Culp Inc (CULP) 2005 Q4 法說會逐字稿

Good day 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 call over to Ms. Drew Anderson. Please go ahead.

Thank you. Good morning and welcome to the Culp conference call to review the Company's results for the fourth 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 & Exchange Commission for a discussion of those factors that could affect Culp's operations in 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 and 8-K filing. This information is also available on the Investor Relation 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.

Thank you and good morning. 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 of Culp. The purpose of this call is to review financial and operating trend reflected in the fourth 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 first quarter fiscal 2006 business outlook.

Fiscal 2005 has brought a lot of significant changes for Culp as we have continued to face many challenges in our industry. However, with these challenges we also see exciting opportunities for Culp. Last quarter we discussed with you some of the steps we have taken to reconfigure our manufacturing operations to address these challenges head on and be in a strong position to pursue new opportunities as they present themselves.

Since our last call we have taken additional actions that we believe will improve Culp's profitability and competitive position in today's marketplace. While many of the strategic changes we now have underway are affecting our bottom line in the short term, we are pleased with the progress we are making with respect to all these initiatives.

I will give you further details in a minute, but first I will ask Frank to comment on our financial and operating results for the quarter. Frank?

Good morning, everyone and thanks for joining us as well. Sales for the quarter were 74.2 million, a 13% decrease from the fourth quarter of last year. Sales for the year were 286 million compared with 318 or a 10% drop. This overall sales decline is attributable to continued softness in our domestically produced upholstery fabric business, resulting primarily from the current consumer preference for leather and suede furniture, as well as customer selection of other imported fabrics, including cut and sewn kits.

Our gross profit margin was 10% excluding restructuring charges, compared about 18.4 in the fourth quarter of last year. For the year, again excluding restructuring charges, gross profit margin was 11.8 versus 18.3. This decrease is mostly attributable to issues in our upholstery fabric segment, and to a much lesser extent, our mattress ticking segment. Rob will talk more specifically about each segment in a moment.

SG&A expenses were 9% for the -- were 9 million for the quarter, down about 9% from a year ago. Reflecting ongoing cost reduction efforts. For the year, we reduced SG&A expenses by almost 14% to 35 million. Interest expense was 924,000 compared with 988,000 for the prior-year quarter. Total interest expense for fiscal 2005 was 3.7 million, a 33% decrease from the prior year.

The fourth quarter results include after-tax restructuring charges of 6.4 or $0.55 per share. These charge -- excluding these charges, net loss for the fourth quarter was 1.4 million or $0.12 per share. Excluding restructuring charges and goodwill impairment net loss for fiscal 2005 was 3.4 million or $0.30 a share. I will also note that fiscal 2005 included 52 weeks versus 53 weeks for the same period of last year.

I would like to now review our results by operating segment. With respect to mattress ticking, we reported 27 million in sales for the quarter, even with the 22 -- 27.2 for the same period last year. For the year, mattress ticking sales were 105 million compared with 106 million in the prior year. Notably, total ticking yards sold were up over 3% for the quarter and 4.5 for the year. So we are pleased with our growth in unit volume. Mattress ticking sales represented about 37% of total sales for the quarter and fiscal year. We believe this segment will continue to account for an increasing percentage of Culp's overall sales.

The average selling price was $2.25 for the quarter, down 3.4% from $2.33 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. As we have discussed previously, customer buying patterns have shifted as mattress manufacturers are buying less expensive fabric for the borders and purchasing higher priced fabrics for the panels.

Operating income for this segment was 2.2 million or 8.2% of sales for the fourth quarter. This represents an improvement from the third quarter on a sequential basis, when operating income was 1.6 million or 6.2% of sales. For the same quarter of the prior year, operating income was 3.6 or 13.1% of sales. For the full year, operating income was 9.4 million versus 15.

