Somnigroup International Inc (SGI) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Tempur Sealy Second Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mark Rupe. Sir, you may begin.

Thanks, Sam. 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&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 our actual results to differ materially from those identified include economic, regulatory, competitive, operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings, including, but not limited to, annual reports on Form 10-K and the company's quarterly reports on Form 10-Q under the 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 as of the date 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, is posted on the company's website at tempursealy.com and filed with the SEC. With that introduction, I will turn the call over to Mark Sarvary.

Thanks, Mark. Good evening, everyone, and thanks for joining us. Today, I'll provide an overview of our performance in the second quarter, and then discuss the progress we're making on our key strategic growth initiatives in 2014. I will then turn the call over to Dale, who will provide details on the second quarter financial results and 2014 guidance. Our second quarter turned out largely as we expected. Sales growth accelerated slightly more than we had planned, but we invested heavily in new products, advertising and in-store marketing support, and earnings were approximately in line with our plan. In total, our second quarter sales were $715 million, and adjusted EPS was $0.39. Tempur North America returned to growth with sales up 10%. Our new TEMPUR-Cloud and Contour beds have been well received by consumers and retailers, and sell-through momentum is building. Demand for our TEMPUR-Breeze beds and the new adjustable bases were also higher in the quarter. Tempur International's performance was in line with our expectations with solid sales growth in Europe, Asia and Latin America. Sales were up approximately 5% on a constant-currency basis, with direct sales driving a majority of the growth. Sealy's performance was also consistent with our expectations. Strong demand for the new Stearns & Foster offering and continued growth of Posturepedic led to double-digit growth in the U.S. Sealy also saw improved performance of Optimum, adjustable bases and Sealy-branded products. Sales outside the U.S. declined slightly, with both Canada and South America slightly below last year. Now, I'd like to discuss the progress we're making on our 4 key strategic growth initiatives in 2014. The first initiative is product innovation. Our goal is to provide our consumers the best bed and the best sleep of their life, and to provide our retailers a complete range of brands, products and price points that meet the needs of every consumer who comes to their store, and thus drives their growth. We've talked a lot about the importance of investing in product innovation to drive growth. When the competitive environment changed in 2012, we said we needed to increase the scale and pace of our investment, and to work with retailers to provide unique and consumer-valued products that allowed them to improve their average retail selling prices. In the past 2 years, we have delivered on this, systematically overhauling our Tempur North America offering with innovative products that command considerably higher average retail selling prices, as well as a much higher adjustable base attachment rates. Today, nearly all of Tempur North America's sales are from products introduced in the last 24 months. Through this heightened focus and investment in innovation, we have returned Tempur-Pedic to a position of strength in the marketplace. The benefits of innovation are not isolated to Tempur. During the second quarter, we completed the rollout of our new Stearns & Foster collection, with 15% more placement than last year. Feedback on sell-through and consumer acceptance has been excellent overall, and in particular, for the upper end Lux Estate and Lux Estate Hybrid Collections. At its current pace, Stearns & Foster will eclipse the previous annual sales record. We also completed the rollout of our new Optimum in the second quarter. Customer response remains very good and sales trends are improving. We also continue to see strong growth from our Posturepedic innerspring and hybrid collections even though they are now in their second year. We're encouraged by this and are optimistic that it shows the potential for lengthening the product refresh cycle. Frequent refreshes are a significant cost burden to both manufacturers and retailers, and are often of very little benefit to the consumers. Internationally, we continue to roll out TEMPUR-Breeze beds in several European markets, and will launch Breeze in Asia during the third quarter. Overall, Breeze has been very successful, and word has been launched that it has quickly become