Culp Inc (CULP) 2004 Q3 法說會逐字稿

Please stand by. Good day everyone and welcome to the Culp incorporated 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. [Drew Anderson]. Please go ahead ma'am.

Thank you and good morning, welcome to the Culp conference call to review the company's results for the third quarter of fiscal 2004. We issued a press release to the wire services yesterday announcing these results. In addition the press release and additional financial information were both filed as an 8-K with the SEC yesterday.

Let me also note that a press release has been issued advising of accessibility of this conversation call on a listen only basis over the Internet.

As we start, let me express that some statements made in this call will be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Actual performance of the company may differ from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission for a discussion of these factors that could affect Culp's operations and the forward-looking statements made in this call. The information being provided today is of this date only. And Culp expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations.

In addition, the company will be discussing non-GAAP financial measurements during this call. These should not be considered an alternative to or more meaningful than GAAP financial information. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements of net income, net income per share, and cash flow from operations is included as a schedule to the company's press release and 8-K filing. This information is also available on the Investor Relations section of the company's web site at www.culpinc.com.

I will now turn the all over to Rob Culp, Chief Executive officer, please go ahead, sir.

Drew, thank you very much. 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 Frank Saxon, Executive Vice President and Chief Financial Officer of Culp. The purpose of this call is to review financial and operating trends reflected in the third fiscal quarter ended February 1, 2004. I will begin the call with some brief comments about the company's operations in the quarter. And provide some additional comments on the status of our other initiatives. I will then turn the call over to Frank who will follow with some remarks on our financial results.

The third quarter marked a solid performance for Culp, driven by continued sales growth in our mattress ticking segment and further productivity and margin improvement in the upholstery fabric segment. Overall our gross profit margin was 18.9%, the highest in 16 years for the company's third quarter.

Let me first -- let me first review results by our operating segments. For both the quarter and year to date periods, the sales mix -- the sales mix was approximately one-third mattress ticking and two-thirds upholstery fabrics. This compares with the sales mix of one fifth ticking and four fifths upholstery five years ago.

I will begin with some comments about our ticking segment. We had another strong quarter this business. The 6.9% year over year increase topped the 6% increase for the second quarter and the 4.6 -- and the 4.6% gain in sales in the first quarter. For the fiscal year to date period, mattress ticking sales were up 5.8%. This growth trend reflects better industry demand and continued gains with key customers. The sales gain in this segment for the fiscal year is especially noteworthy because it is occurring during the bedding industry's transition to selling predominantly one-sided mattresses, which utilize about one-third less ticking. This transition retail began in late calendar 2002, and is expected to continue through early calendar 2005. For the quarter, our gross profit margin declined to 20.3% in mattress ticking, primarily due to some selling margin pressure on our lower-priced product offerings.

And as we mentioned on our last call, we believe there are additional opportunities to gain market share in this segment as a result of our design leadership, outstanding service and low cost operations. Unlike upholstery fabrics, the mattress ticking business does not appear to be at much risk to Asian relatives because of the relative low cost structure of the products and the customer demands for just in time deliveries at quality levels. Furthermore, high shipping costs and the short lead times demanded by mattress retailers have limited Asian imports to less than 3% of the U.S. market for finished mattresses.

Now, we will turn to upholstery fabrics. Sales in this business segment declined 8.1% year over year, which as expected is more than the 4.3% decline we had in the second quarter. But still a substantial improvement over the 22.5% decline we saw in the first quarter this fiscal year. Overall demand for upholstery fabrics continued to be affected by consumer preference for leather furniture and competition from imported fabrics and cut and sewn kits. Even though sales decreased gross profit dollars and margin improved to 9.4 million and 18.2%, compared with 8.8 million and 15.8% before restructuring charges, and last year's third quarter. The key reason for the increase was the productivity and efficiency gains in the Culp Decorative Fabric division. Our ability to drive higher gross profit margin in this segment confirms the value of our strategic initiative over the past year and I have to streamline our operation and focus on improving the profitability of our sales mix.

Additionally, with the company's offshore sourcing efforts, including our China platform, the company is significantly increased the sales of upholstery backs produced outside of the company's U.S. plants. These sales which include -- which include micro den you suedes accounted for about 8.5% of Culp's upholstery fabric sales for the quarter almost doubled the percentage from the year-end period. Year earlier period.

