Culp Inc (CULP) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Culp, Inc. 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 Ms. Drew Anderson. Please go ahead, ma'am.

Good morning, and welcome to the Culp conference call to review the Company's results for the third 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 SEC for a discussion of these factors that could affect Culp's operations and the forward-looking statements made in this call. The information provided today is of this date only, and Culp expressly disclaims any obligation to release publicly any updates or revisions to this forward-looking statements to reflect any changes in expectations.

In addition, the Company will be discussing nonGAAP financial measurements during this call. A reconciliation of these nonGAAP 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. The information is also available on the Investor Relations section of the Company's website at www.CulpInc.com. I'll now turn the call over to Rob Culp, Chief Executive Officer. Please go ahead, sir.

Drew, thank you very much. Good morning and welcome. Thank you for joining us today. I would like to welcome you to the Culp quarterly conference call of analysts and investors. With me on the call today is Frank Saxon, President of Culp. The purpose of this call is to review financial and operating trends reflected in the third 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 updating you on the strategic actions in each of our operating segments. Frank will then review our fourth quarter business outlook.

We are facing challenges in our industry today. However, with these challenges we also see exciting opportunities for Culp. Last quarter we announced to you the steps we are now taking to reconfigure our manufacturing operations to address these challenges head-on, and be in a stronger position to pursue new opportunities as they present themselves. We are pleased with the progress we have made.

We have a major capital project underway that we believe will further enhance our globally competitive cost structure in our mattress ticking business. And in our upholstery fabric segment we are making the necessary changes in our U.S. manufacturing operations, to better utilize our domestic assets and compliment or offshore sourcing and manufacturing strategy.

Before we get into further discussions of these actions, Frank will comment on our financial and operating results. Frank

Good morning everyone. Thanks for joining us as well. Total sales for the quarter were 69.1 million, a 9.8 percent decrease from the third quarter of last year. This overall sales decline is attributable to continued softness in our domestically produced upholstery fabrics business resulting primarily from the current consumer preference for leather and suede furniture, as well as our customers' increasing selection of other imported fabrics.

Our gross profit margin was 9.9 percent excluding restructuring related charges, compared with 18.9 in the third quarter of last year. This decrease is mostly attributable to issues in our upholstery fabric segment, and to a much lesser extent our mattress ticking segment. SG&A expenses were 8.1 million, down over 20 percent from a year ago reflecting significant cost reduction efforts. As a percent of sales, SG&A expenses declined to 11.9 percent, compared with 13.4 in the same quarter of last year. Interest expense was 912,000, compared with 1.5 million for the prior year due to less debt outstanding.

The third quarter results included after-tax restructuring and related charges of 3.4 million, or $0.29 per diluted share. For the restructuring plan in the upholstery fabrics segment, we announced in October last fall. Including these charges we reported a net loss of 4.9 million, or $0.42 per share. Excluding these charges net loss for the third quarter was 1.5 million or $0.13 per share. I'd like to now review our results by operating segment.

With respect to mattress ticking, we reported 25.6 million in sales for the quarter, a 2 percent increase from the same period last year. Notably total ticking yards sold were actually up 9 percent to 10.9 million yards, so we are pleased with the growth in unit volume. Mattress ticking sales represented 37 percent of total sales for the quarter. We believe this segment will continue to account for an increasing percentage of Culp's overall sales. The average selling price was $2.34 for the quarter, down 6.4 percent from $2.50 for the prior year's quarter. This decrease reflects a more competitive price environment, and the continuing product mix shift, with more sales of lower priced products principally related to border ticking. Operating income for this segment was 1.6 million, or 6.2 percent of sales, compared with 3 million, or 12.1 percent of sales for the prior year period. Operating income was affected by a difficult industry-wide pricing environment, higher raw material costs, and manufacturing variances related to the relocation of mattress ticking weaving machines.

Now turning to the results of our second operating segment, upholstery fabrics. Sales were 43.5 million, representing a 15.5 percent decline from the third quarter last year. Fabric yards sold for the quarter were 9.5 million, compared with 11.7 million the same quarter of last year. A year-over-year decline of 19 percent. The average selling price was $4.18 compared with $4.29 last year. We are pleased with the continued growth in sales of upholstery fabrics from offshore sources, including the popular micro-denier suede category of fabrics, as well as fabrics produced at our China operation. These sales were up 92 percent over the same period last year, and accounted for almost 20 percent of Culp's overall upholstery fabrics sales during the quarter.

