Culp Inc (CULP) 2004 Q4 法說會逐字稿

Please stand by. We are about to begin. Good day, everyone, and welcome to the Culp 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, Ms. Anderson.

Thank you. Good morning and welcome to the Culp conference call to review the Company's results for the fourth 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 a press release has been issued advising of the accessibility of this conference 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 those 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 publicly release any updates or revisions to these forward-looking statements to reflect any changes in expectation.

In addition, the Company will be discussing non-GAAP financial measures during this call. These should not be considering 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 the 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 call over to Rob Culp, Chief Executive Officer. Please go ahead, sir.

Drew, thank you. 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, President and Chief Operating Officer of Culp. The purpose of this call is to review financial and operating trends reflected in the fourth quarter and fiscal year ended May 2, 2004. I will begin the call with some 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 financial and operational information.

Fourth-quarter fiscal 2004 was highlighted by continued growth in our mattress ticking segment; however, as we announced in early May, our consolidated sales results reflect weaker than expected demand for upholstery fabrics.

Let me provide some additional comments on our sales results for the quarter. To give you an idea of the trends in our business, I would like to note that both for the quarter and the year our sales mix was approximately one-third mattress ticking or mattress fabric and two-thirds upholstery fabrics. This compares with our sales mix of one-fifth mattress fabrics and four-fifths upholstery six years ago.

Having said that, let me start with the mattress ticking or mattress fabrics segment. We are especially pleased to report another solid quarter for our mattress fabric business. This segment has continued to gain momentum through fiscal 2004. The 9 percent year-over-year increase in the fourth quarter was our best quarterly performance for the year. For the fiscal year, mattress ticking sales are up almost 7 percent. This growth trend reflects better industry demand and continued marketshare gains with key customers. The sales gains 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 mattress ticking. This transition at retail began in mid to late calendar year 2002 and is expected to continue through early calendar 2005.

And as we had previously mentioned, we believe there are additional opportunities to gain market share in this segment as a result of our design leadership, outstanding customer service and low cost operations. We expect that the mattress ticking business will account for an increasing percentage of the Company's overall sales and profitability in fiscal 2005.

Unlike upholstery fabrics, the mattress ticking business is not being threatened by Asian imports because of the rather low cost structure and labor content in these fabrics. Further, high shipping costs and the short leadtimes (inaudible) mattress retailers have also limited Asian imports to less than 4 percent of the U.S. market for finished mattresses.

Now let me turn to upholstery fabrics. Sales in our upholstery fabrics segment were down 12 percent for the quarter. Overall demand for upholstery fabrics continues to be affected by significant competitive pressures, namely the current consumer preference for leather and competition from imported fabrics including cut and sewn kits, primarily from Asia. To enhance our competitive position, we have continued to aggressively pursue offshore sourcing efforts, including our China platform, which I will discuss in a minute.

As a result of these initiatives, the Company is significantly increasing sales of upholstery fabrics produced outside of our U.S. manufacturing plants. These sales, which include (inaudible) suedes, accounted for approximately 11 percent of upholstery fabrics sales for the fourth quarter of fiscal 2004, more than double the percentage from the year earlier quarter. Gross profit for the upholstery fabrics segment in the fourth quarter of fiscal 2004 declined 19 percent, primarily due to the lower sales in our Culp Decorative Fabrics division.

I would also like to give you an update on our China platform. Operations in China have proceeded in accordance with the previously announced plans that we discussed with you on prior calls. During the fourth quarter of fiscal 2004, we successfully began the manufacture and inspection operations and started shipping fabric to customers. As expected, the Company experienced modest operating losses in the China operation during fiscal 2004 as a result of the startup of this operation.

We also are expecting some small level of operating losses from the China operation to continue until sometime in fiscal 2005. Overall, we are encouraged by how much we have accomplished in China in just over a year's time.

