I would now like to introduce your host for today's conference, Mark Rupe. Sir, you may begin.
Thanks, Sharada, and thank you for participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO and Dale Williams, EVP and CFO. 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 statements including the company's expectations regarding sales, adjusted EBITDA, 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. 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 most recently recent quarterly report on Form 10 Q under the headings Special Note Regarding Forward Looking Statements and or Risk Factors as well as the company's press releases. Any forward looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward looking statements.
The press release, which contains reconciliations of non GAAP financial measures to the most directly comparable GAAP measures, is posted on the company's website at temperssealy.com and filed with the SEC. With that introduction, I will turn the call over to Mark Sarberry.
Thanks, Mark. Good evening, everyone, and thanks for joining us. Today, I'll provide an overview of our performance in the second quarter, discuss our growth initiatives, including the progress of new products and advertising, and then provide an update on the Sealy integration. I'll then turn the call over to Dale, who will provide details on the Q2 financial results and discuss our updated financial outlook. The Q2 didn't turn out as we expected.
The steps we have taken to return Tempur North America to growth are appropriate, but they're taking longer than we would like. And as a result, we're lowering our financial outlook for the full year. Having said that, we're pleased with the performance of the rest of our portfolio, and the integration with Sealy is proceeding ahead of schedule. In Tempur North America, we faced several challenges that impacted our overall Q2 performance. We experienced softer than expected demand for our older products and in particular didn't experience the seasonal lift in demand around the 4th July holiday.
In addition, new products contributed less than we expected as rollouts were slower than planned. Notably, the Tempur Choice rollout has been slower than we'd hoped due to initial start up delays that are now resolved. In addition, the transition to the new Ergo Premier adjustable base took longer than anticipated as retailers sold off existing floor models. In short, we had less sell through opportunity given the later rollout timing. But we are confident that the steps that we're taking to return to growth are appropriate and beginning to work.
We are committed to sustaining and growing the premium portion of our retail customers' business by continued focus on product innovations that drive AUSP, investment in advertising to drive consumer demand and store visits and improving how we serve our customers. In the second quarter, sales of products priced at $2,000 and above were positive for Tempur North America, and we saw an overall AUSP increase. Our retail business, particularly with our largest customers, is improving. Our advertising has been refreshed, and we plan acceleration in advertising spend in the back half. We continue to invest for the long term, and the two areas that we believe will lead to long term success are product innovation and advertising.
Everywhere else, we are very cost focused to enable us to invest in these 2 strategic priorities. Looking at the rest of our portfolio, Sealy sales were in line with our expectations during the Q2. The rollout of the new Sealy Posturepedic offering is essentially complete. Both the Posturepedic Innerspring and the Hybrid series, which is constructed of half memory foam and half springs, are performing well. In addition, we've seen continued momentum from the Optimum collection.
Adjustable base sales and our joint venture with Comfort Revolution also contributed to the growth. While Stearns and Foster is down versus last year following the very successful launch in late 2011, we are pleased with its performance. Sealy branded value products are down year over year. Tempur International sales were essentially flat on a constant currency basis. Our Asia Pacific business continued to perform well with positive results in all of our key markets and in particular, Korea and Japan.
Since establishing our Korean subsidiary in 2011, we have experienced solid growth, and it has quickly become an important part of our international business. While Japan has been part of the Tempur portfolio for many years, we have seen it have significant growth recently from our company owned stores. The economy in Europe, on the other hand, has been challenging for us and the industry. There have been pockets of strength, but not enough to overcome the overall malaise. However, we believe that we've continued to take share in the major markets.
Now I'd like to discuss our critical growth initiatives related to our new products and our advertising. Demand for our Tempur Breeze products, which were introduced last year, continue to be high and are a perfect example of consumers' willingness to trade up for innovation. We have added a top of the line Cloud Luxe Breeze this quarter, which has been positively received. The introduction of Tempur Choice in North America enables us to leverage our brand to enter a segment of the market previously not available to us. With Choice, we and the majority of our retail customers have a clear opportunity to take market share.
We've seen good performance so far from customers who've supported Choice with advertising and whose RSAs have been well trained. Initial feedback from end consumers is also positive. However, many of our customers have only just received it. In the Q3, we plan to finish the rollout, increase the amount of training and support the launch with choice specific national advertising. We also completed the rollout of our Ergo Premier Adjustable Base.
The Ergo Premier priced at $19.99 replaced the $1700 Advanced Ergo, which had been introduced in 2,008 and had grown placement to multiple spots on most retailers' floors. The new Premier has advanced features, including the ability to control it with a mobile app. Clearly, this product, too, contributes to retailer opportunity to drive AUSP. Next week at the Vegas Bedding Show, we'll be launching several new products across our brand portfolio, notably from Tempur, Stearns and Foster and Optimum, all of which are designed to improve retailers' average tickets. To support these launches and our future product development efforts, we have bolstered our talent by bringing in some excellent senior level product management capabilities in recent months.
And we will continue to invest in R and D to leverage the combined technologies of our portfolio to deliver a stream of innovative products that will resonate with consumers and grow our retailers' business. Our pipeline of new products is robust, with the anticipation that 2014 will be another year of delivering significant innovation across our entire brand portfolio. Now I'd like to address our advertising initiatives. In early May, we launched Tempur North America's new advertising campaign into a crowded advertising environment, and we were optimistic that it would increase retailer foot traffic, lead to improved Tempur Pedic conversion and over time benefit our direct business. After a review of the 1st 2 months' performance, there are elements of the campaign that are doing very well.
