As a reminder, this conference may be recorded. Now I would like to welcome our host for today's conference Mr.
Mark Rupe. Please go ahead.
Thanks Carmen. Good evening and thank you for participating in today's call. Joining me on our Lexington headquarters are Tim Yeagy, Interim President and CEO Dale Williams, EVP and CFO and Barry Hytinen, EVP, Finance and Corporate Development. After our prepared remarks, we will open the call for Q and 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 statement including the company's expectations regarding sales, earnings or adjusted net income or the integration with Sealy involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. 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 quarterly reports on Form 10 Q under the heading Special Note Regarding Forward Looking Statements and or Risk Factors as well as the company's press releases. Any forward looking statement speaks only of the data on which it is made and the company undertakes no obligation to update any forward looking statements.
The press release, which contains reconciliations of non GAAP financial measures to the most directly comparable GAAP measures and information regarding the methodology used for constant currency presentation is posted on the company's website at kempersilli.com and filed with the SEC. In connection with this conference call, the company has prepared an investor presentation, which has also been filed with the SEC, is also available on the Investor Relations section of the company's website. Management's comments today will supplement the detailed information provided in both the press release and the investor presentation. With that introduction, I will turn the call over to Tim Yehge.
Thanks, Mark, and good evening, everyone. Tonight, we will review our 2nd quarter results, give you an update on the progress we are making on our key strategic initiatives and view our updated full year 2015 financial outlook. We had a solid second quarter with sales and earnings coming in ahead of plan. Net sales were up approximately 7%, adjusted EBITDA was up 16% and adjusted EPS was up 36%. And in constant currency, sales were up 11%, adjusted EBITDA was up 21% and adjusted EPS up 46%.
Margins showed significant improvement. Adjusted operating margin increased 140 basis points and our adjusted contribution margin was 29%. Our North America adjusted contribution margin was 36%, offset by international, which was driven by higher sales of Sealy products. In terms of our outlook, our key strategic focus areas are to strengthen our industry leading brands, product innovation, channel management and cost productivity. Our ultimate goal is to consistently increase our earnings quarter after quarter as we make progress against these initiatives.
And we are building our brand. In the Q2, we spent more in advertising, we had a compelling message and we achieved better media buying efficiency. The benefits were clear. Site traffic and searches for retail locations to buy our products increased significantly and led to strong sales growth and Tempur Pedic share gains. We are also pleased with the level, quality and participation in our joint advertising initiatives as we work with our customers to improve effectiveness.
Our product innovation continues to deliver success. We identified an opportunity to broaden the reach of our Tempur Pedic brand with a third field. Most consumers sleep on an innerspring mattress. With the 3rd feel. Most consumers sleep on an innerspring mattress.
The new Tempur Flex products combine the more familiar feel of an innerspring product with the benefits of Tempur material. We had good launch execution and Flex is off to a very strong start with favorable reaction from customers and consumers. We believe this provides us with a multi year opportunity to grow our business. In our 2015 Posturepedic product launch, we recommitted to what Sealy Posturepedic is known for, back support, adding new support features that consumers have responded to. The new Posturepedic is off to a good start with sales benefiting from a more favorable mix of high end models like hybrids, which should benefit Posture Pedic pricing for the balance of the year.
Internationally, the rollout of Sealy and Stearns and Foster is progressing. These products are differentiated from the offerings in Europe and are starting to gain traction. We are confident in the appeal of these products and believe it represents another multi year opportunity for sales and earnings growth. For the Tempur brand, we are ramping up our product development pipeline for 2016 with a goal to have a positive impact internationally by leveraging the North America strategy. Given the investment we're making in our brands and products, we believe we have a multi year opportunity to further optimize pricing and trade spending.
Our pricing actions in the first half of twenty fifteen on services have been successful and we will continue to seek additional opportunities where appropriate. We are also focused on improving the effectiveness of our trade spend. And lastly, we have an enhanced focus on cost, which is a top priority for the company. We have a number of cost initiatives in place and we're making good progress. One of these is to improve productivity in our Sealy assembly facilities.
You may recall that in the Q3 of last year, we had significant volume and share gains, which created operational challenges. One of the solutions was to begin building inventory of high selling SKUs ahead of major holidays. I'm pleased to report that this process helped us to reduce over time in shipping costs and improve customer fill rates around the 4th July holiday. We expect further improvements as we increase this capability in the future. In addition, we are defining and then embedding best practices across our manufacturing footprint.
