Culp Inc (CULP) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Culp Inc. conference call. Today's call is being recorded and at this time for opening remarks and introductions, I would like to turn the call over to Mr. Pat Watson. Please go ahead, sir.

Thank you. Good morning and welcome to the Culp conference call to review the company's results for the first quarter of fiscal 2005.

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 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 as 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 information.

A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements of net income and net income per share 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'll now turn the call over to Rob Culp, Chief Executive Officer. Please go ahead, sir.

Good morning and thank you for joining us today.

I'd like to welcome you to the Culp quarterly conference call for 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 first fiscal quarter of fiscal 2005.

I will begin with some brief comments about Culp today, and then let Frank review the results for the quarter. Then I would like to spend some time talking about the industry trends affecting our two operating segments and our business strategy for each segment. Frank will then review our second quarter business outlook.

We would like to share with you today why we are enthusiastic about Culp's future and why we believe that Culp is well positioned from a competitive standpoint. Today we see the company operating in two distinct businesses, mattress fabrics or ticking and upholstery fabrics.

Each of these business segments present different challenges and opportunities for Culp. As we will discuss with you today, we are particularly enthusiastic about growth opportunities in our mattress ticking business and our offshore platform and upholstery fabrics.

Our plans are to continue to deliver value for both our customers and our shareholders.

Frank will now comment on our financial operating results for the first quarter.

Good morning, everyone, and thanks for joining us as well.

Overall, sales for the quarter were 67.8 million, a 7.9 decrease from the first quarter of last year, which is attributable mostly to one week less sales in the quarter and softness in our upholstery fabrics business.

Our gross profit margin was 12.8%, which compared with 15.6 in the first quarter of last year. This decrease resulted primarily from underutilization of our U.S. manufacturing facility in our upholstery segment and the effect of one week's less sales volume.

SG&A expenses were down almost 12% to 9.3 million, reflecting cost reduction efforts and lower professional [fees]. And as a percent of sales, SG&A expenses were 13.7%, versus 14.3% in the same quarter of last year.

Interest expense was 940,000, down 560,000 for the quarter due to significantly less debt outstanding. Therefore, with sales volumes off modestly along with the lower gross profit margin, offset somewhat by lower SG&A and interest expenses, we reported a net loss of 1.1 million or 9 cents per share, compared with a loss of 4 cents per share in last year's first quarter.

I'd like to now review our results by operating segment.

It is important to note that this quarter we have changed our measure of segment profitability from gross profit to operating income. Additionally, in our Form 8-K filed yesterday, we included information about the operating income by segment for last fiscal year to provide comparability.

With respect to our first segment, mattress ticking reported 26 million in sales for the quarter, a 4.7% decline. On a comparable weekly basis, however, average weekly sales for the quarter increased 2.7%.

For the quarter, we had 13 weeks in this year's quarter and 14 weeks in the first quarter of last year. This is especially noteworthy considering our customers' recent transition to one-sided mattresses, which utilize one-third less ticking.

Mattress ticking sales represented 38.3% of total sales for the quarter, up from 36.9 in the year-earlier quarter. We believe this segment will continue to account for an increasing percentage of Culp's overall sales.

During the quarter, we continued to make gains with most of our large customers, and are increasing the focus on growing the business with small to middle-sized customers. Ticking yards sold during the quarter were 10.8 million, up 3% from 10.5 million in the corresponding quarter of the prior year.

The average selling price was $2.38 for the quarter, down 7% from $2.57 for the prior-year's quarter. This decrease reflects a product mix shift with more sales of lower-priced products.

Operating income for this segment was 2.9 million, or 11.2% of sales, compared with 4.1 million or 15.2% of sales for the prior-year period. Operating income was primarily affected by one week's less sales for the quarter and inventory markdowns related to certain customer programs.

These factors are expected to have significantly less impact on the segment's second quarter results. We are expecting a moderate increase in sales for the second quarter and operating income to rebound and approximate last year's second quarter level.

While we believe we are the low cost producer in this business, a key initiative underway is to further lower unit production cost by fiscal year-end by implementing two significant cost reduction projects that have been identified.

Now turning to the results of our second operating segment, upholstery fabrics.

Sales were 41.9 million for the quarter, a decline of 9.8%. On a comparable week's basis, average weekly sales for the quarter decreased 2.9%.

