Culp Inc (CULP) 2005 Q2 法說會逐字稿

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 conference over to Miss Drew Anderson (ph). Please go ahead, ma'am.

Thank you. Good morning and welcome to the Culp conference call to review the Company's results for the second quarter of fiscal 2005. As we start, let me express that some statements made in this call will be forward-looking statements. 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 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. 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, which was issued yesterday, and 8-K filing. This information is also available on the investor relations section of the Company's website 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 second 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 our strategic actions in each of our operating segments. Frank will then review our third-quarter business outlook.

We would like to share with you today why we are enthusiastic about Culp's future, and why we believe we are taking the right steps to ensure that Culp is well positioned from a competitive standpoint.

As we will discuss, we have an aggressive cost reduction plan under way that we believe will further enhance the growth opportunities that we see in our mattress ticking business. In our upholstery fabric segment, we are making the necessary changes in our U.S. manufacturing operations to better utilize our domestic assets and complement our offshore sourcing and manufacturing strategy.

Culp has proven time and again our ability to keep pace with the changes in our industry. We will share with you our strategy for today's global marketplace and reaffirm to you our commitment to delivering value for both our customers and our shareholders. Now, Frank will comment on our financial and operating results.

Good morning, everyone. Overall, our sales for the quarter were 75.4 million, an 8.9 percent decrease from the second quarter of last year. This overall sales decline is attributable primarily to softness in our domestically produced upholstery fabrics business, as well as the lack of any seasonal recovery that we typically experience in the fall.

Our gross profit margin was 14.2 percent for the quarter, excluding restructuring costs, compared with 20.2 in the second quarter of last year. This decrease resulted primarily from further underutilization of our U.S. manufacturing facilities in our upholstery fabric segment, as well as a more difficult pricing environment for mattress ticking, as well as higher raw material prices.

SG&A expenses were 8.8 million, down over 14 percent from a year-ago, reflecting cost reduction efforts and lower professional fees. As a percent of sales, SG&A expenses were 11.7 percent versus 12.4 in the same period of last year.

Interest expense was 937,000, compared with 1.5 million for the prior year's quarter, due to significantly less debt outstanding.

The second quarter results did include a 7.5 million charge or 41 cents per share in goodwill impairment and restructuring-related charges for the restructuring plan we announced in late October. Excluding these charges, we reported a net loss of 4.2 million or 36 cents per diluted share.

Excluding these charges, net income was for the second quarter was 505,000 or 4 cents per diluted share, compared with net income of 3.1 million or 27 cents per share for the second quarter of last year.

Now, I would like to review our results by operating segment. With respect to mattress ticking, we reported 26.9 million in sales for the quarter, a slight increase from the same period last year. Notably, total ticking yards sold were actually up 3.7 percent to $11.3 million. I point this out because we are in the final stages of our customers' transition to 1-sided mattresses, which utilize 1/3 less ticking; so this reflects how much we have actually grown yards sold in this business.

Mattress ticking sales represented 36 percent of total sales for the quarter, up from 32 percent in the year earlier quarter. We believe this segment will continue to account for an increasing percentage of Culp's overall sales.

The average selling price was $2.35 for the quarter, down 3.3 percent from $2.43 for the same quarter of last year. This decrease reflects a more competitive price environment and a product mix shift, with more sales of lower-priced products principally related to border ticking.

Operating income for this segment was 2.7 million or 10 percent of sales, compared with 4.2 million or 15.9 percent of sales for the second quarter of last year. Operating income was primarily affected by a difficult industry pricing environment, inventory markdowns related to certain customer programs, and higher raw material costs.

While we believe we are the low-cost producer in this business, we announced a key initiative to further lower our unit costs in the year ahead. Rob will discuss this in further detail in just a minute.

Now, turning to the results of our second operating segment, upholstery fabrics. Sales were 48.5 million compared with 55.9 million for the last year's second quarter, a 13.3 percent decline. Fabric yards sold for the quarter were 10.7, compared with 13.1 million in the same quarter of last year, a decline of 18.3 percent. The average selling price increased to $4.23 from $4.13.

We are significantly growing sales of upholstery fabrics from offshore sourcing including the popular micro-denier suedes and similar fabrics as well as fabrics produced at our China operation. These sales accounted for 7 million or 14.4 percent of our upholstery fabric sales, compared with 2.9 million or 5.1 percent for the same period a year-ago. This is a 143 percent increase quarter-over-quarter.