This should enable our lower performing plants to approach the productivity of our high performing plants. We recently opened our 2nd multipurpose facility in Hagerstown, Maryland. This follows the successful opening of a new facility in Indianapolis earlier this year. Both of these new facilities have improved layouts and equipment for mattress building and function as mega centers that merge Sealy and Tempur Pedic shipments to improve logistics efficiency. I'm also excited about our initiatives to reduce costs through optimized product design as well as reduce SKU complexity.
As we've communicated previously, many of these initiatives will take some time, but we are very confident that we will significantly improve Sealy's U. S. Margins. So in summary, we are pleased with our 2nd quarter results and our improved outlook for 2015. We're making very good progress on our strategic initiatives and we have significant opportunities still in front of us.
I'm very pleased with the focus and dedication of our leadership team and of all 7,100 Tempur Sealy employees. Our team is engaged and working together to deliver on our commitments and we believe this will translate into enhanced value for our stock holders. Before turning the call over to Dale, I want to spend a moment to address the leadership transition we announced earlier today. The company appointed Barry Hytinen to EVP and Chief Financial Officer succeeding Dale Williams. Barry is a highly respected member of our management team and is currently managing the finance organization in North America as well as the company's global corporate development initiatives.
I've worked closely with Barry since joining the company and he has been a great partner in successfully turning around the North America business. I look forward to Barry's continued contribution to our organization as CFO. I would like to thank Dale for his leadership and contributions to the organization. As many of you know, Dale led the company through its IPO in 2003 and has played an instrumental role in the company's significant growth over the past 12 years. Dale will remain with the company until August 31 to ensure a smooth transition.
With that, I'll now turn the call over to Dale. Thanks, Tim.
I have thoroughly enjoyed my time here. We have achieved a great deal over the last 12 years and it wouldn't have been possible without having great products and a team of passionate and dedicated employees focused on growing the business throughout the world. Tempur Sealy's opportunity is substantial and I'm confident that Barry's leadership I'll now focus my commentary on the Q2 results and then I'm going to turn it over to Barry to discuss our updated full year guidance. Consolidated net sales for the Q2 were 764 $400,000 up 6.9% versus the Q2 last year and on a constant currency basis up 10.9%. Adjusted gross margin improved 180 basis points to 39.4 percent and adjusted operating margin improved 140 basis points to 9.2%.
Margin improvement was driven principally by the North America business segment. Our discussion of adjusted operating income and margin excludes $6,700,000 of integration costs as well as $11,700,000 of additional costs related to the company's 2015 annual meeting, the CEO transition and related retention expense. As disclosed in the release, the majority of the integration costs occurred in North America and included costs related to the transition of manufacturing facilities and distribution network. In North America, net sales increased 9.1% and on a constant currency basis were up 10.2%. Strong growth of 11% in the U.
S. Was driven by high teens growth for Tempur Pedic brand and mid single digit growth for the Sealy brands. Our growth in the U. S. Was offset slightly by foreign exchange driven decline in Canada.
Canada sales were down 7.8%, but up 3.9% on a constant currency basis. Tempur Pedic's growth in North America was driven by strong demand for the new Flex products as well as adjustable bases and Breeze, while Sealy's growth was driven principally by the new Posturepedic collection. Bedding product sales increased 10.4% on a unit increase of 3% with positive price growth resulting from a higher mix of Tempur Pedic sales during the period and recent pricing actions. North America adjusted operating margin improved 230 basis points to 11.2% as a result of a 280 basis point increase in adjusted gross margin of 36.6%. The improvement was driven principally by higher Tempur Pedic U.
S. Gross margins, which increased significantly from manufacturing and supply chain efficiencies, fewer floor model discounts, cost productivity and pricing, offset partially by product mix. Sealy U. S. Gross margins were down slightly in the quarter compared to last year as our productivity initiatives were offset by product mix and our extensive rollout of new post orthopedic floor models.
