Mark Rupe - Vice President, Investor Relations Mark Sarvary - President and Chief Executive Officer Dale Williams - Executive Vice President and Chief Financial Officer.

Brad Thomas - Keybanc Capital Markets Inc. Seth Basham - Wedbush Securities Peter Keith - Piper Jaffray John Baugh - Stifel, Nicolaus & Company Jessica Schoen Mace - Nomura Securities Joshua Borstein - Longbow Research Keith Hughes - SunTrust Robinson Humphrey Denise Chai - Bank of America Merrill Lynch.

Good day, ladies and gentlemen and welcome to the Tempur Sealy First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today’s conference, Mr. Mark Rupe. Sir, please begin..

Thanks, Lisa. Good evening 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&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, 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-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 and information regarding the methodology used for constant currency presentation is posted on the company’s website at tempursealy.com and filed with the SEC.

In connection with the conference call, the company has prepared an investor presentation which has been filed with the SEC and is also available on the Investor Relations section of the company’s website. With that introduction, I will turn the call over to Mark Sarvary..

Thanks, Mark. Good evening everyone; thanks for joining us. Today, I’ll provide an overview of our performance in the first quarter and the progress we’re making against our stated sales, margin and earnings growth objectives. Dale will then provide details on the first quarter results and the updated 2015 guidance.

I’m pleased to report that the first quarter of 2015 has been strong. Sales and profits are growing. Correcting for currency, net sales were up 9% and adjusted EPS was up 20%. Margins are improving as we expected and were particularly strong in North America, where both gross and operating margins improved materially.

These improvements are the continuation of the operating margin improvements we saw in the back half of last year.

These results are consistent with the plans that we communicated at our Investor Day in February to drive sales at above industry rates, to grow adjusted EPS by 15% a year and to improve margins by more than 100 basis points in 2015 and 300 basis points over the next three years.

Our sales performance was as planned in Q1, it was driven primarily by North America, but international sales were also slightly better than planned and this despite a more challenging foreign exchange environment.

Regarding FX, our first quarter adjusted EPS of $0.55 included a negative currency impact of $0.09 a share compared to Q1 of 2014 and was about $0.02 worse than we had anticipated at the time we provided guidance in February.

Turning now to North America segment net sales, our North America business segment net sales were ahead of plan, driven primarily by higher Sealy sales. Net sales were up 7.5%, with US net sales up 8.7%. And while Canada net sales were down 4.5%, on a constant currency basis they were up 7.2%.

In the US, sales of both Tempur-Pedic and Sealy products grew at a high single digit rate. Tempur-Pedic was driven by the continued sales momentum of last year’s new product introduction as well as adjustable bases and sales through the direct channel.

Sealy was driven by strong growth of the Sealy brand sales and solid double digit growth of Stearns & Foster and Optimum.

As we look to the balance of the year in North America, we expect the recent launches of TEMPUR-Flex and Posturepedic products as well as continued momentum of adjustable bases and last year’s launches to continue to drive our top line growth.

Now, on margins, North American margins were up significantly year over year and in line with where we expected them to be. Correcting for currency, adjusted gross margin increased 150 basis points, driven by the US where Tempur margins increased over 300 basis points and Sealy’s margins improved 100 basis points.

We’re particularly pleased with the overall gross margin performance, given that both the lower-margin adjustable bases and Sealy products were a higher proportion of the mix than anticipated. Pricing initiatives were implemented during the quarter and productivity, particularly in the Tempur plants, also contributed to margin improvement.

The Sealy US gross margin initiatives that we discussed at the Investor Day are well underway and we believe will contribute to margin improvement to some extent in 2015 and to a larger extent in 2016. The work is proceeding well and we remain confident that we will improve Sealy’s US gross margin to 33% in the next few years.

Overall, the operating margin momentum we saw in North America in the second half of last year continued into the first quarter of 2015. Excluding the effects of the Canadian dollar, North America adjusted operating margin improved 100 basis points and we expect further improvement as the remainder of the year plays out.

Now, turning to international, we're also seeing good performance internationally, with results slightly better than planned. Correcting for currency, net sales increased about 13%, with very strong growth in Asia Pacific and Latin America and modest growth in Europe.

Our Asia Pacific growth resulted from the contribution of the recently acquired Sealy brand rights in Japan and our established Tempur business throughout the region. Our Latin America growth was driven by both Sealy and Tempur brands. Sales in Europe were constrained by continued weakness in Central Europe, which was down in the quarter.