So as you can see, this reflects the very meaningful growth trend, and we continue to aggressively pursue the growth opportunities that are available in the market as a result of our offshore platform.

The upholstery fabric segment reported operating income of 216,000 or 0.4 percent of sales, compared with 3.5 million or 6.2 percent of sales for last year. The primary reason for this decrease is the declining demand for U.S. manufactured fabrics and the resulting lower-capacity utilization, as well as some impact from raw materials price increases.

As we announced in October, we are now in the process of consolidating our U.S. operations to substantially reduce our costs and improve our profitability in this segment. Rob will give you more of the details on the restructuring plan.

Let me now turn 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 second quarter, our balance sheet reflected a cash position of 16.5 million; long-term debt stands at 51.2 million; and our debt-to-capital ratio is 34 percent versus 44 percent a year ago.

Our financial position is sound, with significantly lower debt from a year ago, solid liquidity, and the financial flexibility to pursue our strategic initiatives. Now I will turn things back over to Rob.

Frank, thank you very much. We have got a lot going on, and I'm excited to tell you what we're doing here at Culp. I want to highlight the key trends we are seeing in our business and, just as important, our strategies for addressing these trends both in mattress ticking and upholstery fabrics. A lot going on here.

I will start with mattress ticking. As you know, mattress ticking has become an increasingly important part of our business, and we are very enthusiastic about Culp's position in this market. For year-to-date, fiscal 2005 mattress ticking sales accounted for 37 percent of our total sales. Just 5 years ago it was 20 percent.

Consumer and demographic trends as well as the profitability of this category for retailers favor continued growth in the bedding industry. Additionally, unlike upholstery fabrics, the mattress ticking business -- this is really good news -- we believe is clearly going to remain a North American based business and is not being threatened by Asian imports. Likewise, we believe the domestic bedding industry faces limited exposure to mattress imports from Asia.

Our gains with key customers in mattress ticking tell us that our customers are responding well to our products. We believe there are additional opportunities to grow our business in this segment as a result of our product design, leadership, outstanding customer service, and globally competitive cost structure.

As we have previously noted, our sales on a comparable basis continue to be affected by the industry's recent transition to selling predominantly 1-sided mattresses which utilize about 1/3 less ticking. This transition at retail began in late calendar year 2002 and is expected to affect our sales on a comparable basis through early calendar 2005.

So we are pleased to demonstrate meaningful growth in our mattress ticking business during this transition. As Frank noted, we actually sold more total yards of mattress ticking this quarter than we did a year ago in spite of the industry demand for significantly less ticking.

However, with respect to mattress ticking, we have recently faced a more challenging pricing environment. As Frank mentioned, our margin in this segment for the first 2 quarters of this year were below the levels we experienced in the prior year. The primary reason for this decline is industrywide pricing pressure.

This is due in part to the way our customers are buying ticking. As we discussed before, there is a current trend among mattress manufacturers towards using common SKUs and less expensive fabric for the borders, which is the ticking that goes on the side of the mattresses and the box springs.

Because our customers are incurring higher cost for other mattress components, such as steel, wood, and fire-retardant requirements they're putting additional pressure on ticking suppliers to reduce prices and help offset these higher costs.

Additionally, in the second quarter, we were affected by inventory markdowns related to certain large customer programs.

Finally, like many other industries that use petroleum-based products, we are experiencing significantly higher raw material costs than we were a year ago.

Culp is taking aggressive steps to address these challenges and improve our margins in this segment. First, as we announced a few weeks ago, we will be consolidating our mattress fabric manufacturing into our 2 plants located in Québec, Canada, and Stokesdale, North Carolina. This project will involve relocation of ticking looms from an upholstery fabric plant and the purchase of new looms that are faster and more efficient than the equipment they will replace.

Our capital expenditures for this project are approximately $7 million over the current and next fiscal year. We believe these changes in our manufacturing operations will significantly enhance our globally competitive cost structure, and we expect to realize approximately 4.5 million in annualized savings. This capital project is already underway, and we anticipate completion by August 2005.

Second, we are selectively raising prices and reducing certain customer rebates. Third, we're designing our new products with higher margins. Finally, we're taking a close look at our inventory management and trying to identify ways to improve this process.