The You Are How You Sleep ad is clearly making an emotional connection with our target consumers. However, we believe we need to run-in conjunction with it and add with a stronger rational message and a call to action. As a result, we're making adjustments, including bringing back the highly successful Ask Me campaign. Our plans include running Ask Me commercials tagged with a unique promotional event for Labor Day that our retail customers are excited about. We're committed to accelerating our advertising investment in the back half and we'll also be making adjustments to our media mix to improve the overall effectiveness.
Also, we're very pleased with the consumer reaction to our new Sealy ad campaign, Life Before Your Eyes. The integration with Sealy continues to progress well. Cost synergies are being realized ahead of plan, and we're more confident than ever that the combination provides significant competitive advantage. We know that this early stage of the integration is critical to achieving the long term potential of the deal, and we are placing the appropriate level of focus on it. We have now integrated most functions of the business, including the management of sales and marketing.
We have integrated these areas earlier than we had originally projected, but have done so very thoughtfully and in consultation with our retail customers. Recently, we conducted an employee survey across the organization, and employee morale, engagement and support for the combined company are very high. When we announced the deal, we expected to achieve $40,000,000 in cost synergies by the 3rd year. We now expect to realize upwards of $18,000,000 in cost synergies in 2013 and have good line of sight to achieve the $40,000,000 in the 2nd year. We plan to provide a more detailed update on these synergies at our upcoming Investor Day.
In closing, we remain confident in our company's long term potential. Our pace of innovation will remain vibrant, and we're committed to brand marketing investments. In addition to the very attractive cost synergies we expect to achieve, in the next few years, we expect to realize attractive upside from revenue synergies as a result of a broader product offering and access to more channels, including international expansion. At our Investor Day on September 10, we'll share our new long term plan and provide details on how we are approaching our cost and revenue synergies. With that, I'll now hand the call over to Dale.
Thanks, Mark. I'll focus my commentary on the 2nd quarter financial results and then our updated 2013 guidance. For the 2nd quarter results, I will address the performance on a consolidated basis, then speak to the performance for each segment and provide commentary on the key areas or items where there is a notable variance from the prior year. As a reminder, the company completed its acquisition of Sealy in March 2013 and results for 2012 do not include the Sealy results of operations. Consolidated net sales for the Q2 was $660,600,000 Tempur North America net sales were down 4.9% and Tempur International net sales were down 2.3%.
On a constant currency basis, Tempur International sales were down 0.6%. Sealy sales were $344,600,000 By product, betting net sales for Tempur North America decreased 5.2 percent to $199,500,000 on a unit decline of 11%, principally driven by a year over year decline of Simplicity units. Tempur International Bedding net sales declined 6.1 percent to $73,900,000 on a unit decline of 1%. Sealy's Bedding net sales were $325,100,000 By channel, Tempur North American retail net sales declined 2% and direct net sales declined 40%. Tempur International direct sales increased 48% to $11,400,000 driven by growth in company owned stores and e commerce.
Sealy sales of $344,600,000 during the Q2 were in line with our expectations. Sealy's growth was driven by specialty products at premium price points, the new Sealy Posturepedic offering and increased Consolidated Comfort Revolution joint venture revenue. Partial offsetting factors were lower demand for CLE and Stearns and Foster products. 2nd quarter gross margin was 38.6% and included an inventory step up charge as well as a full quarter of depreciation related to the Sealy purchase price allocation or PPA. As we stated on our last conference call, there are 2 key points that investors need to consider when reviewing our consolidated gross margin.
1, Sealy traditionally operates at a lower gross margin than Tempur North America and Tempur International. And 2, Sealy historically recorded freight costs in SG and A, while Tempur segments have recorded it in COGS. As a result, by conforming to Tempur's accounting, Sealy's historical gross margin would be lower. In addition, Sealy's overall gross margins are influenced as a result of the consolidation of the Comfort Revolution joint venture, which tends to operate at a lower gross margin. On a year over year basis, 2nd quarter gross margin declined to 38.6 percent from 50.7 percent, primarily due
to the following: the inclusion of Sealy,
product mix and higher new product introduction costs as we shipped a significant number of floor models. These impacts were partially offset by improved efficiencies in manufacturing and distribution and lower sourcing costs. On a sequential basis, gross margin decreased to 38.6% from 48.3% as a result of the inclusion of Sealy for the full period, product mix, higher new product introduction costs. These impacts were partially offset by improved efficiencies in manufacturing and distribution. Consolidated advertising spend, which includes both national and cooperative, was $73,100,000 or 11.1 percent of sales in the 2nd quarter.
As Mark indicated, we remain committed to building our advertising investment as the year progresses to reinvigorate consumer activity around the Tempur Pedic brand as well as the other key brands in our portfolio. All other operating expenses were $143,000,000 or 21.6 percent of sales. Consolidated operating income was $44,000,000 or 6.7 percent of sales as compared to $47,500,000 or 14.4 percent of sales in the Q2 of 2012. Operating income included $11,900,000 of transaction and integration costs related to the Sealy acquisition. Excluding these costs, the higher operating income reflects the inclusion of Sealy.