Our operations in China are generally perceived in accordance with the previously announced plans that we discussed with you on our prior calls. During the third quarter, we completed installation of manufacturing equipment and began running some production trials during the fourth quarter, we expect to begin incoming fabric inspection and testing and to start shipping fabrics to customers. Limited operations are also anticipated beginning in the fourth quarter of this fiscal year. As expected we are experiencing modest operating losses in our China operation during the startup phase, which is expected to be completed by the end of this fiscal year, although some level of operating losses in the China operation is expected to continue until sometime in fiscal 2005.

As we have noted before, while this is a relatively small manufacturing platform, we believe this operation, along with our offshore sourcing capabilities, provides us the opportunity to bring value to customers worldwide. We essentially are bringing together cultural design expertise, finishing technology and U.S. quality standards with a low cost fabric manufacturing available in China. We expect the Culp upholstery fabric sales source from off shore suppliers and through our China platform will continue to grow modestly over time. We believe our efforts over the past year to more effectively manage our business and improve our operating efficiencies are reflected in the results for the quarter.

While the sales environment has continued to be challenging for upholstery fabrics, would are pleased with our overall progress and continue to believe that Culp is well positioned to benefit from any sustainable recovery. Above all, we will continue to do what we do best by placing high priority on design craftist, the quality we put through our products and providing superior customer service. Ultimately along with our global initiatives we believe these are the hallmarks of our success, and that will continue to -- that will continue to differentiate Culp in the marketplace.

Now, I will turn the call over to Frank who will apply further details on our third quarter results and then I will wrap up with some final comments about our outlook and then we will be glad to answer your questions. Frank?

Thank you, Rob. And good morning, everyone and thanks for joining us.

We are pleased to report results for the third quarter which were within the previously announced guidance. First, I would like to start with some balance sheet comments. As most of you well know, strengthening our balance sheet has been a key financial strategy for Culp over the last few years. During the quarter, we elected to make a 25 million prepayment on 75 million of outstanding senior notes. Including this prepayment, we have generated sufficient free cash flow to reduce our long-term debt by a total of $86 million over the past 3 1/2 years. By taking this opportunity to further reduce our debt on very favorable terms our long term debt now stands at 51 million. As a result, long term debt to capital ratio improved to 33.9, at the end of the quarter. Compared with 51% a year ago. We expect to realize annualized savings of about 1.7 million or 9 cents per share in net interest expense in each of the next two years, and a declining amount over the remainder of the notes' term until 2010.

We have continued to manage our working capital efficiently with day sales and accounts receivable at 31, at quarter end, down from 34 a year earlier. And inventory turns at 4.7 down slightly from 4.8 last year. With regards to free cash flow, we reported 9.9 million for the nine months. This compares with 17.9 million for the corresponding year to date period. As we expected, the decrease is primarily due to less cash flow from working capital reductions, as has been the case in the previous three years. We are planning to build upon our cash position of 8.9 million during the fourth quarter. For the fulfill year, we are expecting to generate another solid year of free cash flow, in the 15 to $16 million range. A solid balance sheet is providing the company with significantly lower interest expense, excellent liquidity and financial flexibility, and a definite competitive advantage.

Now, I will turn to some income statement comments. Overall, sales decreased 3.7% for the third quarter. Which is in line with expectations. Our gross profit margin was 18.9 compared with 18.3 in the third quarter of last year, which excluded restructuring charges. Therefore, with sales volume off slightly, a higher gross profit margin, and modest SG&A increase, we reported net income of 16 cents per share, excluding the one-time charge for early debt retirement. This compares with net income of 16 cents per share in last year's third quarter, which excluded restructuring charges.

As far as the results of our two operating segments were concerned, the upholstery fabric segment reported sales of 51.4 million for the quarter, a decline of 8.1%. Fabric yards sold for the quarter were 11.8 million, versus 13.2 million in the same quarter of last year, a decline of 10.6%. Average selling price increased to 4.28 for the quarter, up 4%, to 4.11 in last year's quarter. And is due primarily to the CDF division's product. The gross profit in the segment for the third quarter was 9.4 million or 18.2%, versus 8.8 million or 15.8% for the same quarter of last year. The increase in both gross profit dollars and margin, primarily reflects significant gains in manufacturing efficiencies, within the Culp Decorative Fabric division. This gross margin in upholstery fabrics equals the highest quarterly gross margin in over five years for the third quarter.