As we have noted before, while this will be a relatively small platform, we still believe this initiative affords us an opportunity to be more competitive in an increasing global furniture and fabric marketplace. We provide great value to our customers by bringing together Culp's design expertise, finishing technology and U.S. quality standards with the low cost fabric manufacturing available in China. We expect that Culp sales sourced from the Far East and through our China platform will continue to grow steadily in fiscal 2005.

We believe our efforts over the past year to more effectively manage our business and improve our operating efficiency are reflected in our results for the quarter and the year. While the sales environment has continued to be challenging for upholstery fabrics, we have made overall progress and continue to believe that Culp has a sound competitive position. However, if sales continue to be under pressure in the upholstery fabrics segment, we are prepared to take the necessary action to adjust our cost structure and capacity as we have demonstrated in recent years.

Above all, we will continue to place a high priority on design creativity, the quality we put in our fabrics, and superior customer service. And as Frank will discuss with you, we had made significant progress in improving our financial position in fiscal 2004. All of these factors, as well as our increased focus on our global initiatives, will continue to differentiate Culp in the marketplace.

With that, I will turn the call over to Frank, who will provide some additional detail on our fourth-quarter financial results. I will then wrap up with some comments about our outlook, and then we will be happy to take your questions. Frank?

Good morning, everyone, and thanks for joining us. First, I would like to start with some balance sheet comments. As most of you know, strengthening our balance sheet has been a key financial strategy for Culp over the last few years. With the 25 million pre-payment on the $75 million outstanding senior notes in our third quarter, our long-term debt now stands at 51 million compared to 76.5 million a year ago.

Notably, we have reduced our long-term debt by a total of 86 million over the past four years. We were able to accomplish this because we have generated annual free cash flow averaging just over 20 million over the same time period. As a result, our long-term debt to capital ratio improved to 33 percent at the end of fiscal 2004 compared with 44 percent a year ago. Additionally, at year end we still had 14.6 million in our cash position.

We expect to realize annualized savings of about 1.9 million in interest expense as a result of the early debt repayment for each of the next two years and a declining amount over the remainder of the note's term until 2010.

With regard to free cash flow, we reported 15.4 million for the fiscal year, reflecting another solid year of cash generation, which compares with 23 million for the previous year. As we expected, the decrease is primarily due to less cash flow from working capital as has been the case in the previous three years. For fiscal 2005, we are expecting to generate another solid year of free cash flow.

Our 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 the income statement. Overall sales for the quarter were 85.1 million, a 5.8 percent decrease from the fourth quarter of last year. Our gross profit margin was 18.4 compared with 19 percent in the fourth quarter of last year, excluding restructuring charges. Therefore, with sales volume off modestly, a lower gross profit margin, SG&A expenses about the same, we reported net income of 26 cents per share excluding the restructuring credit. This compared with net income of 33 cents per share in last year's fourth quarter, again excluding restructuring charges.

As far as the results of our two operating segments were concerned, upholstery fabrics segment reported sales of 57.9 million for the quarter, a decline of 11.6 percent. Fabric yards sold for the quarter were 13.3 million versus 16.0 in the same quarter of last year, a decline of 17 percent. The average selling price increased to $4.23 for the quarter, up 6 percent from $3.98 in last year's fourth quarter, and this is due primarily to the CDF division's products.

Gross profit in this segment for the fourth quarter declined to 9.8 million or 16.8 percent of sales from 12 million or 18.3 percent of sales for the same quarter of last year. The decrease in both gross profit dollars and margins primarily reflects the lower sales volume in our Culp Decorative Fabrics division.

With respect to our second segment, mattress ticking reported 27.2 million in sales for the quarter, a 9.4 percent sales increase. Ticking yards sold during the quarter were 11.6 million, up 15 percent from 10.1 million in the corresponding quarter of the prior year. The average selling price was $2.33 for the quarter, down from $2.45 for the prior year's quarter. The slight decrease reflects a product mix shift with more sales of promotionally priced product.