Interest expense was $35,700,000 and included $8,700,000 in prepayment premium fees related to the company's refinancing of its Term B loans under its senior secured credit facilities, which was completed in May 2013. The tax rate was 131%. The tax rate for the 2nd quarter reflects tax provision adjustments related to the repatriation of foreign earnings utilized in connection with the Sealy acquisition and the adjustments to PPA as well as non deductible transaction expenses. As a reminder, the company was able to create a tax efficient structure through the Sealy transaction, which provides us the ability to utilize in excess of $1,000,000,000 of future foreign cash flow to be principally used to reduce debt. The normalized rate for the quarter was 31.1 percent, which was influenced by a shift in the geographic mix of our 2nd quarter profits.
2nd quarter GAAP earnings per share was a loss of $0.03 as compared to $0.45 per diluted share in the Q2 of 2012. Adjusted earnings per share were $0.36 in the Q2 of 2013. Next, I'll turn to the balance sheet and cash flow for a brief review. As shown on the balance sheet, the primary changes are related to the acquisition and related accounting treatment. Our total cash cycle on a year over year basis improved 3 days primarily related to improved payable days, up 5 and inventory down 3 days, offset partially by an increase in DSOs up 5 days.
During the quarter, we had an operating cash use of $16,700,000 primarily as a result of working capital, prepayment premium fees and transaction and integration costs related to the Sealy acquisition. Capital expenditures were $13,700,000 As it relates to our capital structure, the company has consolidated funded debt less qualified cash of $1,900,000,000 The ratio of consolidated funded debt less qualified cash to adjusted EBITDA was 4.6 times, calculated on a combined basis in accordance with the company's senior secured facility. A calculation of this ratio is included in the press release. In addition, the company completed the re pricing of its senior secured Term A facility. Combined, the Term A and Term B transactions are expected to reduce our annual cash interest costs by more than $13,000,000 Now I'd like to address guidance.
As a reminder, our guidance and related commentary reflects a full year of Tempur results, but only Sealy results from March 18, 2013. Today, the company lowered its outlook for full year 2000 net sales and earnings. The company currently expects net sales to be in the range of 2,425,000,000 dollars to $2,450,000,000 Adjusted EBITDA to be in the range of $370,000,000 to $385,000,000 for the stub period. On a trailing 12 month basis, the adjusted EBITDA would be $31,000,000 higher. Adjusted EPS to be in the range of $2.25 to $2.40 including $0.14 per share of depreciation and amortization related to the Sealy purchase price allocation.
We're also providing the following additional full year 2013 guidance assumptions. Depreciation and amortization of approximately $90,000,000 with an annualized run rate of approximately $100,000,000 This includes PPA depreciation and amortization of $13,000,000 in 20.13 with an annualized run rate of approximately $17,000,000 PPA depreciation is lower than previously communicated due to adjustments to the valuation of certain assets. Interest expense of approximately $83,000,000 excluding transaction related charges with an annualized run rate of approximately $95,000,000 tax rate to be approximately 31% for the full year, 31.5% for the balance of the year Share count to be approximately 61,600,000 for the year and 61,700,000 for the balance of the year. Capital expenditures of approximately $60,000,000 For Tempur North America, our guidance assumes a continuation of the trends we experienced in the quarter. As we indicated, sales slowed toward the end of the second quarter and July has started off similarly slow.
For the second half of twenty thirteen, our projections are as follows: Tempur North America sales to be down 5% to 10%, Tempur International sales to increase low single digits and Sealy to grow mid single digits. In total, this represents flat to 2% second half year over year growth for Tempur Sealy International. It's important to note that our 2013 adjusted EBITDA and adjusted EPS guidance does not factor in transaction and integration costs related to the acquisition of Sealy or interest expense costs on the financing transactions prior to the March 18 close or expenses incurred on the recent repricing financing transactions. In considering our guidance, it is possible that our actual performance will vary depending on the success of our new initiatives, macroeconomic conditions and competitive activities or the consequence of other risk factors we have identified in our press release and SEC filings. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control.
With that, operator, please open the line for questions.
Thank
Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets. You may ask your question.
Thanks. Good afternoon. Hey, Brad. First, just wanted to kick off diving a little bit more into what you saw in Tempur Pedic North America. Maybe first I could just ask about some of the dynamics in the quarter.
This is a big quarter in terms of new product launches. What does the underlying sell through rate look like when you try and adjust for the sell in?
Well, that's right. It is it was a big quarter for new product introductions. And the big swing factors for Tempur North America were the 2B product lines were Choice and the Premier, the Ergo Premier. And the it's frankly very early to tell. So if I look at Choice in the places where it's rolled out, the sell through is sort of consistent with what we had expected and it builds as A, the customers get more used to selling it and B, it's supported by advertising.
It's in limited we have limited data, but where it is, it seems to be going quite well and consistent with what we expect. But it is a new type of product to sell for most of the RSAs. So the training is critical. And one of the things that we're very committed to doing for all of the customers who have it is making sure we have a high level of training. But it is something that we anticipate will build over time, both because of training, because customers will support with their own advertising, but importantly because as of the beginning of August, we're going to support it with national advertising.