It is important to note that even with the recent challenges we have faced in the ticking business, our operating margin is still 10 percent, which represents a solid level of profitability. Together we believe the steps we're taking will help Culp return to our historical levels of operating margin in the 14 to 15 percent range in mattress ticking.

Now let me turn to our upholstery fabric segment. Without question and unfortunately, sales of upholstery fabrics industrywide are being affected by the decline in demand for domestically produced products. We have previously discussed the consumer preference for leather furniture and the growing competition from imported fabrics, including expansion of cut and sewn kits primarily from China.

This paradigm shift is having a significant impact on our product mix with respect to much lower demand for domestically produced fabrics and a rapidly growing demand for sourced products. As you are aware, the quotas are coming off in January 2005, and we expect more product will start flowing into the U.S. Today, we believe it's all about operating in a global economy in the upholstery fabric business.

As those as you who follow our business know, the retail business has continued to be challenging for many participants. Weak consumer confidence, escalating energy cost, and uncertain economic conditions have resulted in erratic consumer spending patterns. As Frank noted, while we typically see a stronger seasonal pickup in sales during the fall, this year we did not see that kind of meaningful recovery.

While these demand trends are clearly affecting our customers, and Culp as well, it is really the global competitive pressures that are significantly changing the way we do business and the way our customers are purchasing upholstery fabrics.

So what does this means for Culp? One of our key strengths has always been our ability to respond to a changing marketplace; and we have continued to take the necessary steps to adapt and enhance our competitive position.

First of all, we have made substantial progress over the past several years with our previous restructuring actions to adjust our costs and domestic capacity in response to this global trend. However, with the continued competitive pressure on domestic demand in this segment, we recently announced plans to further adjust our cost structure and bring our U.S. manufacturing capacity in line with current and expected demand.

The restructuring plan principally involves consolidation of our Decorative Fabrics weaving operations by closing our facility in Pageland, South Carolina, and consolidating those operations into the Graham, North Carolina, facility. Additionally, we will be consolidating our yarn operations by integrating the production of the Cherryville, North Carolina, plant into the Company's Shelby, North Carolina, plant.

Another important element of the restructuring plan is a substantial reduction in certain raw material and finished goods SKUs to reduce manufacturing complexities and lower costs. We will continue to identify products that are not generating acceptable volumes or margins.

Finally, we have made significant reductions in our selling, general, and administrative expenses. The implementation of this restructuring plan has already started and is expected to be completed by May 1, 2005, or the end of the current fiscal year.

With these plant consolidations and other cost reduction initiatives, we expect to realize annual savings of approximately 9.5 million, of which approximately 4 million will be in the fixed manufacturing costs, an estimated 2 million in variable manufacturing costs, and approximately 3.5 million in selling, general, and administrative costs.

Once these actions are completed, Culp will have 7 manufacturing facilities operating the upholstery fabric segment, including our facility in China. We believe this configuration will allow us to utilize our domestic operations more efficiently, especially for promotional commercial fabric and make-to-order business.

At the same time, we are aggressively pursuing our 2-part offshore sourcing strategy to meet consumer preferences for upholstery fabrics that Culp does not manufacture, including the micro-denier suedes that are currently popular.

In fiscal 2003, we put in place the resources to begin resourcing from Asia certain upholstery fabrics that we do not manufacture, and we continue to expand these resources. We are excited about the breadth and innovation of the sourced products that we are now able to offer to our customers.

The second component of Culp's offshore sourcing initiative is our China operation. We have been manufacturing in China and shipping fabric from that facility since March of this year. Frank has just returned from China, and I can tell you that we are all very encouraged by how much we have accomplished in China in a relatively short period of time.

This platform represents a fantastic opportunity for Culp to be more competitive in an increasingly global furniture and fabric marketplace. Our U.S. customers have moved an increasing amount of their fabric purchases, including cut and sewn kits, to Asia; and we are also now there to serve them. 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.

Sales of upholstery fabrics produced outside of our U.S. manufacturing plants are accounting for an increasing percentage of Culp's overall upholstery fabric sales. As Frank noted, sales of sourced fabrics were up 143 percent over the same period last year.

We believe that blending efficient domestic manufacturing with an aggressive offshore manufacturing and sourcing strategy allows us to offer a compelling value proposition and better meet the demands of our customers. We're confident we are pursuing the right strategic direction for Culp, one that will more effectively position the Company in today's global marketplace.