Gross profit in this segment for the quarter increased to 5.9 million or 21.6 percent of sales from 5.2 million or 20.9 percent for the same quarter of last year. The increase is principally due to higher levels of operating efficiencies and better utilization of our fixed costs. The interest expense of 1 million for the quarter was $400,000 lower or 29 percent than the fourth quarter of last year due to the lower debt levels outstanding.

In summary, we ended out the quarter reporting better sales and profits in our mattress ticking segment and less than expected sales and profits in our upholstery fabrics segment.

For the first quarter, we are starting off with good business trends in mattress ticking and a very challenging environment in upholstery fabrics. For fiscal year 2004, we have made great progress in strengthening our financial position, are continuing to generate excellent levels of free cash flow and reducing debt. Additionally, we have successfully accomplished establishing an operation in China and continue to build upon our leadership position in mattress ticking, in spite of the industry trend toward one-sided mattresses.

Now I will turn things back over to Rob.

Thank you. Looking ahead to our first quarter, as we enter the summer months and schedule plant vacation shutdowns, we typically experience a seasonal slowdown throughout the furniture industry. Also, the first quarter of business in 2005 is 13 weeks versus last year the first quarter was 14 weeks.

Mattress fabric incoming orders and rates of sales are holding firm so far in the quarter. As Frank said, we are seeing a definite slowdown in upholstery fabrics orders as a result of weaker retail activity throughout the furniture industry. Therefore, we expect our consolidated sales for the quarter will show a greater year-over-year decline than we experienced this past quarter. We believe the upholstery fabrics segment will continue to be affected by the competitive factors I discussed earlier, and as a result, we expect upholstery fabrics sales to decline by a greater amount than the fourth-quarter decrease of 12 percent.

Sales in our mattress ticking segment are expected to approximate sales for the prior year quarter, which again was 14 weeks, and on a comparable basis, mattress ticking would be up we are projecting about 7 percent for the first quarter on a comparable week basis.

Based on these sales expectations and lower gross profit in upholstery fabrics and considering the seasonal slowdown and industry conditions, we expect to report a net loss of 8 cents to 13 cents per share diluted for the fourth quarter -- for the first quarter -- excuse me, first quarter -- with the actual results depending primarily on the level of demand throughout the quarter. In spite of these challenges -- in spite of the challenges that we are facing, we believe Culp's results for fiscal 2004 demonstrate the strength of our operations and our ability to execute even in an uncertain marketplace. As we enter fiscal 2005, we believe the continued strength in our mattress fabrics business, our focused efforts to develop our offshore sourcing initiatives and our proven ability to generate free cash flow are fundamental competitive advantages for Culp.

Now we will be glad to take any questions that anyone might have.

(OPERATOR INSTRUCTIONS). Laura Champine, Morgan Keegan.

I wanted to break out the upholstery fabric segment and talk about the potential to grow that business at the end and when that might happen and really what the factors are that would make that happen?

When you say break out, what do you --?

Let's talk about the upholstery segment. If you would like to talk about it in terms of CDF and CVP, that is fine. But in general, just the upholstery segment as opposed to the mattress ticking segment, which is obviously a little more healthy business right now.

Well, certainly in talking on the upholstery fabrics segment, as we mentioned in the press release and also in our conference call, we are being faced with loss of competitive pressures, mainly from overseas fabrics coming in as well as cut and sew kits coming in, and we are certainly participating in that with our China platform. But it does not appear that we are able to grow the China platform as fast as we might be losing some market share in the U.S..

As far as the various product lines, we seem to be facing more pressure on our promotional or midpriced decorative fabrics than any other categories. So we have maintained our volume on the higher-end fabrics. We have maintained our volume on the velvets. Our contract business is actually stabilizing. Our markets in other areas are stabilizing. But it seems like we are getting hit particularly hard on what used to be our main runners in decorative fabrics, and they might be fabrics selling anywhere from $3.75 to $5, somewhere in that price range. And we are trying to understand whether that decrease is coming from more suedes being sold possibly or more imported fabrics thing sold or cut and sewn or more furniture coming in, finished furniture from offshore.