So I would say on that front, it was later to get to the floor than we would have liked, but the trends so far are approximately what we'd expected. On the Ergo basis, the transition there required retailers to sell off their floor models. So essentially what happened was the sell in was almost a one for 1 with a sell out of existing floor models. So that took time to go through and now it's largely we're well through it. I won't say completely through, but well through it.
And there what we were expecting and our plans have always been that roughly speaking, the attach rate would be the same as it was before, but because of the increased price, there would be a lift as a benefit of that. And again, it's early days, but it still looks like that's about what we're getting. Okay. And so just to
be clear, the Tempur North America in the Q1 though was down about 5%. And going forward, you're now modeling, I believe, a decline of 5% to 10%. There won't be as much benefit to sales from sell in. Is that kind of the way to think about how you guys are looking at guidance for the back half of the year?
The one thing I'd be cautious about is thinking about this sell in. The fundamental way we're looking at the trend is this. The way we're looking at the projection is this, is we're looking at the recent trends of Tempur sales and projecting that forward, recognizing that we anticipate and are working toward a turn so that we move back into a growth mode. But for projection purposes, we're using a continuation of the current trends. But when you look at sell in, I would suggest that you be cautious, and we certainly are as we do our analysis, of not thinking of sell in as incremental sales per se.
And what I mean by that is this. If you take a as I said, if you take a adjustable base, if you sell if we sell a new floor model adjustable base, one for 1, another one has to be sold to the consumer that would otherwise have bought a full priced one. So in effect, the sell in is almost a wash and especially when we give something of a discount to the retailers to buy the new ones. So for an adjustable base, it's almost a one for 1 and it's a wash. If you look at mattresses, in general, people who have taken Breeze sorry, people who have taken Choice have added slots.
But roughly speaking, we've estimated for the 2 new products, they've added 1 new slot, which means they've had to sell off another existing product. And given that we sell these products at a the floor models at a significant discount, when you look at the cash value or the dollar value in terms of sales, new product sell ins are not net. They're close to a wash in terms of incrementality.
Got you. That's very helpful. And then maybe just one point of clarification on the advertising. Mark, you mentioned a few refinements that you'd like to make specifically ahead of Labor Day. I think it sounds like how quickly will we see those new commercials?
Will you start running them before Labor Day? Or is that really when we should start looking for them?
We'll have the new commercials, the modified arsenic commercials will be on there next week.
Great. Thanks so much.
And I'll
turn it over to somebody else.
Thanks. Thanks, Budd.
Our next question comes from the line of Budd Bugatch with Raymond James. Your line is open.
Good morning. Good afternoon. I'm sorry. I think the focus on guidance, if I could, for the rest of the year, confused a bit and maybe Dale you could walk us through what the GAAP guidance is and then where the adjustments are both in the amortization and the add backs, how do we get there?
Well, Budd, I don't have a GAAP guidance for you. We're providing the pro form a guidance consistent with the for Q2, we gave you the GAAP results and then the adjustments to the GAAP results by essentially area and most of those adjustments are across the P and L. So a significant portion of for example PPA, but that's not in our adjustments. But just from an ongoing standpoint is in gross profit. But other areas transaction costs, etcetera, a lot of those are in G and A.
Some would be in selling. So I'm not sure exactly what to do to help you there. Well, are there do you see further adjustments coming into 3rd and Q4? There will be I would expect that there will be some small adjustments as we go through the year, but the big adjustments are behind us.
Okay. And you say that there's $18,000,000 worth of synergies this year. How much have we had year to date so far?
In the Q2, we probably had $4,000,000 or so of synergies.
So $14,000,000 in the second half?
Yes. It kind of builds on itself. Okay.
You were going to ship 70,000 new product SKUs, I think in the Q2, if I recall what you said on the Q1 call. Can you give us an update on how many you did ship and how many are left to ship?
It was very I mean, Budd, I don't have the exact number, but essentially what we thought we were going to ship, but we shipped them later than we thought we were going to ship them.
Okay. On the Tempur side, they shipped a little bit later than we thought. On the Sealy side, they pretty much ship on schedule. On schedule, if not ahead.
But they were planned for this quarter and they happened in this quarter.
And I would take it that the bulk of them were Sealy SKUs given the price points. Is that correct?
Many of them were Sealy, but there were a lot of the Ergo adjustables.
I got you. Okay. Can you give us maybe a run rate on Tempur for by month? You said that you fell off late in the quarter. Can you give us an order of magnitude or how much maybe we saw in June of the Tempur North American sales?
I think that's where the bulk of the problem was, right?
Correct. We were when we talked about the Q2, we expected Tempur North America to be mid single digit growth. Obviously, we thought that that would Tempur North America would improve across the quarter as new product got out into the market, as the new advertising started to hit. Obviously, we didn't see that improvement. In fact, as Mark mentioned, things slowed down a little bit towards the end of the quarter as we really didn't have impact that we normally see around the 4th July holiday.
So that kind of affects pre-4th July and post-4th July. So we've seen some softness in July as well post-4th July. But what we have seen is what we use to build our guidance along with expecting things that we are doing as a business. The thing that we are being cautious of is, as Mark mentioned, we're not trying to call the turn anymore. So things that we are doing, we expect the business to turn and start to grow again, but we're not going to try to call the date of the turn.