During the fourth quarter, margins were affected by close out sales for certain customers. Manufacturing variances related to the relocation of mattress ticking equipment also affected margins during the third and fourth quarters in addition to the industry-wide pricing environment and high raw material costs that we have discussed with you previously.

Now turning to the results of our second operating segment, upholstery fabrics. Sales were 47.1 million representing an 18.6% decline from the fourth quarter of last year. Upholstery fabric sales for the year were 181 million compared to 212 in fiscal 2004. As we have noted, this primarily reflects the decline in demand for domestically produced upholstery fabrics. Additionally, sales in this segment for the fourth quarter were somewhat affected by operating constraints related to our restructuring activities.

Fabric yards sold for the quarter were 10 million compared with 13.3 for the same quarter of last year. A year-over-year decline of 25%. The average selling price was 4.19 versus 4.23 last year.

We are pleased with the continued growth in sales of upholstery fabrics from offshore sources, including the popular micro-denier suedes and similar fabrics, as well as our fabrics produced at the China operation. These sales were up 75% over the same period last year and up -- over the same quarter last year and up over 100% for the year. Notably, these sales account for almost 25% of Culp's overall upholstery fabric sales during the fourth quarter.

The upholstery fabric segment reported an operating loss of 2 million for the quarter, compared with operating income of 2.8 million last year. For the year, operating loss was 6.4 million. Again, the primary reason for the operating losses relates to the declining demand we have already noted in our domestic operations and the resulting significant under-utilization of capacity, as well as higher raw material prices.

As we announced in early May, we are now in the process of further consolidating our U.S. operations to substantially lower operating costs and improve profitability. Rob will give you an update on these restructuring actions in a moment.

Let me turn to the balance sheet now. At the end of the fourth quarter our balance sheet reflected a cash position of 5.1 million, down from 14.6 at the end of fiscal 2004. Reflecting cash flow from operations of 4 million, capital expenditures of 13 million, and payments on long-term debt of a 0.5 million. Our capital budget for fiscal 2006 is 4.5 billion, and approximately 60% of this relates to the completion of the mattress ticking capital project now in progress. The balance relates primarily to expenditures in our China operation. Long-term debt stands at 50.6 million, and our debt-to-capital ratio remains at 37.1.

Now I will turn things back over to Rob.

Thanks, Frank. Let me highlight the key trends we are seeing in our business, as well as our strategies for addressing these trends, both in mattress ticking and upholstery fabric. 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. During fiscal 2005, mattress ticking sales accounted for 37% of our total sales. Just five years ago it was 20%. Consumer and demographic trends, as well as the profitability of this category for retailers, favor continued growth in the bedding industry.

Also, for reasons we have discussed previously, we believe the mattress ticking business, unlike upholstery fabrics 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 unit volume growth in mattress ticking is showing favorable trends. We are pleased with the sales levels we have maintained throughout the bedding industry's transition to selling predominantly one-sided mattresses, which utilizes about one-third less mattress ticking. I think it is important to note we still demonstrated meaningful growth in our mattress ticking business during this transition period, even while demand levels were trending down and the industry started buying one-third less fabric.

We will continue to see this level of industry demand going forward. However, we have also faced a more challenging price environment throughout this fiscal year. Our margins in this segment were below the levels we experienced in the prior year, both for the fourth quarter and the year. We experienced some issues in the fourth quarter related to close-out sales and variances in manufacturing related to the relocation of ticking looms.

Throughout the year, we also experienced industry-wide pricing pressure. This is due in part to the way our customers buy in ticking. There is a current trend among mattress manufacturers towards using common SKU's and less expensive fabric for the borders, which is the ticking or fabric that goes on the side of the mattresses and box springs. And ,like many other industries that use oil-based products, we experienced high raw materials this year. However, on a more positive note, these costs now seem to be stabilizing.

