Culp Inc (CULP) 2006 Q1 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 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 first quarter of fiscal 2006. 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 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, during this call the Company will be discussing non-GAAP financial measurements that exclude restructuring and restructuring-related charges. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included as a schedule to the Company's press release and 8-K filed yesterday. 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.

Thank you and good morning, and thanks for joining us today. I'd like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today is Frank Saxon, our President.

The purpose of this call is to review our results and operating trends reflected in the first quarter of fiscal 2006. I will begin with some brief comments about Culp today, and Frank will review the results for the quarter. Then we will spend some time updating you on the strategic actions of each of our operating segments and our second-quarter business outlook.

At the beginning of the first quarter, we had ambitious strategic plans in place for each of our operating segments, Mattress Ticking and Upholstery Fabrics, including US and offshore operations. We're pleased with how much we accomplished during the quarter as we continue to adapt our business model in response to the rapidly changing furniture and bedding markets. While we're not yet profitable in the Upholstery Fabrics segment, it is gratifying to see the improvement in operating results for the first quarter on a year-over-year basis. Although the transition to a leaner, more agile business model is affecting our financial performance, we believe we're taking the right steps to be competitive and position the Company for growth over the long term in today's global marketplace. I will give you further details in a minute, but first I will ask Frank to comment on our results for the first quarter.

Good morning, everyone, and thanks for joining us.

Total sales for the quarter were 62.3 million, an 8% decrease from the first quarter of last year. This overall sales decline is attributable to the continued softness in our US-produced Upholstery Fabric business. Additionally, Mattress Ticking sales were lower than expected due to weaker demand industry-wide. We will comment more specifically on each business segment in a moment.

Our gross profit margin was 11.3% excluding restructuring charges compared with 12.9 in the first quarter of last year. This reflects the slightly higher gross profit margin in Upholstery Fabrics and a lower gross profit margin in Mattress Ticking.

SG&A expenses declined 26% to 6.8 million for the quarter excluding restructuring-related charges compared with 9.3 million last year, reflecting significant cost reduction efforts, particularly in the Upholstery Fabrics segment.

Interest expense was 948,000 compared with 940,000 for the prior-year quarter.

The first-quarter results also included after-tax restructuring charges of 3.3 million or $0.29 per diluted share. Excluding these charges, net loss for the first quarter was 628,000 or $0.05 per share compared with net loss for the first quarter of last year of 1.1 million or $0.09 per share.

I would like to now review our results by operating segment. With respect to Mattress Ticking, we reported 22.9 million in sales for the quarter, an 11.7% decline compared with 26 million for the same period of last year, reflecting weak demand industry-wide and lower average selling prices. Operating income for this segment was 1.4 million or 5.9 percent of sales. For the prior-year period operating income was 2.9 million or 11.2 percent of sales. Operating margins in this segment were affected by lower unit sales, costs related to the startup of the Company's capital project announced last October, and lower average selling prices, principally related to the damask product line.

This pricing trend reflects the ongoing shift mattress manufacturers are making to less expensive common border ticking, which is the fabric that goes around the side of mattresses and box springs. The average selling price for mattress ticking for the first quarter was $2.28 per yard, down 4.2% compared with $2.38 per yard for the prior-year quarter. On a unit volume basis total yards sold were 10.1 million, down 7.5% compared with 10.9 million a year ago. However, excluding the less-popular printed ticking category, total yards sold were only down about 1% compared with the prior year's quarter. Our customers are now selecting more woven damask and knits instead of the printed ticking, which accounts for about 13% of mattress ticking sales.

Now turning to the results of our second operating set segment, Upholstery Fabrics. Sales were 39.4 million, representing a 5.9% decline from the 41.9 million in the first quarter of last year. Upholstery Fabric sales for the quarter continue to reflect significantly lower demand industry-wide for US-produced fabrics. The current consumer preference for leather and suede furniture and the increasing customer selection of other imported fabrics, including cut and sewn kits, are driving this trend. However, the lower sales of US-produced fabrics were offset to a large degree by higher sales of our offshore produced fabrics.

Total yards sold were 9.1 million, down 7% compared with 9.8 million a year ago. The average selling price was $4.31, about 1% higher than the 426 for the same period a year ago.

We're 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 fabrics produced at our China operation. These sales were up more than 100% over the first quarter of last year.