Well, you've done that before. I mean that was the way you handled guidance, I think several years ago when we were going through the Great Recession if I recall, but you basically took the run rate at the end of the quarter and said that was your guidance. So I understand that and I appreciate that. I'm not there's a criticism there. But what it says to me is it looks like June was down probably down 10% if the 1st 2 months were up mid single digits or maybe even a little better.
Is that fair?
No. We never expect as I said, when we gave the guidance on the Q2, we expected the performance of the business to improve as the quarter progressed. What we've tried to do with this guidance is take for the Q2, Tempur North America was down 5%. Right. So we're carrying that forward.
We saw a little bit of softness at the end of June and early July. So we're just trying to bracket what is a reasonable potential outcome.
Okay. And I thought you said it was going to you said guidance was like down 5% to 10%. So, it gives us a little bit of run a little bit of leeway on that. Final question for me is, if I look at Sealy pro form a and I know we don't exactly have the same matching of periods, but it looks like their business on a pro form a basis was up about 10%. Is that fair on looking at
I would say ballpark 9%, including Comfort Revolution joint venture.
All righty. I know others have got questions. I'm sure I've got one too, but go ahead and thank you very much for your consideration.
Thanks, Budd.
Our next question comes from the line of John Pott with Stifel Nicolaus. Your line is open.
Thank you and good afternoon. I just wanted to follow-up on the guidance methodology, Dale. So the sales a year ago, are you looking at it year over year just to be clear, because the sales in the second half of last year were down pretty substantially at Tempur North America and would suggest at least year over year somewhat easier comparison going forward and yet you've got a steeper decline of 5% to 10% versus the 5% decline in Q2?
Right. We're using the percentage.
Okay. So you're using the percentage year over year as your guide to go forward and not some kind of sequential look?
Correct.
Okay. And then on advertising, you mentioned an acceleration. I'm just curious, is there any way to talk about what numbers around Tempur, what numbers around Sealy, what rate of acceleration? I assume that's a sequential comment, not a year over year comment. And is there any way to think about particularly Tempur Pedic North American advertising when that goes into a positive year over year comparison on an ad spend basis?
Thank you.
John, what we're expecting is that the full year spend of Tempur North America, which obviously is the bulk of the spending, is going to be approximately the same as last year. But the difference is last year, the bulk of the spending was in the first half and there was very little in the second half. And this year, it's going to be that a greater proportion of the spending is in the second half than the first. So the first half was down year on year. Tempur North America's spending in the first half was down year on year because bear in mind last year we were spending with an expectation of a run rate of sales of a much different level.
But our spending in the second half is going to be up very substantially. So we're seeing a spend increase in the second half of a substantial amount.
And the new Ask Me, is that that's already done? I mean, I guess, there's just a slight tweak or some kind of update to the old program, so it's quick and easy to do?
Yes. I mean, I think that the plan is that we want to be sure that we have something on air that's good and proven. And that is it has an advantage that we can it is designed and you'll remember this, quite easily modifiable to include other new products or promotions, and that lends itself to what we need for Labor Day. And so we'll get that on air right away, and it's something that is proven and works well. And we are continuing to develop different copy, which we will decide when we see it and when we've evaluated it and when we've measured it to transition from beyond Labor Day and beyond in the 4th quarter, we would anticipate being ready with new copy.
But if we are Splendid and if we are not, we still have this ask me in the can. And we will also run some Choice advertising, which is developed especially for Choice. And over the we anticipate other parts of the campaign, You Are How You Sleep will continue to run-in the second part of the second half, in the Q4. But for right now, we're going to focus on Ask Me.
Great. Thank you very much. Good luck.
Thank you.
Our next question comes from the line of Keith Hughes with SunTrust. Your line is open.
Yes. To build on John's question on ad, if I look at the first half of last year, Tempur Pedic standalone, we're seeing 12%, 13% as a percentage of sales on ad. Are we talking about that magnitude of spending or exactly what level?
It's comparable. I don't have let me just check the number, but it is comparable. And it's the spending in the first in the second half is significantly higher than it was in the second half of last year. So let me just see if I got this here. About 12%.
12%. And that's Tempur Sealy combined, correct, the revenue combined of the 2? Yes. Okay. And if you talked about a September promotion on mattresses.
When will that be sort of launched to the channel?
We're not going to I'd rather not talk about it in detail right now just given it's just for competitive reasons, but it has been communicated to our major retailers already.
Okay. And if we look at the amount of ad spend, how do you have a rough break of how much is going to be Tempur Pedic or I guess Sealy brand focused and how much is going to be product focused? These are rough numbers, Elyse.
Yes. I'm not going to get into too much detail, but I think that one of the things I mean, as I've said, the bulk of our advertising clearly is going to be behind Ask Me. And Ask Me is a product is a brand and the way it's customized is brand and product. So we can do it depends how you count it, but it's essentially both. But it is largely it's going to be focused on brand.
We are going to have special what do you call it, customized unique advertising for choice, which will run over Labor Day and afterwards. But it will run before Labor Day.
Okay. Thank you.
Our next question comes from Piper Keith with Piper Jaffray. Your line is open.
Hey, guys. It's Peter Keith, of course. I was curious to more on the gross margin line. You came in 250 basis points lower than where you had originally guided Q2. I wasn't quite clear on the dynamic.