Culp is taking aggressive steps to further enhance our competitive position in this business. We are well underway with our announced plan to consolidate our mattress fabric manufacturing into our two plants located in Quebec, Canada and Stokesdale, North Carolina. This project involves relocation of ticking looms from an upholstery fabric plant and the purchase of new looms that are faster and more efficient than equipment they will replace.

Our capital expenditures for this product -- project are approximately 7 million of which approximately 4.5 million were incurred this year with the remainder to be realized in early fiscal 2006. We believe these changes in our manufacturing operation will significantly enhance our globally competitive cost structure and we expect to realize approximately 4.5 million annualized savings once fully implemented. This capital project is moving forward on schedule, and we anticipate it will be completed by August, 2005.

We also continue to place more design emphasis on new product with higher margins, and once the capital project is complete, we believe we will be well positioned to return to our historical levels of operating margin in the 12 to 14% range in mattress ticking.

Now let me turn to our upholstery fabric segment. The continued decline in demand for products produced in the U.S. is clearly being felt industry wide. 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, mostly from China. As a result, we continue to see much lower demand for products we produce here compared with the rapidly growing demand for products produced offshore.

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 growth opportunity for Culp and remain confident that we are taking the necessary steps to adapt and enhance our competitive position. We made the decision at the end of the fiscal year to further consolidate our U.S. upholstery fabric operations in order to reduce costs, increase asset utilization and improve profitability.

The restructure plan includes consolidation of our two velvet fabrics manufacturing operations, more fixed manufacturing cost reductions in the decorative fabrics operations, and significant reductions in selling, general and administrative expenses. Another important element is the substantial reduction in raw material and finished goods stock keeping units to simplify manufacturing processes, increase productivity and reduce inventories. We also combined our sales, design and customer service activities for the two divisions within the upholstery fabrics business.

As a result of the restructuring actions, we listed for sale two buildings in Burlington, North Carolina consisting of approximately 140,000 square feet, and now have in place a contract for the sale totaling about $3 million as projected. By consolidating our manufacturing operation and merging the key functions within the upholstery fabric segment, we will significantly reduce operating costs and utilize our domestic operations more efficiently. Ultimately, we believe our customers will benefit from having one dedicated team focused on providing the upholstery fabrics that our customers desire.

The implementation of these restructuring issues began in early May and we are still on schedule to be finished by August, 2005. As a result of the manufacturing consolidation other initiatives, we expect to save approximately $11 million on an annualized basis, of which approximately 6 million will be in selling, general and administrative costs, and approximately 5 million will be in fixed manufacturing costs.

While these were difficult decisions to make, our primary focus in our U.S. manufacturing operation is to restore profitability. We are committed to taking whatever additional steps are necessary to keep our U.S. capacity and cost structure in line with demand and achieve profitable domestic operations. At the same time, we are aggressively building our offshore business to meet challenging consumer preferences and customer buying patterns. We are excited about the innovative products that we are now offering.

An important element of Culp's offshore business is our China operation. We are enthusiastic about the progress that we made in China in a relatively short period of time. Our offshore business is now profitable and represents a significant growth opportunity 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 have an operation located there to meet their fabric needs. With this platform, we can offer the same high quality and exceptional design that's always been a hallmark of Culp, and our customers are getting much better values.

Sales of upholstery fabrics produced outside U.S. manufacturing plants are accounting for an increasingly percentage of Culp's overall fabric sales. Sales of fabrics produced offshore doubled in fiscal 2005. So while the sales environment has continued to be challenged in the U.S. produced upholstery fabrics, we have made significant progress in responding to this shift in demand. We are excited about the trends in our offshore produced business.

Frank will now review the outlook for the first quarter of fiscal 2006.

Thanks, Rob. Looking ahead, we are encouraged by the early indications for the first quarter of fiscal 2006. We are beginning to see signs that the strategic moves we have made are starting to show positive results. Reduced operating costs and greater efficiencies make us optimistic about the -- this year. We expect sales for the mattress ticking segment will show a modest decrease over first quarter sales last year, reflecting the industry-wide pricing and product environment we discussed earlier. However, operating income margin this segment is expected to continue improving from the fourth quarter of fiscal 2005.