As we look to the balance of the year, we expect Sealy's margins to improve due to the new Posturepedic line being fully rolled out and less floor model discounts as well as due to our cost productivity initiatives that are underway. North America advertising expense was higher as we supported the new Flex rollout with higher national advertising and had more branded cooperative retailer advertising. Other selling and marketing expenses were lower as we lapped last year significant in store marketing investments that supported the Tempur Cloud and Kontoor product launches. In international, net sales declined 2.2%, but on a constant currency basis, we're up 14.1%, with continued growth in Asia Pacific and Latin America as well as Europe. Asia Pacific results benefited from higher Tempur brand sales as well as the contribution from Sealy sales in Japan.
Latin American sales increase was driven largely by Sealy sales in Mexico and Argentina. Bedding product sales declined 2.6%, but on a constant currency basis were up 13.5% on a unit increase of 13%. Other channel sales grew up 28% on a constant currency basis, driven by strong Tempur direct sales. International adjusted operating margin was down 90 basis points to 18.1%, driven by a 140 basis point reduction in gross margin to 52.3%. The decline in margin is principally because of a higher mix of Sealy product sales as well as geographic mix.
The majority of the sales growth in the quarter was driven by Sealy branded sales in Latin America, Europe and Japan, which have lower margins. Adjusted corporate expenses were higher in the 2nd quarter due primarily to increased stock compensation. As you will remember in the Q2 of 2014, we recorded a $3,000,000 benefit related to long term incentive compensation, which lowered last year's comparison. Interest expense was $20,500,000 for the quarter. Other expense was $2,200,000 and included a currency impact on foreign denominated loans.
2nd quarter GAAP earnings per share was $0.34 as compared to a $0.04 per share loss last year. Adjusted earnings per share increased 36 percent to $0.53 on a constant currency basis increased 46% as foreign exchange rates negatively impacted earnings per share by $0.04 Adjusted EBITDA increased 16% to $90,300,000 in Q2 and on a constant currency basis increased 21% as foreign exchange negatively impacted adjusted EBITDA by $4,000,000 As it relates to cash flow, year to date cash flows are down versus last year due to timing of several working capital items. This was expected and cash flow is actually ahead of plan. We are planning for significant operating and free cash flow generation in the second half, similar to the second half ramp experienced in 2014. Our leverage continued to improve and as of June 30, the ratio of consolidated funded debt less qualified cash to EBITDA for financial covenant purposes was 3.8 times as compared to 4.3 times the same period 1 year ago.
We expect to be approaching our 3 times leverage target by the end of this year for the Q1 of 2016. In light of the continued favorable interest rate environment and as we approach our optimal leverage level, we will continue to evaluate opportunities to improve our debt structure with an objective to move more of our debt to a fixed rate. As mentioned in the past, as we have approached our target leverage level, we will assess whether debt pay down is the optimal allocation of cash flow. I'll now turn the call over to Barry to discuss our updated financial guidance.
Thanks, Dale, and thank you both for your very supportive comments. And Dale, sincere thanks for your leadership over so many years. I am very pleased and excited to lead our global finance organization and look forward to interacting with the investment community in the coming weeks ahead. Today, the company updated financial guidance for 2015. The company currently expects net sales to be in a range of $3,125,000,000 to $3,175,000,000 which reflects growth of 4.5% to 6% compared to 2014 and approximately a 3.5% headwind from foreign exchange and adjusted EPS to be in a range of $3 to $3.20 which reflects growth of 13% to 21% compared to 2014 and approximately a $0.30 impact from unfavorable foreign exchange.
The increase in our 2015 guidance is based on the better than expected results in the Q2 and our current outlook for the remainder of the year. In the second half, we expect continued solid growth in sales, margins and earnings. Similar to the last year, we are expecting margins and earnings to increase in the second half relative to the first half as seasonality strengthens and product heavy investments that occur early in the year dissipate. It is important to note that our guidance is based on adjusted figures and dependent on the factors that Mark discussed at the beginning of tonight's call. In closing, we had a solid second quarter with results ahead of plan.
The key pillars of our strategy are working. Our advertising message is compelling and has been effective and our new product innovation has been successful. Our enhanced focus on cost is beginning to pay off as evidenced by the increased flow through of our revenue to profit. We have significant opportunities ahead of us and we are focused on delivering on our commitments. And with that Carmen, would you please open the line for questions?
Thank you. And our first question comes from the line of Seth Basham from Wedbush Securities. Please go ahead.
Good afternoon.
Good afternoon. Good afternoon.