Was that certainly or just specifically attributed to the lower sales for the quarter and the deleverage of fixed costs? Or were there some other puts and takes that we should be aware of?
Well, Peter, it's also a function of the mix of the revenue. TP and A being a higher margin business, being where we were off, Sealy coming in, the Sealy brands coming in where we expected. So that mixes you lower. Also from a TP and A standpoint, based on the timing and velocity of the floor models going out, what we missed was the sell through of them generating more business. So you have a higher percentage of your revenue was floor models.
So it's really a mix factor as opposed to both from a segment where the revenue was coming from and then within TP and A its gross margin was off also because of a higher mix of floor models.
Okay. Thanks for that. I guess related to the I guess gross margin for the year, you reduced the PPA by $0.07 You had said it was reduced the valuation of certain assets. So I guess I'm curious on what was reduced so quickly?
Well, basically, Peter, all this is an estimate until it gets ultimately resolved and finalized and thrown in the system.
You're changing
a value and a life on a fixed asset. And at a very high level, you're trying to estimate it. And once it's thrown into the fixed asset system and adjustments are made, it's all calculated. So essentially, there's a recognition that this stuff takes time, which is why from an accounting rule standpoint, you've got a year to sort it all out. It tends to be a bit of a moving target until it's final.
It's possible that it could change a little bit again. We think that we're pretty close to getting there, but it's one of those things as you continue to work through these processes, some things tweak around a little bit. That's why the repatriation tax moved again. As the valuations are fully vetted and fully analyzed, things tend to move a little bit.
Okay. All right. Thanks. Just one other separate question. I was curious on the success of the hybrid launch from Sealy and maybe similar hybrid beds out there.
Do you have a sense as those are rolling out that they actually may be taking a little bit of business from that Tempur North America mattress sales?
I would say that, first of all, the Tempur the Posturepedic Hybrid is doing really quite well, better than anticipated and well. And it's a premium product within the Posturepedic range. And we're all very pleased with how it's doing. And it is clearly in the $1,000 to $2,000 area. And it is the $1,000 to $2,000 area that has been collectively, for want of a better word, cannibalizing or taking away from the $2,000 plus area, which is Tempur Pedic's normal bailiwick.
And so it does I think that there is a degree to which it is likely that it is contributing to the overall pressure on Tempur. But frankly, it's part of our family, and I'm pleased to have a powerful brand like a powerful product like that in the group. I think what we recognize is that Tempur's focus has to be on the $2,000 plus area and that the remainder of our portfolio, including post orthopedic and Optimum, is focused on this 1,000 to 2000 area. And that includes that includes Stearns as well, but that includes spring, it includes memory foam products and it includes hybrids.
Okay. Well, thanks for
the feedback. But just to be clear, I mean, I think that while it is taken away, some of the research that we've done does say that although it takes away both from memory foam and from spring, it's more towards the spring is where it's going to cannibalize from.
Okay. That's good to hear. Thank you very much.
Thank you.
Our next question comes from the line of Jessica Cohen with Barclays. Your line is open.
Hi, good afternoon. My question on the revised synergy forecast for the higher forecast for this year and next is I was wondering if you could give a little bit of color on your philosophy around reinvesting those synergies?
Well, clearly the synergies are were and we're talking here about the cost synergies, were an important part of the logic for the acquisition of Sealy. And what the way we think about it from using your word, a philosophical point of view here is that it gives us a war chest to invest in building the brands of Tempur and the rest of the portfolio. So as we as the world has evolved, is there now multiple Tempur is now the leading viscoelastic player in this market, it gives us effectively ammunition to continue to invest. So we are first clearly, we're going to drive profits and clearly, we're going to drive growth at the top line. But we believe that these synergies are something that can be powerfully utilized to maintain a unique positioning in the market.
Okay, great. And then as we think about gross margin for the back half of the year, is there any way to quantify the impact from the higher level of floor models that might not repeat in the 3rd Q4 as we try to forecast those levels?
Well, one thing is that you must remember the Choice is still not fully rolled out. So and there will be new products that we'll be announcing next week in Vegas, which also will roll out. So it will be diminished. I don't know if we have an exact number, Dale. Yes.
No, Jessica, I would say on the April call, in our guidance then, we said that we thought in the back half of the year, after we got through the bulk of the floor model issues that we would have gross profit company wide in the 43% to 44% range. I would say now based on the mix impacts that I was talking about before less temper business. So the mix of Sealy is a little bit higher. Also just the overall things like volume leverage etcetera, more Comfort Revolutions as Comfort Revolutions is performing well. We're now looking for gross profit on the overall business to be in the low 40s.
Okay. Supposed to 43%, 44%.
Got it. All right. Thanks very much for taking my questions.
Thank you.
Our next question comes from the line of Josh Borysling with Longbow. Your line is open.
Hi. Thanks for taking my questions. Just a follow-up on the synergies. I thought you had mentioned that I know in the past you talked about 3 different buckets that you were focusing on, but it seems like in this call you mentioned also sales and marketing as a new bucket. Did I hear that correctly?
No. No, not as a synergy, as a use of the savings. The way I would think about it is fundamentally the buckets of savings are going to come from the purchasing power and the strength that we have in manufacturing, distribution and so forth. Obviously, there's some G and A savings that we'll anticipate getting. But where we see using those savings is to invest in marketing.