Sales of Sealy and Stearns & Foster products in Europe contributed the majority of growth. We transitioned manufacturing of the Sealy hybrid mattress to a new supplier and are now fully up and running.

Sealy Europe represents a $200 million growth opportunity and with the supply chain established and distribution building across Europe, we are now in a position to capitalize on this potential. From a margin perspective, international margins declined as expected.

As we grow the Sealy business internationally, we expect to generate higher operating profit dollars but at a slightly lower margin rate. In the first quarter, Sealy drove the majority of the growth and foreign exchange was a drag.

As we look to the remainder of the year, we expect foreign exchange to continue to pressure sales and margins, but we are projecting an improvement in gross profit and operating income dollars in the second half of the year versus the prior year after correcting for foreign exchange. 2015 is an important inflection point in our business.

Over the last two years, we've accomplished a great deal. We responded to the changed competitive environment in 2012 by taking decisive and effective action through 2013 and 2014, which has resulted in a doubling of the value of Tempur Sealy from September 26, 2012, the day before we announced the acquisition of Sealy.

This game changing acquisition was completed in 2013 and we then drove strong growth at Sealy in 2014, with Sealy gaining US market share for the first time since 2009 and coming into 2015 with strong momentum. We've also captured $45 million in synergies to date, with another $25 million in our projections that we are confident we can achieve.

At the same time, we re-energized Tempur-Pedic in North America, strengthening the leading premium brand in the industry, achieving a 9% sales increase in 2014 and along with significantly improved margins in the second half of the year.

We also positioned our international business for future growth, through the acquisitions of Sealy brand rights in Europe and Japan. However, our opportunity to improve margins is significant, particularly for Sealy.

It is a primary focus of the company and we are implementing a comprehensive program to improve operating margins by 300 basis points over the next three years. Today, we expect significant improvement to both the top and bottom line to be realized from these initiatives in 2015 and beyond.

Our team has successfully addressed the changed market and as we look to the future is executing a clear plan that will enhance results as we outlined at the investor Day.

We are pleased that our first quarter results met the benchmarks we set, especially with regard to our aggressive gross margin improvement plan and believe this is just the beginning of our positive momentum. We are confident that the continued execution of our plan by this management team will generate enhanced value for our shareholders.

With that, I will now turn the call over to Dale to discuss in more detail our first quarter results and our updated full-year guidance..

Thanks, Mark. I'll focus my commentary on the first quarter results and then discuss our updated 2015 guidance. Along with our earnings release today, we also have filed a presentation which included additional color on our first quarter results.

Given the level of detail provided in the earnings release and presentation, I will keep my comments brief and focus on the key areas. Consolidated net sales for the first quarter were $739.5 million, up 5.4% versus the first quarter last year. On a constant currency basis, first quarter net sales increased 9.4%.

North America net sales increased 7.5%, with strong growth in the US offset slightly by a foreign exchange driven decline in Canada. Bedding product sales increased 8% on a unit increase of 5%. We saw good growth in both mattresses and adjustable bases in the quarter. We also saw growth in our direct sales channel.

International net sales declined 2.6%, but on a constant currency basis increased 12.8%, with very strong growth in Asia Pacific and Latin America. Bedding product sales increased 14% on a constant currency basis, driven by unit growth of 14%. Other channel sales were up 30% on a constant currency basis, driven by strong Tempur direct channel sales.

The first quarter consolidated adjusted gross margin was 38.5% as compared to 38.7% in the first quarter of the prior year. On a year over year basis, first quarter adjusted gross margin declined slightly primarily due to lower international segment margins and unfavorable foreign exchange of 90 basis points, offset primarily by improved US margins.

North America adjusted gross margin was 35.1%, up 110 basis points driven by strong US margin expansion for both Tempur-Pedic and Sealy products.

The key factors driving gross margin improvement in North America were fewer discounts and improved manufacturing efficiencies, offset partially by product mix, specifically adjustable bases [Technical Difficulty] and Sealy branded products 40 basis points to 52.4%.

The key factors pressuring gross margin were a higher mix of Sealy product sales in Japan and Europe, which contributed more than half the decline, foreign exchange, which was 100 basis points and geographic mix where lower sales in Central Europe were offset with sales in other regions like Latin America.

Strong Tempur direct channel growth partially offset these pressures. Consolidated advertising expenses of $81 million were 10.9% of net sales as compared to first quarter of last year’s $73.8 million or 10.5% of sales.

