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Edited Transcript of CFI earnings conference call or presentation 13-Jun-19 3:00pm GMT

Q4 2019 Culp Inc Earnings Call

High Point Jun 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Culp Inc earnings conference call or presentation Thursday, June 13, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Boyd B. Chumbley

Culp, Inc. - President of Culp Upholstery Fabrics Division

* Dru L. Anderson

Corporate Communications, Inc. - SVP and Principal

* Franklin N. Saxon

Culp, Inc. - Vice Chairman, President & CEO

* Kenneth R. Bowling

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

* Robert G. Culp

Culp, Inc. - COO & 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 day, and welcome to the Culp's Fourth Quarter 2019 Earnings Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Dru Anderson. Please go ahead.

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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 fourth quarter and 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 K (sic) [10-K] and Form 10-Q.

You are cautioned not to place undue reliance on forward-looking statements made today, and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements.

In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these 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 website as part of the webcast of today's call.

With respect to certain forward-looking cash -- free cash flow information, the comparable GAAP and reconciling information is not available without unreasonable effort, and its significance is similar to the significance of the historical free cash flow information, which is available in the company's 8-K filed yesterday and posted on the company's website.

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

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

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Good morning and thank you for joining us today. I would like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today is Iv Culp, our President and Chief Operating Officer; Ken Bowling, Chief Financial Officer; and Boyd Chumbley, President of our upholstery fabrics business, who will be dialing in remotely.

I'll begin the call with some brief comments and Ken will then review the financial results for the quarter. I will then update you on the strategic actions in each of our segments. After that, Ken will review our first quarter fiscal 2020 outlook. We'll then be happy to take your questions.

We faced a number of significant challenges in the fourth quarter primarily related to global trade disruption and an overall weaker retail environment. There were continuing headwinds associated with the low-priced imported mattresses from China and the excess supply of these mattresses disrupted the market and affected many of our customers. The outcome for Culp was reduced demand for our mattress fabrics and sewn covers.

Our upholstery fabric business was affected by the softer retail climate for furniture and uncertainty surrounding international tariffs and the associated geopolitical risk. However, even with the lower sales for Q4, we were pleased to have another year of overall higher annual sales for upholstery fabrics business. These results included the first full year contribution from Read Window Products, which we acquired late in fiscal 2018.

In spite of the challenging market conditions, throughout the year, we continued to execute our product-driven strategy in each of our businesses with the relentless focus on design creativity and product innovation. Our ability to deliver diverse product mix and reach new market segments has been a key differentiator for Culp in all of our marketplaces and will remain our strategic focus going forward.

We will continue to diversify both our product and customer mix in mattress and upholstery fabrics with unique opportunities to expand in the hospitality market. We also have the ability to extend our market reach through Culp Home Accessories, our finished products business offering bedding accessories and home goods direct to both consumers and businesses.

We have a flexible global platform to support our business segments with the ability to respond to changing demand as market conditions improve, and importantly, we have a strong balance sheet and the financial flexibility to pursue our growth strategy. We look forward to the opportunities ahead for Culp in fiscal 2020.

Additionally, we believe that May 29, 2019, ruling by the U.S. Department of Commerce imposing punitive antidumping duties on Chinese-made mattresses will provide relief for the domestic mattress industry in our current fiscal year and ultimately lead to improving conditions for our business.

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

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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 fourth quarter. Net sales were $71 million, down 9.2% compared with the prior year. On a pretax basis, the company reported income of $1.5 million compared with pretax income of $6.5 million for the fourth quarter of last year. The financial results for this quarter included a nonrecurring charge of $500,000 for the company's charitable contribution to The University of North Carolina Chapel Hill payable over a period of 3 years in honor of our cofounder and former Chairman, Robert G. Culp, III. Excluding this charge, pretax income for the fourth quarter fiscal 2019 was $2 million. Net loss attributable to Culp Inc. shareholders was $1.4 million or $0.11 per diluted share for the fourth quarter compared with net income of $12.7 million or $1 per diluted share for the prior year period. Notably, this net loss was attributable to 199.7% tax rate for the quarter.

