Barry A. Hytinen - Tempur Sealy International, Inc. Scott L. Thompson - Tempur Sealy International, Inc..

Seth M. Basham - Wedbush Securities, Inc. Bradley B. Thomas - KeyBanc Capital Markets, Inc. Beryl Bugatch - Raymond James & Associates, Inc. Peter Jacob Keith - Piper Jaffray & Co. Curtis Nagle - Bank of America Merrill Lynch Laura Champine - Roe Equity Research LLC Keith Hughes - SunTrust Robinson Humphrey, Inc. John Baugh - Stifel, Nicolaus & Co., Inc.

William Michael Reuter - Bank of America Merrill Lynch Carla Casella - JPMorgan Securities LLC Michael Louis Lasser - UBS Securities LLC Kevin Patrick Heenan - Guggenheim Partners Investment Management LLC.

Good day ladies and gentlemen and welcome to the Tempur Sealy Second Quarter 2017 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. I would now like to turn the call over to Barry Hytinen, CFO. Please go ahead..

Thank you, operator. Good morning, everyone, and thank you for participating in today's call. Joining me in our Lexington headquarters is Scott Thompson, Chairman, President and CEO. After 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 these forward-looking statements, including the company's expectations regarding sales, earnings, net income, and adjusted EBITDA, and anticipated performance for 2017 and subsequent periods, involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business.

The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating, and other factors discussed in the press release issued today.

These factors are also discussed in the company's SEC filings including, but not limited to annual reports on Form 10-K and the company's quarterly reports on 10-Q under the headings Special Note Regarding Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only as of the date on which it is made.

The company undertakes no obligations to update any forward-looking statements. This morning's commentary will include non-GAAP financial measures.

The press release contains reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures, except as otherwise discussed in the press release as well as information regarding the methodology used in our constant currency presentations.

We have posted the press release on the company's website at tempursealy.com and have also filed it with the SEC. Our comments will supplement the detailed information provided in the press release. And now, with that introduction, it is my pleasure to turn the call over to Scott..

one, launching new products; two, optimizing our manufacturing and logistics; and three, improving our marketing efficiency and effectiveness. Our early progress is partly due to many retailers deciding to lean into our brands. They immediately recognized the significant opportunity for them presented by Mattress Firm termination.

And some of these first movers were rewarded with the strongest, highest ASP Tempur-Pedic sales in their history. Based on our ongoing discussions with the broader retail community, we believe that our growth rate can improve further as more retailers recognize the success of these first movers.

Seasoned retailers understand that our brands are especially valuable in an environment in which consumer traffic is somewhat sluggish, making higher ASP essential for retailers' success.

Another bright spot in the quarter was our success at growing direct-to-customer sales in North America, which increased a robust 137% in the quarter, led by a 190% increase in our web business.

While the vast majority of customers prefer to purchase beds in retail stores, we believe that Tempur Sealy should earn its fair share of this niche online market.

And unlike the vast majority of the players in this segment, we are positioned to grow profitably because of our brand strength, our enormous scale advantage in manufacturing, marketing and overhead.

Regarding our North American Tempur-Pedic flagship retail program, we continue to make steady progress towards opening new stores, and we anticipate opening a few new stores later this year.

While our preference in North America is to partner with existing third-party retailers, in certain underserved markets, it makes sense at times for us to establish a few stores in targeted locations. Turning to our International sales performance in the quarter.

Our Asia and Latin American markets grew nearly double-digit on a constant currency basis, which was in line with our expectation. European market performed slightly below our expectation, with sales down low single-digit. We believe the overall bedding market in that region was weak due to macroeconomic issues.

The UK, which is a big market for us, was weak and may be dealing with a little Brexit angst. Additionally, across Europe, there were several distracting elections, and we're hearing about low footfall. I'm glad to report that Germany continues to show year-over-year growth.