With respect to upholstery fabrics, we should first note that the summer months are typically slow for this segment. While we expect continued significant growth in sales produced outside the U.S., we believe demand for domestically produced upholstery fabrics will continue to decline. For the first quarter of fiscal 2006, we expect overall upholstery fabric segment sales to decrease, but to a much lesser extent than the fourth quarter decline because of the strong growth trends in the sales of fabrics produced offshore.

We believe the decrease in U.S. produced upholstery fabrics, combined with manufacturing costs related to the ongoing restructuring activities, will result in operating loss for this segment and the quarter. Considering these factors, we expect to report a net loss of $0.02 to $0.08 per share in the first quarter, excluding previously announced restructuring charges.

This is management's best estimate at present, recognizing that future financial results are difficult to predict because the upholstery fabrics industry is undergoing a dramatic transition and many internal changes are underway within the Company. The actual results will depend primarily upon the level of demand throughout the quarter, the Company's progress with respect to restructuring activities, and the implementation of our capital project for mattress ticking.

We have many reasons to be optimistic about Culp's prospects for the next fiscal year. The actions we have taken over the past year to right-size our domestic capacity and streamline our operations will significantly reduce our costs, and allow us to operate more efficiently with higher asset utilization. We have a strong competitive position in mattress ticking and look forward to realizing the benefits of the capital project now underway.

Our offshore produced business is now thriving and will be an increasingly important driver of our success in fiscal 2006 and beyond. An integral part of this business is Culp's China facility, and we are pleased with the profitability and growth opportunities for this platform. We believe we are moving Culp in the right direction. Above all our primary focus for the next year is to restore Culp to profitability and deliver the results that will reward our shareholders.

With that, we'll now take your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question comes from Joel Havard, BB&T Capital Markets.

Thank you. Good morning, guys.

Good morning, Joel.

Let's see, Frank, a couple of specific ones for you and then I'm going to let you all gang up here. Let's see, the CapEx budget for Q1 and for full year, could you review that again, please.

Capital budget is 4.5 million for the year.

For the year. Okay.

The year. 4.5 million for the year, substantially reduced, obviously, and that is made up of -- 60% of that is for the balance of the mattress ticking capital project, and the remainder is principally related to China expenditures.

Okay. All right, I thought that's what I heard you say the first go around, I wanted to make sure that that was correct. Let's see, and as far as that mattress effort goes, are we now down to buying in this last couple million dollars worth of equipment?

Yes, yes.

Is that what's left. Okay.

And that equipment is being installed this summer, in the months of May, June, and will be operational by the end of July.

Got it. Let's see, the two facilities held for sale, are those completely empty now?

They will be empty by early August.

Empty by August. And I know the industrial real estate market in North Carolina still isn't exactly firm. What would be your best guess on the timing of disposal?

Well we've already, as Rob said in his comments, we've already sold the buildings. We have a contract for sale.

Okay, well I didn't understand that, then. I heard the $3 million.

Which will actually -- the sale of the property is going to close later this month, even though we don't have to vacate until early August.

Okay. Good. And the $3 million is a net or gross or how should we look at it?

That's the net sales proceeds.

Okay. Wonderful. Good.

So that's coming this month. So that was very good news and you're right, the industrial market has been soft, but these were pretty good buildings, and we were fortunate to get them sold so quickly.

You bet. You bet. Congratulations there. Is there an opportunity -- I know your debt is such that you're sort of restricted on what you can prepay. Does this just go to cash and keep your powder dry, is that the thought?

That's exactly right. We -- the prepayment penalties on the insurance debt is just too significant.

Yes. All right. Let's see, regarding China, could you give us a little bit more color, guys, on sort of the product and service range that you're currently offering and what we might look for over the course of '06?