Income taxes for the fourth quarter of fiscal 2019 reflect the mix of the company's taxable income favoring its foreign tax jurisdictions located in China and Canada that have lower -- that have higher income tax rates in relation to the U.S. and a significant decline in U.S. taxable income, which was more than anticipated. This resulted in a significant increase in the company's global intangible low-tax income or guilty tax and led to the 199.7% tax rate. However, income taxes incurred in the U.S. on a cash basis were minimal due to the utilization of the company's U.S. federal net operating loss carryforward generated in fiscal 2019. Additionally, our income taxes reflect provisional adjustments that represented the income tax effects of tax reform enacted in late 2017. No provisional adjustments associated with the tax reform recorded in the fourth quarter of fiscal 2019 while Fed's provisional adjustments resulted in an income tax benefit totaling $8 million that was recorded in the fourth quarter of fiscal 2018.

For fiscal 2019, net sales were $296.7 million, down 8.4% as compared to the previous year. Pretax income was $12 million compared with $26.9 million for fiscal 2018. Excluding restructuring and related charges and credits and other nonrecurring items totaling approximately $2.7 million, pretax income was $14.7 million for the fiscal year. Net income attributable to Culp Inc. shareholders was $5.7 million or $0.45 per diluted share compared with net income of $20.9 million or $1.65 per diluted share for fiscal 2018.

Adjusted EBITDA for fiscal 2019 was $22.9 million or 7.7% of sales. Consolidated return on capital for the year was 11.7%.

Now let's take a look at our business segments. For mattress fabrics segment, sales were $37.7 million, down 18.9% compared with last year's fourth quarter. Operating income for the quarter was $2.7 million compared with $6.1 million a year ago with an operating income margin of 7.2% compared with 13.1% a year ago. As we have noted, our operations for the fourth quarter and year were affected by the significant decrease in demand caused by the influx and lower-priced imported mattresses from China. Despite the headwinds, we continue to manage our business in an efficient manner and provide excellent service to our customers. We have rationalized our manufacturing and distribution locations to meet current and expected demand, and we achieved sound profitability with an 8% operating margin for the fiscal year in spite of the ongoing challenges we faced. Importantly, we have a sustainable business platform that favorably positions Culp for the long term. We will continue to reinvest in our business to maximize our operating efficiencies and delivery capabilities. Return on capital for mattress fabrics for fiscal 2019 was 15.2% compared with 34.3% for the previous year.

For upholstery fabrics segment, sales for the fourth quarter were $29 million, down 8.3% over the prior year. Our operating income for the fourth quarter was $1.8 million compared with $2.2 million a year ago with operating income margin of 6.1% compared with 6.9% last year. As we have noted, our operations for the fourth quarter were affected by trade uncertainty and overall softness in retail demand for furniture.

Our Read Window Products business continues to perform well with annual sales of approximately $11 million and operating income margin in line with the overall margin for this segment as a whole. Return on capital for fiscal 2019 for the upholstery fabrics business was -- continues to be an impressive rate, coming in at 55% for the year.

The Home Accessories segment, which includes the operations of eLuxury, reported $4.1 million sales for the quarter with no comparable results for the same period last year. The $4.1 million was comparable to the sales [that were] achieved for the third quarter. Operating loss for the quarter was $479,000. Our operating results were lower than expected due to additional product rollout cost and reduced demand for legacy products primarily our mattress pads business, which we believe were affected by the import turmoil in the overall mattress industry.

Here are the balance sheet highlights. Despite the headwinds in our mattress fabrics business, we maintained a strong financial position in fiscal 2019. We reported $45 million in total cash and investments and a $675,000 note payable between eLuxury and its minority owner. We have maintained a strong position despite spending $4.8 million for capital expenditures including vendor-financed payments and investments in Haiti, funding $12.1 million in acquisition-related cost and returning $8.1 million to shareholders in regular dividends and share repurchases. In spite of the ongoing challenges for the year, we generated cash flow from operations of $13.9 million in fiscal 2019 and free cash flow of $11.5 million for the year. The company repurchased a small number of shares in the fourth quarter. For the year, we repurchased a total of approximately 160,000 shares. This leaves approximately 1.7 million available under our share repurchase program.