a strong seller. But to date, it has been more cannibalistic with existing Tempur mattresses than we had originally anticipated. At next week's Las Vegas Bedding Show, we plan to introduce a new line of Sealy-branded value products. We have streamlined the collection and significantly enhanced its design and construction. We're also introducing new Tempur-Pedic pillows to North America. We expect both introductions to drive sales improvement in the coming period. In addition to product innovation, we're also very focused on improving our marketing effectiveness, which is our second strategic initiative. This includes advertising, as well as in-store marketing and direct sales. In the second quarter, our advertising investment grew by 7%, primarily driven by an increase in Tempur North America. TV ad impressions grew at an even faster clip, as we reinvested the synergies realized from the combined media buy. We began airing new TV ads nationally, featuring real Tempur-Pedic owners and our new mattresses and adjustable bases. While it's still early, the initial response has been quite good, with key metrics such as store-locator visits improving markedly. We're also supporting Stearns & Foster, Optimum and Posturepedic with consumer advertising including TV, digital and print. Our in-store marketing investments were elevated in the second quarter as we rolled out new point-of-purchase displays to support all of our new product launches in North America. These investments were planned and they will be lower during the remainder of the year. So as you can see, we're very committed to innovation and marketing and we'll continue to make decisions that ensure our investment dollars in these areas are maximized. And that ties to the decision we made last month to exit our U.S. innerspring component business and to sell the related assets. The transaction will provide us greater flexibility to invest in innovation and brand-building in the future. Our third strategic initiative is new market expansion, including our expansion into new international markets. During the second quarter, we completed the acquisition of Sealy brand rights in continental Europe. And during the balance of the year, we'll be rolling out a number of Stearns & Foster and Sealy hybrid products to retailers in several key markets. As Dale will discuss in a moment, while we don't expect much contribution from this acquisition in 2014, the growth opportunity is significant, and we anticipate greater contribution in 2015. We also completed the acquisition of Sealy brand rights in Japan in early July. We absorbed a small amount of ongoing business, as well as integrated certain sales and marketing functions of the former licensee into Tempur Japan. Transition of customer relationships and integration has been in line with our expectations. We see many long-term revenue synergies from this combination. Sealy's customer relationships and distribution footprints are highly complementary to Tempur Japan and this has already resulted in some early wins where Tempur has secured new distribution through leveraging Sealy's existing relationships. We are also advancing several other initiatives across the world and will be sure to update you at the appropriate time. And lastly, our fourth strategic initiative is our commitment to building a world-class supply chain that is easier to do business with. We continue to improve our distribution and warehouse network, and are capturing greater cost synergies as a result. Equally important, however, we are also improving our customer service levels, specifically, order management and delivery performance. We announced shipping Tempur and Sealy products together on Sealy trucks in 4 U.S. markets, and plan to layer an additional market in 2014 and beyond. We're also making good progress with our category management initiative. Because of the breadth of our portfolio, we're in a unique position to use data and analysis to help our retailers optimize their merchandising and promotion to maximize their sales and profitability. Before turning the call over to Dale, I'd like to make just a couple of closing comments. Q2 turned out largely as we expected. Our plans called for growth to accelerate, and this occurred across our segments. We are pleased with the trends we are seeing, and we're very focused on executing our strategy to build on this positive early momentum. That said, our plans for the balance of the year call for our growth on a consolidated basis to continue at rates similar to the second quarter, and the market environment globally is still far from robust. Traffic continues to be fairly stagnant in the U.S. and demand remains uneven in parts of Europe, and particularly challenging in Germany and Benelux. We look forward to providing you an update on our progress when we report again in October. With that, I'll now hand the call over to Dale.

