Congrats on a good quarter and I appreciate you taking my questions.
Thank you.
First, I was just curious, could you give some color on like for like pricing? Maybe what the benefit was in the quarter and what kind of your expectations are for price for 2017? I
want you to benefit to the quarter?
Bobby, it was a small amount in the quarter. As you know, we did put through a little bit of pricing on a net basis on Tempur earlier in the year, and we here very recently have raised the price of some of our Cocoon offerings. It was $1,000,000 or $2,000,000 of net benefit on an EBITDA basis. Scott?
Yes. The only other thing I'd say about the pricing environment, and you probably know the other large bedding manufacturer in North America recently announced a fairly large price increase. We've looked at that. We don't see the need for a price increase or to follow that price increase.
Okay. I appreciate that. And then on the non mattress firm revenue growth in North America, so can you maybe give us a little color on, is it coming from new have you signed up new retail partners or is it slot growth or kind of a combination of both? I mean, what's kind of going on that help you guys significantly outgrow the industry there?
I would say primarily it's with existing customers. There are some new customers in there, but the big drivers are the existing customers.
And I would just add that
we saw strong growth across our brands, Tempur and our Sealy brands in the all other customers.
Okay. Thank you. And then lastly for me, on Sealy four wall margins, any update on how those progress? I mean, I heard in your prepared remarks, you mentioned delivery and stuff that continues to tick higher, but just any further update would be appreciated.
Bobby, we've seen the Sealy 4 wall continue to Bobby, we've seen the Sealy 4 wall continue to improve. It was up a little over 100 basis points on that specific metric, and we've seen very strong productivity within our Tempur factories as well and frankly, across the entire distribution. So as I mentioned in the prepared remarks, the North American margins and our EBITDA were all benefited significantly by productivity.
Next question?
Your next question comes from the line of Peter Keith from Piper Jaffray.
Just looking at the North America gross margin expansion, it did tick up quite nicely sequentially from Q4. So I just want to peel that back a little bit. You had indicated that brand mix was a drag, but it sounded like Temper and Stearns were the outperformers. I thought that would help. And then if you could provide a little more color on the channel mix benefit.
Is that simply direct versus wholesale? Or is there some benefits within the wholesale channel?
Yes. So our Stearns business did, as you would expect, Peter, grow faster, and that's helpful. But Tempur, especially in light of the amount of Tempur business that Mattress Firm used to do, as you know, they were indexing significantly higher on Tempur Pedic and we saw that come back significantly with them to more of a parity in the quarter. And so that was a bit of a drag on our Tempur Pedic business. So that's what we were kind of referring to.
There wasn't a huge point, but I did call that out as an item. As it relates to the channel mix, there's a few things going on there. As we've discussed before, in light of their previous volume levels, Mattress Firm had the highest subsidies. And as they come down, that gives us a natural tailwind, if you will. And then our direct business, as you know, was growing very fast and continues strong growth, and that's also favorable.
Your next question comes from the line of John Vo with Stifel. Your line is open.
Thank you for taking my questions this morning. I was wondering is there any way to isolate in Q1 what the EBITDA amount was from Mattress Firm? I assume with all the charges and everything, it kind of goes to a 0 in Q2. And then a second question, do you have any sense of where Mattress Firm is in terms of cleaning out their inventory of all three
of your brands? Thank you.
I can do some of that and then Barry can clean it up. Clearly, MatFirm goes to 0 in the second quarter. I can confirm that. I could probably confirm that we probably could compute the EBITDA for Mattress Firm, but we wouldn't give an individual EBITDA number for any customer in the Q1. So we'll probably pass on that.
There have been some public disclosures that Mattress Firm has made related to their inventory. We did not have visibility to their inventory other than their public disclosures. But I would say they still have a good bit of inventory as of April 11, which was the last disclosure we got.
Yes. Measured in 1.5 months or so based on last year sales, roughly speaking.
Your next question comes from the line of William Reuter with Bank of America Merrill Lynch. Your line is open.
Good morning, guys. I was wondering if you could talk a little bit about bed in a box. You made the comment that you felt like the that your competitors businesses, the growth there was slowing. And then you also talked about the Cocoon business doing fairly well. Could you talk a little bit about what the growth rates that you're seeing in your segment there and what you think the competitors are growing at?
Thank you.
Yes. I can speak to a little bit. As you know, you don't get hard information on that kind of business. And so you have to make some assumptions based on soft information from various locations. So I'll speak to it, but I just have to say, it's to the best of our knowledge that we can tell.