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

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

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Thanks, Ken. I will start with the mattress fabrics segment. While we saw sequential sales improvement in this business compared to the third quarter of fiscal 2019, the influx of low-priced mattresses from China has continued to affect the domestic mattress industry. The market is still dealing with a significant amount of excess inventory of late 2018 and early 2019 imports and a slower retail environment delayed the sale of these products. As we previously announced in our May 1 press release, customer demand for mattress fabrics was lower than expected and affected our sales for the fourth quarter. However, we are pleased to note some recent positive developments in the retail demand as well as many customers altering their supply chains away from China. We believe the punitive antidumping measures against Chinese-made mattresses, as recently announced by the U.S. Department of Commerce, will ultimately provide relief for the domestic mattress industry with preliminary imposed duties ranging from 39% to as high as 1,731%. Our varied product mix of mattress fabrics and sewn covers across most price points and style trends supports our diversification strategy with favorable results.

Importantly, CLASS, our mattress cover business, continues to perform well and with the support of our global sewing platform. We remain encouraged by the sales trends with our core customers as well as our ability to reach new customers and additional market segments, like the popular and expanding boxed bedding space. We're excited about the additional growth opportunities for CLASS as we broaden our customer base.

While fiscal '19 was a challenging year for our mattress fabrics business, we are optimistic about the year ahead. We have the ability to leverage our creative designs, innovative products and global production capabilities to enhance our leadership position and sustain our competitive advantages. We look forward to the opportunities ahead for this business in fiscal '20 and beyond.

Now I'll turn to the upholstery fabrics segment. Our results for the fourth quarter of fiscal 2019 reflect an uncertain marketplace and a soft retail environment for furniture. As noted in our May press release, sales and profits were lower than originally announced expectations for the fourth quarter. The ongoing trade dispute between the U.S. and China and uncertainties surrounding tariffs have caused significant disruptions throughout the supply chain for the furniture industry. The anticipation of additional tariffs resulted in more advanced customer purchases in previous quarters, especially the third quarter, and inflated inventories heading into the fourth quarter. This factor, combined with generally weaker consumer demand for furniture, affected our sales for the fourth quarter.

For the full year, however, we were pleased to achieve another year of higher annual sales in spite of the closure of our Anderson, South Carolina operation during the second quarter. Throughout the year, we have pursued a product-driven strategy with a sustained focus on innovation and creative designs, supported by our substantial global platform. Our design team has done an outstanding job with current style trends and meeting the changing demands of our customers. Additionally, our popular and expanding line of highly durable, stain-resistant performance fabrics continue to gain acceptance in the marketplace. We're also pleased with the contribution from Read Window Products as fiscal 2019 marks the first full year of sales for custom window treatments and other products for the hospitality market.

Looking ahead, we expect that prevailing geopolitical issues will continue to affect our business and the furniture industry for the near term. We're taking steps to adjust our supply chains, including partnering with sources for cut and sew kits in Vietnam and are working with customers to make necessary adjustments in response to the latest round of tariffs. While we expect continued overall softness in demand for furniture through the first quarter of this year, we believe Culp is well positioned for the long term. Above all, we remain focused on providing innovative products that meet the changing demands of our valued customers.

Next, I'll review our newest business segment, Culp Home Accessories, which includes eLuxury, our e-commerce and finished products business, offering bedding accessories and home goods. We are continuing to learn about and develop this new platform, which supports both business-to-consumer and business-to-business sales of finished bedding accessory and home goods product. As Ken noted, our operating results were affected by additional product rollout cost for new products as well as reduced demand for legacy products primarily mattress pads. We believe this legacy business was affected by the import turmoil in the mattress industry. We're encouraged by more recent sales trends on legacy products as well as our progress related to new product introductions. We remain excited about and are committed to opportunities to capitalize on new products in this new sales channel for Culp.

Ken will now review the outlook for the first 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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At this time, we expect overall sales to be slightly higher as compared with the first quarter of fiscal 2019. The first quarter of fiscal 2020 will have 1 more week than the first quarter of the prior year or 14 weeks compared with 13 weeks. We expect mattress fabrics sales to be moderately up compared with the first quarter of fiscal 2019 and operating income and margins also are expected to be moderately up as compared with the previous year's first quarter.