The Upholstery Fabrics segment reported an operating loss of 380,000 for the first quarter compared with an operating loss of 2.6 million for the same period last year. These results reflect significantly higher gross profit in the offshore-produced business, which offset the lower gross profit in our US-produced fabrics, along with substantially lower SG&A expenses. For the quarter SG&A expenses declined by 34% in this segment and represented 11% of sales compared with 16% of sales a year ago.

Let me now turn to the balance sheet. At the end of the first quarter our balance sheet reflected a cash position of 5.2 million compared with 5.1 million at the end of fiscal 2005, reflecting cash flow from operations of 1.2 million, capital expenditures of 4 million and proceeds for the sale of two buildings of 2.9 million. As planned, 2.7 million of the capital expenditures for the quarter were related to the capital project for Mattress Ticking and the remainder was primarily related to our China operations.

Long-term debt stands at 50.6 million and our debt-to-capital ratio is at 38%.

As announced in our press release, we've executed an amendment to our current bank financing agreement with Wachovia, which was due to expire on August 31, 2005. Under the agreement, the term of the Company's credit facility has been extended by one year. This amended credit facility, in the amount of 8 million, remains unsecured. We have also received a commitment from Wachovia to provide a long-term mortgage on our corporate headquarters building in High Point for approximately 4 million with an expected closing by the end of October 2005.

Now I will turn things back over to Rob.

Thanks Frank. Let me now talk about the progress we are making in both of our operating segments. I'll start with Mattress Ticking.

As you know, Mattress Ticking has become an increasingly important part of our business and we are excited about Culp's leadership position in this market. Mattress Ticking sales now account for approximately 37% of our total sales. 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 previously discussed, 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.

We are in the final implementation stage of our $7 million capital project for this segment designed to improve our globally competitive cost structure. During the first quarter we completed the building expansion and weaving machine installation at our Stokesdale, North Carolina plant, as well as the installation of full operation of the new weaving machines at our Quebec, Canada facility. We're ramping up production of the Stokesdale plant during the second quarter. By the end of October 2005 we expect to have completed the transition of a significant portion of our production from a higher-cost Upholstery Fabrics weaving plant to our two Mattress Ticking facilities. While these changes have affected our results during the last three quarters, we believe that as this project is fully implemented, we will see substantially improved operating margins in our Mattress Ticking business.

Now I will give you an update on our Upholstery Fabrics segments. Let me first discuss our US operation for Upholstery Fabrics.

During the first quarter we continue to take very aggressive actions to bring our US-manufacturing cost and capacity in line with current demand trends. First, we initiated and completed the consolidation of our two velvet production facilities into our Anderson, South Carolina plant. We also consolidated a finished goods distribution center and our design center into other Culp facilities, resulting in lower operating costs and the sale of these two buildings for approximately $3 million. Further, we combined our sales, design and customer service activities for our Culp Decorative Fabrics and our Culp Velvet/Prints, the two divisions within the Upholstery Fabrics segment, resulting in a more unified approach for our customers. With these actions and others, we reduced our selling, general and administrative expenses in this segment by 34% when compared with the first quarter last year.

Earlier this month we announced a plan to reduce the Company's US yarn manufacturing operations in order to lower costs and to facilitate more yarn innovation by aligning with key suppliers. Effective August 15, we sold the Company's polypropylene yarn extrusion operation to American Fibers and Yarns Company for 1.1 million, plus the value of inventories totaling approximately 1.5 million. We also announced the closure of our Shelby, North Carolina plant by outsourcing open end spun yarns and transferring the chenille production to our Lincolnton, North Carolina plant.

As a result of these consolidations and earlier restructuring actions, the bull value book value of our US-based Upholstery Fabrics fixed assets is projected to the 17 million by the end of the second quarter of fiscal 2006 compared with approximately 52 million at the end of fiscal 2004, just 18 months ago.

While we believe it's important to produce some level of Upholstery Fabrics in the US to support our customers' domestic fabric requirements, we remain committed to take whatever additional steps are necessary to achieve profitable US Upholstery Fabric operations.

Now let me turn to our non-US operations in the Upholstery Fabrics segment. We are pleased with the positive trends we're seeing in this business. Sales of Upholstery Fabrics produced outside of our US plants, which include the popular micro-denier suedes, as well as fabrics produced at our China facility, more than doubled over the first quarter of last year. These sales accounted for 30% of our overall Upholstery Fabrics sales for the first quarter, up from 5% just two years ago during the first quarter of 2004.

Customer response has been favorable, and we are excited about the innovative products that we are now able to offer. Our introduction of exciting new offshore-produced fabrics at the Showtime fabric market in July was well received, and we anticipate strong placements with manufacturers at the fall furniture market.