My first question is on the Tempur Flex. It seems like you've had a good launch of that new product. You quantified some of the expected opportunities in various places and products around the world. Could you help us think about what the long term product outlook is there? How many millions of dollars of sales do you think that could do annually?
Well, Seth, we're very pleased with the launch of Flex. We think it has done exactly what we had hoped it would do and planned for it to do, which is to expand the reach of the Tempur brand. We have many people who aspired to buy the Tempur brand, but didn't really like the feel of cloud or contour. And we had the opportunity to deliver a feel that was more responsive, but still have that Tempur benefit. And so it has been appealing and the strategy was to try to bring as many people as possible from below $2,000 to above $2,000 Previously, if you wanted temper, but you didn't like the feel, you would tend to drop down to a lower price point product.
Now our trade customers and ourselves have the opportunity to sell a more premium bet. So that strategy is working. Like I said, it's off to a great start. I think it's fairly early to try to quantify what kind of upside we have and how much of the lift is going to be incremental versus some amount of cannibalism. And also internationally, I think there are long term opportunities, but we have yet to
quantify that. Okay. That's helpful perspective. One follow-up related to the Flex, probably spent a lot on advertising launching it. As you think about your advertising plans for the year, are you still anticipating the same rate of percentage of sales?
Yes. The rate was actually a bit higher in the Q2 for two reasons. One, it was our belief that with really good product news, we wanted to get behind it and shout about it and make sure that Flex got off to a great start, which it has. So that was one driver. And the second driver is, you'll see a little bit more of spending in the bucket that we call integrated advertising, which is the advertising we do jointly with our customers.
And our philosophy is we want to make those dollars work harder and move more of the price based kind of spend to grand building kind of spend. So as we do that, we can then track it as advertising measure it and make sure we're getting the spending rates and performance that we expect to get out of it. So it's back to our strategy of making our trade spending work harder. So that's a little bit why you saw the greater spend in Q2 as well. For the second half, it will be not as high as what's in the second quarter, but a little bit elevated compared to what we've guided earlier.
Got it. Very helpful. Thank you and good luck and good luck to you, Dale.
Thank you. Thank you.
And our next question is from the line of Budd Bugatchi from Raymond James.
Good afternoon. I just I guess I became Italian quickly. First of all, Dale, good luck to you. Barry, congratulations to you on your new role. I guess my question my first question is on the Sealy progress inside the plants.
I know you said you Tim, I think you said you started the new Hagerstown plant. Can you talk a little bit about where we are in getting the same equipment footprint at the remaining plants and getting to a level where you can actually measure and maybe implement best practices?
Sure. The 2 new plants and they were built from the ground up, it's important that they're both reflective of improved equipment and layout, but they're also importantly mega facilities. So we get the benefit of combined shipments as well. And every time we take learnings from the new facility, we decide what we can do differently in terms of both layouts and equipment investments in the other plants. But it's not just about equipment investments.
There are a number of, in my view, good lean best
practices that we can
identify, define and then bring the Great as the Great Recession occurred and times got a little tough and we squeezed some personnel out. And I think we with a little bit of reinvestment and commitment to lean, we can deploy best practices. So but we're in the process of defining those and starting to roll those out. And in fact I can tell you we have 15 plants and I would say 12 to 13 of them showed progress in the recent period. We have a couple that are laggards that we've intensely gone after.
We've sent some of our most seasoned veterans down to a plant in Texas for example. And in the last few weeks we've seen a lot of progress there. So I'm encouraged that we're seeing good progress. And while it is a process, we're very confident that we're going to get to the U. S.
Dealing margins that we we're seeing good progress. And while it is a process, we're very confident that we're going to get to the U. S. Dealing margins that we had previously communicated.
Okay. And my follow-up really has to do with the balance of the leadership transition that you're in progress. And I realize it's a little bit maybe uncomfortable to ask or answer this question given your interim status and the retention bonuses, retention payments that were made and I think other agreements that were done. But where are we? It seems to me we're approaching 90 days from the date of that.
And as I recall during the time that the arguments were going on, we were told or the investment community was told that we're talking to a lot of people, we're talking to people and I think the plan was that or the communication was the inference was that we were going to have some better timing of that or sooner than later. Where are we on that? What can investors expect over the next short period of time?