The upholstery fabric segment reported an operating loss of 2 million, compared with operating income of 2.3 million, or 4.4 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 higher raw material prices. Additionally, profit margins in the segment for the quarter were affected by manufacturing variances related to restructuring activities. As we announced in October 2004, we are consolidating our U.S. operations to improve profitability in this segment. Rob will give you an update on the restructuring plan in just a moment.

Let me turn to the balance sheet. At the end of the third quarter, our balance sheet reflected a cash position of 13 million, down from 14.6 at the end of fiscal 2004. Reflecting cash flow from operations of 8.6 million, capital expenditures and payments on vendor financed capital expenditures of 9.6 million, and payments on long-term debt of 500,000. Long-term debt stands at 50.6 million, and our debt-to-capital ratio is 35.1. Now I will turn things back over to Rob.

Thanks, Frank. Let me highlight the key trends we're seeing in our business, as well as our strategies for addressing these trends both in mattress ticking and upholstery fabrics. I will start with mattress ticking. As you know, mattress ticking has become an increasingly important part of our business, and we are enthusiastic about Culp's leadership position in this market. Through the first nine months of fiscal 2005, mattress ticking sales have accounted for 37 percent of our total sales. Just five 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 segment.

Also, for reasons we have previously discussed, we believe the mattress ticking business, unlike upholstery fabrics is 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. As Frank noted, our unit volume growth in mattress ticking is showing favorable trends. We are pleased with the sales level we have maintained throughout the bedding industry's transition to selling mostly one-sided mattresses, which utilize about one-third less mattress ticking. This transition at retail began in mid to late calendar year 2002, and was expected to affect our sales on a comparable business through early calendar 2005.

It is important to note we still demonstrate amenable growth in our mattress ticking business during this transition period, even while industry demand levels were trending down, and the industry started buying one-third less fabric. Now we've reached the end of this transition period and expect that we will continue to see that this level of demand going forward. However, we have faced a more challenging pricing environment this fiscal year. As Frank mentioned our margins this segment were below the levels we experienced in the prior year. The primary reason for the decline is industry-wide pricing pressure. This is due in part to the way our customers are buying ticking.

As we have discussed before, there's a current trend among mattress manufacturers towards using common SKUs and less expensive fabric for the borders, which is the ticking or fabric that goes on the side of the mattress and box spring. Because our customers are incurring higher costs for other mattress components such as steel and fire retardant requirements, they are putting additional pressure on ticking suppliers to reduce prices, and help offset these hire costs. Finally, we are also experiencing significantly higher raw material costs than we were a year ago. Culp has taken aggressive steps -- Culp has taken aggressive steps to address these challenges, and improve our margins in this segment.

As previously announced, we are well underway with our plan to consolidate our mattress fabric manufacturing into or two plants located in Quebec, Canada, and Stokesdale, North Carolina. This project involves relocation of [Tiki] 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 charges 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 moving forward on schedule, and we anticipate that it will be completed by August 2005.

Second, we are implementing a price increase of approximately 3 to 4 percent beginning in the fourth fiscal quarter, to partially offset these raw material price increases. Third, as always, we're placing more design emphasis on new products with higher margins. Together we believe the steps we are taking will help Culp return to our historical levels of operating margin in the 12 to 14 percent range in mattress ticking.

Now let me turn to our upholstery fabric segment. Sales of upholstery fabrics industry-wide are being affected by the decline in demand for domestically produced products. We have previously discussed the consumer preference for leather and suede furniture, and the growing competition from imported fabrics including the growth 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 offshore manufactured and sourced products. As you are aware with the quotas coming off last month, and the factors mentioned above, there are significantly more upholstery fabrics flowing into the U.S. from offshore.