Thanks, Mark. I'll focus my commentary on the second quarter 2014 financial results, and then discuss our 2014 guidance. I will address the performance on a consolidated basis, then speak to the performance of each segment and provide commentary on key areas or items where there's a notable variance from the prior year. Consolidated net sales for the second quarter was $715 million, up 8.2% versus last year. Tempur North America net sales were up 10.1% and were driven by strong demand for our new Cloud and Contour products, as well as our BREEZE beds and adjustable bases. Bedding net sales increased 12% on a unit increase of approximately 9%. Sales of other products declined 16%. By channel, Tempur North America retail net sales increased 12% and direct net sales declined 8%. Tempur International net sales were up 9%, and on a constant-currency basis, up 5.4%. Bedding net sales increased 10% on a unit increase of 1%. By channel, Tempur international retail net sales increased 5% and direct sales increased 40%. Sealy sales increased 6.8%, driven principally by double-digit growth in the U.S. Bedding sales were up 8% and other products declined 17%. By channel, Sealy retail net sales increased 9%. Second quarter gross margin was 37.5% as compared to 38.6% in the second quarter of last year. On a year-over-year basis, second quarter gross margin declined primarily due to product and channel mix and unfavorable foreign exchange. These impacts were partially offset by the lack of purchase price allocation inventory adjustment associated with the Sealy acquisition that was recorded in the second quarter last year. Looking at operating expenses, consolidated advertising spend, which includes both national and cooperative, increased 7% to $78.4 million, and was 11% of sales. Other selling and marketing expenses increased 15% due to higher in-store marketing investments to support the new product launches. Consolidated operating income was $50.3 million as compared to $44 million in the second quarter of 2013. Operating income in the second quarter of 2014 included $5.2 million of integration costs related to the Sealy acquisition. Operating income in the second quarter of 2013 included $11.9 million of transaction and integration costs related to the Sealy acquisition. Interest expense was $23 million and the second quarter pro forma tax rate was 28.2%. Second quarter GAAP earnings per share was a loss of $0.04 as compared to a loss of $0.03 per share in the second quarter of 2013. Adjusted earnings per share was $0.39 in the second quarter as compared to adjusted earnings per share of $0.36 in the prior year period. On June 30, 2014, we completed the sale of our 3 U.S. innerspring component production facilities and related equipment to Leggett & Platt for approximately $48 million. The net value of the assets disposed was approximately the same as the total deal consideration. However, this did not include the associated goodwill value allocated to these facilities. In short, when we acquired Sealy in 2013, the divested assets were written up for book purposes to market value. And as a result, we did not incur loss on the divested assets, but did incur a $20.4 million loss on the disposal of this business, which is essentially the noncash write-offs of the allocable goodwill. For tax purposes, the tax basis of the assets carried over to our books in the Sealy acquisition, and accordingly, we incurred a $29 million gain on the asset sale for tax purposes. During the third quarter, we will pay approximately $11 million in taxes on this business disposal. Now, I'll turn to cash flow for a brief review. At the end of the second quarter, our inventory and receivables were up slightly as planned due to the growth of the business and the bills of Stearns & Foster and Posturepedic inventory in anticipation of launching products into Europe in the third quarter. These were offset by higher payables, which were up due to timing. Operating cash flow during the quarter was $74 million and free cash flow was $65 million. The company has consolidated funded debt less qualified cash of $1.7 billion. The ratio of consolidated funded debt less qualified cash to adjusted EBITDA was 4.3x, calculated in accordance with the company's senior secured facility. A calculation of this ratio is included in the press release. Now, I'd like to address our 2014 guidance. Today, the company updated its financial guidance for 2014. The company currently expects net sales to be in the range of $2,925,000,000 to $2,975,000,000 which reflects growth of approximately 5.5% to 7.5% compared to 2013 had we owned Sealy for all of 2013, and adjusted EBITDA in the range of $410 million to $430 million. Adjusted earnings per share is expected to be in the range of $2.60 to $2.85. Our sales guidance is based on improved trends within our North American business, both Sealy and Tempur, as well as our recently acquired Sealy brand licenses in Japan and continental Europe, partially offset by Tempur weakness in Central Europe. Our earnings outlook factors in very limited contribution from the Sealy International acquisitions, and that our higher-margin International business is being pressured by the weakness in central Europe. Our guidance is pro forma and does not include costs related to the disposal of the 3 U.S. innerspring component facilities or transaction and integration costs related to the Sealy acquisition. For the third quarter, we expect consolidated sales to be up approximately 8% on a year-over-year basis. We expect our third quarter operating margin to be approximately 12.5%. As the majority of our investments in 2014 were first half weighted, we expect our second half operating margin to increase significantly as compared to the first half operating margins. Through the first 3 weeks of July, we are tracking to these projections. And considering our guidance, it's possible that our actual performance will vary depending on the success of our new initiatives, macroeconomic conditions and competitive activities or the consequences of other 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.