We believe the development of our China operation represents a compelling opportunity for Culp. As our US customers have continued to move an increasing amount of their fabric purchases to Asia we have moved with them and responded with an operation design to meet their fabric needs.

The cornerstone of our China strategy is the state-of-the-art fabric finishing and inspection facility located near Shanghai. With specialized and proprietary equipment, we have the capability to control the value-added finishing process, thereby assuring our customers that our fabrics will meet or exceed US standards.

By providing innovative fabrics and value-added technology in a low-cost production environment, Culp offers differentiated products and value to our customers. Our vision has developed quickly and today we have a growing Upholstery Fabrics operation in China with over 130 dedicated associates. Overall, our offshore produced business is now profitable and represents a significant growth opportunity in today's global marketplace.

I will now ask Frank to review the outlook for the second quarter of fiscal 2006.

We are pleased with our progress to date in executing the strategic changes underway in our operations. However, in the short-term, we do anticipate a continued decline in our overall sales. While Mattress Ticking sales have picked up somewhat in the earlier part of this quarter, we expect this segment will show lower sales than a year ago. Operating income in this segment is expected to improve from the first quarter of fiscal 2006, due to a higher sales level than the first quarter and the benefits from our capital project.

In the Upholstery Fabrics segment, we expect continued significant growth in sales of fabrics produced outside the US. However, we believe demand for domestically produced Upholstery Fabrics will show a sharp decline, resulting in a year-over-year decline in overall Upholstery Fabrics sales as the industry faces weak consumer demand. Even with the lower sales, however, we believe this segment's operating results will approximate breakeven for the second quarter, due to the profitability in our offshore-produced business and the substantial cost reductions in our US operations.

Considering these factors, we expect to report earnings in the range of a net loss of $0.03 to net income of $0.03 per share in the second fiscal 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 a undergoing a dramatic transaction and many internal changes are underway within the Company. The actual results will depend primarily upon the level of demand throughout the quarter, our progress with respect to restructuring activities for our domestic upholstery operations, and the continuing implementation of our capital project in Mattress Ticking.

We estimate pre-tax restructuring and related charges of approximately 6.6 million will be incurred during the second quarter. These charges are primarily related to the Company's previously announced plan for the reduction of its yarn manufacturing operations.

In closing, let me reiterate that our primary focus for this fiscal year is to restore Culp's profitability. While we're still in a period of transition, the strategic moves we have made in our US Upholstery Fabric operations are already making a positive difference. Our offshore-produced Upholstery Fabric business, including our China platform, is showing strong and profitable growth trends, and we're excited about these opportunities for extending our market reach and adding additional capabilities in this platform. We have significantly strengthened our competitive position in Mattress Ticking and look forward to realizing the benefits of the capital project in this segment. We believe we have the right strategy in place and that it is being implemented aggressively.

With that, we will now take your questions.

(OPERATOR INSTRUCTIONS) Joel Havard, BB&T Capital Markets.

I guess, number one, we understand the operational challenges. And thanks for the outlook portion; that was pretty in-depth. On the balance sheet type issues, the charge that's going to affect Q2, if I'm reading this right, you expect the fixed asset to be down to 17 million at the end of Q2 on the upholstery business. What is the remaining asset value still assignable to Mattress guys?

It would be the difference. I don't have that in front of me, but it would be the difference between that -- it would be the difference between the fixed assets on the balance sheet and the 17 million.

I'm sorry. I was reading this to say that the 17 would be associated with the Upholstery only.

That is correct. By the end of the second quarter. And when you look -- I'm not sure I understand your question. When you look at the first quarter, PP&E was I think 60 million, something like that. PP&E was, yes, $60 million. But consolidated PP&E will be down in the second quarter because of the yarn decisions we've made, plus, of course, we will have some more depreciation.

And then of the new number -- of the number of the second quarter, only 17 will relate to US Upholstery Fabrics, down considerably from 18 months ago. What we're trying to say is we obviously are getting more agile. We have much less investment in the US than we had 18 months ago and four years ago. And there's just not that much left. We're down to one velvet the plant, one weaving plant, one finishing plant and one yarn plant. We're down to four plants. That's the point we're just trying to make. And of course then we have our ticking plant -- two ticking plants and our operation in China.

Which doesn't really have any asset value associated with it, really.

I think that the China -- you remember we've invested -- announced we're investing 3 million. I think we've got 3.5 there now, just over 3.5 to 4 is all we've got.

I guess with what's left that becomes more meaningful, but that's beside the point.