So clearly we are operating in a global economy in this business. As we have noted before, we believe one of our strengths as a Company has been our agility in responding to a changing marketplace, and we continue to see a great opportunity for Culp and remain confident that we have taken the necessary steps to adapt our business model. We have been working hard this past quarter to implement our previously announced restructuring plan for the upholstery fabrics segment. The purpose of the plan is to consolidate our Decorative Fabrics weaving and yarn operations, reduce manufacturing complexities, and lower cost, and significantly reduce selling, general, and administrative expenses. The implementation of this restructuring plan is on schedule, and we are pleased with our overall progress to date. Completion is still expected by May 1, 2005, or the end of the current fiscal year. Like many other industries that use petroleum-based products, we are also experiencing significantly higher raw material costs, than we were a year ago. For example, polyester and polypropylene are up over 20 percent from a year ago, and are still training higher.

Also, as you know, on January 25th our acrylic supplier, Solutia, notified us of plans to exit the acrylic fiber business by mid-April. While we regret this decision, we have already identified, and are working closely with other international suppliers as alternate sources for acrylic fiber. However, until we work through the last orders of fibers from Solutia, and begin using these new suppliers, we are incurring increased costs for this fiber. To partially offset higher raw material prices, we have recently announced a price increase of approximately 3 to 4 percent on our domestically produced upholstery fabrics.

At the same time we are aggressively pursuing our two-part offshore strategy to meet changing consumer preferences and consumer buying patterns. The first component of this strategy is sourcing upholstery fabrics that Culp does not manufacture, including the micro-denier suede category products that are currently popular. Beginning almost three years ago we put in place resources to begin sourcing from Asia, certain upholstery fabrics that we do not manufacture, and we have continued to expand these resources. We are excited about the innovative source products that we are now able to offer customers, and the sales growth we are achieving.

The second component of Culp's offshore effort is our China operation. We have been manufacturing in China and shipping fabric from that facility for about one year. Frank has recently returned from China, and I can tell you that we are all encouraged by how much we've accomplished in China in a relatively short period of time. This platform represents an opportunity for Culp to be more competitive in an increasingly global furniture and fabric marketplace. Our U.S. customers have continued to move an increasing amount of their fabric purchases, including cut and sewn kits to Asia, and we now have an operation there to meet their fabric needs. 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 nearly doubled over the same period last year. While the sales environment has continued to be very challenging for U.S. upholstery-produced fabrics, we have made significant progress in responding to the lower demand. We will continue to execute on what we believe are the key success factors in today's global environment.

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

Number two, we have an effective global sales and sourcing strategy in place, including our China operation I just mentioned, and we continue to aggressively pursue additional opportunities in this area.

Number three, we believe we are making considerable progress in our efforts to consolidation domestic manufacturing operations, and improve asset utilization and reduce SG&A expenses. As we look forward, we are also continuing to evaluate our costs and manufacturing capacity through our U.S. operations, and remain committed to adjusting our domestic cost structure as necessary to keep it in line with expected demand for U.S.-produced products.

I'll now let Frank -- turn it over to Frank to review the outlook for the fourth quarter.

Thank you, Rob. Considering current market conditions and trends, we expect to see a year-over-year decline in our overall sales for the fourth quarter, that is slightly higher than the sales decrease in our third fiscal quarter of about 10 percent. However, we are encouraged by the recent trends in our mattress ticking business, and we expect mattress ticking sales will show a modest gain over fourth quarter sales last year. Operating income margin in this segment is also expected to improve from the third quarter level, and approximate the margin of 10 percent reported for the second quarter of this year.

With respect to the upholstery fabrics segment, while we expect continued significant growth in sales of fabrics manufactured and sourced outside the United States, the outlook remains uncertain for any recovery in demand for domestically produced product. For the fourth quarter upholstery fabric segment sales are expected to decrease somewhat more than the third quarter decline of 15.5 percent. We believe the continued softness in demand for U.S.-produced fabrics and the related under-utilization of this capacity, combined with the raw material price increases we're experiencing, will result in an operating loss for the quarter. Although smaller than that reported in the third fiscal quarter. In light of these factors, we expect to report a net loss of $0.03 to $0.08 per diluted share in the fourth quarter. Excluding previously announced restructuring and related charges. With the actual results depending primarily on the level of demand throughout the quarter.

