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Edited Transcript of CFI earnings conference call or presentation 30-Aug-18 3:00pm GMT

Q1 2019 Culp Inc Earnings Call

High Point Sep 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Culp Inc earnings conference call or presentation Thursday, August 30, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dru L. Anderson

Corporate Communications, Inc. - SVP and Principal

* Franklin N. Saxon

Culp, Inc. - President, CEO & Director

* Kenneth R. Bowling

Culp, Inc. - Senior VP, CFO, Treasurer & Corporate Secretary

* Robert G. Culp

Culp, Inc. - President of Culp Home Fashions Division

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Conference Call Participants

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* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Marco Andres Rodriguez

Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst

* Robert Kenneth Griffin

Raymond James & Associates, Inc., Research Division - Senior Research Associate

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Presentation

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Operator [1]

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Good evening, and welcome to the Culp's First Quarter 2019 Earnings Conference Call. Today's call is being recorded.

At this time, for opening remarks and introduction, I'd like to turn the conference over to Ms. Dru Anderson. Please go ahead, ma'am.

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Dru L. Anderson, Corporate Communications, Inc. - SVP and Principal [2]

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Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the first quarter of fiscal 2019.

As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q. You are cautioned not to place undue reliance on forward-looking statements made this morning, and each such statement speaks only as of today. We undertake no obligation to update or revise forward-looking statements.

In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of the non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included as a schedule to the company's 8-K filed yesterday and posted on the company's website at culp.com.

A slide presentation with supporting summary financial information and additional performance charts are also available on the company's website as part of the webcast to today's call.

I will now turn the call over to Frank Saxon, President and Chief Executive Officer. Please go ahead, sir.

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [3]

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Thank you, Dru. And good morning, everyone, and thanks for joining us today on the call. I'd like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today is Ken Bowling, our Chief Financial Officer; and Iv Culp, our Division President of the mattress fabrics business.

I'll begin the call with some brief comments, and then Ken will then review the financial results for the quarter. I'll then update you on the strategic actions in each of our segments. After that, Ken will review our second quarter fiscal '19 business outlook. And then Iv, Ken and I will be happy to take your questions.

As expected, our results for the first quarter reflect challenging bedding industry conditions, resulting primarily from the significant increase of low-priced imported mattresses from China. We estimate now that total mattress imports represent approximately 20% of U.S. industry shipments, up substantially over the last few years. We are pleased, however, that even with substantially lower sales of mattress fabrics from a year ago, we achieved an operating income margin in this business of 8%.

Additionally, we're optimistic that the U.S. bedding industry could benefit in the near term from relief under U.S. trade laws to address this situation. If and when such action would occur, we believe it will favorably affect our business and the domestic mattress industry going forward.

With regard to our upholstery fabrics business, we were pleased with the improved sales performance for the first quarter, which included an additional contribution from the Read Window Products company acquired at the end of last fiscal year.

Overall, our operating performance for the first quarter was affected by lower sales of mattress fabrics and unfavorable currency exchange rate in China and the impact of closing our Anderson, South Carolina, upholstery fabrics operation. While we're experiencing considerable headwinds, we're optimistic that we will begin to see improvement in our quarterly results in the second half of the fiscal year. The incremental sales from Read and our upholstery fabrics business and the expected contribution in sales to our mattress fabrics segment from our investment in eLuxury completed during the first quarter will support our product-driven and diversification strategy.

For both businesses, we remain focused on offering creative designs and innovative products that meet the changing demands of our customers. Importantly, we have the financial strength to support our business in this current environment, and we are well positioned for continued growth as market conditions evolve.

I'll now turn the call over to Ken, who'll review the financial results for the quarter.

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Kenneth R. Bowling, Culp, Inc. - Senior VP, CFO, Treasurer & Corporate Secretary [4]

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Thanks, Frank. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website to cover key performance measures. We have also posted our capital allocation strategy.

Here are the financial highlights for the first quarter. Net sales were $71.5 million, down 10% compared with the prior year.

Pretax income for the first quarter was $1.9 million, compared with $6.7 million last year. Pretax income margin was 2.7% compared with 8.5% a year ago.