Advertising was up slightly as a percentage of sales which reflects our plan to be on air on a regular basis throughout the year and improved participation in our retail cooperative advertising programs. We’re very pleased with the level and quality of our joint advertising initiatives as we work with our customers to improve effectiveness.

All other operating expenses as a percentage of net sales were largely unchanged on a consolidated basis. However, they were up in international due to growth in the number of direct company owned stores and infrastructure investments in Sealy Japan and Europe and were down slightly in North America.

Consolidated adjusted operating income was $68.2 million in the first quarter of 2015 or 9.2% of net sales, with unfavorable foreign exchange rates impacting adjusted operating income by $8.9 million, or 80 basis points. Adjusted operating income for the first quarter of 2014 was $69.8 million, or 9.9% of net sales.

North America adjusted operating margin improved 60 basis points to 11.2% and correcting for currency improved 100 basis points. International adjusted operating margin was down 410 basis points to 18.3% and correcting for currency was down 310 basis points. As Mark indicated, the decline in international margins was expected.

The majority of the sales growth in the quarter was driven by Sealy branded sales in Latin America, Europe and Japan, which weighed in on mix. Consolidated GAAP operating income was $54.4 million in the first quarter as compared to $62.4 million in the first quarter of the prior year.

Included in first quarter 2015 GAAP operating income was $11.7 million of integration cost, related to the Sealy acquisition, which included certain plant actions, closures and openings as well as costs related to integrating Sealy into our international operations.

In addition, the first quarter included $2.1 million of additional costs related to the company's 2015 Annual Meeting. In the first quarter last year, the company recorded $7.4 million of integration costs. Interest expense was $20.4 million. Other income was $1.3 million and included a currency benefit on a foreign denominated loan.

The first quarter pro forma tax rate was 29.4%. Also you’ll notice in our income statement in the first quarter, we have a line item titled “Redeemable Non-Controlling Interest.” This deduction to net income attributable to Tempur Sealy International, Inc. and GAAP EPS is related to our joint venture with Comfort Revolution.

Because we did not own 100% of Comfort Revolution, this amount has historically included the percentage of Comfort Revolution’s accumulated earnings that we did not own.

As described in the footnote in our earnings release, we’re required to recognize the cash outlay of acquiring Comfort Revolution in the expected purchase price calculated in accordance with the terms of the joint venture agreement exceed accumulated earnings of the joint venture.

We will record adjustments in future periods as necessary and it could be positive or negative. These adjustments will not be reflected in our adjusted EBITDA or adjusted EPS. First quarter GAAP EPS was $0.38 as compared to $0.44 per share last year. Adjusted earnings per share were $0.55 in the first quarter as compared to $0.53 in the prior year.

On a constant currency basis, first quarter adjusted EPS increased 20% as foreign exchange rates negatively impacted EPS by $0.09. Adjusted EBITDA was $90.5 million in Q1 as compared to $91.4 million in the first quarter of last year.

On a constant currency basis, adjusted EBITDA grew 8% in the first quarter of 2015 compared to the first quarter of 2014. As of March 31, 2015, the company had consolidated funded debt less qualified cash of $1.6 billion.

The ratio of consolidated funded debt less qualified cash to adjusted EBITDA was 3.9 times, down significantly from 4.6 times last year, calculated in accordance with the company's senior secured credit facility. The calculation of this ratio is included in the press release. Now, I’ll turn our attention to guidance.

Today, the company updated financial guidance for 2015. The company currently expects net sales to be in a range of $3.100 billion to $3.175 billion, which reflects growth of 4% to 6% compared to 2014, and approximately a 4% headwind from 2014 based on current unfavorable foreign exchange rates.

We expect adjusted earnings per share to be in the range of $2.80 to $3.15, which included approximately $0.32 per share of unfavorable foreign exchange impact compared to 2014. The increase in our 2015 guidance is based on the better than expected results in the first quarter of 2015 and our current outlook for the remainder of the year.

It’s important to note that our 2015 adjusted EPS guidance excludes the impact of ongoing integration cost related to the acquisition of Sealy Corporation as well as additional cost related to the company’s 2015 Annual Meeting and redemption value adjustments to the company's redeemable non-controlling interest.

In considering our guidance, it’s possible that our actual performance will vary depending on the success of our new initiatives, macroeconomic conditions, unexpected changes in foreign exchange rates and competitive activities or the consequences 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. Before turning the call over to Q&A, I’m going to turn the call back over to Mark for closing comments..