Easy part is our business. Look, we're up 100 call the web business up 200% in North America. But I think the more important point on that, although 200% is maybe an eye popping number, I think the part that we feel most proud of is that the EBITDA of that business is growing more rapidly than the sales. Another way of saying that is we're not over investing in customers and we're running that channel just like we run any other of our channels. And so it's we're doing that better and we've gotten better at it and we think that that's going to be a good growth engine for us.
When we look at the overall bed in the box market and we look at Google searches, talk to various people, it's clear the industry is still growing. It's clear to us that the pace of that growth has slowed, and I might even say slowed significantly. And it's clear within that industry, there are big winners at times and there are some losers. And there's a little bit of a shakeup going on. So when we look at it in total, we're where we've been for the last, I guess, year, year and a half, which is, look, we think there's a market there, obviously, because we got a product in there.
But it feels like it's a relatively small market, niche market. But we'll continue to watch it. And to the extent if that's where customers want to buy beds, we're in that channel. But the lion's share of the activity, we clearly believe is in the traditional retailer.
Your next question comes from the line of Keith Hughes with SunTrust. Your line is open.
Thank you. Question on raw materials. You called out a number of raw material and FX. That's of course been the big topic on a variety of manufacturer calls. Can Give us sort of a view for raw materials for the year.
And one technical question on the $9,300,000 payment for Mattress Firm. It appears that's excluded from adjusted net income, but I think it is included in adjusted EBITDA, if you could tell me if that's
correct? It's included in both, Keith. And just to do that last one first, it's included in both. And as a reminder, last quarter, in the Q4, we incurred over $13,000,000 of costs, investments essentially into the Mattress Firm profile for store transitions and Stearns and Foster. All that also ran through EBITDA and net income.
So that was our thought process and it's kind of offsetting the 2 at least partially. On your earlier question as it relates to commodities, largely our outlook is unchanged from the beginning of the year when we said we thought that this year we would incur about $15,000,000 of commodity headwind and roughly $12,000,000 of FX headwind as we go through the Q1. We are largely in line with our expectations for the full year. So that's what's kind of embedded in the EBITDA guidance. We've seen steel, foam, raw chemical be modestly inflationary this year.
Your next question comes from the line of Curtis Nagle with Bank of America. Your line is open.
Great. Thanks very much for taking the question. So I was hoping you guys could maybe go into a little more detail about some successes you've had, I guess early successes you've had with your non firm partners. Are these primarily specialty retailers or specialty bedding retailers, furniture retailers? And are any of them going, I guess, full exclusive for TPx product?
Yes. The answer to all that is yes. We've made progress with specialty retailers. We've made progress with the furniture companies. And we have what I'd call a few Tempur Sealy dominant players that have moved.
So early, and as we described them described it in the prepared remarks, yes, we've had some early successes. But this is a process that's going to take some time. But I couldn't be happier with the performance of the sales team, how quickly they got out of the gate from the unexpected termination. And quite frankly, I'm thrilled so far with the response we've gotten from 3rd party retailers.
Your next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Your line is open.
Yes, good morning. Scott and Barry, thank you for taking the question. I wanted to ask about the cost opportunity that you have in front of you here. Scott, you're very explicit in your commitment to driving growth to the best of your abilities in the next couple of quarters. But you've also talked about, I think, a $75,000,000 to $100,000,000 cost opportunity.
What do you think the right time would be to consider starting to make those cuts? And are they contemplated at all in your guidance for 2017? Thank you.
First of all, they're not contemplated in the guidance for 2017. As I think we've explained a couple of times, look, we're going to spend some money and I think we've used the non official term, but we're going to run a little sloppy. But we're going to run a little sloppy until we understand how the bedding market resets. I think that's going to take a couple of quarters. And so we're going to run a little sloppy for a couple of quarters and probably take a look at our cost structure later in the year.
If we're performing as expected, then I don't think we'll have any actions that we need to implement in that area. If we're not performing as expected, we clearly have a variable cost structure. We might need to bring down some of the cost and we'd look at that in the Q4 of this year as we for
2018. Your next question comes from the line of Carey Martin with Jefferies. Your line is open.
Good morning. Certainly encouraging to hear retailer expansion with some new stores coming. But in terms of immediate changes, I mean, are there any additional floor spots that you're gaining with the shift in your customer base?
Yes. Yes, look, yes, I mean opening new stores takes some time. And there is a good number of very interested parties that would like to open new stores, some existing customers and some new capital into the industry. But as far as the next quarter or so, where the big gains will come, will come from traditional retailers in the stores that are currently in place.
I'd just add that with our Sealy launch, we are seeing incremental slotting come through and our Kemper business is also seeing opportunity for incremental slots and as retailers move this direction to go after that significant amount of revenue that's out there.