Impacting the quarter were divisional gross profit pressures, which we will cover in more detail shortly, somewhat offset by a significant reduction in SG&A due primarily to much lower incentive compensation costs as compared to the same time last year. These results also included $2 million in restructuring and related charges for the planned closure of our Anderson, South Carolina, facility.

Excluding these restructuring and related charges, pretax income for the first quarter was $4 million. Importantly, the pretax results included a full quarter of operating performance for Read Window Products and only 5 weeks for eLuxury given the timing of the transaction closing.

Net income attributable to Culp, Inc. shareholders for the quarter was $957,000 or $0.08 per diluted share compared with $5 million or $0.40 per share last year. Again, the results for the first quarter included $2 million in restructuring and related charges.

The effective income tax rate was 46.5% for the quarter compared with 24.3% for the first quarter of last fiscal year. The increase was primarily due to the mix of pretax income favoring our foreign income tax jurisdictions that are taxed at higher income and withholding tax rates compared to the U.S. federal statutory rate of 21%.

Looking ahead to the rest of this fiscal year, we estimate that our consolidated effective income tax rate will be in the 33% to 35% range based on the facts we know today.

Also, as commented on last quarter, we have approximately $7 million in NOLs to apply against this year's U.S. taxable income. This fact, coupled with the ability to now immediately expense all U.S. capital expenditures, is expected to result in minimal U.S. cash taxes paid this fiscal year. This expectation excludes the mandatory repatriation tax payments that began this fiscal year and are spread over 8 years. These expectations are based on facts we know today.

Trailing 12 month's adjusted EBITDA was $32.7 million or 10.4% of LTM sales compared with $38.1 million or 12.4% of LTM sales for the same period a year ago. LTM consolidated return on capital was 21.4% compared with 28.8% a year ago.

Now let's take a look at our 2 businesses. For mattress fabrics, sales were $37 million, down 24% compared with last year's first quarter. Operating income was $2.8 million compared with $6.4 million a year ago, with an operating income margin of 7.6% compared with 13.1% a year ago. Operating income was primarily pressured by lower sales, which impacted manufacturing efficiencies and fixed cost absorption, offset somewhat by lower incentive compensation expense. LTM return on capital for mattress fabrics was 28.6%.

For upholstery fabrics, sales for the first quarter were $34.5 million, up 11% over the prior year. Operating income was $2.5 million for the quarter compared with $2.9 million for the same time last year. Operating income margin was 7.3% compared with 9.3% last year. The decrease in operating income and margins was primarily affected by an unfavorable currency exchange rate in China. LTM return on capital for the upholstery fabrics business, 53.7%.

Here are the balance sheet highlights. We reported $39.3 million in total cash and investments and $4 million outstanding on the company's line of credit for a net cash position of $35.3 million.

During the first quarter, we spent $2.2 million on capital expenditures, including vendor-financed payments, funded $11.6 million for the eLuxury investment and spent $1.1 million on regular dividends.

Consistent with the first quarter of previous years, we borrowed funds for working capital requirements at the beginning of the first -- fiscal year, and we expect to reduce this outstanding debt as soon as possible.

The company repurchased approximately 3,000 shares at the end of the first quarter at an average price of about $24 per share, leaving $4.9 million available under the share repurchase program.

With that, I'll turn the call back over to Frank.

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [5]

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Thanks, Ken. And I'll start with the mattress fabrics segment. As expected, our sales for the first quarter reflect the significant disruptions and uncertainties surrounding the mattress industry compared with conditions a year ago. We have continued to face soft demand trends related to the rapid growth of low-cost imported mattresses from China. The influx of these products has significantly disrupted the domestic mattress business and affected many of our customers.

As a leader in mattress fabrics and sewn covers, we felt a disproportionate impact with produced orders from our major customers during the first quarter. In addition, ongoing changes with a large mattress retailer have created more uncertainty throughout the industry supply chain, which also affected our distribution. Despite these challenges, we continue to see consistent placements from customers, and we have strong, established customer relationships and expect to see our business normalize as these market conditions improve.