While the sales environment has continued to be challenging for 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 execute on what we believe are the key success factors in today's global environment.

Number 1, we have always placed a high priority on our design, creativity, the quality we put into our fabrics, and on providing superior customer service. Today, this means finding the product our customers want, either through our own manufacturing facilities in the U.S. or China, or with sourced fabrics that we do not manufacture.

Number 2, we are aggressively pursuing a global sales and sourcing strategy including our China operations I just mentioned. Number 3, we're taking the right steps to further adjust our cost and capacity in our domestic operations to meet the demands of the marketplace.

We're very optimistic about our prospects. As Frank mentioned, we have a strong balance sheet and therefore have the financial flexibility to pursue our strategic initiatives and enhance our competitive position. I will now ask Frank to review quickly the outlook for the third quarter; and then we will be glad to take any questions you might have.

Thanks, Rob. Looking ahead, the third quarter is typically a slower period for our overall business as a result of the traditional holiday plant shutdowns. For the current quarter, we expect mattress ticking sales will approximate the third quarter sales last year, and expect the operating income margin in this segment to approximate the margin of 10 percent reported for the second quarter of this year.

With respect to upholstery fabrics segment, the outlook still remains uncertain for a recovery in demand for domestically produced upholstery fabrics. For the third quarter, upholstery fabrics segment sales are expected to decrease slightly more than the second quarter decline of 13.3 percent.

We expect the sales declined and the related underutilization of U.S. capacity, combined with the raw materials price increases we are experiencing, will result in an operating loss for this segment. Given these trends and the current industry dynamic, we expect to report a net loss in the range of 6 to 10 cents per share, excluding previously announced restructuring and related charges, with the actual results depending primarily on the level of demand throughout the quarter.

As we noted in the press release, we also expect the restructuring charges in the third quarter to be approximately 38 cents per share.

We are developing the growth opportunities that are available in the market as a result of our offshore manufacturing and sourcing capability. Over the next year, we will also focus on our initiatives to reduce cost, increased asset utilization in our U.S. operations, and improve our profitability.

We are excited about the opportunities ahead for Culp, and believe the restructuring plans, once completed, will complement very well our offshore capabilities and provide us with the right platform to compete more effectively in today's global economy. Our core strengths, including design creativity, exceptional customer service, and financial soundness, provide us with the confidence that we will reach our objectives. With that, we will now be glad to take your questions.

(OPERATOR INSTRUCTIONS) Laura Champine, Morgan Keegan.

What happened with Culp Velvets/Prints? I noticed you grew 7 percent last quarter; and this quarter we had a nearly 10 percent decline. I don't think it's declined that much since your last restructuring.

I will answer that. In the velvet area, obviously we are being affected domestically for our velvet business as well; not only in our Decorative Fabrics business but also in the velvet area. I don't have the first-quarter numbers with me right now, but you are saying we were up 7 percent in sales in the first quarter?

That is what I have got. It is always -- it has held in over the last several quarters better than CDF has; and I think that segment benefits from your growth in sourced micro-denier suedes. So I'm a little bit surprised by the degree of the decline this quarter.

Laura, it is the velvet and domestic velvet print business.

Okay. The second question is a little more big picture. This is the tenth consecutive quarter of revenue declines. We guided for reacceleration in declines in upholstery fabrics next year. As you looked over your operations leading into this last restructuring, why did you decide to keep anything to open in the States?

It seems like we're getting to the point in upholstery fabrics where this business -- who knows if it ever comes back to what it was? Why not become a sourcing Company exclusively in that segment?

Laura, that is a nice question and something that we debate on a regular basis. We are now down on the decorative side of our business to 1 weaving plant in the U.S., and 1 finishing plant in the U.S., and a couple of yarn plants that support all of our businesses.

We feel like that there are certain categories of fabrics that we can be very competitive in the U.S.; first of all in the promotional fabric category, whole (ph) fabrics somewhere from $3 to $4. We feel like we can compete very nicely with what is going on Asia at that price point.

In addition, we are beginning to build a nice commercial business with some of the larger office manufacturers and panel manufacturers. And again that is a U.S. business, and we think it will remain that way.

Third of all, several of our customers offer a lot of choice. At the medium price points, the medium-high price points, as much as 50 to 60 percent of the fabrics are custom-order fabrics. So we feel like we need U.S. capacity to service those needs.