With respect to our second segment, mattress ticking reported 25.1 million in sales, a 6.9% increase. Somewhat better than we expected. Ticking yards sold during the quarter were 10 million, up 11% from 9 million in the corresponding quarter of the prior year. Average selling price was $2.50 for the quarter, down from $2.59 for the prior year's quarter. The slight decrease reflects a product mix change, with more sales of promotionally priced products. Gross profit in this segment for the quarter was 5.1 million, or 20.3% of sales, compared with 5.7 million or 24.3 for the same quarter of last year.

In summary, we ended up the quarter, reporting better sales and profits than it appeared early in the quarter. After finishing with a strong January. For the fourth quarter, we were starting off with strong business in mattress ticking, and okay in coming orders in upholstery fabrics. As a part of the upholstery fabric segment, we are currently seeing continued growth in sales of products, especially micro denim suede sourced from offshore supplier, which would include our China operation. For fiscal year 2004, as a whole, Culp is making great progress in strengthening our financial position, improving gross margin, and generating excellent levels of free cash flow.

I will now turn it back over to Rob.

Thank you, Frank. Looking ahead, we are seeing indications that the home furnishings retail environment appears to be improving. Based on the trends we are seeing now in our business, we anticipate our consolidated sales for the fourth fiscal quarter will decrease slightly over last year's level. With the continued strength in mattress ticking sales, sales of this segment are expected to continue to increase over the prior year, and we believe the gain will be significantly higher than the 6.9% increase this quarter. Upholstery fabric segment sales expected to decline about the same rate as we experienced this quarter. Based on these sales expectations, the current outlook, we expect to report net income in the range of 31 to 35 cents per share diluted for the fourth fiscal quarter, with actual results depending primarily upon the level of demand throughout the quarter. We believe the Culp results for the year to date demonstrate the strength of our operations of value of providing our customers. Our financial position is strong. And we remain confident that we have the right strategy in place to capitalize on a global trends in our industry, and to continue to generate free cash flow.

So now, Tracy we would be glad to take any questions that anyone might have.

Thank you if you have a question at this time press the star key followed by the digit one on your telephone. Once again press star one if you have a question.

The first question from Laura Champine with Morgan Keegan.

Good morning, Rob and Frank.

Good morning, Laura.

You mentioned in your prepared comments that you think that imports from offshore for mattresses represent less than 3% of the market. Give me a number, like that, for fabric upholstery?

Laura, this is Frank. That number is less than 3% of imported mattresses. And for upholstery, do not have a figure.

Let me just make sure I understand. It less than 3% of imported mattresses come from Asia? Is that --

Yes.

Okay.

The whole market of U.S. -- the U.S. mattress market.

Okay. Okay. You mentioned that order trends for imported fabric are growing and you mentioned that offshore upholstery fabric is at 8 1/2%, where do you think that is at the -- let's say the end of fiscal '05?

Well, I mean Laura, this is Rob. It is certainly growing. I mean we don't have a -- I don't know that I can give you a good figure, but I guess the best way to answer your question is this way. Culp started as a converter 25 years ago, and our mission at that time was to provide to our customers the best quality, the best product, the best service, to the U.S. market, and wherever we sourced it, that was great. And we're seeing some tremendous values overseas, particularly in Asia, but in other Middle East countries as well, and so we are continuing to grow that market share, and provide those values to our customers. We've seen tremendous growth this year, and I think we will see continued great growth in -- whether the suedes or mattress ticking, or corduroy, or Jackard, whatever they are, we have a nice setup to brings they goods through our China platform and offer them to the U.S. market. And you know, it is scary, it is growing quicker than we thought it would, and as we sit and see where it might go, it could be dramatic.

Okay. Next question on visibility, you mentioned that order trends were okay in upholstery. Yet you're expecting, you know, roughly 8% down upholstery segment revenues, in the next quarter, how far out do you have visibility? I mean do you feel like you've got good visibility through the end of Q4?

No, this is Rob again, no, we do not. What is happening to us with our incoming orders is because of the popularity of imported fabrics, suedes, cut and sew, leather, you know, all that has impacted what we do in the upholstery segment.