I am not sure we have a good idea, or part of it might be that the retail business is just -- we keep hearing reports that (inaudible) goods business is a little bit better than upholstery business on the retail side. So that is sort of the factors that we are seeing, and I am not sure we have a real clear understanding which one of those is causing the most problems. I think I would make the comment that maybe it is a combination of all of them.

You have made some tough decisions in the past. Is it possible that you are going to have to shut down all the domestic CVP plants, and if you did that, what do you think the difference would be on the bottom line from an operating basis?

Let me answer the first question, and I will let Frank answer the second part. It is no way ever would we shut down all of the domestic plants. There is a wonderful opportunity for us to provide certain types of fabrics produced domestically, and we feel very strongly that that market is you know very viable and it will never all go offshore.

I think what we are struggling with is what that level is, and I am not sure that as we look at our cost structure and capacity, I am not sure that it necessarily involves closing plans. There are lots of other ways to take costs out other than closing plants.

We have done a nice job of getting our plant structure where we want it. Now we have just got to make sure that the costs associated with the plant meets the demand that we have and I think that is the key thing.

Now I will let Frank discuss what impact that could have on our result.

That brings up an interesting point. Maybe if you could walk me through what the other -- instead of closing plants, what could you do to save costs on the upholstery side?

The big opportunities you have in any plant outside of raw materials are your labor and overhead. In a decorative fabrics environment, you are probably -- 40 percent of your costs is in labor and overhead. So you still have lots of opportunity there, and we have SG&A expenses. So we have plenty of opportunity to get more efficient and adjust cost structure to whatever level of demand that we think we are going to have.

But having said that, we are being as aggressive as we can be to grow the business. We have got some new introductions coming this summer in the decorative fabrics area that we were very bullish about. So while at the same time, we have proven that we will do what is necessary to adjust our cost structure to demand, we are certainly getting a lot more aggressive to grow the top line as well.

I might just add and you know us well enough that no one has a greater stake in this than I do, and I promise you we are going to do whatever is necessary to have our cost structure in sync with what we are able to sell profitably in the U.S., and we are going to grow our China platform as fast and as prudently as we can to take advantage of what that market gives us.

Great. Thank you.

Joel Havard, BB&T Capital Markets.

Good morning, guys. You have given us a pretty good bogey here for Q1 top line. I guess from the immediate outlook since this really is a margin issue, understand the week less, understand the shutdown, maybe you could quantify that how may days down or was it a one week or two week downtime last July, and what is that going to look like this year?

It's about the same year-over-year. We are looking at two weeks in most of the upholstery fabric operations this summer and not mattress ticking because this is their seasonally strong period, and last year we had some level of two week shutdowns, as well.

Okay. I was going to say that does not sound abnormal. I wondered if maybe from your comments that you did not foresee additional downtime.

I think what you are seeing, we are doing it throughout this quarter. Not only at the two week shutdown around the July 4 level, we are taking additional downtime throughout the quarter.

Okay. That was the real gist of the question, Frank, is what will the total downtime be that you foresee right now out of Q1 being compared to a year ago?

I don't know if I could give you an exact number, but it's certainly more.

But it will be more.

It will be more. We could take a Friday out here and there. We could take weeks out from time to time, other than the two weak shutdown.

Okay. So we are looking at probably down 6 or 7 percent total top line and margin pressure year-over-year?

Yes.

All right. Well, that is pretty clear. Echoing Laura's question, we talked in the past about CDF maybe having -- I want to make sure I understand this right -- domestic capacity of $170 million. If you are running 120 or so this year, does that maybe really imply that there is another bullet to bite at the structural level? Do we need to shut down, or should we be thinking about as investors, the need to shut down maybe one more leg of CDF? I am not accusing you here; really I do want a philosophical discussion on it.

I think I would just reiterate what Rob indicated in the Laura's question. We do not see today the need for a plant closing. We are evaluating a lot of options, you know, that are to get cost out. There are other things we can do given the plant structure we have got.