Sales of upholstery fabrics also reflect soft demand by furniture retailers during the summer months, which is historically the seasonally lowest quarter of our fiscal year due to customer scheduled plant vacation shutdowns. Additional factors affecting the demand for upholstery fabrics are the current consumer preference for leather furniture and increased competition from imported fabrics, including cut-and-sewn kits primarily from Asia.

Fabric yards sold for the quarter were 9.3 million versus 10.6 million in the same quarter of last year, a decline of 12%. The average selling price increased slightly to $4.25, up 3% from $4.13.

We are significantly growing sales of upholstery fabrics from offshore sources, including microdenier suedes and similar fabrics, as well as fabrics produced in our China operation. These sales more than doubled over the first quarter of last year and accounted for 5.5 million, or 13% of upholstery fabric sales for the quarter.

Offshore source fabrics were 2.1 million, or 4.5% of this segment's sales for the same quarter of last year. We are aggressively pursuing the growth opportunities that are available in the marketplace as a result of our offshore platform.

The upholstery fabric segment reported an operating loss of 2.6 million, or 6.1% of sales, compared with an operating loss of 1.7 million, or 3.7% of sales for last year. The segment loss in each period was primarily due to underutilization of the company's U.S. manufacturing capacity.

We are currently in the process of reviewing our cost structure and U.S. capacity in this segment. While we believe upholstery fabrics will be profitable for the second quarter, operating income is expected to be down considerably from last year's second quarter.

Turning to the balance sheet.

One of our financial objectives for fiscal 2005 is to continue to capitalize on the strength of our balance sheet. At the end of the first quarter, our balance sheet reflected a cash position of approximately $12 million, long-term debt now stands at 51 million, compared with 77 million a year ago.

As a result, our debt-to-capital ratio is now 33%, versus 45% a year ago. Our financial position is sound, with significantly lower debt, excellent liquidity, and the financial flexibility to pursue our strategic initiatives.

Now I'll turn things back over to Rob.

Thank you, Frank.

Let me review the key industry trends we are seeing in our business as well as our strategies for addressing these trends both in mattress ticking and upholstery fabrics. I will start with the mattress ticking segment.

U.S. bedding industry has enjoyed strong and stable demand trends with over 6% average annual sales growth since 1982 driven by growth in both units and average unit selling prices. Consumer and demographic trends as well as the appeal of this category for retailers favor continued growth in the bedding industry.

Bedding represents a highly profitable category on a retailer’s floor and lease investment in inventory because of the just-in-time delivery model. So we're very positive about the long-term outlook for growth in bedding demand.

To give you an idea what this means to Culp, five years ago mattress ticking accounted for about 20% of our business and now accounts for over a third of our total revenue. Our gains in mattress ticking with key customers tell us that they are responding well to our products and that we are executing our strategy well.

We believe there are additional opportunities to grow business in this segment as a result of our key drivers for success: Leadership and product design, outstanding customer service, and delivery performance and a globally competitive cost structure. We are very pleased to demonstrate meaningful growth in our mattress ticking business during the bedding industry's recent transition to selling predominantly one-sided mattresses which utilize about one third less mattress ticking.

This transition in retail began in mid-to late calendar year 2002, and is expected to affect our sales on a comparable basis through early calendar 2005.

Additionally, and really good news for us, the mattress ticking business remains a U.S.-based business, unlike upholstery fabrics. It is not being threatened by Asian imports because of the just-in-time delivery demand of our customers, low average selling prices, relatively low labor content, and our competitive cost structure.

Furthermore, more good news, Asian imports of finished mattresses have been limited to less than 4% of the U.S. market, due to short lead time demand by retailers, and the limited inventories they carry, low labor content in mattress manufacturing, high shipping costs, and customized product lines, and maybe most importantly, strong brand-name recognition in the mattress arena.

For instance, we were informed that a leading mattress manufacturer recently did a study with a leading major retailer to sell a limited number of SKUs to see if it made sense to manufacture mattresses in China. The study actually showed it was less expensive for them to make mattresses in the United States, so it appears to us that there's not a great economic advantage for our customers to produce mattresses offshore.

We are encouraged by the incoming orders we see in our mattress ticking business through the first month of the second quarter. We expect that this segment will account for an increased percentage of the company's overall sales and profitability for fiscal 2005.

As you can tell, we're very excited about our growth prospects in mattress ticking.

Now let me turn to our upholstery fabric segment.

Those of you who follow our business know that we are seeing a dramatically different landscape in the residential furniture and upholstery fabrics business.

Today is all about operating in a global economy in these businesses. Therefore, we are highly focused on maintaining the right level of domestic capacity and aggressively developing the international sourcing capabilities to ensure we are providing the right products for our customer.