So for us it is a blending of doing what China does best, which is to provide us with large quantities of the big runners, and then blend those in with pillow patterns and coil (ph) patterns that we make here. So that blended strategy we think is the right strategy.

As we looked with this restructuring, we feel like we are now set up correctly that we can run our U.S. manufacturing facilities at a profitable level and make a nice return. If that turns out that we can't do that, then we will have to look at it further. But right now our thought is that there will always be goods produced in the U.S.; there is a place for it; and we are very bullish for it and think we can do that profitably.

On the mattress ticking side, I have been watching Leggett & Platt pass through their cost increases all year long, and it seems like their gain is your loss with pricing pressure. I know that your competitors are fairly weak, too. Do we get to a point where the weaker competitors in ticking are flushed out, and you have better pricing power in that segment?

Yes, Laura. Again that is something we have looked at very carefully. We also noted that price increases, not only from other suppliers to the ticking industry, but several of our large customers raised their prices as well.

We have been so attuned to this 1-sided phenomenon and making sure that we did not lose market share as the industry went from -- as the industry lost 30 percent of their ticking purchases. Maybe we are guilty of going a little bit overboard of making sure that we maintained market share with our customers.

We are essentially through the 1-sided phenomenon now. Certainly by the first quarter of '05 it will be over. I think we're in a nice position to firm up pricing a little bit in the ticking area. That is certainly something we have looked at.

We have had discussions with our major customers, and we feel like we are the leader in that industry. We feel like we are their best supplier; and they know we have had the same cost pressures they have had. So we are taking a very hard look at that, and we think now is the time, as we are through this 1-sided phenomenon, to start looking at that part of the business again.

As for the second part of your question, whether we think any of the competitors might be going away, that just has not been our experience. We certainly would hope for that, but in the upholstery fabric side, there have been some people go away due to weak financial position, but not nearly as many as you would suspect.

So we don't look for competitors to go away in the -- domestic competitors to go away in mattress ticking. We have seen less competition from the European ticking suppliers, and primarily the result of the euro/dollar relationship.

Thank you.

Budd Bugatch, Raymond James.

This is actually Chris Thornsberry on behalf of Budd. Just a couple of quick questions for you. The first 2 are on the upholstery segment.

This is kind of, after all the restructuring is done, and keeping in mind what is going on in China, kind of what are your expectations for kind of a longer-term capacity level for this segment once all is said and done? What was your planning going into this restructuring? And kind of what are you looking at there?

Second part of that is, what do you expect -- after all these cost savings are done, and everything is done there, with what your current expectations are -- what do you think would be kind of a normalized operating margin to look for in that segment over the longer term?

I guess the answer to your first question is, we have scaled back in this restructuring to where we think it is going to be. As Rob said, we're down to 1 weaving plant in our Decorative Fabrics operation, 1 finishing plant, and 2 yarn plants. So there is not a lot more we can do consolidation wise. That is what we believe where it is going to be.

Secondly, as far as a normalized expectation for operating margin, our target operating margin has always been the 8 to 10 percent range on upholstery. So that certainly is what we are shooting for.

Okay. On the mattress ticking segments, you mentioned in the release that there is going to be about 4.5 million annualized savings as a result of these initiatives you're taking there.

How much of that could you break out into what would you say would be fixed manufacturing cost versus variable; and how much SG&A? I know you broke that our for the upholstery segment, but what would that look like for mattress ticking?

Let me answer you this way. That is all manufacturing related. That is the lower unit cost of the mattress ticking. It is not a capacity expansion, it is just a more efficient production setup. Probably half-and-half between variable and fixed would be a guesstimate for you.

My final question is really more of a housekeeping question. Regarding the restructuring charge you all are going to take in the next quarter, which is about 7 million pretax I believe, is that going to be all in the upholstery segment? Are you going to take any charges in mattress ticking?

And how would that break out between any more goodwill impairment? I don't think there will be. I think there was only going to be 5.1 million there. But anything on cost of sales versus other types of restructuring charges?

On that, the anticipated future restructuring charges, as you know now, or as you may not know, the accounting rules require us to do that now in the quarter in which the costs are incurred. Very few things you can accrue upfront. So we will be seeing cost in third quarter and fourth quarter as we implement the restructuring. That is all related to upholstery fabrics.

Okay. Do you expect to take any charges as you are consolidating the mattress ticking plants?