We remain focused on our product-diversification strategy, with a favorable product mix of mattress, fabrics and sewn covers.

Although we experienced lower sales for our CLASS business, our mattress fabrics cover business, compared to the first quarter of last year, we are pleased with the recent trends. We are expanding our business with existing customers, and we are also seeing orders from new customers in the growing boxed bedding space. We are well positioned to support this business with global production facilities in North Carolina, Haiti and China.

We recently launched our new line of bedding accessories, marketed under the brand name Comfort Supply Company by Culp. And we remain excited about the opportunities to extend our market reach in this area.

As we have identified additional marketing channels, we have also implemented a new digital marketing strategy and expanded our social media presence to enhance Culp's brand awareness and increase sales, especially with younger consumers. During the first quarter, we completed our previously announced majority ownership investment in eLuxury, an e-commerce company offering bedding accessories and home goods direct to consumers. This strategic investment substantially expands our addressable market. It provides an important new sales channel for Culp in the bedding accessories and home goods area, and it expands our ability to participate in the rapidly growing e-commerce direct-to-consumer space. We have already developed and are beginning to launch our Phase I product offerings, which we are also -- and we're also creating innovative new items to be marketed through this exciting platform. We believe eLuxury will enhance our strong value proposition, and we expect to see meaningful sales contribution from this business category by the second half of this fiscal year.

We have been aggressive over the past 2 years as we have worked to create a sustainable, efficient platform with enhanced capacity and distribution capabilities. The flexibility and scalability of this platform have served us well, especially during the difficult market conditions we faced in the first quarter. We continue to focus on maximizing the efficiency of our operations and aligning our costs in tandem with current and expected demand.

In addition, we have reduced our capital expenditure budget for the year and deferred certain projects to next year. Overall, our manufacturing service platforms are in excellent condition worldwide, and we're excited about the benefits we will realize from our recent work.

Looking ahead, we see continued uncertainty in the near term in the mattress industry that could affect short-term demand trends and our operating performance. We are optimistic, however, that the proposed relief being sought by the bedding industry under U.S. trade laws to address the impact of imported low-price mattresses from China will be favorable for our business. Assuming such actions, if and when they're done, are successful and factoring in the incremental sales from eLuxury, we expect our mattress fabrics business and operating performance will improve in the second half of this fiscal year.

We have a solid core business and a strong competitive position across all product categories from fabric to sewn covers. Furthermore, we have a comprehensive strategy in place to expand our market reach with complementary products and new sales channels.

Now I'll turn to the upholstery fabrics segment. Our upholstery fabrics sales were in line with expectations for the first quarter of this year, with an 11% growth in sales compared with the first quarter a year ago. Our ability to execute our product-driven strategy and diversify our customer base has been the key driver of sales performance. Culp's creative designs and innovative products continue to resonate with our global customer base.

Our results reflect consistent organic growth with our China-produced fabrics as we continue to see favorable demand trends for our popular line of performance fabrics.

Our sales for the quarter also included the first full quarter of financial results for Read Window Products, and we are very pleased with the successful integration of this business as we achieved our anticipated financial and operating objectives for the quarter.

Looking ahead, we're excited about the additional growth opportunities Read provides as we extend our reach further into the hospitality market.

We continue to diversify our sales with additional end user markets and customers as well as expand our sales in certain other geographic markets. Additionally, we are pleased with the continued growth of fabrics sold for stationary furniture applications in the residential area.

As expected, our operating performance for the first quarter was primarily affected by an unfavorable currency exchange rate in China, although we did see some benefit from a weakening currency late in the quarter and that has continued into the second quarter. In addition, we incurred $2 million in restructuring and related charges for the previously announced closing of our Anderson, South Carolina, facility.

We expect to recover most of these costs over the next 2 quarters from the sale of our plant and equipment in Anderson, with anticipated proceeds of $1.7 million to $2 million. Also, we are on schedule to cease production in Anderson at the end of August.

Looking ahead, currently, the impact of proposed tariffs are uncertain. We continue to monitor the situation and the potential impact on our business. And if additional tariffs would be implemented, we'll determine an appropriate response at that time. Additionally, we continue to monitor the gradual increase in raw material costs in China.