Overall demand for U.S.-produced upholstery fabrics continues to be affected by significant competitive pressures, namely, the current consumer preference for leather furniture and competition from imported fabrics, including the rapid expansion of cut-and-sewn kits from China. More than ever, the upholstery fabrics segment is being affected by this paradigm shift that has taken place in the furniture industry with the sourcing of imported fabrics and cut-and-sewn kits.

Without question, this globalization trend has moved quickly and will continue to affect our industry and our business. As many of you are aware, the quotas on textiles are coming off in January 2005, and it's likely that more products will start flowing into the U.S.

One of Culp's key strengths has always been our ability to respond to a changing marketplace and we've already taken major steps to adapt our business model to take advantage of this transition and position ourselves more effectively in this environment.

First of all, in response to this global trend, we have significantly adjusted our cost structure and domestic manufacturing capacity over the past several years. Second, we have focused on design creativity and product development to provide breadth and innovation in the fabrics offered to our customers to meet changing consumer preferences.

Third, we have implemented a dual strategy to aggressively develop offshore sourcing capabilities for Culp. In fiscal 2003, we put in place the necessary resources to begin sourcing from Asia, certain upholstery fabrics that we do not manufacture, and we have continued to expand these resources.

The other component of Culp's offshore sourcing effort is our China operation where we are now well underway with our manufacturing operations and our fabric shipments to customers. We are encouraged by how much we've accomplished in China in a short time and believe this platform represents an excellent opportunity for Culp to be more competitive and increasingly global in the fabric marketplace.

We are now providing greater 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. In addition, we believe our dual sourcing strategy will allow us to better serve our furniture customers who are establishing or expanding production in China as well as other international customers outside North America.

With our offshore sourcing efforts, we have already significantly increased sales of upholstery fabrics produced outside of the company's U.S. manufacturing plant.

As Frank mentioned, during the quarter we more than doubled the percentage of sourced products, sales from the prior-year period. We expect that Culp sales sourced from the Far East through our China platform will continue to grow steadily in 2005.

While the sales environment has continued to be challenging in upholstery fabrics, we have made significant progress in responding to these challenges and believe that Culp has a sound competitive position. Above all, we will continue to focus on what we believe are the key success factors in today's global environment.

Number one, we place a high priority on our design creativity and product development to meet changing consumer preferences. Number two, we are aggressively pursuing a global sales and sourcing strategy, as I just reviewed. Number three, we are prepared to do what it takes to further adjust our costs at capacity and our domestic operations to meet the demands of the marketplace.

We have proven our ability to do this successfully in recent years. So in effect, we see this as a blended strategy for Culp by effectively utilizing both our domestic operations, especially for our specialty fabric and make-to-order business, and continue to build our offshore sourcing capabilities.

We believe that blending efficient domestic manufacturing with an aggressive outsourcing strategy allows us to offer a compelling value proposition. We are optimistic about our prospects in both operating segments and believe we have the financial flexibility to pursue our strategic initiatives and enhance our competitive position.

Now I'll ask Frank to review the outlook for the second quarter, then we'd be glad to take any questions you might have. Frank?

Looking ahead to our second quarter, mattress ticking sales have already picked up during August. For the current quarter, we expect sales in this segment to be moderately ahead of second quarter sales last year, and expect that operating income will approximate last year's level.

With respect to the upholstery fabric segment, the outlook remains uncertain for a sustained recovery in retail furniture business conditions. We are optimistic that upholstery fabric sales will also pick up in the fall, as is seasonally typical in the furniture industry.

For the second quarter, upholstery fabric segment sales are expected to decrease somewhat less than the first quarter decline of 9.8%. While we do expect to be profitable in the upholstery fabric segment, operating income will be down considerably from last year's second quarter.

At this time, we expect to report net income in the range of 13 to 17 cents per share, with the actual results depending primarily on the level of demand throughout the quarter. We believe the excellence in our design creativity, the strength in our mattress ticking business, the aggressive expansion of our offshore sourcing capabilities and our sound balance sheet effectively position Culp in today's marketplace.

With that, Rob and I will now take any of your questions.

Thank you. To ask a question, please press the star key followed by the digit one on your touch-tone telephone. Also if you're listening on a speakerphone you may want to disengage your mute button to allow your signal to reach our equipment. So once again that's star one to ask a question, and we'll pause for just a moment to assemble our roster. It looks like we'll take our first question from Laura Champine with Morgan Keegan. Go ahead, please.