Thanks, Dale. Today, Tempur Sealy is a stronger and more stable company than it has ever been. We’re developing great products that retailers and consumers are purchasing, investing our marketing dollars more effectively and positioning ourselves for substantial future growth across the world.

Our cash flows are strong and major cost reduction initiatives are underway which will improve our margins. But today, Tempur Sealy is at a critical junction.

A change in leadership at this time would inevitably result in a transition period that will put at risk the progress we’ve made to date and the initiatives that are underway and we believe would be detrimental to both on momentum and shareholder value.

We have a clear plan and strong momentum and we’re counting on the support of our shareholders as we continue to execute this plan. With that, operator, please open the line for questions..

[Operator Instructions] Our first question comes from the line of Brad Thomas with Keybanc Capital Markets..

I wanted to first ask about raw materials and input prices and hoping you could give us a little bit of color on what that impact was in the first quarter and what your outlook is for petrochemical and steel prices through the year?.

As regards to commodities in the first quarter, really there was no benefit from commodities. And as we said on our first quarter call, if there is benefit we don’t expect it to occur until the second half due to contractual matters that we have with our suppliers that really are designed to protect the company against price increases.

But that does give us a delay in any benefit on price decreases. So as we look at the year, as time has gone on, we’re now thinking that there could be some commodity improvement in the back half of the year. But that’s something that is not included in our current outlook, because we haven’t got any yet..

Turning to the Sealy side of the business, the margins on Sealy clearly is something that you all are focused on, I would imagine there is a particular opportunity as we lap the Labor Day sales from last year.

Could you maybe talk about either in dollars or percentage of sales, what you think that opportunity is on the Sealy side in particular this year?.

In the first quarter, we saw Sealy US business gross margins improve 100 basis points.

We would not say that’s based on the Sealy transformation effort at this stage, it’s based on strong blocking and tackling and driving efficiencies, but the real longer term opportunity, the significant portion of the 300 basis point opportunity we identified at our Investor Day, we think, will come in the coming years as opposed to little bit of benefit in the latter parts of 2015, but most of it in 2016 or beyond.

If we look at the first quarter why did Sealy do better in the first quarter, a combination of things. Just looking at basic fundamental operational improvements, really a lack of operational issues in the first quarter, also we had some improvement in discounts in Sealy in the first quarter based on the mix of products that were being sold.

So we feel good about where Sealy ended the first quarter..

Our next question comes from the line of Budd Bugatch with Raymond James..

This is [Bobby] filling in for Budd. Two quick questions from me and I apologize if these are already answered, I got kicked off the line and I had to get back in the queue, so I missed some things.

But can you maybe comment a little bit on how the roll out for Flex and the new Sealy products has gone and what percentage of that roll out is complete?.

It's going well in the sense that it's on schedule and it's going out as we expected. The bulk of the roll out is happening in the second quarter. So we got some distribution of Flex in the last part of the first quarter, but the bulk of the distribution is happening this quarter. And so it's early.

What we've seen is we now have a better view to what number of floor models that we expect to get. So we have a better – you never know until it's finally all distributed, but we have a better view to it.

And both on Flex and on Posturepedic, we're looking at getting higher levels of floor models than we had thought and double-digit levels of higher floor models than we had thought. So, so far so good. The initial distribution, where we have distribution, particularly in Flex because it's a relatively – it was out first, is going quite well.

And in some chains where it is, it is taking quite significant part of the total balance of share. And we are getting – it's too early to tell, but it's certainly a good – it's a good place to be standing here right now..

And then Dale maybe given those comments about the roll out coming in the second quarter, how should we think about gross margins for the North America segment when we look at our models here for the second quarter?.

In looking at last year, the roll out this year obviously on the Tempur side is smaller than the roll out last year that was part of the improvement in Tempur gross margins in the first quarter, it will continue to be a factor in the Tempur gross margins in the second quarter. So Tempur margins should be better than last year.

On the Sealy side, Posturepedic is a very large roll out. It's a little bit less expensive roll out on a per unit basis than Stearns & Foster, but there is a lot more units.

And so for Sealy in the second quarter, you should anticipate a second quarter with a significant impact from floor models, because the bulk of the Posturepedic roll out is in the second quarter.

[indiscernible] to last year where most of the Stearns & Foster and Optimum roll out were in the second quarter, but Sealy is a higher volume, Posturepedic has a much higher volume than those roll outs combined. So overall, we would look for improvement on a year over year basis in the second quarter.

In total, North America, we expect to see improvement in margins, we need to temper those expectations a little bit just because there is big roll out effect, just not as big effect as last year..