Despite these uncertainties, we believe Culp is well positioned to benefit from the uptick in demand in home furnishings and the more stable market conditions.

Ken will now review the outlook for the second quarter, and then we'll take your questions.

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Kenneth R. Bowling, Culp, Inc. - Senior VP, CFO, Treasurer & Corporate Secretary [6]

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We expect overall sales to be down approximately 5% compared with the second quarter of last year, which includes contributions from our 2 recent acquisitions. We expect sales, operating income and margins in our mattress fabrics segment to show sequential improvement but to be lower than the second quarter of last fiscal year.

Assuming bedding industry relief materializes under U.S. trade laws and business conditions improve, we expect to see more normalized trends in the second half of this fiscal year that are more in line with the prior year.

In our upholstery fabrics segment, we expect sales to be slightly higher compared to the same time last year. Operating income and margins are expected to be slightly up compared with the same period a year ago, assuming more favorable trends in currency exchange rate and the elimination of operating losses associated with the Anderson facility. Considering these factors, the company expects to report pretax income for the second fiscal quarter of $3.6 million to $4.6 million, excluding any restructuring and related charges and credits. Pretax income for last year's second quarter was $6.2 million.

Our performance for the second half of this fiscal year is currently expected to be more in line with the results achieved during the second half of last fiscal year.

Based on our current budget, capital expenditures for this fiscal year are expected to be in the $6 million to $6.5 million range as we have moved to a more maintenance-level capital expenditures.

Depreciation and amortization, including stock-based compensation, for this fiscal year is expected to be approximately $9 million.

With that, we'll now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Bobby Griffin from Raymond James.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [2]

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So first for me, I want to maybe just think about it at a little bit more of a high level. But assume we get some type of trade relief in the next 3 weeks or month -- or a month or so here on imports from China, what is kind of the steps from there that happens during the process? And when could we actually start to see the duty put in place and maybe some of the relief in the import numbers that we monitor from the trade organization?

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [3]

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Okay. I'll be glad to relay what I hear. I'm certainly not a trade lawyer, but -- and we're not part of the petitioner group, but we do hear a general outline of the timetable. So the key dates, it seems to us, are from the date of the filing, 45 to 60 days following that, the Department of Commerce will issue a preliminary ruling. Then -- and then from that date, the next key points -- so that's a significant time. So it's a relatively short time frame where a preliminary ruling is issued. Then another key date is when the cash deposits on duties begin to be put in place, and that's in the range of 4 to 6 months from the filing date. Having said that, what we hear, experience teaches folks, is that you can begin to see some impact certainly around or possibly before the preliminary ruling date. In fact, we're hearing some things already that where some customers are beginning to think about realignment of their supply chains, which give us -- is a positive sign in our view. So I think that's the 2 sort of key dates, Bobby, the preliminary ruling and then when cash deposits begin to be realized. So what that means to us is why we said second half of the year. We believe we're going to begin to see some relief beginning in our third quarter. And hopefully, in the beginning of the third quarter, which is the month of November. Certainly, more of it, though, in the fourth quarter -- fourth fiscal quarter, which is February to April.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [4]

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Okay, I appreciate that. That's helpful. I did also want to touch on the Anderson facility and the closures. From a modeling standpoint, just to help us think about it, last year, Anderson was about 6% of upholstery sales. Is there an opportunity to make up some of those sales with the China platform? Or should we just assume that 6% kind of goes away over the next 4 quarters as we roll past the closure?

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [5]

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No, I think we're seeing organic growth -- continued organic growth from our China-produced sales. Definitely believe we're going to make some of that up. Maybe not all, but certainly some. Because what's happened is, we've been able to replace those placements with China-produced products with certain customers.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [6]

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Okay, that's helpful. And then I guess lastly for me, I know it's still early on, but maybe any color or early learnings with the eLuxury acquisition that you care to share? And maybe could be helpful if -- when -- I guess the time frame of when we could maybe start seeing some of the cross-selling efforts take place between some Culp products and the eLuxury web-selling brand?

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [7]

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Okay. I think that's a great question for Iv. Iv has responsibility for the eLuxury business, and he's working closely with them.