We clearly recognize the challenges facing our domestic upholstery business, and we will continue to adapt our strategy to meet these challenges head-on. As we enter the final quarter of fiscal 2005 and look forward to fiscal '06, we are excited about our growth prospects and leadership position, with respect to our mattress fabric and offshore upholstery fabric businesses. In addition, we will remain focused on reducing cost, increasing asset utilization in our U.S. upholstery operations, and improving profitability in this part of our business. With that, we will now take your questions.

Thank you. [OPERATOR INSTRUCTIONS]

We'll take our first question from Joel Havard with BB&T Capital Markets.

Thank you, ma'am. Good morning, guys. Let's see. I guess to get into the details of the fabric restructuring, kind of where we are today with regard to facilities and what -- I caught in your comments you think this will mostly be wrapped up this fiscal year. Could you go into again where you are from a facility standpoint today, and what could be under study for fiscal '06?

Joel, we are making very good progress on the restructuring, and we expect to complete it by fiscal year-end, the end of April, and possibly a little earlier than that.

I think you all were in the process of closing Pageland.

Pageland, South Carolina, and our Cherryville, North Carolina, one of our yarn spinning operations. So we're in the process of consolidating and closing two plants, one weaving and one yarn, into the remaining decorative weaving plant in Graham, North Carolina which leaves us with one, and the remaining 2 yarn plants.

Graham is absorbing Pageland. Is Burlington still -- --

Then there's a Burlington finishing operation, yes. So there's a weaving operation, a finishing operation, and two yarn plants. Then in the velvet area you've got Burlington velvet in print operation, and an Anderson, South Carolina velvet operation.

Now, if I recall the specialties of the CVP plants are different, so it's not that you have two like velvet operations. These do different things, is that correct?

That is correct. One is tufted velvet and printed fabrics, and one is woven velvet fabrics.

Velvet has been better relative to CDF the last few quarters, although that was less true here in Q3. Is there a fashion thing going on, or is this more of a kind of day-to-day operational challenging thing?

We're seeing the same trends from our domestic business in the velvet area also. The velvet numbers that we show you, the CVP division also includes some of the our sourced products, the suede family of products is included in that division.

Right, right. Okay. Frank, just to clarify that, earlier in your comments you were talking about 20 percent of upholstery sales. That was -- that wasn't just China; that was China plus these suedes, et cetera, or did I interpret that wrong?

No. That's correct. That's anything not coming from our U.S. plants.

Have you guys offered color on what the import contribution is to CDF or CVP individually?

We have not.

Well, I had to try.

Had to try.

Yes, sir. Let's jump over to the balance sheet. I'm trying to recall. We've got debt staying pretty much where it is through '06, and where you've got a payment in '07, is that correct?

The first payment is March of '06 on our $50 million unsecured term loan.

March '06.

So we're just over a year away from that payment.

That's how much? ?

7.5 million. Then the following year we have another 7.5.

Good, good.

So we're in good shape.

Yes, sir. CapEx, you talked about the -- where was it? The CHF consolidation into Stokesville and Quebec being about 7 million. What other CapEx efforts are going to show up here on the upholstery side, and really getting at what do you think the whole number is for fiscal '06?

For fiscal '06? For fiscal '06, while we haven't completed the budget, we're looking in the $4 million, 4, $4.5 million dollar range will be the top, just maintenance -- the portion of the ticking project that carries over into next year, plus some maintenance level stuff. Very low.

So we're closer to wrapping up the consolidation efforts, and most of that will be done here by Q4?

Yes, yes.

Okay. Thanks.

By August we'll be wrapped up with the CHF.

I got it. I was afraid the 7 million number was hanging above '06. Okay. That's good.

No. It would be very lean next year. We don't see a lot of capital expenditures over the next several years. I think it will be modest.

Good. As imports continue to grow, what ought we to think about being a proper level of inventory? I assume you know the commitment there is you want to be timely with your domestic customers. That means you guys are really holding the buffer stock for them, as it were. Do you have any thoughts on where that ought to go as a percent of sales over the next couple of years?

Well, we look at what we've done so far, Joel, and inventory turns are actually increasing as we're grossing this business. We're now up to 20 percent of sales for upholstery fabrics, and inventory turns this quarter were 5.6 versus 4.7 the same quarter of last year. Probably a reason for that is, you know, a significant portion of the offshore sales stay in China. There's a lot of cut and sew being done in China, so a significant portion of sales stay there, and there's no inventory requirements for those.