I mean, not exclusively, not entirely, it's not a one for one, but what it does is it makes the combined entity of Tempur and Sealy by having us be able to run more efficiently, thanks to the combination, to have effectively the ability to invest some of that back in marketing and particularly advertising.
I see. Okay. Thank you for that clarification. And then in terms of the guidance, could you talk a little bit about what's baked into your guidance for Tempur North America in terms of volume and price and what you expect there?
From a volume and price standpoint, we in the Q2, as I mentioned, the volume was down more than the revenue was down and that was really a function of simplicity. And so on a go forward basis, that will still be a factor. We don't expect simplicity to do a lot. And so I would think that we would see positive ASP in Tempur North America, particularly now that we've gotten through the bulk of the floor model rollout. Now there's still more floor models to go on choice, but we're about 60% rolled out there as of the end of June.
And we're for the most part, we're rolled out on Premier, which also affects that. So in the back half, we would expect to see some ASP benefit versus volume.
Okay. Thank you for that. And then just the last one for me. On the overseas or international advertising strategy, I've noticed the past two quarters, your company owned stores and e commerce has increased a lot. Have you changed your strategy internationally or doing something different?
We haven't changed the strategy. For some time, we've said the two things that you refer to, the advertising and the company owned direct sales up both have been for some time key focus areas. What we're seeing is in Europe right now, there's just such a as I'm sure you know very well, there's a malaise there. So the return on investment on advertising is less promising there, whereas direct stores actually work quite well even in this time. So we're continuing to see the benefit of our direct sales.
But the big place where that's paid dividends or the greatest amount of dividends in the most recent period has been in Japan. So they're both important. They both continue to be important and they both will be important for as far as we can see. Right this minute in Europe, given the economic environment, we're finding that advertising investment is not as productive as it is either in other parts of the world and also in terms as much as using direct sales as a method of getting to consumers.
Okay. And you mentioned a few pockets of strength internationally. You called out Korea, Japan. Were there any pockets of strength in Europe as well?
Not well, there were. France is a pocket of strength. But I mean quite honestly, it bubbles. I mean it's not like it's there and some of the Nordic countries. But generally, it's pretty spread in Europe.
The Malaysia is pretty widespread.
Thank you and good luck. Thanks.
Our next question comes from the line of Joe Altobello with Oppenheimer. Your line is open.
Thanks guys. Good afternoon. Just a couple of quick ones for you. The Choice rollout, how many doors do you expect that bed to ultimately get into in terms of your overall North America retailer base?
The majority of them. We expect the majority of our retailers to carry it, but we haven't given an exact number. You're asking about Choice? Exactly. Yes.
I mean, it's a majority, the majority, but we just haven't we're not giving an exact number.
Okay. And then just secondly, I'm looking at your sales guidance. Obviously, it's down $50,000,000 to $75,000,000 or so from where it previously was. And I heard you guys talking about the issues there. I mean, a lot of those sound like Tempur specific issues, but are there other industry issues?
I mean are you guys seeing a slowdown or a lack of a lift or tailwind if you will from housing for example that's partly to blame for that?
I don't want to get I'm always I'm always I'm always I'm always I'll make definite justifications. But I will say that what I am hearing from speaking to customers across the country is that there is a degree of weakness in the industry that we are that is certainly contributing to our slow performance in Denver, North America. I mean, there is a degree of
traffic.
There's a general concern about lack of traffic. Now that's a commonly said thing. Nobody ever thinks they have enough traffic. But I do believe that there is a degree of that. And moreover, there is a degree to which it's becoming more spiky around the promotional periods too.
Okay. And just one last one if I could. The PPA you said $0.14 for this year. What do you expect that to be for next year?
Sorry. Oh PPA? Yeah. Yes. At $17,000,000 that would translate to roughly about $0.20
About $0.20 for next year?
We'll just check that. Let's just check that, Vijay. We'll get back to you.
Okay. Thank you, guys.
Our next question comes from the line of Karru Martinson with Deutsche Bank. Your line is open.
Good afternoon. When you guys talk about integrating most of your sales and marketing and consulting with the retailers, I mean, what exactly have you guys integrated? I mean, are these the sales forces that are actually knocking on the doors? Or is this more of a high level back office type function?
Yes. I mean, the answer is it's what we absolutely isn't is a smashing together of the 2 organizations. In fact to a large extent most of the people who are in most of the organizations are continuing to do the same job. What we've done though is this is for the largest of our customers we have combined the teams who support the head office, who do this who support the chief buyers and the owners of the big retail stores so that they have a one face to the customer, so that they can we can coordinate across the whole Tempe Sealy portfolio and work to optimize everything from deliveries to promotional schedules to everything else done at one point for the central coordinator. However, that individual will have a person will have a representative there will be 2 representatives, 1 from Tempur and 1 from Sealy, because we want to maintain that expertise of the brands and the special all of the components of the brand.
So there'll be a single phase to our biggest customers. But to the people in the who are calling on the stores, there will we will have as we have in both companies, an East and a West leadership and then organization regional managers below that. But there will be Tempur and Sealy people calling on the stores. So that those the people who are calling on the stores will remain specialists in their areas. They'll be coordinating with their colleagues, but they'll be remaining specialists in their areas.