And then lastly from me, can you maybe talk about what your expectations for the adjustable base growth is for the remaining of the year into your sales guidance, we just start to lap some of the high growth comparisons sometime this year, right?.

Yeah, adjustables really took off in the second half of the year last year. We saw a good growth in every quarter on adjustables last year, but where it really took off was in the latter stages of last year, I would say that adjustables continued to grow even on a sequential basis. So that's a good thing, that's a very positive thing for the business.

But the compares get easier, the impact gets lessened as the year progresses, because we don't expect the same level of growth rate this year that we saw last year..

Our next question comes from the line of Seth Basham with Wedbush Securities..

A little bit more color on the gross margins in North America for Tempur, if you wouldn't mind, specifically how much of that 300 basis points improvement did you get from price increases and how do you expect that to benefit your gross margins going forward?.

The impact of pricing in the first quarter was limited, there was a small amount of pricing in the first quarter the related to adjustables because we had raised some price on adjustables last year in the fall, so there's a little bit of impact there.

The Tempur mattress price increase that went into effect in March obviously very limited impact since it was just in the latter stages of the quarter. But we do see improvement in price in Tempur in the first quarter just because of the new product.

If you remember, last year we had price actually reduction in the first quarter last year where we had closed out the pricing on the old product line, where we had a small discount on the old product line to help retailers get rid of it, so just every unit that was sold in the first quarter this year was sold at a better price because it didn't have that pricing from the year ago..

So when you look at it on a prospective basis going forward, would you expect your Tempur-Pedic US gross margins to be as strong in coming quarters?.

Yeah, we expect Tempur margin growth to continue to be very strong on a year over year basis.

Now, it's not going to be 300 basis points possibly every quarter, we saw significant improvement in Tempur margins in the second half of 2014 as we got the new product line out and got it established and started getting volume on it, but we continue to expect to see improvements in our operational cost, the factory cost related to Tempur as we continue to go up that learning curve of getting the – producing those new products.

We expect to continue to – we have a small price increase coming again in Tempur in May, which will provide impact in the second half of the year, obviously the March price increase will have impact across second, third and fourth quarters.

So there's a lot of really good things going and a lot of good momentum on the Tempur brand that we expect to have a very strong margin year in Tempur in 2015. It's off to a great start. It ended 2014 very good, with great momentum and that's continuing..

Last question on the topic of the price increase, early days, but with the price increase in March, have you seen any negative effects on volume?.

As you said, it is early days, but candidly no. So far, as I said, it's early days, we have to be careful, but no. And frankly that is what made it apparent to us that it made sense to take another small increase which is going to kick in in May. And remember, really what we're talking about with price increases is the strength of the brand.

And so far, as one can take a price increase and the retailers support and the consumers are prepared to make that little bit extra investment, it does talk to the strength of the brand. And so we are pleased to see that we are able to do that..

Our next question comes from the line of Peter Keith with Piper Jaffray..

I wanted to ask just about the international segment, so I can understand some of the margin pressure with the Sealy launch.

It sounded like you expected improvement in the back half, are you expecting, is it sequential improvement or are we going to a point where by back half international is actually now going to start trending up year on year?.

We are talking about from a margin improvement in the back half of international versus what we will see in the first half. We've said that we are going to see margin pressure in the international business in 2015 as we launch and roll out Sealy and Stearns in Europe and in Japan. Those are lower gross margin products.

And in the first half of the year, in particular, you're going to have a lot of pressure – there is lot of floor models. So as we're broadening the distribution of those products here in the first half, you have a lot of floor model impact.

So as we get into the second half and you get more to a normal margin, we will see significant second half to first half improvement, also as volume picks up we'll see better flow through to operating margin internationally, because, A, we do have the floor model discounts as much and B, as we get more volume, we did have to add some infrastructure internationally related to Sealy and Stearns rolling out, but we didn't have to add much.

So essentially once you get up to a decent volume on that business, you're leveraging to a great extent the existing infrastructure on Tempur.

So we expect from an operating margin standpoint for Sealy to be negative internationally in the first half, but improving a little bit each quarter such that for the year it will be positive for international and in terms of its total, its bottom line contribution to international accretive from a rate stand point, but positive.

And we'll see that improvement this year and going into 2016 without the big launch effort, we should see a difficult improvement in margin rates of the Sealy business within international and there we're specifically talking Japan and Europe.

Obviously Latin America, we're seeing good growth in the Sealy businesses that already operate there and that growth is very beneficial..