Sure, Budd. Well, obviously, the Board formed a committee to run the search. And I can tell you that they are actively viewing and vetting candidates.
It is
a process. And of course, they want to make the right decision. I don't have any update for you on timing. What I can assure you though is that this team is incredibly focused on executing our strategy, delivering our commitments. I feel like we have prioritized the initiatives that are going to matter the most in terms of driving value.
And you might think that there's some distraction, but there isn't. We're focused. We're aligned. We feel good about the quarter. We feel good about the back half and that's the way we're operating.
Okay. Good luck to you on the balance of the year.
Thank you. Thanks, Mike. Thanks,
Mike.
And our next question is from the line of Josh Bernstein from Longbow Research.
Good afternoon, everyone, and congrats on a nice quarter.
Thank you.
Dale, thank you for your service. It's been nice working with you and Barry welcome to your new role.
Thank you. Thanks.
Just a question on the rollout of Sealy in Europe and Japan. Just could you go over what inning you are in the rollout if it's an Japan. Just could you go over what inning you are in the rollout if it's in all the countries right now that you want or all the doors that you want?
I would say it's still relatively early. We didn't see a whole lot of traction. We started to see a little bit of improvement towards the back end of the quarter and into July. But as you know, we had some issues with delivery of the products early on. And so the team has now had to reinvigorate basically the channels to get them excited again about the product.
I was in Europe recently with the team and I can tell you that there is still excitement that the product is differentiated from typical offerings in Europe and it's still compelling. But we have to kind of reinvigorate the excitement around our customers. So lots of work to do there. It's still in early days. But the team believes that long term this is still a very good opportunity.
And are all the contract manufacturer issues now worked through?
Yes, absolutely.
Okay, great. And then just one follow-up for you. Just with respect to the guidance raise on the top line, where is the outperformance coming from that gives you the confidence to raise the revenue guide?
Sure, Josh. Our North American business has been strong. And as Tim mentioned, we outperformed in the Q2. We have a positive bias as it relates to Flex and Posturepedic. And that is the principal driver as we think about the second half.
Okay. So it sounds like North Americas were the outperformance and within that it's Flex and it's Sealy Posturepedic?
Right. I would say overall the Tempur business was very strong. Flex was certainly a big piece of it, but we got some really nice efficiencies in our factory. Cost productivity, we talk about it in Sealy, but it's important in Tempur too. We leveraged the volume nicely in the plant.
We've got the benefit of pricing. So a number of factors drove a really nice improvement in Tempur. And so we feel really good about that business.
Great. Thank you for that and good luck in 3Q here. Thank you.
And our next question is from the line of Brad Thomas from KeyBanc Capital Markets. Please go ahead.
Thank you. Congratulations on a great quarter. Dale, best wishes and Barry congratulations. I was hoping we could maybe talk about gross margin and some of the puts and the takes here for this quarter?
Sure. If we look at the Q2, gross margin performance was pretty good for the overall business. And the gross margin, as I said in my prepared remarks, internationally gross margin was down a little bit. From a North America standpoint, we saw good improvement in gross margin depending on if you want to look at it on reported or constant currency, but outstanding performance there. Gross margins in the U.
S. In North America up 2 80 basis points. International was down 140. If you look at the U. S, gross margins were up quite a bit.
And we mentioned that celiac margin was actually slightly negative. So what that implies is the Tempur margins were up significantly to the tune of over 6 100 basis points. And the drivers of that improvement in Tempur was the productivity in the plants from the volume. We talk a lot about the integration related to distribution.
A lot of that
benefit accrues to Tempur because it's the
Tempur because it's the Tempur products that are now riding on Sealy trucks and it makes Tempur's transportation cost much less. You also have the price increases in Tempur, etcetera. So there are a lot of very strong improvements in the Tempur margin that makes us feel very good about the progress there.
Great. And how are you thinking about gross margin for the Q3? And maybe specifically, what are you seeing in terms of the input costs? I'll take that in reverse order Brad. From a standpoint of commodities and input costs, we did experience a slight benefit in the Q2.
As you might recall, we had some unfavorability actually from commodities in the Q1. And so that favorability continues to ramp. We've actually included in our updated guidance several million of benefit from commodities in the remainder of the year. And as it relates to guidance for gross margin, I think at the beginning of the year, we indicated that we thought it'd be right around 40%. And we're probably a tick ahead of that for the full year as the way we're thinking about it.