Now, when you look at Culp, one of our strengths from the very beginning and we probably don't talk about it as much as we should is we are a very diverse manufacturer in that we produce velvet, inexpensive, expensive velvet, mattress ticking, the whole gamut and our develop velvet is we have the high product, we have always been fortunate enough to have a product that has great demand. Today we see velvet coming back. They've been out of fashion for a couple of years and all of a sudden this placement season in April we are seeing huge increases in our velvet business, velvet places for the first time in really three to four years. In addition we're seeing huge interest and placements on our suede both Jackard, and both doby suedes that we bring in. Offsetting that is we are seeing a little less demand for placement of our textured and Jackards goods and Jackards are not great values are not because they are tremendous looking item, it is just that the market shifts, and this industry, everybody is talking about suedes and velvets now, and that's -- that's what the market is giving us.

So to answer your question another way, this is also -- this is income tax season, we call, it I saw an article today in the Wall Street journal about this tax effect, tax refund effect, it appears to be kicking in, we are shipping a lot of goods out of our warehouses in Tupelo, Mississippi, and high point, California. Our customers are running pretty strong know and we feel comfortable that business will be okay in the fourth quarter. But we do not have the kind of backlogs we enjoyed in years past. And really any of our product lines other than the imported products.

Great. Thank you.

And we will go next to John Baugh with Wachovia Securities.

Good morning.

Hi, John.

Good morning, John.

Can you help me understand why ticking mix and gross margin is down, is the bedding numbers I look at say price per unit is up fairly dramatically that the high end is doing extremely well in bedding.

Yeah, John, this is Rob. I can't help you there. And first of all, the -- we feel like the gross profit in the third quarter of ticking is a little bit of an anomaly of maybe a one-time deal. We were starting up huge programs on market share that we picked up, and it just took us a while to get it ramped up to the level. We expect fourth quarter mattress ticking to be much -- gross profit to be much improved over third quarter.

What is happening in the that mattress ticking business, and at first, it scared us, but as it has turned out it has really worked to our benefit, when they went to one-sided mattress, most of the mattress manufacturer, the big guys at least, went to a body cloth or a border cloth they call it, they use a common border cloth and they use a very inexpensive or inexpensive as they can get it on the border and they put a more expensive panel or top, so if you go look at a Sealy or Simmons or a Serta or Spring Air or one of these mattresses you will see the borders are common through all these mattresses and they have different top, where you lay on the top, and they use a more expensive fabrics on the panel and less expensive fabrics on the border, sort of like what we did with upholstery with body cloths and pillows.

It is the same rationale. Culp has been very fortunate to have picked up significant market share on the border business. And that has really driven our increase. We have also picked up significant market share on the top of the mattress. But it is less yardage than the border because it is just one panel. So the mattress folks have really done a wonderful job of increasing their selling price and in turn increasing their gross profit by using the one-sided mattress.

Okay. So a combination picking up border and you think you're gaining share, but with obviously one-third less fabric per unit, you might be actually losing yardage a little bit.

That is correct. But I don't think there is any question that we're picking up share in the mattress ticking.

Okay. You can comment on the margin of sourced goods versus domestically produced goods? You know, what are you making on a suede, versus what you might make on a textured Jackard here?

Yeah, John, this is Rob again it is about the same. I mean our model when we were in the converting business that you needed to have a 20% gross profit to make it work, and that's pretty much the model we're following on anything we import. Now, if we -- some things we're trying to have a lot higher margin than that, because, you know, we sometimes add more value to it, through our facility in China, but overall, we would be -- you know, our target is to have a 20% gross profit on the imported goods.

Okay. And to the extent that we're swapping sales, you know, we're sourcing something that we otherwise would have made in the factory, it either implies we are going to run the factory here less, -- wouldn't we need in theory a higher margin on it, than simply a swap, and what does that imply about domestic capacity? I guess my concern is we're seeing a fairly noticeable upturn in furniture demand, and your units are down somewhere in that 10%, I think, area, in the upholstery.