I guess in a related topic, when you're talking about the Sealy cost in the roll out, by the way I appreciate the additional disclosures in the press release, so we can now see the Sealy integration costs this year versus last year and they are nearly doubled this year what they were last year, I think about $13.8 million this year versus $7.5 million last year.

Could you help us understand at this juncture couple of years into the purchase those integration costs are still moving up quite a bit?.

Yeah, the key there is in 2013 mostly what we were experiencing was transaction related activities, just the beginning of the integration.

In 2014 what we saw was organizational integration combining organizations you had some retention programs to keep people, there was some severance programs, there was move programs as we're trying moving people physically to get the organizations together, really what you're seeing in the latter part of 2014 and 2015 and will continue actually into 2016 is structural change.

We've talked a lot about the project to re-do our distribution systems so that we have merged centers and we can ship Tempur and Sealy on the same truck and significant savings that that is generating where we have it, but it's still rolling out.

Also, late in 2014 and what we're seeing in 2015 is related to some of those structural changes that we are making in regards to plants. So we're opening a new plant in Indianapolis, we announced that we are closing a plant in Batavia. So the opening and closing aspects are flowing in and the cost associated with that is rolling into integration.

We just recently announced that we're opening another plant, actually moving a plant because it's not big enough and the new location will give us the ability to have more space to handle the volume, but also have a merged center right there with the plant and that's in Maryland. So right now, we are getting into some structural stuff.

The organizational integration is complete. Now, the structural things are really – the rubber is really hitting the road and that's what is driving the integration cost..

And then lastly from me, maybe for Dale or for Mark, the foreign currency drag, obviously we know it's substantial.

I guess the question has come up recently about why the company doesn't hedge away some of that currency risk? And I guess could you address that, what that decision was to not ever hedge or it once turned out to be a big negative impact here?.

Actually, we do hedge. In retrospect, maybe we should have hedged more, but we do hedge. We did have hedges on the Canadian business, we do have hedges on transactional exposure in the rest of our global business. It's impossible to hedge translation.

So in 2015, a major factor of what's impacting the current foreign currency impact is translation as opposed to transactional – Canada for example, we've explained part of the issue with Canada is a significant portion of the product cost is in US dollars in Canada.

So as the Canadian dollar weakens, it is creating a big margin squeeze because the cost is stable. We had hedges in Canada, in retrospect it might have been good to have higher level of hedging. The currencies had basically been flat for almost 10 years and then suddenly they moved in a big way.

They are never flat, but they fluctuate up and down a little bit.

And so currency has never been a big factor, but then suddenly in 2014, big moves in currencies, we're looking at some structural things to make some adjustments to maybe try to get us a little bit better positioned to be able to manage currency and you can never totally protect yourself from currency, because even if you have a little more hedge program, you can only hedge out so far.

And ultimately you're going to get the impact of that currency, you may just delay it, kind of like on commodities. Our commodity contracts are structured to protect us against price increases. So when prices are going down, it delays getting that gratification.

Same thing with currencies, although it's not quite as easy to do, we have hired a new Treasurer who has significant experience in exposure on global hedging programs and that's something that he is getting all over..

Our next question comes from the line of John Baugh with Stifel..

Actually I had follow-ups to both Peter's questions. The first one was on the European transnational headwind you've got with the euro.

If this settles in with the rate cuts there and then on the bond buying program, this might be a more permanent situation, I was just curious whether you've contemplated any actions there on pricing or otherwise or is the competition there local and you really can't be much about it?.

The competition is largely local, I mean there are anomalies like in Switzerland where there has been some movements relative to the euro where there we have been able to take pricing and there are things that you can do. But in general, we had to have pricing down. I mean, my point is you can move a bit, but in general competition is local.

I think as Dale was saying, there is the translation concern, but there is also the intercompany concerns, because all of our products essentially is made in Denmark and is shipped all of Europe and then all over the world. And so how we hedge within that is something we are looking at doing.

Pricing is something that we’re looking at and we will look at, for example, pricing on sizes rather than across the board. But it is not – we don’t have the situation in Europe that we have in America with the unilateral pricing. So pricing is always a harder thing to do in Europe..

And then I know you don’t report at this way anymore, but is there a way to get a feel for the Tempur International or more specifically I guess Tempur Europe margin, you mentioned Central Europe is tough, but just trying to get a feel for either margin performance, earnings performance or Tempur International without all of the Sealy European ramp, Japanese ramp, et cetera?.