Yes, Joel, this is Rob. From the very beginning, our goal in -- really the strategy in China was to create differentiated products, Culp designed, Culp quality, logistics, et cetera, in a low-cost environment, and that's really exactly what we've accomplished. And it is a blend of fabrics that we may source acting as a converter, but running through our facility in Tsingpu to add value to it, inspection, finish and testing, whatever, or products that we actually produce in China that are designed by Culp, created by Culp, that also to run through our China facility.

So the whole purpose of our China platform is to service our U.S. customers who are making cut and sew kits or producing furniture in China and they want to buy from a local source and we're able to give them Culp-type products in China in a low cost environment, and we're very excited about the reaction we've had so far and the prospects that we see in China.

Rob, I wanted to make sure I understood, I think when you all got this thing up and running you were acting as a converter, buying in from mills locally, running it through your QC and treatment and all of that stuff. Do you all now have looms in -- built into the facility too? I want to make sure I've got that right.

We thought you might just ask that, Joel. I think what we would say, while we do not have looms in that facility and there is not room for it, we now have a second facility, and we're doing several things in there, but from a weaving perspective, in essence, while we may not own the looms, we control our own weaving operations. And increasingly as our business expands in China, our goal is to control the mills that we buy -- that we buy from, and more like a Nike model if you will, no capital investment, but yet we have control in the low-cost environment.

I understand. That's even better. So we are talking a CDF-type product and a CVP type?

We're talking about both. That's correct. The CDF product of course is the decorative products, and the CVP is the suedes and increasingly other kinds of fabrics, whether they're suedes or knits or non-decorative fabrics.

More traditional wovens or --?

That would be in the decorative fabrics area.

Okay.

But we're evolving into a model of controlling for of the mills that we are doing business with.

I don't want to bog down in those details. You're talking about, you are still broadening the range of types of products while expanding that volume obviously -- very obviously. I --

Joel, this is Rob. Let me add one more thing I think might be of help to you in this area. As we've studied what some of the other much larger companies in the U.S. are doing about sourcing goods offshore, we've learned that really the most effective way is to control enough of the production of the plant that you control the plant yet there is not a fixed cost.

Yes.

And that's really the model we're following.

I understand.

It has really served us very well, and it is really a blue print for our future growth in China.

I am glad to hear that, Rob. I think that's just what we were looking for. My question, guys, had a little hook in it, too, I mentioned product and services. In the past you all talked about the thought process and exploring cut and sew on a contract basis for some of these customers over there. Any progress or update you can discuss yet on that front?

Joel, nothing we can update you on there now. I think I would say that this platform provides us a lot of opportunities in upholstery fabric and mattress ticking. Our first priority, as we've told everyone, was to get our operation up and going, establish ourselves in China, and build the business in both decorative fabrics and suedes and other. We have now accomplished that. We're very pleased with the operations of the -- so far, we're profitable, business is growing well, customers are happy with what we're doing. We're getting significantly better at new product introductions. The longer we're there, the better we're getting at that as well. I think I would just leave it as there are plenty of opportunities to build upon what we have today.

That's vague enough. I will interpret accordingly. Just two more. Sorry to hog this. The restructuring effort that you're undergoing now, you didn't talk about charges beyond Q1. Do you think you'll still have this wrapped up in Q1?

I think most of the charges are going to be wrapped up in Q1. It will be a small 5 to 10% at most carrying over to the second quarter, very little.

Okay. And lastly, Rob, this may be more philosophical in nature, but with what's happened within the ticking segment, we've been talking about the one side conversion now for several quarters. I believe you made reference in the past to that being essentially accomplished. Am I correct in that assumption?

That is correct.

Okay. So what we were experiencing here more recently, then, going back here and kind of looking at your words, still some price sensitivity, certainly some cost sensitivity for you guys, is there any other sort of underlying industry dynamic that, I believe you said here sort of downgrading the fabrics that they're using on the sides and on the springs, that sort of thing?