One quick call out, I recently attended business reviews for our Asia and Australian markets, toured plants, distribution centers, spoke to key retailers, employees, and I left feeling even better about our long-term growth potential of our businesses in that region. Our joint venture partner in Asia and our operating team are doing a great job.

Before I hand the call off to Barry, I'd like to make a comment on the trends post quarter-end. Based on everything we see to-date, our expectation is that the third quarter growth in sales, excluding Mattress Firm, will be greater than the 17% growth we achieved in May and June period. Finally, regarding our full year outlook.

While worldwide industry trends are a bit sluggish, and we are still in the very early innings of our North American sales channel realignment, we are very pleased with our results thus far in 2017.

Through the first half of the year, we have outperformed our internal expectations, and we are raising the low end of our adjusted EBITDA guidance from $400 million to $425 million and maintaining the high end of $450 million. Now, I'll turn the call over to Barry to discuss the quarterly numbers in more detail..

first, we resolved the tax matter in Latin America; and second, we repatriated some cash from our Canadian subsidiary. Consolidated EBITDA was $86 million, down $38 million from last year. EBITDA was impacted by lower volume resulting in fixed cost de-leverage and our increased investment in our brand advertising campaign.

This was partially offset by favorable channel mix, lower launch expenses and operational improvements. Unfavorable foreign exchange rates and higher commodity costs together were about $6 million of headwinds to EBITDA. Now moving on to the balance sheet and cash flow items.

We generated operating cash flow of $75 million in the first half of 2017 versus $52 million in the same period last year. The increase in operating cash flow was primarily driven by improvements in net working capital.

For the first half of the year, we generated $49 million of free cash flow, nearly doubling the $28 million we generated in the same period last year. Cash cycle improved 1 day from the same period last year, driven by payables days.

In the second quarter, our top five accounts represented 22% of net sales, down significantly from last year when they were 40%. During the quarter, our largest account was 6.5% of sales. At the end of the second quarter, net debt was $1.9 billion. Our leverage ratio on a trailing 12-month basis was 3.74 times.

With our leverage target at 3.5, we still are leaning towards debt reduction. Turning to our guidance. Today, we are raising the low end of our adjusted EBITDA guidance from $400 million to $425 million and maintaining the high end at $450 million.

Our updated guidance includes an additional $10 million headwind from the combination of commodities and foreign exchange compared to our prior expectation. As disclosed in May, we expect depreciation and amortization to be $105 million for the full year.

Consistent with our first quarter results, this projection does not include the $8.4 million net benefit for stock-based compensation expense we incurred in the first quarter. On tax rate, with the elevated level we incurred in the second quarter, we expect the tax rate for the full year to be about 32%.

And now, I'll turn the call back over to Scott..

Thank you, Barry. Great job. Most of our comments today have been focused on our performance in recent months. Before I open the call for questions, I want to remind you about the progress we've made within the framework of our four long-term initiatives that our global team is focused on.

Our first goal is to develop the most innovative bedding products in all of the markets we serve. Our launches all around the world continue to be on time and on quality. Internationally, our large Tempur launch is ongoing, with expectations to be completed by year-end.

Domestically, we launched the entirely new Sealy line during the quarter, with 95% plus of our accounts having the new product by Memorial Day period. The new Sealy line is performing well, and we feel the market is rewarding us for the quality and the innovation in that line.

We also believe that listening to consumer research has paid off as we simplified the book brand structure and made it easier to understand and shop. The second long-term initiative is to invest significant marketing dollars to promote our worldwide brands.

Direct advertising spend in North America was up as a percentage of sales compared to the second quarter last year and was also up in terms of total dollars. We are all in supporting our retailers, and we believe that those that have leaned in are taking share in the marketplace.

For the third quarter, we will once again step up our direct advertising dollar spend to drive share gain. The third long-term initiative is to expand North American margins while executing our sales growth strategy.

As we previously mentioned, we expected the second quarter to be the most challenging as we aggressively invested in advertising to fuel sales growth strategy while facing a large and disruptive liquidation of Tempur Sealy inventory by our former largest customer.