Not specific to Central Europe, but all Tempur International, if you back out the Sealy roll out, half of the decline was related to the roll out of Sealy in Japan and Europe. Another 100 basis points as we said was FX. So geographic mix is the remainder.

It’s a small amount, not that large, but there is some negative geographic mix where we’re seeing growth in Latin America, we are seeing growth in Asia. Europe broadly, we saw a little bit of growth in Europe, but that was in countries other than Germanic region that we’ve talked about before.

So Tempur direct channel is continuing to grow, but as we add stores that adds cost and then in a little bit of time it actually then take a long time, it’s a matter of months, but as you add stores, it’s a drain on your – from a operating margin standpoint until our stores get to a breakeven point and actually they get to a profitability point pretty easy.

But the big drivers, if you want to try to see Tempur to Tempur, the gross margin reduction, half of it is related to Sealy and then another 100 basis points is related to FX..

And my last question quickly just back to the integration cost, I guess they were $4 million in corporate, $8.5 million in Sealy, sort of $12.5 million in the first quarter.

Any sense, Dale, for where that will be for 2015 and 2016, just if not exact, directionally?.

It’s hard to give you an exact, because certainly these infrastructure projects where we have an idea on, some of them are not fully decided for a lot of reasons I’m sure that you could understand, things that impact people, things that impact plans, you have to be very cognizant of the timing of when those decisions are ultimately made, there is bargaining issues et cetera.

But in general, we would anticipate that the integration cost should begin to moderate. As we said at the end of last year using one project as an example, the distribution realignment we said by the end of year last year was about 60% complete. It will be essentially complete by the end of this year.

So as the year goes on, the cost associated with this distribution realignment will get less. As we get further into the Sealy transformation, we’ll see if that requires something that we don’t currently have planned. But we’ll have to continue to look at where the opportunities are, but these infrastructure things are large, but should start to wane.

It’s important to understand that we’ve got a lot of growth going on and we are trying to at the same time optimize the cost in the business. And those moves and structure changes cost money..

Our next question comes from the line of Jessica Mace with Nomura Securities..

My first question is about the North American sales growth and I was just wondering if you could give us any context on how the underlying environment performed versus your expectations and maybe how you think about market share shifts versus rising tide impact?.

I think that there is a bit of a rising tide, there’s a little bit of a rising tide, however, it was affected by some bumps at the beginning of the quarter because of the weather. And there is a degree of buoyancy in it, but I think that we don't have any actual data on market share.

But I would say that we would anticipate that we’ve gained some share in this quarter. What we think though is as we go into – I think the key here is going to be we’re comparing a year last year which was very different in many ways.

Last year we were in a sellout mode, because our retailers were getting rid of the old products and we were discounting the old products and bringing in new. Now, we’re on a lasting basis and now the new Flex and Posturepedic are rolling out. So where we’re really going to keep our eye on this is in the second quarter..

My second question is just on the marketing expense and just how we should – is 40 basis point of deleverage a good benchmark to think about for the remainder of the year and are there any other major moving buckets within SG&A to think about as we model?.

On advertising, if you look back, basically in the first quarter we spent right about the same level that we spent in the second half of last year. So really the first quarter of 2014, it was our lowest advertising quarter of the year and that really was a function of the transition.

We weren’t advertising a lot because we were getting rid of old stuff and the new stuff weren’t out. So we picked up the advertising in the second quarter, continued to driving it in the back half of the year.

From a sequential basis, I think the first quarter is almost spot on from a percentage standpoint or even from a dollar standpoint where the fourth quarter was. We want to have our advertising to be more level that we wanted to be always on. Absolutely, that’s your area of expertise..

The point is there are a couple of things. The key point is that what we talked about last year was the benefit that we saw in the second half of last year was the ‘always on’ strategy, which we had – if you remember, we had in previous years spiked the advertising to tie into the promotional periods.

And what we discovered it to be true in the second half of last year was the ‘always on’ advertising. So what you’ll see is a very consistent rate of advertising from this quarter versus last fourth quarter and third quarter and we’ll continue that going forward.

And therefore, the difference in the second part of the year will be best marked, because we essentially lack again in the second part of the year. The other thing is that we’re also working hard to make sure that our advertising and our retailers’ advertising is coordinated what in timing and in message. And that too adds to the sense of always on.

So it’s a continuation of the strategy we had at the end of last year..

[Operator Instructions] Our next question comes from the line of Josh Borstein with Longbow Research..