No, and the remaining goodwill is all related to mattress ticking. There is no issue of possible impairment on mattress ticking. You know we are solidly profitable. As Rob said we are still 10 percent operating profit and we are trying to get back to 14 to 15 percent. So the remaining goodwill is all associated with mattress ticking, and obviously no issues with that.

Okay. All right, thank you.

Todd Schwartzman, Sidoti & Co.

Could you talk a little bit about which raw materials on the ticking side rose during the quarter? And whether they are still going up? And what the relative comparisons were, let's say, versus a year ago in terms of prices?

Yes, Todd, virtually all our raw materials across the board went up. The most significant on the ticking side of the business was polyester, which we use lots of polyester. I think every warp we have in ticking is polyester. By numbers, if my memory serves me correctly, polyester a year ago was in the 80-cent a pound range; effective January 1, it is going to be in the $1 a pound range. So that is a significant increase that we have incurred.

The other big item that we used lots of in ticking is rayon. I think rayon is up maybe 20 percent, somewhere in that neighborhood. So rayon I think has been a little less increased than the polyester. But virtually every yarn we use throughout Culp, whether it be upholstery or ticking, has increased. By far the most significant has been polyester.

We are thinking that we don't know of any more increases after polyester gets to $1 a pound. That is the latest we have heard. Nobody is making any promises, but you can watch the price of a barrel of oil as we can; and depending on what it does is where polyester is going to end up.

But it is not there yet. You're expecting it to reach about $1 in January 1 of '05, polyester?

That is correct.

Where was it on average during Q2?

It was in the 93 to 94-cent range.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) Matt McCall (ph), BB&T Capital Markets.

Frank, you said that you thought after the restructuring your capacity would be, I think you said, where you thought it should be. Does that imply further -- I guess what I'm looking at here is, where do you think equilibrium is going to be for domestically produced upholstery? Given what you said about promotional, commercial, the make to order items.

We have put in, in the weaving plant that we have, 1 large weaving plant in Graham, which is a beautiful big facility, we now have every loom in there is practically brand-new and very efficient. It is really as nice a weave operation as I think there is anywhere.

We have filled that plant up with the very best looms that Culp has. As I said, really the top looms in the industry. We can't do any better than what we have. So our capacity is limited to those looms.

We build our plan on a 5-day capacity. We certainly can run a more than 5 days if business is a little better than that. If business is short of that, it is just a matter of taking some labor cost out, to run based on what the level of business is.

We have seen the last 5, 6, 7 weeks orders coming in in excess of our plan for the CDF Graham facility. We feel encouraged that we might have reached the bottom, and we can at least see some stability and hopefully some growth in that business.

Okay. SG&A, you mentioned the cost reduction efforts on the upholstery side; low professional fees. What was the breakdown of the savings there between those 2 in Q2?

I would say 50-50.

Was there any other -- did you pull back any spending based on the demand trends? Or was pretty much everything included in those 2 items?

We have been lowering some cost over the first 6 months. But then part of the restructuring, we took a much more significant reduction. But we certainly have been watching the SG&A cost closely over the last 6 months.

You said that total savings would be about 3.5 million from the upholstery restructuring. How much of that have you recognized so far, Frank?

You'll see 70 percent of that probably within the third quarter; and probably all of that not implemented until latter part of the fourth quarter.

Okay, great. Thanks, guys.

Significant steps.

Right. Right. Okay, thank you.

John Baugh, shareholder.

A couple of questions here. I think you might have just touched that last time, but in terms of the savings on the restructuring, both for mattress ticking and upholstery fabrics, when do you think those going to be fully recognized on the operating side in terms of quarters?

Our goal is to complete the restructuring in upholstery by the end of our fiscal year, so we are well positioned going into next fiscal year, which is the majority of the savings in the restructuring plan we announced.

In the mattress ticking side, we said that project will be completed by August. We are hopefully it will be done earlier; but that is our target date for full realization of the mattress ticking savings, although we will start seeing some savings in that end beginning in the fourth quarter.

Do you anticipate a tax loss carryforward for this year? Will there be a tax refund this year akin to last year?

We don't see any. First of all we will have tax NOLs created, but no tax refund.

Do you anticipate any further borrowing for the CapEx coming up in the next 2 quarters?

Absolutely not. If you followed us, John, over the last 3.5 years we have significantly reduced debt. I think everyone on this call knows our desire to reduce debt completely.