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Robert G. Culp, Culp, Inc. - President of Culp Home Fashions Division [8]

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Yes. Thank you, Frank, and good morning, Bobby. I -- we are probably -- well, for sure, I'm more excited about that investment for Culp and for eLuxury than we were when we started researching it. It's been so far a terrific eye-opening experience for us, and we see, really, innumerable opportunities. I've already learned a lot from Paul Saunders and his team. And Paul is the CEO at eLuxury. And just understanding and us learning what it means to get high-quality products available to be listed in a high-quality way and then sold with some intention has been very helpful to us. So we have all the tools we need. We have terrific products of our own. We have great sourcing relationships that we can leverage around the world. And it's just a matter of how much we can do and how quick we can do it. It does take some time to get things listed properly and to get things on the right keywords and things to drive the sales. But we are already in process with 5 or 6 Phase I products. A couple of those have already hit the websites and more to be coming. And it's important to note, these are also through our eLuxury owned and branded site as well as all the other marketplaces, including Amazon and others, where we'll have success. So we're thrilled about that. It's coming. It just takes a little time to get it marketed well. But that should start impacting us very imminently.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [9]

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Good to hear it's off to a great start.

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [10]

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And Bobby, I'll add just a couple of comments to Iv's comments. And we are -- as he said, we're just really excited about the -- working with Paul and his team. We're more excited today than we were in the initial stages. The culture of Paul's business and our business seem to have fit already like a glove. Working together, they've already -- Iv and Paul have already been to China, looking at product-development opportunities. We're learning a lot working with Paul and the team. And just -- it's off to a very good start. And we're pleased, and it's just going to take a little time to get things going, get the supply chains working. But one of the strengths we talked about in this marriage was that Culp has such broad product capabilities from China to Haiti to the U.S., upholstery fabrics, mattress fabrics and we have lots and lots of opportunities to develop product that can go over eLuxury and the other marketplaces. So it's just a couple of added comments there.

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Operator [11]

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Moving on, we'll take our next question from John Baugh with Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [12]

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I was curious, and maybe this is for Iv, have your bedding customers in your view got their inventories down fully to sort of reset for all the turmoil? Or is there further pain to go there in Q2 or beyond?

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Robert G. Culp, Culp, Inc. - President of Culp Home Fashions Division [13]

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John, thanks for the question. Without having full visibility of that, I do believe that a lot of progress was made in that -- with that over Q1. We do see better -- a better situation today looking forward. We already started to see that. And with Labor Day around the corner, we're optimistic for a good holiday there. So yes, I think they are, in general, much better positioned, but there are some programs that were scheduled to launch over the summer. And for us, Q1 is a, typically, very strong quarter. And Q1 is -- involves a lot of holiday and high summer sales. And there probably are a few things that may not recover and we -- and maybe some inventory in the system that may have to be discounted and covered. But for us, at Culp, we have a very high emphasis on inventory in Q2, and we're going to make a solid adjustment there. So it's a big emphasis for us, and with a little wind in the sails, -- no pun intended -- in the real sales, we can do it faster.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [14]

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Got it. And then we are right upon the important Labor Day event and there's so much static or noise in your results and the bedding industry in general. I'm wondering if there is any sense from your seat, what kind of Labor Day we're going to have in terms of if you were somehow able to take out the mattress firm noise and extricate yourself from the low-end Chinese imports, which have accelerated here according to customs data. Is there any way to discern kind of how the marketplace is ex those factors? Or that's just not an analysis you can do?

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Robert G. Culp, Culp, Inc. - President of Culp Home Fashions Division [15]

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Yes, I think it's hard for me to see and be able to tell. Although we see and we forecast a sequential improvement for Q2, it's hard to decipher exactly where that's coming from. I do think it's important, we referenced that our sales for Q1 was across the board. It wasn't really just impacted by a certain customer or a certain retailer, it was really across all segments we felt that were somewhat depressed. As Frank mentioned, we already see some supply chain realignment going on. There's opportunities coming for some supply chain shifts. We do think retail will be stronger. At Labor Day, we expect a stronger business. But in general, there is more activity and more developments happening that it feels real to us. So knowing whether that's Labor Day promo or just a general improvement, it's hard to tell.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [16]

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Okay. And then my last question is China. And maybe we could talk currency first and what you anticipate the impact there, say, for the back half or next few quarters? And then address, I don't know what might happen if we got a 25% tariff, what steps would you take? And how would you think that might impact your business? How fast can you adjust? I assume there will be some negative impact to earnings? But just curious to your thoughts around that and your planning around that, if any.