In our upholstery fabrics segment, we expect first quarter sales to be moderately down compared with the first quarter of last year as we continue to operate in an environment of trade uncertainty and soft retail demand. Operating income and margins are also expected to be moderately down compared with the same period a year ago.

In our Home Accessories segment, we expect first quarter sales to be moderately up compared with the fourth quarter of fiscal 2019 with no full period of comparison for the first quarter of fiscal 2019 based on the June 2018 investment date for eLuxury. We expect an operating loss for the first quarter that is comparable to the fourth quarter of fiscal 2019.

Considering these factors, the company expects to report pretax income for the first fiscal quarter of 2020 in the range of $2.5 million to $3.2 million. Pretax income for last year's first quarter was $1.9 million, which included $2 million in restructuring and related charges. Based on current projection, capital expenditures for fiscal 2020 are expected to be in the $6.5 million to $7 million range as we continue with the maintenance level of capital expenditures. We expect depreciation and amortization to be approximately $9 million for fiscal 2020. Finally, we expect another good year of free cash flow comparable to the prior year.

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) We'll now take our first question from Bobby Griffin of Raymond James.

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

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This is Bobby from Raymond James. First, I want to talk on eLuxury. Frank, can you maybe expand some of your comments that you talked about and give us some color on what some of the drivers would be within that business segment to move towards profitability over FY '20 and beyond?

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [3]

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Bobby, this is Iv, I'll pitch in for Frank on that, if it's okay, and he can certainly chime in, if he wanted to. Thanks for the question, I appreciate that a lot. Frank, as he talked about or touched it in his overall comments, it is a new, a very new business for us. Although we're learning so much about it and really coming to us it's different because e-commerce but it's still commerce and we're finding out that we have really good opportunities B2C but we're also realizing that we got some terrific opportunities B2B, which we knew but maybe we see those opportunities giving us the chance to help drive profitability even more. So we've really refocused to B2B strategy with those products. Now what's special about eLuxury is we get incredible dropship service, like you would get in e-commerce world but we can offer that also to some of our customers. So that is one for sure strategy that's going to be big in FY '20 to help us drive some profitability. And then also, we -- our legacy products, which are high-end mattress pads, really very similar to what you would call a mattress in some cases, we feel like we're impacted a bit unfairly by some of the import pressure and some low-priced beds. So with some refocus, some redesign and some just remarketing, we think there is a lot of B2C business there on legacy products. And then lastly, I'd say that there's just some new marketplaces because the synergies between our team at Culp and the team at eLuxury, we're finding our way and we're getting placed on a lot more marketplaces meaning we're not just reliant on the big marketplaces like Amazon as much going forward, we'll have products placed a lot of different marketplaces online. So I'd say those 3, our 3 major ones that are in our strategy plan.

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

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Okay. It's great detail, I appreciate that. And I guess the follow-up on that and maybe some comments around the -- the comment around that luxury mattress pads. Are those items higher-margin items so with the impact from imports and stuff that happened this quarter that caused some gross margin headwinds as the mix of the business changed? And then secondly, within this segment, new product rollouts were called out as well as having a little bit of impact in the quarter. Did that impact SG&A of Home Accessories? Or does that impact the gross margin of Home Accessories or both, I guess?

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [5]

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I want to make sure I understand the first part of the question.

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

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Sure. Yes, I'll rephrase. I guess, you mentioned that the legacy mattress pad products had a little bit of a negative impact from the import situation that's going on right now in the country. And I guess I was wondering, are those legacy products higher-gross margin products. So with those not performing as well, it drove an overall margin headwind for the Home Accessories segment itself?

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [7]

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Yes. I would say, for sure. I mean we were selling those products. Those are for us anywhere from -- online to consumer anywhere typically from $80 to $115. And we're selling those at premium prices. And when you had mattresses for sale as low as $99, in some cases, that obviously put a little bit of pressure on a mattress pad at that level. What we really do see though for our pad business, it's really a topper but a mattress pads business because a lot of lower-priced beds have been sold in the market, we actually are pretty optimistic that there'll be a lot of people who wanted to upgrade their comfort. And that's where our product really comes into play which is why we have such a good strategy around that business. We need to merchandise new items, new offerings, new styles, new fabrics like we would anything. But that's a pretty exciting area for us, and it's also really important because we make it. So we make that product in our facility. So having a good run schedule on busy on that product helps us cover a lot of costs, which is why it's so important.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [8]

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Okay. Great. And then I guess while we're talking about...