Joel, what it is more than anything is a product mix change that the mattress folks are beginning to standardize very much like, it's similar to what we see in upholstery, a body cloth and a fancy pillow. The mattress guys are using, in some cases, a less expensive border and then a fancy paddle for the top of the mattress very much like the upholstery folks. That's the mattress, if there is any change, it is a shift in the product mix, not -- I mean, and of course, if the product mix drives the selling price down, while our margin might be greater, it doesn't mean we generate more profit dollars.

I see. Maybe I don't lift the sheets enough, but is this -- is it a different look or is it something that you give them a similar look, but you just engineer out some of the quality that would go into the top piece?

What they're doing is putting a much more expensive piece or panel on the top because that's where you sleep.

Yes.

And using a less expensive cloth on the border. It looks just as attractive as what you saw before, it is just engineered to be less expensive. So --

And -- okay, go ahead.

And then the other good news, as we said in our -- and I think is important, is that we're not seeing any movement of fabric coming in from offshore for the North American mattress industry, and we watch that very closely because we know what can happen on the upholstery side.

You bet.

So we're watching that very carefully.

And you guys --

Joel, one other comment on the border ticking trend, this is really positive for us. We already had the lowest cost in the industry with the capital project we're implementing now, we're lowering that cost base significantly. So this plays right into our hands, and the border business is now 50% of the overall ticking purchases.

Is that a source issue?

No, no. We're very -- with our -- we've gotten the mattress ticking business out of the upholstery fabric plant, which is the higher cost, into our Canadian facility and our Stokesdale, North Carolina facility. So we are positioned very well to capture the majority of the border business.

Okay. Okay. Let's see, two other thoughts on mattress. It seems like the high end has been where we've seen a lot of trade press discussion. And I am talking those sort of specialty makers and I know that a couple of big S's are coming at it with a Visco product. Are you guys already sort of specked into that business as well, or is that new ground for you or replacement business?

We're specked into some of it now, but is certainly a growth for us. With the Temper-Pedics, the Select Comforts, the higher end of the Viscos and latex, with the S's, yes, that's room for growth there.

Okay, good to hear. And lastly, any flame retardant issues, updates? I know California is in effect now; is that correct?

Yes, but there is no further updates than that. I think we're still waiting to see how the final -- how it is going to play out.

At a national level, Rob?

Yes, on a national level.

Is that affecting the cost of what you're shipping to China -- or to California such that it's affecting your margins one way or the other?

No impact.

You are able to price it accordingly?

Yes.

All right, good. Guys, thanks for letting me spend so much time with you here. Good luck.

All right.

And our next question comes from Laura Champine, Morgan Keegan.

Good morning.

Hey, Laura.

I am trying to determine what the complexion of your upholstery business is going to be going forward. And with that in mind, can you talk about what customers or what type of customers you're growing with in upholstery? And are you still -- are your largest customers still the same suspect Lazy Boy and furniture brands, and the big companies and how is your business with them compared to your business with some of the private companies that are smaller?

Well, I mean, Laura, I think overall our business is pretty much stable with all of those customers. We're showing some decline, I want to say stable, it is what it is. We're in some cases doing less business with some of them because they're sourcing more suedes and also sourcing more cut and sew kits offshore. We do believe that it is beginning to stabilize somewhat. Certainly the bigger manufacturers are -- seem to be moving more rapidly to offshore sourcing than some of the smaller private companies you mentioned. So we feel like that with a blended strategy of our China platform with limited low cost SKUs with our U.S. operations, that that appears to be the way to go and that's the strategy that we're implementing. So we hope that we've reached the bottom as far as the domestic business, but we don't know that for sure yet.

And, Laura, our model out of China, we can sell both goods in China for our customers' cut and sew operations, or we bring the goods here and distribute to them or a broader selection of customers.