What you all described in your answer to her sounded like maybe some headcount, maybe some back office. I am not sure.

In the plants we own, different from some of our other plant closings, the plants today that we have we own them. So there are not any big lease contracts to get out of or things like that. So your bigger cost savings are concentrated in the labor and overhead area.

What overheads are variable beyond reducing some headcount if you are experiencing slower volumes for awhile guys?

You have got your various fixed costs. You have got fixed salaries. You have got some level of fixed costs even in your utilities and all of your overhead items. But the biggest part of the conversion cost in manufacturing is labor and compensation by far.

All right. Do you think you can be flexible enough now -- I will try and turn the conversation a little more positively. If you all can tighten the belt up a couple of notches here for the next quarter or so, can you then ramp it back up if the broader spending recovery does start to get legs back underneath it?

Absolutely, absolutely.

Is it a concern that you would lose some semiskilled labor that maybe you would have a little trouble getting back after a two month layoff sort of thing?

That is always a risk, and that is something we look at very carefully.

Okay. Just so that I do understand, is CDF still comprised of Burlington, Graham and Pageland?

Yes.

And those are all owned. Looking at segment data, is the decline in ticking average prices a function of the import mix, or is that still more domestically driven?

No, this is Rob. The decline in ticking average price really comes and you can see it if you walk into a mattress department of any store that they have gone very much to the body cloth panel concept just like in upholstery, you have a body cloth and a pillow. And the panel is a little more expensive and the body cloth they are using over all different styles, and the body cloth or the border is around the sides of the mattress and on the box spring, and then the panel is what you would sleep on.

With the change from two-sided to one-sided, the body cloth has been significant volume, and of course, because of the volume, the price has been driven down. So we challenged our typical folks, and they did a super job on this that when it started moving to a one-sided mattress, it was imperative that we adopt this border or body cloth business on mattresses, and we have been very successful in doing that. But along with it, it was a lower-priced product.

So we think that is about over. We think now we will start seeing the selling prices start to inch back up again or at least not decline anymore. We should get a little boost because we are able to sell the panel fabrics for more money. So it is just a phenomenon of going from two-sided to one-sided, and the fact that we saw that we had a chance to lose one part of our volume and we were not going to let that happen.

Actually that is new information for me; I am glad to hear that. You anticipated the next question was how far is that one side conversion finally getting, and am I hearing you right to indicate that that may be within a quarter or two?

I would think early 2005. Simmons is 100 percent one-sided. Sealy is close to 100 percent one-sided. Serta is 50 to 60. So the rest of the industry is coming along nicely or not nicely, depending on your point of view.

So you all picked up new fabric volume of a certain type of this panel cloth, while the overall volume and environment was going through this conversion process?

No question. I think one of the real success stories, and we probably don't give our home fashions guys enough credit, the fact that they have grown the business when they were faced with losing a third of the business is pretty remarkable, and also growing the profits at the same time. That is a pretty good business. As it settles down, which it is beginning to do, I think we have some chances to certainly continue to grow the top line and the bottom line.

We know you have bragged on that. Something else to brag on here is the working capital usage. You all have done a very good job over the course of the year. Q4 was especially good. I have been modeling to reflect a higher working capital requirement based on what I presume was a growing import stream, most imports in CDF out of China and in the mattress business. Am I assuming too fast a growth in imports, or are you all somehow managing the working capital requirements of imports? Could you explain what is going on there a little bit?

We certainly are managing that very carefully. You probably were right to anticipate a little higher level, but I think we are doing a pretty good job on that, and it might not be as much as we first thought.

Frank, is that the function of limited amount of vendors giving you better terms because you are a better customer, or is there some other tool at your disposal?

Well, as you know, we have focused on working capital for about the last four years, and inventories, receivables, payables, we look at every week. So a variety of tools that we use.