Good morning.

Good morning Laura.

Good morning Laura.

Frank, why were inventories up in the quarter?

Inventories were up in the quarter for a couple of reasons, mostly in upholstery fabric. We had a couple of converted programs, our offshore source products, that we built inventory in the first quarter. Partly for the fall business that we expect, because we don't have such great lead times coming from offshore.

Uh-huh.

And partly because of the quota situation. We are hearing and being advised that there could be shortages in November and December because of the shift over of quotas. So we're hedging somewhat on that.

I'm not sure I understand that fully. So in November, these manufacturers might be working hard on someone else's product? I mean I'm not sure I understand.

Quotas could be a lot tighter earlier in this year.

Okay.

What we're hearing is that, you know, in the past, companies could sort of move forward quota from the next year to the previous year.

Uh-huh.

But this year that's not gonna be available. So from all our sources over there and our own folks over there, we're being advised to be more cautious this year because it could be tighter supply situation in November and December.

Could that help Culp in your domestic operations?

I don't think for one month. The key is, you know, we've developed such a, so far, an outstanding track record of delivery performance from Asia, and that's one thing that sets us apart from the competition. And we don't want to get caught in November and December not being able to supply our customers.

Got it. Where did the yarn segment go?

The yarn segment is combined with, it really is not a segment, it's a part of CBS, called Decorative Fabrics. It's combined with that.

Okay. Did, has China become the yarn sourcing platform that you wanted it to be when you started this China initiative?

Laura, yeah, this is Rob. Certainly, China has become a wonderful platform for a lot of things. We are sourcing lots of yarn in China for our China operation, and we are working on sourcing some yarn to bring it back in the U.S. for our domestic operation as well.

But currently not bringing in a lot of yarn to the U.S.?

Currently not bringing in a lot of yarn to the U.S., but I think over the next year that could change.

From, and I would add to that, Laura, from China, we are sourcing yarn from other countries in the world.

Got it.

For both segments. Now, I think we probably would have in China, but there's just only so much we could have focused on in this first year being over there, and now that the level of business and our operations are settling down, as Rob said, that is going to get increased focus over the next year.

Would that move the needle on your margins in that segment?

Could, absolutely.

Okay.

You've got to remember, they do not have producer-dyed fiber over there. Everything is package dyed, so it's somewhat different than what's available in the U.S. today.

Got it. And could you give us more detail on the mattress ticking cost reduction projects that you referenced?

Laura, we thought you might ask about that, and at this point we're not prepared to give any more details, but we did think it was important to share with everyone that, yes, we're the lead, we believe we're the low-cost producer, but we're still trying to lower costs further. And at this point, really not at liberty to say anything further about those.

Okay. Thank you.

Our next question comes from Joel Havard with BB&T Capital Markets. Go ahead, please.

Thank you. Good morning, guys.

Good morning.

The second quarter bottom line outlook, does that include the, I believe you had said 3 cents approximate negative impact as you moved some properties around, I think at the headquarters?

Yes. We had referred to that in our third quarter 10-Q of last year related to the new company offices and showroom that we purchased during the first quarter. That does not include that and we do not see that charge in the second quarter. We anticipate that move to be late in our third quarter.

Okay. So we're pushing it back.

Yeah. And we don't see it to be that level anymore, because we are going to be staying in our current facilities longer than anticipated. It takes us longer to get the showroom designed and built. We are consolidating our showrooms into this new facility as well.

So the impact won't be as much as --

Won't be as much. You know, it, penny, penny and a half per share, maybe.

Oh, okay.

At most.

All right.

And of course we're saving, it's a much less expensive facility versus where we are today.

Okay. Even with the sort of push back we're getting in your operating forecast here, you're still in pretty good shape from a cash flow standpoint. You noted the strengthened balance sheet. I suppose that covenants and such still prevent you from doing anything on a share repurchase effort, but is there a thought to your potential use of cash over fiscal '05, fiscal '06?

Joel, that's a good question. Our covenants at this point, we're obviously in full compliance with all of them. There are no, we're well below any covenants that would restrict dividends or share repurchases. So there's no restriction there.

Ah.

And we continue to look at all available options for, you know, our cash flow and available cash.

Okay. Well, that sounds like a slight shift in stance, maybe, over the past couple of quarters.

I think our first priority is we've consistently said our first priority is to reduce our debt levels. Now, as you know, the debt that we have is $50 million private placement note.

Uh-huh.