Well, I mean we -- as you know, we scaled down our capacity the last 3 1/2 years. So I mean we -- we anticipated I think correctly this coming. Our strategy with the imported versus what we do here is really a blended strategy. And we're really -- it is almost -- in a lot of ways, we copied the Stanley model of blending export goods they import with goods they make here and that's exactly what we're doing and we're blending the imported goods we bring in with what we make here. For example, we may bring in a beautiful pillow pattern from China that is a great value, and marry it up to a body cloth we make here.

So we feel that that makes a lot of sense. It works for us. And as it blends out, we are looking for an overall gross profit somewhere in that 20% level. And our strategy is to blend both of them together.

Now, we're seeing increases, you know, as I said earlier, one thing is important to note, we break out our velvet thread business and we break out our textured business. We are going to see nice growth we think next year in our velvet business because between our loan velvets and our promotional velvets and the imported suedes we are going to see that grow we think very nicely next year because the market trend seems to be moving that way.

Okay. Can you comment on the upholstery fabric kits that are coming in? In terms of like which one of your -- which of your customers are doing it? Are retailers doing it? What kind of product is it? And is it a product that, you know, it is the labor savings are where the savings are at or is it the fabric itself just cheaper coming out as well?

Well, in goods coming in from Asia, or Middle East or wherever, there is really two or three ways they can do it. First of all you just think of the roll goods in and of course there is a savings on the roll goods, but there is still is some duty and quota, particularly on chenille fabrics, so while people are bringing roll goods in, we are as well and we sell them, that's not the least expensive. The second way is some people got excited about doing cut and sew kit, and there have been a few people that have been successful with that. Cut and sew is beneficial because the fabric stays in Asia, there is no freight involved, there is no duty or quota involved, and if it is cut and sewn, there is a lot lower labor cost of the cut and sew versus what there is in the U.S. and then the cut and sewn kit comes in duty-free, quota-free, into the U.S., and it is a significant savings. That's the good news.

The bad news is that cut and sew kit just works on one style of furniture. A lot of manufacturers have really been hurt by getting off balance in inventory about with all of these cut and sew kits and then not having the right kit for the right frame they're selling. Now, they've been very successful in leather. You have to sort of -- you have to sort of separate leather out as a -- into itself, into in that for the most part you walk in a furniture law all you see is brown leather and you see four or five frames. People have been very successful doing cut and sew kits on leather. They have not been as successful and I'm personally not as concerned about the cut and sew kit.

I think that is a -- in the just in time delivery and the quick response going on, cut and sewn is a very big inventory risk if you get the wrong cut and sew kit for what is selling or if you get a spike in business, it takes you a long time to catch up with it, so that's the second way. Just, you know, what scares us most is the whole piece of furniture being made in China. And we see that as the -- as a potential issue that one of our customers would just go to China and put a plant in China, and start making finished furniture, importing the finished furniture to the U.S. And that's really the basis of our China platform, is the service our customer -- if he is making furniture in China, we want him to buy Culp fabric that is manufactured in China. That is the greatest risk we see to finished furniture.

Any wild guess, Rob, as you look out to, I don't know, calendar '05 maybe, what you would hope to be doing in volume for your China operation?

John, I don't have no guess. I mean no.

Is there a capacity limitation there? Is there a top number that you could finish, inspect, you know, whatever.

Total capacity, we have now, is about 150,000 yards a week, which would give us somewhere, if we were at capacity, 25 --

Yeah 20, 25 million dollars.

20, 25 million dollars.

But John, there is really no issue to expand capacity.

Yeah.

As you've been over, there you slap up building, put some more finishing range, easy to do.

Okay. Great. Thank you for answering my questions.

Okay.

We will hear now from Joel Havard with BB&T Capital Markets.

Good morning, guys. Let's see here. Come back to Laura's earlier question, on that 8 1/2% of upholstery fabric comprised of import, would we be right to assume that that is pretty much all in CDF volume?

No, you would not. That is --

Then what is the break-out if you can give that?

I think the best we can do is give that, Joel, 8 1/2% of the upholstery business. That's a combination of the suedes that we've introduced, as well as products coming through the China platform.

I asked a question wrong then. I didn't mean -- I didn't mean what was going through your China operations yet. We're assuming that the volumes there are still negligible. I meant under the upholstery segment numbers, does that 8 1/2%, including the suedes, would that really count as a CDF sub segment or or is there some velvet mixed in there?

Well the suedes are accounted for in the CVP division.