But as I highlighted before, our four-wall margin is up and our SG&A is down on a dollar basis. The last long-term initiative is to optimize worldwide distribution to make sure our products are properly represented in all channels where our end customers want to shop.

Our primary focus is on expanding our relationship with third-party retailers, and we have reported the growth in that area. Additionally, we've made significant progress towards expanding direct-to-consumer businesses. Our second quarter results demonstrated the strength of our business model and our iconic brands.

The quarter also highlighted our variable cost structure and the skill our team has in dealing with unforeseen situations. While we're adapting to our new environment, our long-term initiatives remain unchanged. Operator, you may open the call for questions..

Thank you. Our first question is from Seth Basham with Wedbush. Your line is now open..

Thanks a lot. And good morning..

Good morning..

My first question is to – or only question is to understand a little bit better some of the moving pieces of the North America division between Sealy and Tempur-Pedic in terms of sales; and then secondly, in terms of gross margins, as you talked about gross margins being slightly up for Tempur but down 210 basis points for the entire division?.

Sure. Seth, we saw strong performance, excluding Mattress Firm from both brands. And I would note, excluding floor models, both brands grew considerably faster. As you'll recall that last year, we had much more significant launches ongoing particularly on Tempur and from a dollar value, also on our Sealy brands.

And as it relates to North American gross margin, it was down 210 basis points. Now if you think about our fixed cost as we previously disclosed, that's about 15% on prior revenues. And so if you work through the model, I think you'd find that de-leverage was several hundred basis points of that.

And then together with that, with brand mix, I noted that in light of the way that Mattress Firm's revenues previously skewed to more Tempur, particularly in the second quarter of last year since they didn't have Stearns & Foster, as you'll recall, we had more of a decline on our Tempur business all in.

And as a result, we had some brand mix that was negative as well. Now those factors were partially offset by the fact that our productivity was up in across our operations, net of the de-leverage. Our channel mix was quite favorable, and we had, as I mentioned at the start, fewer floor models and less launch.

I would note that we – I didn't call it out specifically, but certainly, a headwind to gross margin also was FX and commodities. So we felt the performance in light of the revenue was quite good. Thank you..

Our next question is from Brad Thomas with KeyBanc Capital Markets. Your line is now open..

Yes. Thank you. Good morning and nice execution here. Scott, I was hoping you could talk a little bit more about the outlook for North America in the second half and what it is that you're seeing that gives you confidence that revenue growth trends will continue to accelerate.

And then, Barry or Scott, to the extent you could comment on the decremental margins that you're seeing here in this quarter in terms of the underlying sales loss that you had and what those decremental margins might look like going forward? Thank you..

Sure. Great question. I'm going to break it up into kind of two parts because there's things we can control and things we can't control. When I look at the things that we can control and the execution, it looks very strong to me. And let me point out a couple of things.

I think one of the big concerns for some people were things like our share of voice when you lose a strong advertiser like Mattress Firm. But when you look at our share of voice in the second quarter, our share of voice actually did not go down.

And another way to say it is the all other retailers stepped into the void created by Mattress Firm's lack of advertising our products, and quite frankly, it's flat. So we're seeing evidence of the other retailers clearly doing their part to help support us.

I think I look at our own store, same-store sales are up 7% post quarter end, and we continue to hear nothing but great things about our products, particularly master brand. So execution's strong. And as we said on the prepared remarks, the quarter built. Obviously, April, quite frankly, internally, we call that a Mulliken (27:20). April was tough.

But as soon as we got through the inappropriate use of our brand in advertising that they were doing, look, it's been growing. So we feel good about going into the quarter, and as we mentioned, obviously, we've got some information post quarter end. So confident on execution.

When you look at the overall economy, and again, we're talking North America, I mean, you're bullish about 4.4% unemployment, wage growth at 2.5% is okay, inflation continues to be low at 1.7%, and certainly, gas prices are under control, and consumer confidence at 121 and up feels good.