Which has some, oh, expensive prepayment penalties.

Right.

We repaid 25 million or a third of that debt last January with a much-reduced premium below what's in the agreement. That would still be our priority if that could be accomplished.

Okay. And as far as, you all can almost write a check for that over the next couple of years out of cash and cash flow. I guess would it be safe to say that negotiations continue, or are you just waiting for an offer from the holders?

I think, let's just say that remains our first priority.

Fair enough. One more operating-type question. The breakpoint to profitability is extremely dramatic, somewhere between 70 and $80 million, you know, where you shift from losses to profit. Is your thought process regarding, you know, potential future rationalization going to lower the threshold there to, you know, again we'll call it from the 70s to, is it a 5 million gain, is it a 10 million gain, again in the breakpoint from losses to potential profits?

Joel, I'm not sure we understand the question. Are you referring to our breakeven point?

Yeah.

In the upholstery fabric segment?

Exactly, exactly. Well, yes, assuming that we can ignore mattress, then it's doing fine. But your overall sales line, there's a really obvious breakpoint for you, and I just wondered if you could characterize maybe the percent improvement in what that breakeven point would move to with some further rationalization effort. It sounds like you're considering right now.

Well, let me attempt, see if I can answer the question that I think you're asking. Throughout our upholstery segment our plants are running under capacity.

Uh-huh.

And when you're running plants under capacity, it's hard to, you know, under capacity of five days, it's hard to generate any meaningful profit. So we're, at the same time, we're growing dramatically goods that we source outside the U.S. or manufacture outside the U.S.

Uh-huh.

But as those products come in, they do nothing to help cover the fixed costs of the plants we have in the U.S.

Right.

So what we're looking at is to try to get a handle of how much we can sell of source products versus how much we need to manufacture products in the U.S., and that's driving our decisions. So, I mean, we are prepared to do whatever's necessary to adjust our capacity to where it's profitable in the U.S.

And Rob, I'm, go ahead, Rob.

We will always make upholstery fabric in the U.S., we'll always make a significant amount of upholstery fabric in the U.S., dependent on what the market tells us, you know, how much that is, is dependent on what happens when the quotas come off, where the consumer taste goes. Part of our issue on our upholstery fabric today, is that if any of you go into any furniture store, whether it be a department store or any of the large retailers in any city, as much as 65 to 75 to 80% of the floor could be leather and suedes.

So our opportunity to sell our woven texture product where we used to have a chance to, you know, half of the floor might be in that product, now maybe 20, 25% might be in that product. That trend will change. We know that will change. We don't know when it'll change, it could be next year, it could be the next year.

So we just got to look at it real carefully, make sure we adjust our capacity, because we are in the fashion business, and we know that we're already hearing leather has slowed a little bit, it's not growing like it has previously. What has continued to grow tremendously is suede. We're hearing that people are getting tired of the suedes, but yet as we look at our placements for the upcoming market, our biggest and best placements are in the suede and similar-type products category.

So I'm not sure I'm answering your question, but our thought is that we're going to do whatever's necessary to adjust our capacity to meet the demand we see in the U.S.

Okay. It sounds, then, that the overhanging capacity is still pretty much CDF division-specific. It looks like CVP's actually doing okay.

I would say, Joel, we would say mostly CDF. But there are issues in CVP as well. You know, the velvet business is affected, that's a domestically produced item as well. And has also felt pressure from suedes and, you know, similar-type products or the microdenier products.

I was going to ask about that product question I'm really not qualified to ask it, even correctly. But does CVP not have the manufacturing capacity to, is there too big a change in the underlying product between what CVP is set up to do and these suedes, can you all just not do it internally so it has to be sourced?

That is correct. We do not have the equipment in this country, nor do we have the environmental, you know, the environmental regulations are such in this country, that product, those products cannot be produced in the U.S.

I see. Okay.

So it's not available. Now, we have some folks and we're doing as well, trying to do some suede looks on the equipment we have.

Uh-huh.

But they're suede want-to-be's, they're not the true microdenier suedes that we see from Asia.

Okay. That's all I've got right now. Thanks for helping us out today.

We'll now go to Budd Bugatch with Raymond James. Go ahead, please.

Good morning, gentlemen, this is Chris Thornsberry sitting in for Budd this morning.

Hi, Chris.

Just have a quick question regarding the mattress ticking segment. I saw that average selling prices were down about 7% year-over-year this quarter, you said that was mostly due to product mix shift. Also, was there some impact from the inventory markdowns you mentioned? And could you break out for us what the relative impact was of each of those two on the pricing this quarter?