[Operator Instructions] Our first question comes from Brad Thomas of KeyBanc Capital Markets.

I want to just first ask about the guidance and the change in the guidance. It's clear that you've raised the revenue outlook, but by the same token, it looks like you've nudged down the EBITDA outlook. Could you just help to bridge that change?

Sure. On the revenue side, a couple of pieces. Number 1, the Sealy Japan and Sealy Continental Europe license acquisitions. Continental Europe, we're starting that from scratch but we do expect, based on our strong retail relationships, to see that business start to pick up and contribute in the second half. Sealy Japan, we are picking up a run rate business. And so, the combined impact of those 2 license acquisitions in the second half is $20 million to $25 million of revenue upside, but essentially no EBIT. Those are going to be a little bit lower than normal Tempur International gross margin businesses, but there's startup costs associated within from an operating standpoint, that we're not anticipating EBIT on that business, plus the gross margins on that business will be a little bit lower, particularly in Europe, as we're putting new business in place and sending out floor models. We have anywhere that sells it have to get floor models, so it really is a startup on the -- as we said, on the rest of the business, we are looking at continued strong performance in Sealy U.S. and continued strong performance in Tempur North America. Tempur International is doing well in Asia, it's doing well in Southern Europe, U.K. We're seeing some good growth in South America but the weakness in Central Europe, which essentially is the German-speaking corridor, Germany, Austria, Switzerland, Benelux, which is a significant portion of the Germany or the European economy, is -- has turned. It was bad last year, it started to show some signs of improvement earlier this year, but in the second quarter, it actually started turning back down. And so we're anticipating that continues through the second half. From a revenue standpoint, that's the key components there. From a margin standpoint, or what we're looking at in the second half in terms of profitability of the business, we are anticipating that on the U.S. side, we're going to see significant improvement in profitability from the first half as the floor models go away, as we get through the transition aspects that we were going through, particularly on the Tempur business, which continued well into the second quarter. With the higher volume, we'll start getting volume leverage on the U.S. business. That's going to be partially -- that improvement is going to be partially offset by the weakness in Central Europe, which is a very profitable region for us, as well as ongoing difficulty around the currency mix that we're getting in our International business right now. While we got positive top line from currency, we're getting a bad currency mix on the cost side. So that's what's muting the margin. From an EBITDA standpoint, I would point out that the decline from what we anticipated before is about $5 million lower in EBITDA, and that's really 2 main pieces. One is with the continued outlook that we had and really, the outlook was in place in the guidance we had before, but we've made the determination that it does not look like the business is going to make the minimum requirement on our long-term incentive plan for this year so we -- that reduces or affects the outlook by approximately $4 million for the year. It affected the second quarter by $3 million. Also, the transaction of selling the spring plants takes away some dods[ph] from the business, a couple of million of dods[ph]. So those 2 things have affected the EBITDA outlook [indiscernible] the business fundamentals.

Okay. And then I'll just ask maybe 1 follow-up here. A common question that you all get when you do a big launch, can you help us to think about in 2Q, was there any quantifiable revenue number that you'd tell us for sell-in that we should think of as really being unique to this quarter and something that wouldn't necessarily continue going forward?

I mean, the way I think about it, Brad, is that the bulk of the growth came from increased sales, through increased sell-through. We did have sell-in, obviously, but the sell-in in the second -- the new models in the second quarter was roughly the same as the new models in the second quarter last year. So year-over-year, that was a relative wash. The lift we're seeing is due to sell-through.

I would add to that, Brad, if you think about sell-in, yes, the retail just want to have a base level of inventory so that when a consumer walks in, they can sell it. But you know what, they had a base level of inventory of the old product. So they have to sell out the old product, which we're not getting any sales on, and then they rebuild their inventory with the new products. So for us, it's a wash. We get no sales as they reduce their inventory and then we get sales as they put that same base level of inventory back in.

Got you. And in light of it being such a strong revenue quarter, I just figured I would I ask.