But the other side of the equation is consumer sentiment is down at 93.1. Durable goods have been down. Retail sales have been down. Auto production is down. And so I call it kind of a so-so sluggish retail economy.

And I think as the quarter goes and other people report, I think we'll continue to see that but feel very good about our internal execution..

I guess, Brad, I'd add to the second part of your question on margins. Look, we expect the gross margins to sequentially improve as we move through the year from this level, and we expect the EBITDA margins obviously implied in the guidance also to improve.

And I'll note that in light of the strong performance we are seeing in the Tempur margin from things like channel mix and product mix, despite deleverage which we will be incurring in the back half, we would expect the Tempur margins to continue to be up year-on-year in the back half; and our Sealy margins, as I noted, too, improve sequentially.

And both of those statements are inclusive of about $10 million of incremental commodities in the back half, so we're feeling good about performance, as Scott noted..

Yeah, I guess, the only other step that I'm sitting here looking at my paper that I should probably throw out is we are seeing a 30% increase in our web traffic, and we're seeing a 30%-plus increase in our dealer locator, which is certainly always been a key indicator that we keep an eye on. Thanks for your question..

Our next question is from Budd Bugatch with Raymond James. Your line is now open..

Good morning, guys. Thank you for taking my question. You talked a little bit about advertising. I wonder if we could get some more color and quantification of what the delta was in Direct and maybe how much you saved from the less co-op that you paid to your former largest customer or that what you might have paid to others.

And if you would also talk a little bit about maybe you're seeing some slight population increase in some of the brand, particularly Tempur, and retailers who are leaning into your product?.

I'll start with a little bit of that, and then I'll give it off to Barry to either correct it or give you some more details. Let me give you a little bit of color on what we're seeing. You got to go into the detail and look at particular markets. And if you go in and look at like New York and Philly.

If you look at that market in particular, which, of course, is a hotbed for bed-in-the-box, we're seeing our Tempur sales up 70% in the New York, Philly market as other retailers lean in and take the share that Mattress Firm has left over.

If we look at our direct-to-customer business, we're also seeing that it's over-indexing in the New York and Philly area. If you go to Phoenix, which is again another hotbed for bed-in-the-box, our Tempur sales were up 50% in Phoenix. And again, our direct-to-customer business is over-indexing into Phoenix.

Of course, there's some other markets like Houston, and Houston has been particularly weak, I think some of that's oil and gas, I think some of that might be where Mattress Firm is concentrating still some liquidation activities, but Houston is down 25%.

So that gives you a little bit of color of what we're seeing as far as allocations of advertising stuff. We normally don't get into that kind of detail..

Yeah, the only thing I'd add there to that last point is, okay, it was a multimillion dollar increase in our brand advertising campaign. We are going to continue to aggressively advertise as you move through the back half.

And as I noted in the prepared remarks, we expect to kind of grow into that advertising budget because it's clearly at, as compared to prior years, an elevated level in terms of dollar and rate. But we're thrilled with the way the business is performing, those all other statistics that Scott just mentioned are a testament to that..

But it's fair to say that integrated market, the co-op advertising is down significantly, and the direct advertising is up significantly..

Yes. And for obvious competitive reasons, we do not break out that level of subsidy by customer. Thank you for the question..

Our next question is from Peter Keith with Piper Jaffray. Your line is now open..

Hi. Thanks. Good morning everyone. Scott, you had mentioned in the script that you now expect to fully recover, I guess, the Mattress Firm, it was either revenue or EBITDA presumably, maybe both.

I guess now that you are a couple months into this termination; can you give us a sense on timing? Maybe what, maybe another way to ask, what would be deemed unacceptable to you and how long to get all that back?.

Yeah. I think if you remember when we originally had our first call about this topic, I asked kind of if you all would give me a hall pass until we get to the end of the third quarter, and I'm going to go back to that and say, look, this is in the very early stages. We've got several months of data.