Well, I'll give a shot on the first part, maybe Frank can help on the second part.

Okay.

The shift in mattress ticking product mix has to do with, when the mattress folks shifted to a one-sided mattress, at the same time they also went to a border-panel product, and it's sort of like on the sofa a body cloth on a pillow. The border is what's around the base of the mattress and the panel is what you actually sleep on.

So the mattress folks, I guess, learned of, got some information from the upholstery industry and they're using a common border. So the bedding manufacturer would use one border on every mattress they make and then use a more expensive panel on the top of the mattress.

And of course the border fabric is huge volume, but it's not always seen by the consumer because they don't sleep on the border, so they try to buy that product as inexpensively as they can. We are selling lots of border material and we are just doing a super job there, but that's a lower selling price than what we used to sell as a blend of the border and the panel.

Now, Culp still sells a lot of panel fabric, but as you can imagine, the border fabric is a lot less expensive than the panel fabric.

As far as the markdown this quarter, we have, we were lucky enough to grow tremendously with a couple new big bedding manufacturers and, quite frankly, the initial forecast that we put in for them on what they thought they were going to use, we just, we both did not do as good a job as we could to get that figure right, and that's what's resulting in the markdown. We're so focused on creating cash in Culp, that if we got something we don't think's gonna sell, we mark it down to get rid of it because we want to generate cash, and that's our, one of our real core values.

And we now have that under control, we're working very closely on projections with these customers, and it was just a start-up issue. And it wasn't anybody's fault, it was just a start-up issue, but when we see it slowing down, our goal is to turn it into cash and that's just what we're doing. So, Frank, you might comment on what percentage of that is of the --

Very small. That really would not have accounted for much of the decline in average selling price.

The inventory markdowns?

That's correct.

Okay. And I know that with raw material prices going up so much, particularly with steel, a lot of the components are going up for mattresses themselves and manufacturers are not also willing to spend as much on the ticking as well. Are you still seeing pressures there and where do you see that going?

Well, that is correct, Chris. That's a good question. You know, as the, and, also, impacting it that you didn't say, and we maybe should have mentioned in our presentation, with the FR standards going in in California in January and then maybe U.S. the next year, that's gonna add additional costs to the mattress.

I think Culp has an opportunity to really participate with that FR process. But that's gonna further put pressure on selling prices because, you know, the mattress guys are going to do everything he can to keep his costs as low as he can.

It really plays right in our hand because we are the low-cost producer to begin with, and these couple of projects we have in place will significantly, these couple projects that we have plans for will significantly reduce our costs. So it's really all good news for us in that segment.

All right. Thanks. Now, just one further question here. Regarding the CDF division, actually, the upholstery segment. Average selling prices were up a little bit in the quarter, is that correct?

Yes, that's correct.

Is that also due to mix issues and is that also due to the same things we saw in the last quarter where middle price points of fabrics were selling better than, I'm sorry, were selling worse than the higher price point fabrics?

You know, the change is only up 3%. I don't know I'd draw a lot of conclusions.

Okay.

From such a slight change.

Okay. All right. Thank you. That's all I have.

Just a reminder, to ask a question, please press star one. And we'll now go to Colin Carthouser with [inaudible] Capital. Go ahead, please.

Good morning guys.

Good morning.

Good morning.

A quick question, most of my other questions have been answered. But I was wondering if you could give us more color into expected quarter-over-quarter growth of overseas upholstery fabric sales for the second quarter?

As we have said several times in this presentation, we are focusing on that area, aggressively pursuing it, and expect those sales to grow significantly. If you looked at our last several quarters, that percentage of upholstery fabrics from offshore source products has grown each quarter by somewhere around maybe 2 percentage points. So I think you might could trend that on out.

Okay.

As a, I don't, it was 13% this quarter, we believe it will be more in the second quarter, but it --

More in the third.

And as Rob indicated, we are pleased with our placements in these fabrics, in this category for the upcoming October market. So all indications are, that's a nicely growing part of our business.

Definitely. Thanks a lot.

Star one for questions, please. Well, gentlemen, there appear to be no further questions. I'll turn the call back over to you for any additional or closing remarks.

Thank you very much, Jessica. Thank you for your participation and we appreciate your interest in Culp and look forward to updating you on our progress next quarter. Have a great weekend.

Thank you. Again, that does conclude today's conference call. We do appreciate your participation and you may now disconnect.