Great. Thank you so much.
And our next question is from the line of Peter Keith from Piper Jaffray. Your line is now open.
Hey, thanks
a lot and congrats on the nice results everyone. I was hoping you could talk a little bit about the Tempur progress in Europe. I know that's been one area of sluggishness. Has there been any uptick or signs of improvement as we're kind of coming out of Q2 and into Q3 for the Tempur European business specifically?
No. It's while we're very bullish about Flex and the results here, we haven't seen as much of a good environment certainly in Europe. For example, in Germany, while we're starting to see a little bit of recovery, it tends to be at the low end of the business as opposed to recovery in the premium segment. So as we think about our outlook, we're a little bit more bullish on the U. S.
And a little bit more conservative right now on our international business mainly due to the environment.
Okay. Thank you, Tim. And then just thinking about the price increases that have been incorporated, I believe you did 1 in March and then a smaller follow on 1 in May. At the Analyst Day earlier this year, you thought it would be about a $25,000,000 benefit from the price increases. Where do we stand now that you've had 2?
Are we still at $25,000,000 or is it a little bit bigger numbers?
Yes. Actually we're a little bit bigger. We had a price increase in March as you recall and then the smaller one in May. We got about an $8,000,000 give or take benefit in the quarter. I would say you could annualize that and that would be about right.
Okay. Thanks a lot. Again, all our people others have said, Dale, it's been a pleasure working with you. And Barry, look forward to being in touch.
Thanks, Peter. Thanks.
And our next question is from the line of John Baugh from Stifel. Your line is now open.
Thank you. And Dave, my best wishes as well. Tom, Barry, congratulations. Quickly, just on Sealy Europe, could you sort of tell us where we are in terms of placements indoors, product acceptance? Are we moving country by country?
And any feel for how that moves the international revenue? Yes.
A lot of the growth in international from Sealy in particular came from Asia and Latin America. We feel really good about that. So constant currency we had a 14% revenue growth. But again a fair amount of that came from other parts of the world. In terms of Europe, we had we probably have a few 100 doors now.
We have to again rebuild the confidence, rebuild the inventory levels and make sure that our trade customers are confident to get behind the product. So as I said, there's a lot of effort around retraining and re excitement getting them going again. So it's still relatively modest level of sales. I think it will be behind where we had hoped to be by the year end. But again, that's one offset.
We have other good guys in the business that net net we feel good about it overall. That's one that's probably going to end up being a little bit of a slower ramp. But still long term, we have every confidence given the product is still as I said earlier viewed as compelling and different. We still think it's a good opportunity for us long term. It's just going to take a little bit longer.
Great. Thanks for that color. And then a follow-up on cash flow. I think Dale or Barry somebody mentioned we're quote on target and we haven't generated much of any cash year to date from operations. Could you walk us through kind of how the back half of the year looks and if you want some view to 2016?
And then maybe related to the commentary around building up inventories around holidays, of course, have Labor Day coming up. Thank you.
Yes. Sure, John. From a standpoint of the way we're thinking about the full year with obviously this in the back half, we'd be looking for operating cash flow in that same kind of vicinity as what we were talking about at the beginning of the year right around $240,000,000 give or take. And we would anticipate free cash flow would be right about $180,000,000 to 1 $185,000,000 just kind of with CapEx being a plus or minus $5,000,000 of that sort. So as we're thinking about the second half, we expect it to be up considerably and obviously up dramatically from the first half and that will be driven by both improved margin performance and seasonality with sales and the outlook for the positive second half.
In terms of the building of inventory, it tends to be a wash. We build a little bit ahead, but it tends to wash out from a working capital standpoint. Again, I'll tell you that we did a little bit of it before Memorial Day. We did more of it before the 4th July. The week after the 4th July, we had virtually no back orders.
We had much less overtime. So we keep learning and building this muscle and we think we can do even more of it prior to Labor Day and we should be in a good position relative to last year's inefficiency and we keep getting better. But I'm pleased with what I've seen so far.
Thanks and good luck.
Thank you.
Your next question is from the line of Keith Hughes from SunTrust. Please go ahead.
Thank you. Question on the North America. I think you had said Dale it was 3% unit growth in the quarter. Is that correct?
Correct.
That's for the combined North America business.