Okay. They are. All right.

And the China sales are are or other chenille or Jackards that we source from China, whether they go through the platform or not, are part of the CDF sales numbers.

Okay. All right.

And Joel, just to answer -- just to give you a little added, one thing I thought of of John's previous question about the U.S. capacity, you know, four, five years ago, Culp had 18 plants, and we're now down to 10 in the U.S. So we have really I think done -- anticipated what is happening and we're really -- and we think we are in really good shape for what's going on in the world today.

Yeah.

It wasn't fun to do but we know it is the right decision.

I know we talked a lot about ya'll changing the structure of the model down there.

You betcha.

What price do you guys get for your suedes? Not all your suedes are sourced then, right?

All our suedes are sourced from different places in Asia. And we are selling suedes anywhere from 4.50 to $8.

Okay. And well, you already didn't answer the question the first time, I won't try and answer that one again.

Frank, as we look here, I know you all talked about it after the 8-K on the release, not a lot else to do on the debt reduction side. Good job getting that thing worked out. We've got you all building cash. Is there -- you've talked about the low investment necessary in China. Other investment areas particularly from a sourcing standpoint that you ya'll are looking at or do we simply build cash?

I think, Joel, as we have said, in the past call, we think our capital expenditures will be around and certainly no more than 50% of depreciation, at most. As far as we can see.

And that would -- that horizon would carry out three, four, five years then?

Yeah, we need -- continue modernizing the U.S. operations that we have here, as we -- and we don't see a lot of investment with the sourcing. There could be certainly additional investment in China. Demand-wise, as we see that demand grow. But again, it is smaller investment. We are in the finishing side, not the weaving side.

Uh-huh.

So we really don't see large amounts of capital spending, so I think we're going to continue focusing on the free cash flow generation as you've indicated.

Well, I mean it begs the question of when ya'll might consider reauthorizing a dividend, or a share repurchase program. What about the loan -- or the no covenants would preclude that? And what's the window?

No, we have complete flexibility to do whatever we would want to do now.

Okay.

The balance sheet and loan covenants are, you know, have huge cousin in them so we really have total flexibility.

I know we talked about that in the past, I wanted to get you on the record with it, though.

And we have a lot of options available to us as we look ahead over the next year or two, but we kind of like to be debt-free, also.

And that will become more pronounced by '06, won't it?

As a U.S. textile company, that is probably not a bad capital structure to follow.

Sure. All right. That's all I've got this morning, guys. Thanks. Good luck.

As a reminder today, if you have a question, please press star one now. We will go next to Budd Bugatch with Raymond James.

Good morning. Good morning, Rob, good morning, Frank. I got on a little late. I had an early morning appointment that ran a little long.

Hey, Bud, how are you doing?

I am all right, Rob. How are you?

Good.

A couple of questions. One, I just want to explore what is going on in upholstery in terms of market share. We've seen the upholstery volume degrade now for a period of time, continuing to degrade. Even though in this period, it looked like the unit pricing actually rose -- rose a tick or two. And I know that you've got leather encroaching on the issue, so I wonder if you could pars, it maybe quantify it maybe to the extent you can, even segment by segment, the modular -- the recliner market, the motion furniture, stationary, what is going on, in those various segments, between fabric goods, and I would include suedes and velvet, and fabric goods and leather coming off of, you know, an animal, if you would.

Well, I mean you know, I feel -- that's a broad question. I think the best answer I can give you is we see today in the retail furniture store as much as 50% of the furniture on that floor is either leather or suede. And we think the suede has not yet seen its growth. So we think suede is still got another couple years of growth. So you know, suede and leather can get to 60% of the retail floor.

60% of the frames?

60% of the frames. Could be. I don't think they are. It could be.

Now, in addition, we are seeing growth in motion, they seem to be coming back to velvet. So recliners and motion furniture, there have been some issues with chenille in the marketplace about durability and wearability and et cetera and the big motion people seem to be swinging back to velvets just as a -- first of all, because they look different, it is the new look, and second of all, because they are constructed a little bit better, or seem to wear better than the chenille, so you know, our velvet business appears to be getting ready to really pick up. It hadn't picked up yet, but our placements tell us, and our market share gains tell us that velvets are going to be strong, suedes are going to be strong, leather is not growing, but it is not decreasing, either. So what that leaves is a smaller pie for the textured and Jackard, and then if you look at that pie in textures and Jackards, you've got some number of goods coming in offshore. We don't know exactly the number but there is a significant number of -- will it be cut and sew kits or roll goods or finished furniture, impacts that percentage of the business.