Just one of the Sealy roll out in Europe, could you talk a little bit about maybe how many doors Sealy is in right now and geographically where you have Sealy if it’s Germany or beyond Germany at this point?.

It’s in several of the German-speaking countries, it is in Germany, it’s in Benelux, it’s in France and we expect by the end of the year to have approximately 1,000 doors. And we said that before, we still think that’s the plan that we’re on. As we said, the supply chain now is up and running with the new supplier, that’s now in full distribution.

So we’re still on track for what we thought. But we’re not going to give guidelines of – we’re not saying where we’re right this minute, we haven’t got that number, so we’re going to publish. But we’re on track for the 1,000..

Are you able to say what the contribution was from Sealy in Continental Europe and Japan?.

Combine for the two, we saw about $7.5 million in the first quarter related to Sealy Europe and Japan and that was about 50/50. You got to remember, Japan has more of an established business. So it was slightly larger than Europe.

That shows that Europe, now that we’ve got a go and it’s starting off at a pretty good pace and it’s a significant improvement from what we saw in the third quarter and fourth quarter last year where Europe was almost non-existent, given the start up issues we had with the old manufacturer and then we switched to the new manufacturer in the first quarter and feel good about the opportunities that we have ahead of us there..

And then just a quick one from me, you talked about gross margins in Tempur North America and Sealy North America being up on a year over year basis, was that the same for EBIT margins as well?.

Yeah, the US margins were up. Let me find that number right here, from a North American standpoint, on a constant currency basis, adjusted operating margin is up 100 basis points on a constant currency basis, it’s 60 basis points on an actual, operating margin..

And just to make sure I heard it correctly, both Sealy and Tempur were up on the EBIT side?.

The thing is we can’t give you a Tempur or Sealy operating margin.

We can still see and understand that gross margin for the Tempur brand and Sealy brands, but the operating costs are so intertwined right now, you can’t split them, which is why we have new segment reporting, because we’re required to be able to split the business in a way that the business is run today, it’s run as one business.

And so the segments have to reflect how it’s run. And as we integrated the business, we can’t distinguish between who works for Sealy and who works for Tempur anymore..

Our next question comes from the line of Keith Hughes with SunTrust..

Just a follow-up to the Europe comment, this 1,000 stores that you’re looking to get Sealy into, what percentage of the Tempur locations does that represent?.

From a Continental Europe, that would be between 25% of the stores that Tempur is in..

Do you have any kind of feel yet or slots you’re getting as compared to your number of Tempur slots in those locations more or less?.

The number of slots, first of all, we’re going from about a third of the number of stores this year. Ultimately for Sealy, we think we’ll have as many stores carrying Sealy as we will have carrying Tempur, although there won’t be a perfect overlap. There will be some that carries Sealy that don’t carry Tempur. But we’ll have about the same number.

But in terms of the number of slots, we are expecting two to three from Sealy and one to two from Tempur. By the way, just to be clear, Stearns will not be in the 1,000 stores. Sealy is going to be in the 1,000 stores, Stearns will be in less than 1,000 stores..

And our next question comes from the line of Denise Chai with Bank of America Merrill Lynch..

Just going back to adjustable bases, could you update us with where you are in your plans to create a global platform to lower your component costs?.

There is a big program and that is well underway, but that is not something that we – where we have announced when we’re going to launch that yet, but that is – I think it’s safe to say that will be next year..

And also you commented on a lack of Sealy operational issues this quarter, could you go into some detail about the specific actions that were behind that?.

I think that we’re very focused obviously on the margin improvements that we’re seeing in Sealy that we intend to generate at Sealy, to get to 300 basis points that we’ve talked about and we’ve laid out the strategy and the plan, that transformation plan to achieve it.

But we’ve also talked a lot about the first step of that, which is just basic blocking and tackling and a focus by all of the people throughout the organization, from the most senior down to the people in the plant on this, everything from inventory control to costs to cleanliness to using – implementing 5S to improving work practices so that we reduce injuries and so on, lot of things that are going on.

And we’re doing some things like experimenting with level loading. We’ve talked a lot about level loading and we’ve said it’s going to take time. What I think is that – this is very good management focus, we’ve just been on it..

I’m showing no further questions on the phone lines at this time. I’d like to turn the call back over to Mark Sarvary for closing remarks..

Okay, very good. Thank you very much everybody for joining us and we look forward to talking to you again in July on our second quarter earnings call. Thanks for joining us this evening..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program and you may now disconnect. Everyone, have a great day..