Our next question comes from Budd Bugatch of Raymond James. Budd Bugatch - Raymond James & Associates, Inc., Research Division: I am confused a little bit, Dale, maybe just I didn't -- I couldn't get the weeds right. I think your revenue guidance for the year went up by $75 million to $125 million from where it was and the earnings stayed the same. And I think I got the idea that there's some issues in central Europe, but I'm trying to understand maybe the other parts of the business and why the earnings are not coming forward. Is that -- do I have it right?

Well, the way I look at it, Budd, we've -- because that in April or May 2nd, I guess it was, we thought like we were at $2.9 billion. And when we said we're going to be -- we're right at the high end of that range, of the old range. So we felt we were at $2.9 billion, we're adding roughly about $25 million, so I viewed as adding $25 million to $75 million. $25 million of that approximately is Japan and Continental Europe for the license acquisitions, which doesn't give me any profitability in this first 6 months start up period and then -- so really, we're talking about 0 to $50 million of benefit for improved Tempur North America, improved Sealy, U.S. and International growth. But the international growth being our most profitable segment is being -- continuing to get hit negatively by cross-currency. It's continuing to get in the central European region, the Germanic region being hit negatively. We're getting some bad mix internationally where we're getting growth and lower margin international segments and we're losing out on business in one of our most profitable segments in the world. Budd Bugatch - Raymond James & Associates, Inc., Research Division: So, okay. So just before I give my follow-up, so last year, in the third and fourth quarter, if I remember right, the operating income for Tempur International was about $52 million, $22.9 million in the third and $29.4 million in the fourth. So you're thinking that will be down this year when you reported for a combination of those, the bad guys and currency, and perhaps, some of the other pressure you're quoting, is that what you're thinking?

Yes. Tempur International profitability is going to be down. The gross margin is going to be down year-over-year, 300 basis points or so. And from of course, we'll try to manage operating expenses, but most of that gross margin is going to fall through. Budd Bugatch - Raymond James & Associates, Inc., Research Division: Okay. That's very helpful, Dale. And my last -- my follow-up question then is we enticed you last time to sort of giving us the operating margin by segment. Can we do that? And gross margin also.

Absolutely, and this is on a GAAP basis. So Tempur North America for the second quarter, 3.5%. And I'll just draw out the reminder, all of corporate is in that and a lot of Sealy corporate expenses moved into Tempur North America between last year and this year. Tempur International at 17.5% and Sealy at 6.2%. Budd Bugatch - Raymond James & Associates, Inc., Research Division: And gross margins?

Gross margin. Tempur North America, 39.7%, Tempur International, 58.5%, Sealy, 29.9%.

Our next question comes from John Baugh of Stifel. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: I want to just jump in to ad spend. One of the thoughts there in the second half, and maybe preliminary into 2015, and any medium changes there?

As we said in the comments, our ad spend was up in the first half and we expect to continue the rates we're spending in the second half at the same ratio. It's important to note on the ad spending that we have been able to get some quite measurable synergies out of the combination of the 2 -- of our buy. Frankly, we renegotiated it and we have more GRPs than simply the increased spending would represent. So we're actually quite pleased with what we're getting, and so that's good, we're getting more impressions. What is quite encouraging is that we can quickly see that hitting our direct business. So for example, our weekly site traffic is up something like 15% year-over-year since June since we started running the new ads. Our store-locator visits are up nearly 70%. And this applies to Tempur, but it also applies to Stearns & Foster. So we're seeing some good response to this in a very measurable sense. And then in terms of the advertising spots that we're going to use, we launched a series of new ads to announce the new Oslo [ph] products for Tempur. We then had a set of new ads that we ran just before the end of the second quarter, and we got some new ads that we're running right now. And we're very pleased with the response that we're getting from these new ads. We are getting actually, very positive response, measured response, test response, but also consumer and retailer response. So what our plan is for now is that we're going to continue to run these spots for some time. They're good and they're working. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: Great. Then my follow-up is -- and you've given a lot of color on gross margin, channel mix and all these things, but I was wondering, within Tempur North America in the quarter, was there any appreciable mix of products sold that influence margin or was that in line with expectations or better than expectations?