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [9]

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And the second part of...

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [10]

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Yes. The second part was around the new product introductions and just where did that cost -- where did those onetime cost hit? Was it a gross margin issue or was it more that it drove a little bit of incremental SG&A as you rolled out some new products?

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [11]

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What we're learning about that, Bobby, and differences in our core businesses we sell through manufacturers' fabrics. So a lot of those startup and rollout costs that we see through our customers, we never have experienced that before because we're selling fabric, they're buying it and then it's getting rolled out of the finished products. When we're rolling out our finished products and all of the stuff that we're making through our global platform, we're having to commit to bringing products in ahead of a sale rate. So we're actually building up inventories and purchasing items and having them stocked up in our facility before we even get them online to sell. So there's just a lot of -- there's front-loaded cash and expense that we're having to put in the system before we can start selling. And we want to go really fast and do as much as we can at one time. So we're just battling some of that cash flow and expense trade-off.

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Robert Kenneth Griffin, Raymond James & Associates, Inc., Research Division - Senior Research Associate [12]

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Okay. And then I guess lastly for me while we're talking about bedding, can you maybe give us a little update on how the Haiti operation is progressing? Looks like it might even become more important part of your business with some of the production shifting back towards the U.S. now with antidumping and you guys been able to supply at a low cost out of that operation?

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

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Yes. I think -- well, I would say for sure, the Haiti operation is something that we are really thrilled about. We feel better and better every day about that strategy. We've got quite a bit of time under our belt now. We're making a lot of items there. Staff is being trained very well. It really has a lot more room, we can move it up. We do have additional space where we can continue to grow that as needed. And I do agree with you. I mean it's been -- on both sides of the business, it's been tumultuous, to say the least, in sort of figuring out how and where production and manufacturing may settle out. So Haiti seems to be one that's in favor because it's close to the U.S., gives us different speed to market. It's protected by the HOPE Act, which so far not to say that anywhere safe doesn't seem like these days to be producing outside the country with what could happen but with the HOPE Act, that's extended for a lot more years, and we're looking to be extended further, we like Haiti is the place that's going to offer some reduced duty or duty-free advantages for a long time. So as we get more customers accepting in that, we feel like it's definitely a place where we'll continue to grow and will be able to attract more customers there.

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Operator [14]

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(Operator Instructions) We'll now take our next question from John Baugh of Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [15]

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Let's see. Let's start. We've seen a fairly significant shift in our opinion in the Tempur Sealy kind of share shift, if you will, versus what's going on in SSB. And we know Serta at least is a fairly big customer. Is that something that you're seeing and still a challenge? Or you can overcome all that with the duties now out and some of the tailwind you expect there?

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [16]

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Yes. John, I don't want to talk too much about specific customer. We would be really careful about that because I don't know strategies they have. But for sure, I mean those companies, Tempur Sealy and SSB, make up a big share of the market. Very important customers to us and ones that we focus on first. I mean these are ones that we have to do a good job with. But the market is certainly more fragmented. And we're looking at other places where we can grow our sales as well because we just need to. It's just not as -- it's not as dominated by a few manufacturers who doesn't seem to me as it was before. How that market share is traded between them, I'm not fully clear on that, we just do our best to be important to both.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [17]

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Understood. And then I know you don't want to speak to customer specifics, and this is more just an example. But the Corsicanas of the world, private low-end kind of bedding manufacturers domestically, are you seeing any improvement with those types of customers? You mentioned that you are finally seeing a light at the end of the tunnel, or is that just sort of an elsewhere comment?