Joel, we set for a goal just a couple of months ago, and Frank may have mentioned this to you, but our goal is to be debt free in three, and when we say debt free, we want to have enough cash in the bank that we could pay off any debt that we have. The way to do that when you are in a tough business as we certainly are in the upholstery business with low margins and in a changing environment, the only thing we know good to do is generate as much cash as we can. And everybody in this firm, every day 24 hours a day thinks about what we can do to generate cash.

Rob, that is a worthy goal. You ought to be congratulated on the cash flow side of this. We will hunker down and try and figure out earnings in the meantime. Good luck to you guys. We will talk to you soon.

(OPERATOR INSTRUCTIONS). Todd Schwartzman, Sidoti & Company.

Good morning, guys. Given that you're able to grow the China business at a rate where it offsets the weakness in the U.S., could you talk a little bit about the main reasons to proceed cautiously with respect to ramping up the China platform more quickly?

Maybe there was a little misunderstanding. We certainly do not think we can grow the China platform as fast as we appear to be possibly losing some marketshare in the U.S.. Certainly, China is going to offset it.

I think the main issue of growing China faster is just making sure that we have our platform and the structure and the quality and the supply chain all in place. We have seen lots of textile companies file Chapter 11 because they bet the ranch going to some foreign country thinking it was the holy grail, and our thought process is to go slow, take it easy and that is what we're doing. We are very fortunate, and I might add that one of my best selling jobs ever was to convince Howard Dunn, who was our President, as he started to step back a little bit to take over responsibility of our China platform, and he has given that his full attention now. And Howard knows Culp better than anyone, and Howard is going to grow that China platform as fast as we can, but also to make sure that we do it very prudently and properly so that we have a long-term profitable growing business in China.

Is there anything that you could point to now that would lead you to believe that at some point in the future that, yes, you do have the platform, you do have the structure in place, and now it's time to expedite the project?

The way I would answer you, we really have moved very aggressively over this past year. If you look, we announced the China initiative at the end of March in '03. Here we are just over a year and a quarter, not even that, and we have got a fully functioning plant. We have got plenty of capacity in this plant. We have got customer service. We have got finishing. We have got suppliers. Of course, as you may or may not know, I was intimately involved with Howard in getting this thing set up. So we have really accomplished a lot in one year. I think, as of now, we have got the plant capacity set up, established. We are able -- as we are able to drive the top line out of China, the plant is ready to handle a good bit more volume.

If you were to look out to let's say fiscal '06/'07 looking out a couple of years, would you care to project any percentage of production on the upholstery fabrics side that China will represent at that point in time?

I don't know that we talked about that. I can just tell you we believe it's going to be a lot more than it is today.

It is a couple (inaudible) to get to that, right?

I know. But we have the capacity there now. We have built the infrastructure. We have got the management group there that is just fantastic. We have worked through many issues in getting the plant up to the operational level it is today in training suppliers, training people, hiring our management group. A lot has been done, and we are now ready to drive more business through there.

I might add one more comment on Frank's response, and I think this is good for you folks to know. Three or four years ago in the U.S., several of us, of the large mills decorative mills, if furniture was sold in the U.S., they bought it from one of us, and if we had a hotline, then we did better. If we did not have a hotline, we did not do as well. But overall, all of the fabrics sourced in the U.S. came from one of the five or six or seven large mills.

That format or that platform is no longer in place. Our customers are buying from everybody now, and whether it's from us or people we don't even know, lots of fabrics are coming in from lots of places.

As we have looked at China, and I guess this is another way to answer your question, this is a tremendous opportunity, and if anything, we have got to make sure we take our time and build it correctly foundation-wise. We do not see any issue in selling one heck of a lot of fabric through our China platform.

The stream is running fast. We are the boat on the stream. If anything, we have got to throttle down to make sure we do it correctly.