That's a great point. Let's finish up on the China note. You all have been shipping fabric, which I guess at this point you're still sourcing from producers there. You're running it through your finishing QC processes, and then shipping that fabric both to the U.S. and to Chinese operations of upholstery manufacturers, be they foreign or domestic based. You've talked in the past about looking at cut and sew. Are you in the process of developing, or is that estimate experimental?

As Rob said with his comments, with our China platform, we have now been shipping fabrics for a year to customers, and getting that up and running smoothly. We are now looking at a number of opportunities in that platform.

And I guess that's all you want to say at this point?

Yes.

Okay. Well, we'll interpret it. Guys, thanks for the update. Best of luck.

Thank you, Joel.

Our next will come from Anand Krishnan with Morgan Keegan.

Good morning.

Good morning.

My question relates to pricing. Can you comment on your ability to pass through price increases in a deflationary environment? If I look at both of your segments on the mattress ticking side, we've been seeing deflation over the last couple of quarters, and also on upholstery fabrics and the quarters coming off, more and more imported products should find their way into the U.S. in this kind of environment, can you talk about the price increases you're proposing?

Yes. On the mattress ticking segment, it has been much easier to pass on the price increases, because we're really dealing with an industry that's dominated by brands, and these brands are very well-established brands for a number of years. These big mattress manufacturers realize they need a strong supplier, and they have been more willing to work with us on these raw material increases, simply because it's a much more organized industry, fewer players dominated by a few big guys. So it's really been much easier. It's never easy, but we've been very successful so far in the mattress ticking segment.

The upholstery segment has really been a much more of a challenge. We have not been very popular the last few weeks because, as you said, it's hard to pass price increases on in a deflationary environment, and also hard where there's more supply than there is demand. So it's very challenging for us. But we have said to our customers that we have got to -- if they want us to remain a viable domestic supplier and they value that relationship, we've got to be profitable domestically. So we've been very disciplined about telling these customers what we need. And I think so far we've been reasonably successful. It's never easy, and it's always give-and-take, but our customers realize prices are going up as well, and for the most part I think they've been willing to help us.

You mentioned the second part of your question, it certainly makes it a little bit harder, because you have goods coming in from offshore that can be lower prices. So our customers are faced with that, but we do not think at the end of the day that everything can be brought in from offshore. The industry -- you know, we think it's far more SKUs, lots of variety, quick delivery, et cetera. We think there's a place for the U.S. manufacturer, but it is going to be at a higher price point than what could be brought in from offshore.

Just to clarify what the operating margin expansion that you're expecting in the mattress ticking segment, compared to the third quarter. I guess you were at 6.2 percent in the third quarter, and probably looking at making 10 percent in the fourth quarter. Is all of that derived from pricing, or are you factoring in any benefits from this capital project that you are going to be undertaking?

Actually, it's a combination of everything we mentioned when we had a discussion. Price increase is part of it. The capital expenditure cost savings is a major part of it. New looms are starting in place. We've taken a lot of cost out with the consolidation, so it's really a combination of all of the above. Pricing is certainly helping, but I'd say the main factor is the cost reduction move that we have in place.

Okay. That's helpful. Best of luck. Thanks.

Yes.

Thank you.

Thank you. We'll take our next question from Todd Schwartzman with Sidoti.

Hi, gentlemen. You just addressed my question on pricing. Thanks.

Thank you. Moving on Budd Bugatch with Raymond, James & Associates.

Good morning. Are you having any fun yet Rob?

It's a walk in the park. It's interesting.

I'm sure it is. You've got paradigm shifts all over in terms of the industry, and we're seeing it in the public markets with lots of accounting changes, and that's going to get to some of my questions as well. When you look at the business to the extent that you'll at least give us some directional, is China profitable at this point in time?

Yes.

So China is profitable at the operating line, Frank?

Yes.

What about difference in gross margin between Chinese goods both manufactured and added value over there and sourced and domestic? Can you kind of characterize the gross profit relationships of those three segs as you look at them, or those three business units?