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [17]

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Okay. I think from the -- we'll take the currency piece first. The currency over the last 4 months, as you know, has probably moved -- it's moved significantly, weakened CNY 6.3 to the dollar to this morning just over CNY 6.8. So we -- our view is, and this is not worth a lot, but I'll tell you our view is it as these trade discussions are going on and a weakening of the Chinese economy, it is probably going to stay weaker. Don't know if it'll get any weaker than this, but it's moved a lot already, which certainly helps us, a weaker currency. So our -- we're certainly hoping it will stay in this range, potentially weaken further. That may depend upon the level of tariffs that ultimately come down. The more tariffs that come down, it seems to us the weaker the currency and vice versa.

In terms of the tariffs, I mean, our view is, and looking at other negotiations that have happened in the current administration that it was likely to not end up at 25%. It's likely to end up at something considerably less. And let's say if it ends up at 10%, which was the original proposal, then that's a manageable level. The currency has already moved almost that much already from CNY 6.3 to CNY 6.8. Speculating if it were to be 25%, I think some of the outcomes of that might be that will really be punitive mostly on finished goods imports of furniture into the U.S, which would be, in a way, helpful to us. When we look at the global upholstery fabric supply chains, there really isn't any other countries. And as we said on this call numerous times, we're constantly looking around the globe to look at other sources, whether it's India or Turkey or Malaysia or Indonesia, South Korea, wherever, Mexico. And there just aren't any other good sources of upholstery fabrics, reliable, as cost-effective as China, even domestic. Even domestic, there's not. Even with a 25% increase, if that would happen, we just don't see where it would go. It's going to stay in China. And us -- it'll affect all the players and people will have to raise their prices. But again, I just don't think -- our view is that's not going to happen, and there will be something less than that.

John, one other thing. People talk a lot about Vietnam. There is no upholstery fabric in Vietnam. So you've seen case goods go there, you hear about furniture, so there's -- that's not a place people can go. What China did to the U.S. textile industry and the European was wipe out dye houses, fiber -- big fiber mills, yarn plants. It wiped out the infrastructure. So there's just not a lot of other places to go for us. We'll continue to look at that as well.

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Operator [18]

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(Operator Instructions) Moving on, we'll take our next question from Marco Rodriguez from Stonegate Capital Markets.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [19]

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Real quick follow-up on the prior questions around the tariffs in China. I was wondering if maybe you could delve in a little bit and discuss, what you can, the pricing between yourselves and the furniture -- the finished goods furniture guys. Assuming that we do have a worst-case scenario where tariffs rates are ultimately high, let's just call that 25% rate, and the prices of furniture has to go up, what's -- what are sort of in your contracts between yourselves and the furniture people there? And what sort of levers, I guess, you have to kind of help that?

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [20]

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I think the only way, I think, I'd answer that, Marco, is a rule of thumb that we've always used in the industry is upholstery fabric represents about 20% of the wholesale price of furniture. So that gives you some idea of where that fits in. So it's not going to be -- it'll be some increase to the finished furniture but maybe not a great deal since it's only 20% of the price. Does that give you some relative indication of it?

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [21]

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No, it's helpful, it's very helpful. And then sticking on upholstery fabrics, looking at your guidance here for revenues in Q2, just slightly higher compared to Q2 of '18, just trying to think through here, I mean, obviously you've got the Read acquisition that should be adding anywhere from $2.5 million to $3 million of additional revenue. Is that impact kind of what I'm reading for slightly higher? Is that because of the Anderson facility is losing out those revenues? Can you kind of help me think through that?