I should have congratulated you guys straight off. I mean, that is the reason you're a survivor and I'm shareholder right now; it's because you were able to manage that balance sheet so well. All you have to do is look at the landscape littered by textile manufacturers that leveraged up, and you can see what happens when things tighten. So kudos to you on that one.

I think I read in last year's annual report the Canadian earnings. Is there any steps to repatriate those earnings with the new tax law? I think it is roughly like 30 million on that. Will you give me any comment on that?

Furthermore, also, a part B on that would be -- what do you see on the U.S. dollar devaluation for earnings?

First of all, no plans to repatriate that money, those profits. Secondly of course the Canadian dollar to the U.S. dollar has strengthened considerably; and that has had some effect on our mattress ticking business because a majority of our production is in Canada.

However, it is not as great as you might think. Because in mattress ticking, all raw materials, which is the majority of the cost of the product, are purchased in U.S. dollars. We have done that for years.

So the currency effect affects us on labor and utilities and those types of operating costs in Canada, which are a smaller part of the cost of the product.

2 more quick ones here. We talked about the restructuring; maybe 1 more. Can you touch briefly -- I think you did it earlier on some of the calls, why was it so difficult to forecast the domestic upholstery furniture fall off in the third quarter in terms?

I guess just anecdotally you look at the home sales are still pretty strong. Why was it that it was so difficult to forecast the fall off for your so-called seasonal pickup for the fall?

That is a good question. I am not sure we know. Normally in the fall, beginning August-September, we get a spite that really runs through March, really runs through almost towards our year-end. This year, we just have not seen that.

I think the reasons are partly because leather is still a big part of the business. The micro-denier suedes are more of the business. There are some important fabrics still coming in. Generally, for whatever reason, consumers have not been buying as much furniture this fall as they have in the past. That's really the only --

We relate that, if anything, we relate it to consumer confidence and disposable income. That is probably 2 factors we look at.

Okay, are there any -- as you stare out there into the horizon, what is the lead time you guys typically gather for maybe the fall '05 season? Is that a 3, 6 months crystal ball right there? Or do you just have to wait until it is upon you?

You have to wait till August of next year. Maybe late July we will be seeing some orders, but lead times are so short these days you just don't have the forward visibility that we used to have. We don't operate on 8-week backlogs anymore. It is 3, 2, and 4-week backlogs.

Can you guys reach into your bag of history and replicate a time like this? Or is it just the textile landscape right now?

This is a whole new world we're working in now. We have been doing this a long time and we have never seen the dynamics of the industry. Now, having said that, as we said on our call, we think we're really well positioned to really take advantage.

We think when we get through these next 3 months or actually 6 months, through year-end, that we have got ourselves in a very nice position. So we're very bullish.

What is going to affect us the next 6 months is no matter how good we are at doing all of this consolidation, it causes lots of disruption and lots of inefficiencies. That is what is hurting in third quarter; it is going to hurt to some extent in fourth quarter. But when this is behind us starting fiscal '06, we feel pretty good about things.

Well, you are certainly a coiled spring. But then again you only can shrink so much. Because when your anticipated demand comes back then you've got to have capacity.

My final question is, are you still on target with the banks? With all these write-offs, I know you have taken your -- your long-term debt is way down. But is there any concern with covenants with the next 2 quarters and the write-off?

Our largest and only significant debt is $50 million with insurance companies. That debt has no P&L covenants. No fixed charge covenant test, no interest coverage test, balance sheet only. That has really helped us throughout these last several years. So that is the largest debt we have.

We are in full compliance with our agreements at the end of the second quarter and certainly don't see anything on the horizon in terms of the insurance debt. Because again no P&L or fixed charge test.

You've got a $7.5 million principal payment coming up, I think in March '06. Is there any talk about restructuring that, the repayment of that? Or are you comfortable with being able to make that principal payment?

We are very comfortable with that. We've got 16.5 million in the bank now, and we would expect to generate more cash in the time between now and next March.

Very good, thank you very much.

We want to be out of debt.

I would concur. Thank you, gentlemen.

We have no other questions standing by at this time. I will turn the conference back over to you gentlemen for any additional or closing comments.

Pam, thank you very much, and thank you for your participation and your interest in Culp. I would like to wish everyone a happy holiday season and look forward to updating you on our progress next quarter. Thanks again.

Thanks very much. This does conclude today's conference. We do appreciate your participation. You may now disconnect.