Bud, let me answer it this way. For many years we've targeted 20-plus percent gross profit margin, and an 8 to 10 percent operating margin in upholstery. That's been our target forever, and I would say we're following those same targets with our products out of China.

Are they realized targets at this point in time? How close are we to realizing them? On the sourced goods, you shouldn't have any issue in realizing that, true?

All I can tell you now is that we are profitable, and I need to leave it at that.

We get a price per yard or a selling price per yard. Is the Chinese price per yard higher or lower than the upholstery segment?

Our average price point of fabric coming out of there, it's about -- on average it's about the same. When you average what we leave in China and what we bring back here, it's about the same.

So no significant difference. When you look at the fourth quarter outlook to have a slightly greater than, I guess, the 9.8 percent sales decrease, are we looking at 75 to $76 million of revenues for Q4?

I think we're looking at slightly an overall sales decrease of slightly higher than last year.

I was putting that slightly into that old calculator of mine, and I keep getting that -- I just want to make sure I understand what 'slightly' means.

Next question.

Okay. Sarbanes Oxley. Two questions on that. What are the costs that are going to be incurred? When are they going be incurred? How many are going to continue, and what's the outlook for compliance with a clean opinion on 404?

Let's see. We're through through most of the compliance cost in Sarbanes-Oxley. It has been difficult and expensive, but through our third quarter I would say, we've probably 80 to 90 percent of the cost that we're going to incur have been incurred.

Those were outside costs to pay --

Yes. You're talking about professional fees? Lawyers and accountants.

Well, yeah. They call themselves professionals. That's correct.

Okay. But it's gone reasonably, reasonably well for us. It's not over yet, but, you know, -- you've known us for a long time, and we've always run a very tight ship, you might say. So while it's been expensive, there's a lot of -- massive amounts of work, certainly questionable how valuable it is to people, but we've had to do it. It's gone relatively well.

So how much have you spent, and what will we see in Q4?

You're going to see not much more. I think we see our expenses decreasing from here on out. You've seen the bulk of the expenses already in the first three quarters, as well as last year. We started much earlier. We started a year and a half ago.

So how much did you spend? Can you tell us?

It's probably -- how much did we spend in Sarbanes-Oxley compliance?

Your delta professional fees, your differential.

I would say project-to-date it's under 500,000 over the last three, four quarters.

Rob, as you look out on the industry, you have made this comment about the industry preference to leather and micro-denier fabrics. Of course, you're now participating in micro-denier. Do you get continual hard data on that, or is this really anecdotal, or just your eyes looking at what placements your customers have put on the goods when you walk around the market?

There's not really any hard data, although as we look around the market and visit retail stores, we have really nice relationships with all of the major retailers, we guess there's anywhere between 60 to 70 percent of the retail floor is either leather or suede. That's really affected all of us, in that our opportunity is smaller, because of the 60 to 70 percent suede. The suedes have -- and leather have really affected all product categories because as the price of leather has come down, it's now -- leather is now very inexpensive, as well as on expensive furniture, and suede is of course all up and down the price chain as well. Right now it's anywhere from 60 to 70 percent.

Anybody's guess is what's going to be next. I think we've come to the conclusion whatever is going to be next will probably be something that -- from that part of the world. So, you know, as we look at our domestic opportunity, we've got to continually, you know, get those assets in line with what the demand is going to be.

This quarter when you looked at Pageland, what were the differences in efficiencies between Pageland and Graham? How bad was it?

It's been tough. We're moving literally almost every loom. You had to move looms around in Graham, to make room for the ones in Pageland. It's been difficult. I wouldn't want to quote you specific efficiency numbers, but it's been a challenge.

Our folks have done a great job doing it quickly. We have not missed customer deliveries, and Rob and I believe they're going to finish early.

Are all the looms that are supposed to be moved out of Pageland now moved?

No. We have another month.

Are all the looms that have been moved in Graham back up and operating?

Yes.

So the physical facilities are done?

Yes. And we're down to one weaving plant.

Lastly, you know how big a fan I am of new capital expenditures for looms. I'm just thrilled to hear you are putting new looms in. I know you guys know your business a whole lot better than we know it. What's the payback on those looms? What's the payback period for them? Is it under 2 years, I hope, or something like that?