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [18]

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No, I think when we say we see improvement, we really see it across the whole chain and we try to make it clear in the comments. For us, one of the biggest growth potential has been our cut and sew business because we see more beds going roll packed. But that's happening both with new customers that you know of and it's also happening with traditional customers. So really from high to low, we're seeing improvement across the whole chain. It's not distinguished for one or the other. We're seeing some lift at all areas of the market.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [19]

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Okay. And you talked a little bit about CLASS. It sounds like it's still growing. Just kind of curious what you're seeing there? Are you attracting new customers? Is that mostly you're growing with existing customers? Give us an update on Haiti and sort of where that facility is in terms of ramp up, et cetera.

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [20]

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Yes. It really -- the growth really is for bed-in-a-box and for our cut and sew business, really across both channels. We're having really good success. Our customers -- traditional customers are really smart in some of the things they're doing to react to new market demand is impressive. And we're having some good wins there. And I feel like if we collaborate with them, we can do pretty special things from fabric to finished cover. It really helps them drive their strategies also, which is great. And that's really from low to mid to even high end in some cases. Haiti is definitely a place that we want to continue driving customers to because we think it's a safe place for the long term from a duty rate. We're already -- we don't want to give too much information, that facility is doing well, we're upwards of 10,000 covers a week there, with the potential to do a lot more. So we're really excited about that platform. I would tell you today, we're also still currently really excited oddly enough about our cut and sew business in China. We're having great success there with cut and sew covers. Those so far have not been, in fact, affected by Section 301 tariff. They are on a pending List 4. So today that's a really good platform for us, one that's well seasoned and high volume. It's something that we could obviously be prepared to move towards Haiti, if we ever had to.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [21]

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Okay. And my last question quickly is I think you mentioned bed-in-the-box is still -- you're seeing nice growth there. One of the leading manufacturers' CEO seem to think that growth currently was nonexistent, although he admitted he couldn't prove it statistically. Do you see any slowing with those customers there? Is that still a significant tailwind for you? Or are you just gaining share with those customers?

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [22]

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Well, you're speaking to the traditional bed-in-the-box disrupters, I guess. And I don't know about that. I do think from a Culp's standpoint, we're likely gaining some share as we talk about supply chains being altered in some of the big cases. They're looking for different opportunities other than fully Chinese-made mattresses. So that has been something we may be picking up somewhat greater rate than the market's picking up. I also think we may have some coverage there because the traditional mattress companies are also doing more bed-in-the-box type products. So we're seeing growth in that segment of business really across the whole chain.

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Operator [23]

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We do have another caller with questions. We have Marco Rodriguez from Stonegate.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [24]

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So wondering if you could talk a little bit more on the mattress fabrics side, just kind of based on your discussions with your customers, your clients, how are you guys thinking about the excess inventory that's in the channel. I mean are we talking weeks, months? Any sort of color around that.

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [25]

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Yes. That's a really good question and something we've talked a lot about, Marco, internally. The way I'll ever be able to measure it, we track every month like a lot of people do sort of the imports monthly. And they've come down from a high of over 650,000 mattresses in a month to the -- 2 months ago it was 242,000 to the last month it was 125,000 mattresses. So a lot of inventory is -- a lot less is coming in. We don't -- what we don't know -- I don't think that our customers have a lot of inventory like we actually feel some push and a little bit of preparation for we're building back on inventory. But what I don't know is on the major marketplaces, how many containers of mattresses might be in 3PL warehouses or in somewhere to just sold online. So it's hard for us to get a gauge on that. I don't think it's months in terms of several months but it could be a couple of months more. But that's purely conjecture on my side.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [26]

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Got you. That's helpful. And in your prepared remarks, on the mattress fabrics side, you talked about rationalizing manufacturing operations, just wondering if you could maybe provide a little more detail in terms of what are the specific actions you've done here recently for that.