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Kenneth R. Bowling, Culp, Inc. - Senior VP, CFO, Treasurer & Corporate Secretary [22]

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Yes, Marco, this is Ken. That's exactly right. In the second quarter, we have significantly lower sales related to Anderson. So we are having the -- a consistent effect of Read Window Products and also we are having some organic growth on the China produced side. But what's offsetting that is the big drop in sales associated with Anderson.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [23]

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Got you. And are there going to be any other additional charges you're seeing from the Anderson facility closure or are we done?

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Kenneth R. Bowling, Culp, Inc. - Senior VP, CFO, Treasurer & Corporate Secretary [24]

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Maybe some. I mean, charge wise, there's always a chance that there may be a little bit more severance or maybe very unlikely some additional inventory write-downs. The main issue there is the amount of income that we're going to receive from the sales equipment and plant that's going to happen over the coming quarters. We guided at $1.7 million to $2 million. So it's feasible if everything hits the way we hope and think that we could offset the initial $2 million pretty closely.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [25]

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Got you. And will those numbers, where will they show up on your P&L?

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Kenneth R. Bowling, Culp, Inc. - Senior VP, CFO, Treasurer & Corporate Secretary [26]

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They -- if it's inventory, it will be what we call related again. But if it's a sale of equipment or additional severance, it will be on the -- it will be a charge or a credit to the restructuring expense line item.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [27]

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Got you. Then moving here real quick here to the mattress fabrics. So I was wondering if you could just talk a little bit more about your comments on the mattress covers. Just the bed-in-the-box industry, it sounds like you're gaining some more traction. I think you said you signed some additional clients or won some more business. Can you just talk a little bit about how that industry is kind of progressing for you guys, also, in respect to all the dumping from the Chinese imports? And then, if you have any sort of special marketing or any marketing campaigns that you might be undergoing here in the near term to kind of accelerate that market share there?

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Robert G. Culp, Culp, Inc. - President of Culp Home Fashions Division [28]

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This is Iv, and I'll jump on that one first. We are really excited about our cut-and-sew business. And as we've thought about the industry for some time, that was really our first step on the mattress fabric side, and do some diversification to get into cut-and-sew and taking our products down another level, and we're working on that more as we do eLuxury and other things to get further down the chain with our products. But the cut-and-sew has been a terrific entrée for us. And even though some of those customers that took to that product were also -- have been struggling for us too, there is a lot of momentum around that business and there is a lot of opportunity that we feel. And note, forever, we've had a lot of development in that space. But so many bed-in-the-box companies have come and gone and some have lasted, and it's been a lot of, maybe, development but maybe not as much traction in some cases. And some of the big guys are now winning, and we feel positioned well to do great there. What's making us so confident about that business are 2 things: first, we do think outside of normal bed-in-the-box that everyone knows about, the companies we hear more and more beds, we feel, are going to go to that format for convenience of delivery. So even the major traditional brands and others will do more of that kind of product, so that's optimistic for us. Plus, we just feel like we have unparalleled supply chain with really quick service, great location in North Carolina, combined with medium-speed service in Haiti and what has become a fantastic platform from us. And then layered on a third leg with our cut-and-sew platform in China, just gives us 3 really strong ways to address that market. So cut-and-sew and rolled packed beds feels like a very optimistic future for Culp.

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Operator [29]

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(Operator Instructions) And at this time, it appears there are no further questions.

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Franklin N. Saxon, Culp, Inc. - President, CEO & Director [30]

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Okay. Thank you, operator. I just -- one concluding comment I'd like to make. One thing you've heard us talk about today and in our press release that we are very pleased with the diversification of our sales, whether it's the CLASS business, as Iv has talked about, eLuxury, Read. We're making a lot of progress in various markets in that diversification strategy. And we're quite optimistic about how we see the future. The Chinese import situation is temporary in our view, and it will pass. So just wanted to be sure everybody knows how we look at the future from our standpoint. All right. Thank you, operator, and again, thank you, everyone, for your participation and your interest in Culp. And we look forward to updating you on our progress next quarter.

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Operator [31]

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And at this time, it will conclude today's conference. We do thank everyone for their participation. The audience may now disconnect.