Yes. In the second quarter, from a Tempur North America standpoint. As I mentioned, from a negative standpoint, we did have some ongoing transition effects where the transition -- just quite honestly, and we said this on May 2nd, the transition was more complicated and took longer than we expected. It continued -- the transition effects continued into May and so that was a factor in the overall second quarter performance versus what we thought it would be. It did take us a little bit longer. Where we saw some benefit in revenue came in better adjustable attach rates now. So we saw upside revenue in a very low margin part of the business. So adjustable margins are much lower than mattress margins. So we saw a continued increase in attach rate, Tempur-Up really starting to get traction. But overall, those margins are not the same as selling mattresses.

Although they rate the AUSP for the retailer [indiscernible]

Yes, absolutely.

And they're a very important part going forward. They're a good margin, they're just not as good as the mattresses. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: And so the unit column and just to be clear on Tempur North America, that's got foundations in it or maybe another way to ask it, just what were fewer mattress units in Tempur North America, year-over-year Q2?

The 9% is mattresses and foundations, so the mix within that is less flat foundations, more adjustable foundations. With virtually every mattress that's sold, there's a foundation. So we had good growth in mattresses in the second quarter. If you look at that 9%, adjustables was a little bit better than 9% growth, mattresses just a little under 9% growth, flat foundations were just down a little bit of growth. But because of the mix change, very low, low single digits.

Our next question comes from Josh Borstein of Longbow Research.

Just on the gross margin, could you help us a little bit with the second half, what the expectations are? I know we talked about a 42% consolidated level, what are the assumptions today?

Yes. From a -- right now, what we would say from a first half to second half, recently we thought it would be about 42%, but this first half came in lower. The second half expectation would be that gross margins will improve half-over-half, tune of about 340 basis points. So for the year, or for the -- in the second half, we're looking at about 41.5% and a bit -- which would give us about 40% for the year, so just slightly lower than what the prior expectations were, and that's really a function of the combination of the new international Sealy business being a little bit lower margin. Also the central European, negative influence there. But from a -- looking at the pieces, we expect Tempur North America's gross margins to be up dramatically in the second half, in the neighborhood of 550 basis points. And as the floor models go away and you start getting volume leverage, Sealy margin should be up again. Significant reduction in floor models and some volume leverage where Tempur International is going to be down in the second half versus the first half. Again, central Europe pressure, as well as adding revenue -- the new Sealy revenue at lower gross margin rates.

Okay. And will Tempur International have negative sales growth in the second half on a constant-currency basis, do you think?

No, no. We will see growth in our Tempur International business. The profitability will be down because of currency, but we'll still see some top line currency benefit, would be our expectation right now based on currency rates. But the cross currencies, you got to remember our cost internationally is -- at least our product costs, is DKK, which is tied to the euro. And so what happens is, depending on what's happening in the relationship of the euro currency versus the pound or the yen or the won or Australian dollars, that's where we get cross currency issues from a margin standpoint.

But we do anticipate growth in Tempur in the second half in International.

Okay, great. And just to make sure I heard correctly, Dale, you said for the -- these expectations for gross margin around 40% for the full year?

Yes.

Okay, great. And then if I could sneak one more in. On the earnings guidance, do you expect -- still expect to be around the midpoint as you had expected last quarter?

Yes. Since we re-did the revenue model of the business, we completely re-did the relationships based on our latest, greatest data, et cetera. We're at the low end of the guidance, we expect to be at the low -- of revenue guidance, we expect to be at the low end of the earnings guidance. If we're at the high end of the revenue, we expect to be the at the high end of the earnings guidance. So we're giving you a range because right now, we're not -- that's what we think. We've got roughly $1.5 billion, a little over $1.5 billion of revenue still to go in the second half. And the $50 million range is about 3%, so that's some puts and takes ability, but we've retied the model directly to those revenue points based on what we see as the outcome. So I'm not saying -- sitting here today, I'm not saying this is where I think I'm at in the range. I'm giving you a completely new range and I'm going to be somewhere in it.