So with Sealy doing its launch from the earlier new products, were those Sealy numbers up similar to the mid single digit growth in North America Sealy?
If you look at the units, the 3% was related to dollars. Sales for bedding was up 10% in the quarter. From a unit standpoint, Tempur was double digit. But when you compare the units of Tempur to the units for Sealy, there's a much higher volume of units within the Sealy business. From a sales standpoint, Tempur was in the high teens growth.
Sealy was in the lowtomidsingledigit top line growth and that's a factor of the transition of Prostropedic and getting the floor model discounts out and all that kind of thing. But we saw outstanding top line and unit growth within Tempur. CLE's top line growth and unit growth was a little bit slower because of the transition.
So on a blended basis just on mattresses what were units in
North America? On a North America basis units were up 10%, or I'm sorry 3%.
3%.
Okay. Second question, can you give us That
would be bedding units, Keith, consistent with what
he was asking on mattress.
Oh, man. This was bedding units.
3% is bedding units, correct? Yes. Okay. And then just switching to currency, can you give us the EBIT impact of currency in both segments in the quarter, the dollars?
For the Q2?
2nd quarter, yes.
Yes. For the Q2, from a North America standpoint, EBIT was affected about $2,000,000 International is actually about a wash. We had significant translation drag internationally on currency, but we had what we often call cross currency benefit that at the EBIT level negated the translation effect. And the cross currency real quickly to give you an example, our cost internationally is essentially in DKK, so which is tied to the euro. The euro goes down in value and it goes down more than the Japanese yen goes down.
You sell in Japanese yen, you see a margin expansion in Japan. So that's what we call cross currency and the currency offsets the translation at the EBIT level within international.
Okay. All
right. Thank you very much.
Yes. Congratulations on the good results. But thank you. Thank you.
And our next question is from the line of Jessica Mayes from Nomura Securities. Please go ahead.
Hi. Good afternoon and congrats on the nice results.
Thank you.
My first question is about the strong Tempur margin. I think you said it was up 600 basis points in the quarter. I was wondering if you could help us think about what kind of opportunities are remain for further improvement on the Tempur side and just how far along we are in realizing some of those benefits?
Sure. From a Tempur margin standpoint, we absolutely believe that we can continue to see improvement in the Tempur margins. As I said earlier, price was a factor. The fact that Flex was a smaller rollout than the Cloud Contour last year, so there's less discounts. Operations, we saw a very good improvement in the plants and in the supply chain.
So but that was partly negatively offset by mix, which was related to adjustables still growing faster than mattresses. And that's going to, we believe, balance itself out in the second half, because the second half last year was where we saw adjustables just really take off. And also product mix around the new product. Flex has a little bit lower margin than the core line. As we said when we launched it, it's a new product, new technology that tends to be introduced at a slightly lower margin rate.
And then as we learn to build these things, we're able to improve the margins. So we'll see margin improvement related to getting flex cost better. We'll continue to see significant margin improvements around improving the distribution. We've got ongoing productivity initiatives within Tempur. So we think there's a lot of opportunity to keep improving Tempur margins even from where they're at now.
Great. Thank you. And then my second question is on the forecast for operating margin to expand in the back half more than in the first. And I was wondering if you could give some color on the different buckets of SG and A sales marketing and G and A that will drive that?
Sure. As we think about looking at selling and marketing, we would as Tim alluded to, advertising as a percentage will come down a little bit and be more consistent with the Q1. And with leverage, they'll be lower as a percentage of sales than the Q2, Jessica. G and A, we would expect to be a little bit of incremental leverage as compared to the first half. Those would be the principal drivers.
Great. Thank you. All the best to you Dale and congrats Barry.
Thank you. Thank you.
And our next question is from the line of Laura Champine from Cantor Fitzgerald. Please go ahead.
Good evening. Thanks for taking my question. It's really on the back half guidance for Tempur North America. What do you have built in for price realization in your sales year on year in the back half? And how much of that do you think you'll give up on mix?
Well, we continue to expect about $8,000,000 a quarter. In terms of mix, it should be fairly consistent with what we saw in the 2nd quarter. It may be a little bit better in that as Dale said, we're now comping in the back half very good volume on adjustables. So while adjustables was still growing year over year in the Q2 that will moderate a bit. Flex growth is a little bit dilutive because of the start up and the learning curve.