But I think in this situation, we need some more data before I start putting internal guidelines or goals in place. But it's very clear that we're ahead of our original projection and feeling pretty good about things, but I'm not in a position yet to tell you what that glide path looks like..

Okay. Thank you..

Our next question is from Curtis Nagle with Bank of America. Your line is now open..

Great. Thanks for taking my question and good morning Barry and Scott.

How are you guys doing?.

Great..

Good. Thanks, Curt..

Good. Good. So, just a quick question.

So thinking about the markets where you have the most overlap with Firm, I guess, how are you guys thinking about, I guess, potential implications of your largest competitor really ramping up with Firm and, I guess, what that could do to recapture efforts with all your other accounts? I mean, have you seen any impact from this, or it's too early to tell? Do you think that could be a tailwind?.

Well, I mean, our largest competitor is servicing Mattress Firm. They have been servicing Mattress Firm. And Mattress Firm has ramped up the advertising during the second quarter and continues. So we continue to see that activity. And while that activity is in the marketplace, I think we reported our numbers, we feel pretty good about things.

I mean, it's really the other retailers have been very supportive. And some of the growth that the other retailers are having in Tempur particularly is just outstanding. I mean, when you're talking about 60% and 70% increases in Tempur sales in a marketplace, there are some retailers that quite – other retailers, quite frankly, are doing very well.

So it's a long journey, but it's started out pretty well..

And Curt, I guess I would add, we talked a lot about Tempur, that our Sealy performance is I think really quite strong against the macro bedding backdrop that appears weaker. I'm sure as the next few days and weeks go by, we'll have more industry data come out.

And I don't think that the rest of the industry is anywhere close to the plus 10% that we indicated our Sealy business is up in that May-June period excluding Mattress Firm. And I just know we're seeing great performance from our new Sealy launch. That's at the lower to mid-priced products across all technologies.

Our Stearns & Foster's line is continuing to grow double-digits, and that's on the back half of having been launched last year with just great performance. So, we feel very, very good about the May-June performance and, as Scott mentioned, that continuation, as we move here into the third quarter..

Our next question is from Laura Champine with Roe Equity Research. Your line is now open..

Good morning. You did a good job of controlling the absolute dollars in SG&A expense and moving those lower year-on-year.

Is that sustainable in the back half as well given the ramp up that you're making in advertising expense?.

Laura, you should expect us to seasonally be a little bit higher in terms of sales, as you know, as you followed the industry and the business for a long time. And with that, we naturally have a little bit more of the cooperative advertising that goes along with sales.

However, excluding variable items, I think the management team and leadership team here is very focused on expense management, so the fixed items are quite fixed here, and we are working on continuing to improve our expense structure. So bottom line, yes, ex-variable items..

Our next question is from Keith Hughes with SunTrust. Your line is now open..

Thank you.

Just going back to gross margin, your comments on the Tempur gross margin in the quarter, the Tempur-Pedic brand gross margin in the quarter, did that include any International sales, or was it just domestic? And does id that include all sales Mattress Firm and for other retailers?.

Good follow-up question, Keith, and thanks for the questions. Yeah, my comments there were about North America, so specifically, our North American Tempur margins were up slightly, and that is all in.

So that reflects the significant amount of deleverage we incurred on the Tempur-Pedic brand and kind of speaks to the underlying strength from productivity improvements, our team in the factories and logistics are doing a great job. We've obviously had some very favorable channel mix. We had less launch activity, as I mentioned.

And we had very good product mix within the Tempur-Pedic brand within North America. And we did have a little bit of pricing, and as I mentioned, also, I anticipate the Tempur-Pedic margins to continue to improve and be up year-on-year in the back half..

Our next question is from John Baugh with Stifel. Your line is now open..

Thank you, Scott and Barry and congrats. I just had two kind of detail questions, one you may not answer it, but I was curious if you could at least ballpark us roughly on the gross margin of the Direct business versus the Wholesale.