Okay. And when we look at the slower than expected rollout on Tempur Choice, ultimately, my sense here is that it is still an incremental product. Are you getting those slots on the floor space? Or are you feeling that you need to replace an existing Tempur or an existing Sealy product on that front?
As I've said, it's halfway through the rollout. But what our expectations are is, in general, we're getting we are getting incremental slots. But roughly speaking, for the 2 products, we're getting an incremental slot. And what is less of a trade off than it's just that customers are continually evaluating which products have got terms that justify their position. And so we're seeing that it's essentially a 2 for 1, give or take.
All right. And then just in terms lastly, in terms of the rollout costs, certainly, this is a rollout that you guys do every year. I mean, do you feel that when you look at the rollout and the complexity of the products that you put out, the rollout costs for the whole year will be greater than prior years? Or would this be kind of in average on average with what expenses have been in prior years?
I mean, I think forgive me. Just one comment, and then you can make it. Yes. I think the thing is, I think from a point of view of a rollout, this is a more complicated product and so on. I think when you look at it over a whole year, we're going to say it's about comparable to a normal rollout.
It's going to be more or less, but it's going to be comparable. The thing that is important to note though is that we are now in a world and we have been now for 18 months where new product rollouts are part of our DNA. That's what we're going to that's the way that we're going to need to compete more and more going forward. And so it's like the rest of the industry, but it's an important thing that we're getting is more and more part of
our DNA. Yes. And I was just going to add, if you're looking just at Choice on the for the balance for the full year, the product rollout cost this year may not be different than what they were last year, a little bit more concentrated. The thing that was a little bit of an anomaly this year and made product rollout costs higher this year for Tempur was the Ergo Premier. As Mark mentioned in his prepared comments, it replaced a product that was introduced in 2,008 and built distribution
over a number of years where we're replacing
all of those in Tempur side. Now on the Tempur side. Now on the for the Sealy brands, Posturepedic is a big rollout for Sealy and also very concentrated. But over the last year or so, they did Stearns and Foster, they did the Sealy brand. So there's a continuous stream of rollout.
Sometimes in a given year, it's more concentrated than possibly another year depending on what exactly is being rolled out. But on a continuous basis, for the most part the rollout cost should be in the same neighborhood.
All right. Thank you very much.
Our next question comes from the line of Joan Storns with Wedbush. Your line is open.
Hi, guys.
Hi, Joan.
I was wondering if you could be there was a couple of questions on the call about sort of the synergies and Mark mentioned sort of some of those buckets. Can you give us some more specific examples or maybe quantification just as an example like a combined back operations and finance and whatever area and that's going to save you $X,000,000 and same thing with purchasing, the volume purchasing. Can you be a little bit more specific there so we can see some of the progress that you're making?
Yes. Here's what I would suggest, John. We're not really prepared to get into that level of detail on this call. But at the Investor Day on September 10, we'll commit to give you a little bit more color in terms of the areas of the synergies and some ballparks in terms of the savings that we're seeing.
Okay. And then just to clarify on the second half gross margin, you originally had been at 43% to 44%. Now you're saying low 40s. So does that mean like 41%, 42% or how do we get to those numbers?
Yes, ballpark. Okay.
I guess that's it for now. Thank you.
All right. Thanks, John.
Our final question comes from the line of Joe Anderson with William Blair. Your line is open, sir.
Hi. It's John, of course. Hi, guys. Hey, John. I just have a couple of quick questions.
The if you'd be willing to comment, I don't know if you can, Sealy's net sales for the Q2, I think you called out at $345,000,000 Would you provide the EBIT or operating income for Sealy in the second quarter?
It'll be in the Q.
Okay. It'll come out in the Q.
I guess the other question
I had was on the advertising spending. I know you commented on it, Dale. I may have missed it. The $73,000,000 in the quarter, what did that include? I mean, did that include co op?
And I think you indicated that, that will build through the year. Will that build as a percentage of sales? And how should we think about that?
Yes. The $73,000,000 is a global consolidated including co op, the portion of co op that is included in advertising. There is a portion of co op that is treated as a reduction of sales also. But so that's TP and A, that's international, that's Sealy. We do expect the advertising to build as the year goes on.
Most of that build would be coming on the Tempur side, Tempur North America side.
And as a percent and as dollar?
Yes, on both the dollar spend and a percent. Most of the build that we'll see in the balance of the year is Tempur North America.
Okay. And the last one, I think when you mentioned the rollout of Choice being somewhat slower than planned, I think you mentioned some startup issues. I guess I just was looking for some more clarity there. Was that production startup issues? Was it anything else?
And have those been resolved at this point?
They have been resolved. I mean, it was the thing is that it's a more complicated product because it relies on the 3rd party suppliers for components of it. It relies on quality checks that we have to do coming in and then going out of the completed product. And candidly, we were learning a little bit how to do that. I'm quite pleased, frankly, how we're doing it now.
It took a little longer to get going in the way that we would have liked, but that it was that sort of those sorts of issues.
Okay. Okay. Thanks a lot guys. Good luck.
Thank you very much.
I would now like to turn the call back over to Mark Sarveri for any further remarks.
Thank you very much. Thank you everybody for joining us. We look forward to talking with you all again on September 10 when we host our Investor Day in New York City. Thanks for joining us this evening.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect, and everyone have a great day.