Yes. But I'll also say, I mean, clearly, we watch slot counts and everything very closely. But I also got to tell you that we are very focused on getting the velocity in the slots that we have because that's a net positive for us, but also a huge positive for the retailers. So slot velocity is also a big part of the plan.
Your next question comes from the line of Bob Drbul with Guggenheim Securities. Your line is open.
Hi, good morning. I was wondering if you could talk a little bit about how you see the demand being impacted by a lot of the discounting that's going on like the longer term Tempur Pedic brand demand by the most current clearance sales? How much pull forward do you think you're seeing? And the second question is, with the share repurchase for this quarter, can you just update us your thoughts on share repurchase for the rest of the year?
Yes. On your first question, I really can't touch that because that might also run into a computation on damages. And as you know, we're currently in litigation with Mattress Firm, so I would prefer not to touch that one. So I'm going to respectfully pass on damages and how it might impact share or sales. As a share repurchase, yes, I think what we've said, clearly, our long term target for debt is, call it, 3.5x EBITDA.
We're there right now, but clearly, our guidance for EBITDA is down some. So we expect to be in, I'll call it, debt payoff mode for the next few quarters and would expect that we'd be back into repurchase mode in 2018.
Your next question comes from the line of Seth Basham with W. D. Bush Securities. Your line is open. Thanks a
lot and good morning.
Good morning.
I was hoping you could disaggregate
a little bit that 50% increase in sales to non mattress firm customers. For example, do you have a sense of how much floor model sales and inventory loading drove that growth in Q1? And how would you expect that to trend in future quarters? Should we see an acceleration from that 13%?
There's not many floor models in there.
Yes. Floor samples, it was actually grew a little bit faster. Yes. Because if you think about last year, Seth, we had the Stearns and Foster launch ongoing as well as the Breeze launch, which were very significant and within the quarter and a little bit in the Q2. And this year, our Sealy launch is while it's more slots, it's a much lower average price.
And frankly, most much of it is in the April timeframe in advance of May. And on the Tempur side, we have a very limited launch, which is really a April phenomenon.
Yes. So it's really it's a clean number. As far as future recapture percentages, as I said in the prepared remarks, you got to give us a couple of quarters and let us get some more hard market data, so we have a better foundation, so we make sure that we give you a glide path that's based in some actual market data as opposed to just studies.
Your next question comes from the line of Michael Laufer with UBS. Your line is open.
Good morning. Thanks a lot for taking my question. So we can properly calibrate our models for the Q2. Can you give us some sense of what you're seeing from the non mattress firm business for the 1st month of Q2? And then my follow-up question is, you talked about the more advantageous margin you saw on the gross margins in the non mattress firm business.
How much of that margin benefit are you going and reinvesting back in the business in order to get preferential treatment from new and existing retail partners, especially as you more aggressively grow your direct bids? Thanks.
Yes. Let me try some of that. And again, I'll let Barry kind of clean it up. As far as current trends, if you look at the non mattress firm revenue, that pot is growing, okay? I'm not sure how to think about it because we are still working through some Mattress Firm liquidation of their inventory, but we are seeing the non mattress firm revenues in North America grow.
As far as your comment on how we're thinking about investing in the business going forward, our investment in growing revenue is in developing a great product and it is in both developing and implementing significant advertising dollars. And that's what we'll continue to do in the future.
The only thing I would add is, look, there was a tremendous amount of advertising in the month of April by Mattress Firm around those activities that Scott mentioned, and we're going to support our authorized retailers as we ramp our advertising to try to offset the impact of that as we move forward. And so but we feel good about the fact that so many of our retailers are seeing a positive trajectory.
Your next question comes from the line of Carla Casella with JPMorgan. Your line is open.
Hi. Just two quick clarification questions. First, the Mattress Firm, the discounting of selling other floor samples, is that almost all a second quarter hit or was some of that also affecting gross profit margin in the Q1?
I would that hit us in March. A little bit March. And continues today.
Your next question comes from the line of Laura Champine with Roan Equity Research. Your line is open.
Good morning. I know that most of your cost structure is variable, but given the loss of Mattress Firm, is there anything that you're doing today to try to reduce your fixed cost to keep those your margin levels intact?
Not anything special. I mean, I would say from a company culture standpoint, we're constantly looking at cost and how to become more efficient in everything we do. But I wouldn't say we're doing anything special in that area.
I'm showing no further questions at this time. I would now like to turn the conference back over to Barry Heitenen.
Thank you. This is Scott. To the 7,000 plus employees worldwide, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for your confidence in Tempur Sealy's leadership team and the Board of Directors.
Operator, this ends the call.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.