And then secondly, just remind us, as we think about 2018, and I know you're not guiding, but how much earnings, if you will, were in 2017 relating to Matt Firm that obviously won't repeat? Thank you..

Let me see if I can answer part of that question. I think what I would say about the Direct business' margin, maybe as it compared to the Wholesale, I think the important point there is the Direct margin is increasing. And the reason I make that point is we're not buying sales online, and we're not trying to push a customer to any particular channel.

And like I said, in fact, the Direct margin is increasing, because we don't want to over-invest in customer acquisition cost in that area..

For competitively sensitive reasons, John, we don't really break out earnings by customer, but nice try again, and you tried that last quarter too. We did disclose that we had roughly $95 million of sales to Mattress Firm in the first quarter, and we broke out a little bit of detail.

It's too early to comment on 2018, but we certainly will have, as Scott mentioned earlier, anticipate that on the next call, we'll talk a little bit more about our view as it relates to how we're doing on the relative recapture.

But I would just point out that comments that Scott made about regional performance and, for example, New York, where all our other Tempur business is up 70%, that is for the entire second quarter, I might add, that's April to June. And Phoenix, being up 50%, and that's a wholesale all other for Tempur, is early good indication.

We've got a lot more to do, but we are feeling good about where we are in what will be a long journey..

Our next question is from William Reuter with Bank of America. Your line is now open..

Good morning, guys..

Good morning..

You made the comment that you're pretty certain that the 10% growth ex-Mattress Firm was in excess of the market in the quarter, and I'm sure you're right on that. I was wondering if you could talk about what you expect the domestic market to grow at in 2017 as a whole on a dollar and unit basis..

Yeah, I don't think I could give you an expectation. Clearly, we had some internal forecast, but we run the business with a flexible business model so that we can ramp up and down. Obviously, in the next 30, 45 days, there will be a lot more information that comes out.

I guess, I'd really like to look at that before I get locked down too much on a forecast because we're into the heavy summer season. But as I mentioned to you before, I mean there are some factors you look at that you can get very optimistic about, and then there is some sluggishness that you feel.

And some of that may be, what I'll call, the Washington effect, so as not to get in any kind of political discussion. It may be a little bit of a hangover from the great recession and maybe student loans or auto loans, I'm not sure.

So I would say we're getting mixed signals as we sit here today, some really good news, and then really some softer news domestically. So we're going to need a little while longer before we get out there making those projections..

Our next question is from Carla Casella with JPMorgan. Your line is now open..

Hi. You talked about the great business you've done outside of Mattress Firm, the sales up 10% overall in the U.S.

How much of that is actual new retailers? Or are you just adding floor space at existing?.

Yeah..

Or is it purely just turns at existing?.

Yeah, it's really not very many new retailers, and it's also not really that many new slots. It is really greater velocity of the slots that are in the installed base.

That is, by far, the lion's share, wouldn't you say, Barry?.

Oh, definitely. I mean if you look at the performance that we're talking about, Carla, and thank you for the question, I would say it's clearly velocity. Our world-class retailers are leaning in and directing traffic, along with us, to their stores to find Tempur-Pedic and Sealy brands. And I mean, take those just couple of regional quotes we gave.

I mean, we are very kind of nearly flat as it relates to doors in those locations. And we are seeing great performance in how those markets are performing, so yeah, it's velocity..

Yeah, and that's really the most productive way to grow revenues..

I think it's a testament to the fact that these are consumer-preferred brands, and consumers want to find them, and it's our job and our retailers together to direct them to places where they can find them..

Our next question is from Michael Lasser with UBS. Your line is now open..

Good morning. Thanks a lot for taking my question..

Good morning..

So across the entire Wholesale business, what was the growth and can you quantify the growth in Tempur slots and Sealy slots as of the end of the second quarter? And then just a detailed question on the sales and marketing spend.