Our internal rate of return equals to less than 3 years on our projects, and this is one of the best projects we've done in the last several years, last 5 years the pay back.

So are you telling me yes, sir to my question, it's 2 years or so?

I'm telling you it's a very attractive payback.

Those looms get outdated. It seems like they don't get in and they're already outdated and somebody else has got faster looms after that.

What makes us comfortable is before doing this Rob and I and of course our ticking folks, we have done significant research and questioning from customers into -- also looking at the import threats, and we have satisfied ourselves from what everybody we talked with, we just aren't seeing that as a major threat, and we believe it's a North American based business.

I don't want to hog this. Just the paradigm shift you had in the upholstery segment, you sure didn't need another one, and you got a double whammy in the ticking segment with the move to single-sided, and the move to double the cost in steel componentry last year. You have had so many things in the environment just hit you upside the head. You ought to be commended for the job you've done, in the face of incredible change in the environment. We're always looking to see what the future looks like.

Budd, thank you. I appreciate that. We've still got some work to do, but on the loom side, let me just give you an example that I think will help you understand. First of all, if you see that we're buying an upholstery loom in the U.S., would you come hit me on the head up here?

I'll aim lower.

Right. That's exactly what you need to do. The ticking side is a little bit different, and let me give you an example. Several major retailers of mattresses that we talk to, these are huge sellers of mattresses. Of course, they've looked at could they source goods offshore, but because of the way the industry works, and the number of mattresses that are sold, and the gross profit that mattresses enjoy on the retail floor, these mattresses are sold on Monday and delivered on Tuesday.

I'm well aware of all that.

In other words, if you've got, let's say, a big retailer selling mattresses, whether it be from Sealy or Simmons or Serta, or whoever it is, that mattress is sold on Monday, and delivered to the store on Tuesday, and delivered to the customer on Wednesday. These retailers have done studies if they bring mattresses in from offshore, they'd have to build massive warehouses to store the mattresses. It just doesn't work from a cost perspective. It's such a 'just in time' inventory. In addition, the average cost of the ticking is so low, and the ticking is so much a yard, it's very little -- the total cost is 80 percent is by the yard, and worldwide fiber prices are about the same. Where China wins out, as you add more value to something, China becomes a better deal. Every way we look at mattress ticking, we feel like it will stay a U.S. business. We look at it very carefully every day, because you're right if that paradigm shifts, but so far our cost structure, and we've benchmarked our ticking cost against China, and we can produce it lower than China can. We feel good about that.

All righty, sir. Thank you very much. I'll talk to you soon.

Thank you. We will take our next question from John Baugh with Private Investors.

Good morning, gentlemen. Couple questions here. Let's see. A competitor, Quaker fabric talked about a 20 to 30 percent increase in utilities, mainly electricity. Have you been express experiencing the same or is it less in your region and what do you see in '06?

We're seeing a little less than that because we're in North Carolina and South Carolina, but it's still significant like theirs. We see it moderating some from last year. Still increasing, but not at the same rate.

Okay. And as far as the price increases for the polys, I guess petroleum based, do you see any moderation of that, or what has been your percentage increase on the polys, and what do you see for '06?

For year-over-year right now, both polyester and polypropylene are up over 20 percent. Polypropylene up more than polyester, and we are expecting some increases this year, but not nearly that rate.

Is there any hedging in place for that or not?

No hedging. Not able to do it.

Okay. My quick back of the napkin calculations show you will be generating a net operating loss this year, and if I use your figures I'm coming up with maybe a 8 million in tax savings. Are you anticipating a tax loss this year, and if so, could you quantify that? Am I close with that $8 million for a tax refund?

We are generating a tax -- adding to our tax loss carry forward this year. That is correct. But I don't see the tax refund is going to take, you know, several years out. We have to -- as we generate taxable income in the U.S., we can offset that NOL.

Maybe I didn't ask the question correctly. Will there be a tax refund for fiscal year '05 or not?

Nothing for '05. We're adding to our NOL carry forward. There's no carry backs we can go to.

Got it. So we're just talking about going forward.

Yes.