[Operator Instructions] Our next question comes from Keith Hughes of SunTrust.

A question about Sealy in Europe. You referred to the U.S. business being double-digits and some weakness there in Europe. How much within Sealy does non-U.S. business represent? And I believe there's a Posturepedic launch you had mentioned coming in Europe in the third quarter. How long will it take for that to potentially impact the revenues there?

We are launching in Europe in the third quarter, Posturepedic and Stearns & Foster. They're starting from 0.

Very tiny amount. I mean, you...

Okay, so that's what you're referring to earlier. I ask [indiscernible]

And that's going to -- let me just clarify because this will be important when we announce the third quarter. That revenue is going to show up in Tempur International and we'll give you some color on how the Sealy licensees did, but that -- because it's fully integrated over there and we're just building on the Tempur infrastructure, that revenue's going to show up in Tempur International and not be attributed back to the Sealy segment.

Second question, the other products in the Sealy and Tempur down in the quarter, I know these are small numbers. What's kind of your outlook in the second half there?

On the Sealy, other products, we would expect that business to go back to growth. That's primarily Comfort Revolutions. We had some timing disconnects last year versus this year in terms of -- it's a small business, growing business and so if you get a big order movement from one quarter to another, it can still effect that kind of play. But we expect for the back half and for the year, Comfort Revolutions to show good growth. On the Tempur business, that's pillows, that's some of the other accessories, that's an area we've been struggling and...

In Vegas next week, we'll be launching a range of 3 new pillows, which is -- the mattresses was our first area of focus, but now, the pillow business is not where it needs to be and we're very focused on that, and will be for the next period. But the new products that we're launching in Vegas are the first foray into addressing that issue.

Our next question comes from of Jessica Schoen of Nomura Securities.

My first question is on the guidance for operating margin on the third quarter of 12.5%. Can you talk about some of the moving pieces in SG&A to be aware of in that context?

Yes. I mean, in comparison to the second quarter from an advertising standpoint, we're going to continue to keep the pedal down on advertising. Other selling, we'll see some improvement in other selling. There is still store POP going out as was anticipated. But from a quarter-to-quarter standpoint, we'll see some improvement there because a lot of it shipped in the second quarter, but some of it does still continue to go out in the third quarter, which will then give you more benefit in the fourth quarter from a leverage standpoint. With higher volume, we're expecting to see some leverage on the other components of SG&A.

Got it. And then a follow-up on the Sealy International question. In addition to the $20 million to $25 million from the licensees, which sounds like it will be included in Tempur International, what's assumed in the guidance for how the other Sealy International regions? It sounded like they were under pressure this quarter? What's assumed in the guidance for those going forward?

We would expect some -- essentially the current trend to continue. I mean, obviously, bulk of Sealy non-U.S. is Canada. Canada, as a market, has been weak and under some pressure. But also, if you look in the -- by channel, Sealy Direct, that is primarily Argentina, that business was down a little bit but if you -- Argentine currency has dropped dramatically, so a lot of that decline is currency-related. But because the currency is under so much pressure, obviously, consumers there are not spending like they would before. So that's really the International business where Sealy is, Canada, Mexico and Argentina, predominantly. And we don't see any change from kind of where they've been.

Understood. And then finally, you mentioned on the transaction selling, the component facilities that you would see a little bit less D&A from that. Any other income statement items to be aware of where that could have an impact, especially if you're sourcing those components, like externally?

No. Really, the primary thing is some D&A goes away, but that effectively, kind of becomes part of the -- what was the cost of the product. By and large, that D&A is a separate component but part of the overall cost, so that -- it shifts from D&A to regular cost built into the price that we're getting from Leggett.

Our next question comes from Joe Altobello of Oppenheimer. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: First question. I guess, just a point of clarification, Dale, if I heard you correctly, the revenue from the Sealy license acquisitions will be in Tempur International?

Yes. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay. I just want to make sure. Just for context, how big is your central European business from a revenue standpoint?