Do you feel like you have been able to keep share with the manufacturers that are moving overseas? As those big players move to China, are you able to keep the share of their business that you had before out of your Chinese operations?

I would say for certainly some of them we have. No doubt. The big ones we are keeping share of what they are moving, as long as it is non-leather, non-leather part of the business.

Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Budd Bugatch, Raymond James.

Good morning. This is actually Chris Thornsberry on behalf of Budd.

Hey, Chris.

Hey, Rob. Hey, Frank. How are you guys doing?

Good.

A couple quick questions for you, if I may. Recalling some of the other restructuring you guys announced back in October where you were consolidating the Pageland into Graham, is that pretty much done now or you still have any of that left? And are we seeing the savings of that starting to flow through the bottom line in upholstery?

Yes. That is completed and we are beginning to see that reflected in our -- we will begin to see it in the first quarter.

Okay.

Throughout the fiscal year.

So the savings there, which I believe was about 9.5 million I think you all said, is that in addition to what you're going to be seeing from the restructuring in-house in early May of the 11 million total?

Yes.

Okay. So we can see some significant savings going forward as a result of all these actions you all are taking?

That's right. But again, be cautious, though, those are savings we see, but of course, the savings can be offset somewhat by lower sales levels.

Sure. When do you start to see the savings from the most recent actions that you announced in early May start to take effect? I think that you said that's going to be completed in August. Do you start to see a ramp up from there and when do you see the full 11 million start to hit the --

You will see that starting in the first quarter and then completion in the second quarter.

Okay.

Early in the second quarter.

So by the end of the second quarter, early third quarter, you will see the full impact of the savings there?

Yes. Yes.

That's good to hear. How long do you see the manufacturing variances occur as a result of all these actions that you're seeing right now, including mattress and upholstery.

I think first quarter.

First quarter?

Substantially complete in the first quarter, we have -- in the first quarter we're consolidating the two velvet operations and that will be complete by the end of July.

Okay.

The mattress ticking project will be completed also by the end of the month of July.

Okay. All right. And switching gears a little bit to the offshore, and specifically into China as well. Where do you see the ultimate percentage of sales coming from offshore? I think you said you're just under 25% now. Where do you see that trending to over the next year or two?

I guess that's the $64 question. What we tried to do is position it to be a global producer and our customers are going to drive that. We're prepared to grow as much as we need to in China. We're prepared to downsize here further if we need to. So our customers are really going to drive that. But if you're asking us -- I believe we do believe you're going to continue see a higher percentage.

Okay. What kind of capacity do you have overall right now with the facilities you have in China and also offshore and the other areas you all are producing?

Well with the model we've got, we really do not have a capacity constraint.

Okay.

When you're adopting a model like we have, there is just not -- capacity is reasonably easy to add.

Okay. What kind of profitability difference do you see between your domestically produced goods and your goods produced offshore? I know China will be different than where you produce outside of China as well.

As we said really for the first time, we've said our operations are now profitable over there. It is a substantial difference.

So on the gross margin line, I know you're hesitant to kind of give hard numbers there, but would you say 400 to 500 basis points more or more than that?

Probably wouldn't be able to quantify it, but I think it is fair to say it is substantial and we're pleased.

All right. And one final quick question and I will yield to others. More of a housekeeping issue. I saw the short term -- I am sorry the current maturities of long-term debt jumped up by about 7.5 million. I think you all talked about that on the last call. When is that payment due this year?

The payment is due March of '06.

And no issues of paying that back?

We do not see any issues with that.

Thanks.

[OPERATOR INSTRUCTIONS] Gentlemen, it appears we have no further questions. I would like to turn the call back over for any additional or closing remarks.

Jennifer, thank you very much. We appreciate your participation and look forward to updating you on our progress next quarter. Have a great day.

Once again, ladies and gentlemen, that does conclude today's conference. You may now disconnect.