But I think those would be the key drivers.
Got it. Thank you.
And our next question is from the line of Curtis Nagle from Bank of America Merrill Lynch. Please go ahead.
Good evening and thanks for taking the question. So yes, just curious on going back to the Flex, I guess any indication you'd have in terms of customer mix, I guess existing versus new? And then any updates in terms of improving the margin on the adjustable basis? I know it's very early in terms of universal platform, but any updates would be appreciated.
Yes. On customer mix, we have if I'm answering your question, we have some variation between customers as to who's doing extremely well of it and who is not as far up the curve yet. And for those that are doing really well, we're trying to understand what it is that's driving it and share those best practices. I would also say that we rolled out on balance a little more than 2 slots per store per floor. And given the success, we would we're going to push hard to get that 3rd flex unit, which oftentimes is actually the higher end part of the line.
We rolled out more commonly the first two models in the line, because the idea was that we were pulling people up from cheaper price points. But given the success, we're going to push hard to try to get that third product out there, which we call Elite. And so it's a combination of pushing more Elite and trying to share those best practices that we think will help further improve our success more broadly and more consistently across the trade.
Did I answer your question?
You did. You did. And then just any commentary on the adjustable margin would be great.
Yes. We have a lot of activity on cost productivity. It's a huge driver for us right now. And I'd say there is both opportunity to continue to reduce the current products and as well as apply global leverage, which we've talked about previously in our buying and our R and D and so forth. And we're still working very aggressively to try to do both.
So in the shorter term, I would continue to see cost productivity in the current line. And then we are at the same time moving forward with the global project that we've mentioned
previously. Okay. Thank you very much.
Thank you.
And our next question is from the line of Budd Bugatch from Raymond James. Your line is now open.
Yes. Thank you for letting me ask a follow-up. I'm curious on the balance sheet, Barry. You talked about getting I think to a 3 getting close to the 3 times or Gail, the 3 times leverage at the end of the year. Can you maybe give us a target for where you think the long term debt ends at the end of the year, Ian?
Is it about $1,400,000,000 or where is that?
Yes, that's about right. I mean, we're kind of expecting to be approaching that 3 times leverage ratio, but at the end of the year, So whether it's 3.1 or right in that vicinity as Dale mentioned, we're looking at being approaching that long term target at the end of the year or maybe in the Q1. So we're obviously very much looking forward to that as we think about how to maximize value for shareholders through capital allocation.
And that's the net debt to EBITDA, Barry? Is that the way to think about that?
That's right, Budd.
And hazard a guess for maybe the end of next year? I know we had wanted to get it down closer to 2 at the time of the acquisition. Where do we think and we've kind of relaxed that I believe a bit.
Yes. At the end if you recall at the Investor Day, you remember correctly and also at the Investor Day here earlier this year, we updated that expectation for more like we felt like it would be 3 times. After we looked at our optimal cash and capital allocation model, we felt 3 times would be the appropriate place for the company. And so as it relates to hazard getting a guess for next year, we're certainly not setting any guidance here today for 2016, but I'd say that also depends on what we're doing with our total use of cash at that point. And so I'd as Dale alluded to that would be something that we'd be looking at as we approach the target here at the end of the year.
Okay. And last for me, Dale, you said, I think Tempur margins were up. I think Tempur North America margins were up about 6 100 basis points year over year. As I went back and looked at the numbers last year, I think the number might have been 3.5%, because that a little watermark for the margin comparison. I realize we're not necessarily apples to apples since the reframing of the segment data, but help us understand what that comparison is to it.
Is that the operating margin or is that the gross margin?
I was talking simply gross margins.
Talking gross margin. Yes. So I think last year's gross margin was, what was it 49% high 40s, if I remember looking back.
Tempur was about 40.5% in the Q2 last year on gross margin Tempur U. S.
So we're talking about 46.5% gross and
Yes, I said over 600 basis points, so a little better than that.
And how about the operating margin comparison then?
You can't compare the operating margin because of the segment changes.
Okay. All right. Thank you very much and good luck again, Dale.
Thanks.
And ladies and gentlemen, this ends our Q and A session. I would like to turn the call back to Mr. Tim Yeagy for any final remarks.
We look forward to talking with you again in late October on our Q3 earnings call. You for joining us this evening and have a good night.
And ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day.