As far as the 20 million in the restructuring, is there some -- if we were to look at a nine-inning ball game right here, where are we we in terms of starting to experience the savings from, on both the mattress side, as well as the upholstery fabric side with the restructuring?

In the mattress side, we're probably through the end of the third quarter we are in the second inning. We've got a lot more to go. A big benefit as Rob mentioned in our fourth quarter, and then we will see a lot more in the first, and then we will have the full benefit in the second quarter of next year.

In terms of the upholstery operation, we're not seeing the benefit in the third quarter obviously, because we're moving all the looms around between facilities, and we've moving a lot of looms in the fourth maybe. We're hopeful we're going to see some benefit in April, but we'll start seeing that benefit fully in the first quarter. We are seeing and you saw it in our numbers in the third quarter, the SG&A reductions that we did. We were down 20 percent in SG&A expenses. So we're seeing that component of the restructuring plan start to benefit us.

Okay. With the continued losses, is there any issue with your long-term debt and your lenders? Is there any covenant problems whatsoever?

We were in compliance with all covenants at the end of the third quarter, and as I've said to folks in previous years, our $50 million unsecured term loan has no P&L covenants.

Any other balance sheet covenants?

It has balance sheet covenants only.

With the projected losses in the fourth quarter, are you getting close to --

No, we have plenty of room in those covenants.

Are you comfortable making the $8 million principal payment next year at this time?

Yes, we are.

Okay. Did we get -- I may not have written it down. Did we get CapEx year-to-date for this fiscal year, as well as the projected for the fourth quarter? If we did, could I have those numbers again.

CapEx for the year is projected at 15.5 million, and we are at -- let me look here. We are at -- right at 8 to 9 million year-to-date.

So you've still got a fair amount for the -- and that's for this fiscal year, right? So doing the math right we have 6.5, 6.6 --

Yeah. The 15 million is not all cash. The 15 million is a lot of deferred financing with the equipment vendor

On a related topic right there, with the remaining goodwill, you've done the goodwill analysis on that and you're comfortable that the goodwill that's about 4 million on the balance sheet is realizable?

Yes. The goodwill remaining pertains entirely to our mattress ticking segment. All goodwill relating to upholstery fabrics has been written off.

Do you have EBITDA numbers right now, or should I wait for the 10-Q?

I would wait for the 10-Q on that.

Okay.

Last night we filed an 8-K, which has detailed financial statements in it.

I didn't have a chance to check that last night. And looking forward a little bit right now, what do you think the cause was of -- when you're looking at the top line revenue shortfall, in terms of your projections, am I correct in assuming it was a little bit -- the shortfall was a little bit greater than what you originally projected with the second quarter conference call?

That is correct, and that, John, is coming completely from the consumer preference for leather and suedes, and also more goods coming in from offshore. We have -- our industry has not done a good job, and us in particular of projecting what the short fall is. I think we're getting better at it.

Would you think your improvement in projecting it when you look at '06, what are some of the internals you're using there? I'm seeing anecdotally. some of the trade publications looking at a 3 to 5 percent increase. When you start modeling fiscal year '06, any idea what you're looking for on the mattress side, and the upholstery fabrics side?

Well, I think we said in our presentation that we expect mattress ticking to be modestly up, and we expect the upholstery fabric business domestically to continue to decrease.

And also any idea -- you guys look around when you walk the retail stores, the consumer preference for leather or suede, is there any idea if that's going to start to wane, or is that just one of those things, when it happens it happens?

I think your latter comment is correct, when it happens it happens. The good news is from the apparel side, which we usually follow a season or two behind, we're seeing a lot more color, and a lot more patterned fabrics in ladies apparel. So we keep thinking that some day these guys are going to get tired of their floors looking all the same.

Well, we just redid our house. I don't know if that's got any predictive power. Let's keep at it, guys. Great job guys. I know you guys are in one tough industry, but whether it turns, it turns. Thanks again.

Thank you. As a final reminder if you would like to ask a question, please press star 1. And gentlemen, there are no further questions at this time. I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you very much. We thank you for your participation and your interest in Culp, and look forward to updating you on our progress next quarter. Have a great day. Thanks.

Thank you. That does conclude today's conference call. Thaw for your participation, and have a great day. You may now disconnect.