We are hearing story after story from customers and others who have sourced fabrics from China and are having tremendous quality problems, leadtime problems, etc., etc.. A big part of Culp's value proposition to our customers in addition to the U.S. design is they can count on our quality and service. You know as Howard has built that operation over there, quality and service, what we do in the U.S. is exactly what we're trying to do over there. I promise you every fabric they receive into that plant to finish and inspect is not without defects. There is a lot of work going into that, helping our suppliers improve their quality.

My last question is about leather. I know that, Rob, you had previously said you don't have any interest in becoming a leather producer. I am just wondering about acquisition opportunities, about getting into that business externally. Any thoughts on that?

I don't think we have any interest in getting into the leather business if that is your question. That business is more competitive than our business. It also appears to be leveling off, and I believe the leather producers are at the end of their growth curve. So in my opinion, not a good time to get in that business.

There are some other acquisitions that might make some sense down the road. We don't think leather is one of them.

(OPERATOR INSTRUCTIONS). Budd Bagatch, Raymond James.

This is Chris Thornsberry. I am sorry. I am pinch hitting for Budd. He stays on the road.

We are happy.

Anyway, just a couple of quick questions. Actually a follow-up to Todd's question on the leather side. You mentioned that leather was starting to level off a little bit. Around where is that in the upholstery penetration of the market, and where do you see that ending up at in the near future?

We think it's around 30 percent maybe, 25 to 35. So a good guess is maybe 30 percent, and we don't -- most of our customers tell us they don't see much growth beyond that.

Now what is impacting a little bit is the suedes have come in, these micro (inaudible) suedes have come in. We think they could be as much as 20 percent now. So if you add leather to suede, you might be as much as 50 to 55 -- 45, 50, 55 percent, those two categories. Certainly some of the retail stores I go in, some of the promotional stores, the retail mix on the floor is 50 to 55 percent leather and/or suedes.

Okay. Another question on the upholstery fabrics segment. Could you give us an idea of what your capacity utilization rate is like here in the states, and how many plants do you have producing the upholstery fabric domestically?

In upholstery fabric, we have three plants producing for our Culp Decorative Fabrics division, and we have two plants on the Culp Velvets Prints division. In addition to those, we have three smaller yarn plants that support those two divisions, as well as our Culp Home Fashions division, which does mattress ticking.

Okay. And do you have any type of idea what a utilization rate would be like right now?

Utilization rate, we are certainly struggling there as you might guess this quarter. It's certainly I would say below 80 percent.

Okay and another question on that segment. You did mention that pricing was up a little bit from about 6.3 percent due to the higher average selling prices in the CDF division. Is this in response to the higher raw material costs we are seeing out there, and if so, are you able to get back most of those cost increases with that price?

No. We have not -- due to the supply and over supply and demand, we have not been successful and able to pass on any raw material increases. We are able to pass them on as we develop new items, and that has been our saving grace. New pads we bring out, we can incorporate what increases we have and get back to an acceptable profit margin.

We are not -- the increase in the selling price with CDF has been -- as we said earlier, the biggest impact we have seen in CDF is what used to be our big runners. The big cloths that we would weave 10, 15, 20, 30,000 yards a week on that were medium-priced fabrics, that is where we seem to have been hit the hardest. On higher-end fabrics, we have stayed okay demand-wise. In fact, we are okay on the higher-end fabrics.

So logic would tell you, if you do less of your promotional and medium fabrics and you are staying even with your higher end, your average selling price is going to go up a little bit, and that is what has happened.

Okay. So you had product mix affect the average pricing in both the upholstery and mattressing units?

That is correct.

And one last quick question just for housekeeping. For Q1 what type of tax rate should we be assuming, and do you have any idea of what the tax rate should be for pretty much the whole year?

We are estimating 35 for the year.

For the quarter?

For the quarter and year.

That is all I had. Thank you, guys.

There are no additional questions at this time. Mr. Culp, I will turn the call back over to you for closing comments.

Thank you very much, and thanks for your participation. We appreciate your interest in Culp and look forward to talking to you next quarter. Have a great day.

This will conclude today's conference call. We do thank you for your participation, and you may disconnect at this time.