Well, we don't break down our international revenue by country, but Germany is by a great, large margin, the largest economy in Europe. And if you think about central Europe in total where you're talking Germany, Austria, Switzerland, Benelux, Nordic, that are all very influenced by Germany, that whole region is seeing softness. I mean, that's a significant chunk of Europe. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay. But if overall, Tempur International is, call it, I don't know, between $450 million, $475 million in revenue, that's roughly $150 million? I'm just trying to ballpark it.

Yes. I don't want to get to that level, but Europe is roughly 2/3 of our International business and so that's -- you're in the neighborhood. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay, that's fine. The premium segment, the north of $2,000 price points, it looks like that grew again this quarter. I guess that makes it 5 quarters in a row. Did that growth accelerate?

Well, yes. I mean, all of the products that we sell basically are above $2,000 for Tempur, and Tempur is growing very well. So now, that's bound to be the case. But yes, it did, and I think that part of what we're really focused on is the AUSP and driving -- especially for Tempur. I mean, obviously, we've got a whole range of products but the job of the Tempur portfolio is at that high-end. And one of the things that we've seen with the new product range is that the -- if you look at kind of like-for-like products, people are essentially trading up. The average price is going up because the products that are being sold are not a direct replacement for the ones they replaced. They're often the one that's a half a step up from the ones they replace. The net of that is the average selling price is going up, which, obviously, is good for Tempur, but it's good for the retailers.

And also, Joe, we did see improving trends through the quarter, but April and early May was still part of the transition. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Right. That's exactly what I was trying to get at, did it accelerate throughout the quarter?

Yes. Joseph Altobello - Oppenheimer & Co. Inc., Research Division: Okay, okay. And then lastly, I guess, the operating margin, even though gross margin was, call it 100-plus basis points below, I guess, what we and you guys were expecting from early May, the operating margin on a pro forma basis was actually pretty close to the 8% guided. So it sounds like things are trending pretty nicely on the G&A side of things. Was there anything that was unusual in the quarter that led to that reasonable operating margin number?

Well, yes. I mean, there is a $3 million benefit on LTIP.

[Operator Instructions] Our next question comes from Jon Andersen of William Blair. Jon Andersen - William Blair & Company L.L.C., Research Division: A couple of quick ones. Just an update on cost synergies, what you're expecting for the full year and over the next couple of years? And then, Dale, if you could just update, if necessary, some of the guidance items below the operating income line? And I'm focused a little bit here on the tax rate, which has trended lower in the first half, and also D&A in the context in your comments?

Yes. No, that's great. From a synergy standpoint, our goal through the year was to be at $40 million of synergy be on accumulated basis this year. We still feel very good about that. By 2016, we said we would have $70 million, still feel very good about that. So the synergies are working. We did say that we would reinvest along the way, some of those excess synergies from what we had previously expected. For example, the synergies that we got in media from the combined buy, we're absolutely reinvesting that. Rather than taking those savings to the bank, we're increasing the amount of advertising at similar dollars. Yes, good question. On some of the other components below operator margin, just run down a list here. CapEx for the year, $55 million to $60 million, so I think last time, we said $60 million, so it's trending a little bit lower than that but somewhere in that $55 million to $60 million dollar range. D&A for the year, I now expect to be at $88 million, and that's a little bit lower than before and that's, again, partly influenced by the Leggett & Platt purchase of 3 of the spring facilities. Interest for the year, we're looking at about $90 million. Tax rate for the year, we do continue to see some benefits in taxes. So for the rest of the year, we expect the tax rate to be around 29.5%, which it'll net [ph] better than we thought before. And the tax rates continue to be a little bit better. It's partly a function of country mix, it's partly a little bit better manufacturing tax benefit than credit and expected a little bit better R&D credit than we had thought we would have.

And now, I'd like to turn the call back to Mark Sarvary for any closing comments.

Thank you, everybody. We look forward to talking to you again in late October when we host our third quarter earnings conference call. And obviously, we'll see a lot of you next week in Vegas. Thanks a lot.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect. Everyone, have a wonderful day.