Now, what we've done at Culp, is we have, as you know, we have lowered our capacity, and we just made a decision that we would go after the more profitable business, and we wouldn't participate in some of the fabrics that didn't have any market in them. And that has helped us increase our gross profit in the texture side. Hurt our volume a little bit but you know, we made a decision a lot better to try to make more money. So I mean we are the category leader, we believe, in velvets, and also, there is no velvets being imported, so it is 100% U.S. market.

No velvets being imported?

No woven velvets being imported to the U.S..

No woven velvets but the suedes are in -- are in CVP, right request.

Suedes are a microvenue like fabric, I think people like it is more like leather than velvet but a decline in the category.

We still see a decline in CVP year over year down what, 4.7% in these three months.

Right. And I think you are going to see that change in the coming -- I think early this quarter you can see that change, but certainly next year, you will see growth in CVP.

So as the quarter unfolded, through January, did you see much -- how did the quarter unfold, month by month?

Well, we had a decent November. We had a missable December. For whatever reason. Christmas fell on a, you know, we make all these excuses about how Christmas falls, but it was not our friend this year, and then we had an outstanding January.

And was upholstery up in January year over year?

Yes, it was.

And was that primarily CVP driven or was it CDF?

I think it is pretty much across -- well, yeah, it was probably a little more driven CVP. I think we are about flat on the CDF side.

Okay. So I mean that's -- so when do you think -- I mean obviously retail business has gotten better, and is getting better and looks like it has a chance of staying somewhat good for, you know, some quarters out. When do you think the upholstery segment can change in terms of revenues growth?

Well, I mean we're shortly -- we -- I believe we discussed with our Board that we expected to see growth in fiscal '04. Fiscal '05, excuse me.

So is that Q1 or is that Q4? How does that play out?

Maybe begin in Q2. Being conservative.

All right. Just one other area. You were talking a little bit about the cut and sewn and the issue with inventory on that and I totally concur with what you said. When you talk about finished furniture being made over there there is a certain break point in term was economic value where it only pays to bring in product above a certain price point other than leather. Can you quantify what that price point is? You've got 100 to 120 seats in a three seater, are you looking at about 100 dollars worth of freight for a three seater. What -- at what wholesale price point does it pay to bring in goods from offshore as opposed to making them domestically? What is the differential?

Well, we actually think the freight is more in the $125 to $135 level for that furniture company, and you get about 30 groups on a container.

So you only get about 90 seats then on a container? I've heard anywhere from 100 to 120 seats.

The information we get, you know, what we're getting is about 30 group, 30 to 35 group, somewhere in that ballpark and you're somewhere 100 -- and we earn 115 to 135, so if you look at the freight, alone, you know, any sofa that retails under 699 doesn't make sense, because if there is -- if their sofa retails under 699, it means the retailer is paying for it, 350 dollars or so and about $350 is as much as 125 of it could be freight. So it just doesn't work. China is not that cheap.

So the key is, is that they've got to bring in better goods and the elasticity of demand at that level is a challenge for the consumer to get above 699 you're starting to get into some -- a little bit more rarified area.

That is correct. That is 100% -- in fact, most of the -- most of the major retailers in this country are importing significant amounts of their case goods, 100% of their leather, but very low percentages of upholstery furniture.

Yeah. Okay.

I think you would agree with that.

I do agree with it. It is about 15% of upholstery is imported right now and about 47% of the case goods market looks like it is imported today.

Right.

Okay. All right. So there is a price point and that's going to limit the amount that upholstery could grow and so you have to be very, very careful of how much investment do you make offshore?

That is correct.

Okay. Thank you. That is very helpful. Thank you very much.

And Mr. Culp there are no further questions at this time. I will turn the call back to you for any closing comments.

Okay. Thank you, Tracy, very much and to each of you on our call, thanks for your participation. We appreciate your interest in Culp and look forward to updating you on our progress next quarter. Have a great day.

Thank you, that does conclude's today's conference. Thank everyone for joining.