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Robert G. Culp, Culp, Inc. - COO & President of Culp Home Fashions Division [27]

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A lot of things. I mean that rationalization comment covers a lot of work we've done in the last really 2 years. Part of that is we did -- and we've talked a lot, almost too much in a lot of press releases going back about all the capital investment we did in our mattress fabrics facilities, rightsizing and then also expanding and moving and shifting. So we spent $15 million give-or-take to build that platform better. In the face of -- looking back, it wasn't really the ideal time to do it financially. But we're still proud to have got that behind us and it will provide a lot of benefits as we move ahead. Also, rationalization characterizes one thing we did was relocate certain parts of our manufacturing into more advantageous locations. One example that is we consolidated our weaving location into our Canada platform, which may seem minor but when you factor in the advantages we have in Canada bringing in raw materials and yarns duty-free into Canada and then allowing those to come into the U.S. as finished woven products under a TPL or a tariff preference level type of thing, we have a significant cost advantage in Canada for weaving as opposed to what we had in the U.S. So that's the kind of thing we talk about in rationalization, and we're doing that across all product categories to get the right things in the right places, balancing speed to market, which is very critical, along with price, which is equally or more critical, trying to figure those things out. And then without being said, again, Haiti is a big part of that rationalization too, thinking about where we'll put cut and sew. We're just constantly trying to stay -- you would hear from if an upholstery question or mattress, we're just trying to stay nimble where we can move -- try to adjust our production to be quick service and advantageous from a price standpoint because that's what we think our customers demand us to do.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [28]

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Understood. And then kind of shifting gears here to upholstery. Can you talk a little bit more about Read Windows? I believe I heard you guys had about $11 million in revenues here in fiscal '19. If I'm not mistaken, when you guys acquired it, I thought you disclosed it that they had done prior to about $11 million or so in revenues. Can you just kind of give us an update as far as how that business is kind of moving and your expectations going forward?

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Boyd B. Chumbley, Culp, Inc. - President of Culp Upholstery Fabrics Division [29]

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Yes, Marco. And this is Boyd. Yes, we are very pleased with how the Read Window acquisition has gone for us. We -- you're correct that $11 million sales this year is -- and this really was somewhat of a transition year as we absorbed this business into Culp and the upholstery fabrics business. But we are pleased with the positive contribution that Read made for our upholstery fabrics business in year '19. And we certainly remain very optimistic with the enhanced platform or product portfolio that we now have by bringing window treatments into our offering in the hospitality segment. So we're very pleased with the results thus far. We do think there's a lot of opportunity remaining and yet to come as we continue to focus in this area, but very pleased with the performance and the acquisition of that product category to date.

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Marco Andres Rodriguez, Stonegate Capital Markets, Inc., Research Division - Director of Research & Senior Research Analyst [30]

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Understood. And then last quick question, just talk a little bit more about your capital allocation priorities going into fiscal '20. And if you can also talk maybe and update us on the M&A landscape.

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Kenneth R. Bowling, Culp, Inc. - Senior VP, CFO, Treasurer & Corporate Secretary [31]

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Yes. Marco, this is Ken. We really value the -- our capital allocation strategy, that's why we put it on the website. I mean we've committed this year to continue to invest in CapEx although at a lower rates. We did -- it was really a perfect timing in that we had significantly lower CapEx spending this year but it was more -- pretty much planned that way. So that certainly helped in our free cash flow position. I think as we look ahead, the same thing, we're going to continue to invest in the business through capital expenditures, which would -- we said would be about $6.5 million to $7 million. We're also going to continue to be on the look for strategic acquisitions and to evaluate that and look at the timing in such that it fits with the other 2 acquisitions. So that's still in our strategy. Of course, what we've tried to do along this whole time is to maintain a strong balance sheet so that we could take advantage of those opportunities and we feel that we're there. So that won't change. We'll continue to review the landscape, look for opportunities. And then, of course, if that doesn't -- if we need to -- if we don't have an opportunity, we'll continue to generate free cash flow and maybe from time to time look at our share repurchase program and look at that opportunity. And then depending on the economy and all the uncertainty, just continue to maintain a war chest of cash for basically making sure that we can sustain or withstand any pressure. So really no change in our strategy. Just continue to look for opportunities and, most of all, keep the company strong and keep -- just keep prepared for the opportunities as they come along.

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Operator [32]

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(Operator Instructions) It does not appear we have any further questions at this time. So I would like to turn the conference back over to the speakers. Thank you.

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Franklin N. Saxon, Culp, Inc. - Vice Chairman, President & CEO [33]

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Okay. Thank you, everyone, for your participation today and your interest in Culp. We look forward to updating you on our progress next quarter. Have a great day.

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Operator [34]

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This concludes today's call. Thank you for your participation. You may now disconnect.