Was the entirety of the about $20 million decline due to lower co-op advertising, or were there other factors that drove the decline? Thanks..

So on slots, as we were just kind of, Michael, mentioning to Carla, it's a pretty small increase. And we did see a little bit of slot improvement with our Sealy launch, but not much and that was as planned. And then on the Tempur side I would say, it's fairly flat year-on-year. If you look at the total selling and marketing, there's a few things there.

Obviously, we've been very tight on expense management. Clearly, the first item resulting in the decline would have been the lower subsidies or cooperative advertising, offset by the significant multimillion dollar increase in brand advertising as well as expense management elsewhere. So thank you for the question..

Our next question is from Bob Drbul with Guggenheim Securities. Your line is now open..

Hi guys, good morning. This is Kevin Heenan on for Bob.

As you think about the sales recapture in North America, can you just comment on the channels you are most excited about sort of over the next couple of years and particularly maybe the opportunity that you see in department stores? And just separately, with the number of leading brands beginning to embrace Amazon a little bit more, just your general views on that platform as well? Thanks..

Sure. Look, I mean, the lion's share of the business and where our focus is, is supporting our third-party retailers, and quite frankly, how we manage that channel will probably determine our success.

If you're talking about kind of with our individual customers, I guess, groups, some department stores are going to be a headwind, and there's probably some opportunities in some other emerging department stores in the bedding area.

If you're talking about growth rate, from a growth rate standpoint, I imagine direct-to-consumer will have the highest growth rate in the next couple of years. A lot of that is catching up with the marketplace, and all we're trying to do is get our fair share of that market, but that's probably going to have a higher growth rate.

We are doing a little bit of business on Amazon. Sealy has been on Amazon since 2016. We do have some Tempur on there. Tempur was already on Amazon through resellers. We kept shutting them down and they kept popping back up, and our product kept showing up on Amazon, so much like Nike.

We wanted to be able to control our brand and message to our customers on that site, and so we're doing a little bit of business there, but I don't expect that distribution to be significant at all. Anything else, Barry, that you think about from a distribution....

I think that's a good summary..

I guess the other thing, we're going to open a few stores, as we mentioned in the prepared remarks. Those stores will not be significant to 2017. I doubt they'll be significant to 2018, but it is something that we feel strongly about that we need a few stores in the marketplace aiming to fill in some holes from a distribution standpoint..

And we have a follow-up question from Keith Hughes with SunTrust. Your line is now open..

Thanks. Question for Barry on raising the low end of the guidance range.

Particularly given you have the extra raw material and FX headwind you discussed in the prepared comments, can you give any kind of indication of what things have gone right to kind of one, two, three, what has gone right to lift the lower end of that range?.

Sure, Keith. I think first and foremost, in the first half, we outperformed our expectations, albeit at the beginning of the year, we gave ourselves a fairly wide amount of latitude for the full year as we were just getting started on this recapture effort, and we weren't sure how long it would take or how quickly it would generate improvement.

And so the first point would be the outperformance in the first half, what drove that? One, the May-June period was a quick improvement from the impact we saw in April and early May from those liquidation activities we referenced before.

The margins have continued to improve despite the deleverage, and that's a testament to the operational and productivity improvements I mentioned earlier as well as channel and product mix have come in very well. We feel very good about where we are with those items going forward.

And in light of the recent trends Scott, is there anything else you'd add?.

Yeah, I mean, if you think back to the budgeting process, Barry, I mean, it would be the productivity in the plants and the deleveraging, how they handled that. It certainly would be the direct-to-consumer..

Yes..

And then it would be the favorable channel mix probably for more of the sales that come through, I think if you just had to jump through..

Anyway, great question..

And I'm showing no further questions. I would now like to turn the call back over to management for any further remarks..

Thank you. To 7,000-plus employees worldwide, thank you for what you do every day to make this company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders and lenders, thank you for the confidence in Tempur Sealy management's leadership and its board of directors..

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a good day..