On the financing side, I actually thought that the new office headquarters facility, I thought you all had paid cash or had that on some sort of leaseback or something like that. I didn't know that there was a mortgage on it. I apologize if I'm just not remembering properly.

No, we paid cash for it. But what we've announced is a signing of a commitment letter for Wachovia to provide us with a mortgage on that facility in the amount of about $4 million.

So you're using that as a chip now, is that --?

Yes. Just to provide additional liquidity.

That makes sense then.

On the outlook, and again I appreciate what you've added to it. The 5.9% operating margin at Ticking, given volumes that were a little worse than we were looking for, but not stunningly worse, are we at some sort of critical inflection point for operating leverage? In other words, how much more volume -- and I know you get a sequential pickup in Q2, but could you characterize the sort of tipping point for where operating margins can be for the unit, for the mattress segment, that is, in Q2 and for the year as a whole? I know you put some color on that in the press release, but I was just wondered if you could elaborate.

This is Rob. Certainly that's a good question and one we're looking at very carefully as well. We have -- with our capital expenditure that we have almost completed in Ticking, it was just sometimes you get lucky and do things right. And this is a fabulous opportunity for us in that we've lowered our costs dramatically, moving the Ticking out of a higher-cost Upholstery into a low-cost Ticking facility.

It's certainly not hard installing looms, building buildings, moving looms around. So we were hurt by operating efficiencies as we made that transition. That's almost behind us now. I think Frank said by the end of October we think that we will be fully operational.

Keep in mind, none of this was to add -- none of this was to add more capacity. This was replacing at a lower cost the capacity we had. So we will be able to run this equipment wide open, 24/7 from day one.

Now, we have experienced in the Ticking business unit selling prices decreasing because the mattress folks have gone to a border panel just like the furniture guys have a body cloth pillow application, which you understand. So the panel fabrics are like the pillow fabrics, more expensive fabrics. The border fabrics, which is about two-thirds of the yardage, 50-50 -- excuse me, 50% of the border, 50% of the panel. The border has actually reduced in price. For example, one of our major customers reduced his border -- I don't know his exact figures exactly, but somewhere from 285 to 185. So he came down $1 on his borders, which represents 6, 7 million yards for us.

Now we have more margin actually in the lower price, but of course we don't generate more gross profit dollars. So the bottom line for us, we have not -- I checked very carefully last quarter on the unit sales with several major manufacturers of parts to the bedding industry. We're here to report that bedding was down double digits for most people in our first quarter. So we do not think -- in fact, we're sure we've not lost any market share. In fact, we think we may be gaining a little market share, but because of the lower-price border and because now Serta has gone to 100% one-sided mattress, all of that is affecting the sales number. We feel we're very well positioned. But as to the second part of your question, we fully expect to be back by the end of the year in the double-digit operating margins in this segment.

You're anticipating what I'm looking at there. I wonder how much of that 5.9% you could have -- by how much you could have exceeded if we ex out some of these movement, consolidation, those sort of things. I know that's not really a fair question. That's kind of looking in the mirror.

A lot of it was the effect of the implementation of our capital project.

Yes, and I know that you can't effectively ex that, but do you think that at this volume and what you see in your forecast that you're outlining here, you just said that you're going to be back in that double-digit range by year end.

On a gradual basis. We do not see double-digit margins the second quarter, but we see nice improvement in the second quarter, improving throughout the year.

Again, there was probably some artificial negative impact in Q1 that it is just kind of impossible to ex out based on the movements and consolidation, etc.

Exactly. I think we're very pleased that this project was -- that we initiated it last October. It's exactly what we needed to do in facing the new competitive environment in this border arena. So we know we have significantly lower costs than our several competitors.

Good. Yes sir. Thanks for the update. Good luck.

(OPERATOR INSTRUCTIONS) Laura Champine, Morgan Keegan.

Could we talk a little bit about your business in Upholstery Fabrics from Asia, who your primary customers are there, and where you think that goes long-term as a percentage of your Upholstery Fabric business?

I'd rather not tell you over this conference call who our large customers are. I think we'd be glad to share some of that with you personally in some cases. But, our China platform is set up to deal with the largest US furniture manufacturers who are beginning to source lots of goods or cut and sew kits in Asia. We are currently, to my knowledge, selling every major US upholstery company who is sourcing goods in Asia.

And how big do you think that business can go long-term as a percentage of your Upholstery Fabric business?

We are now 30%, which is up from 5% two years ago. We're moving rapidly in that direction.

Does it ever get to be a majority, Frank?

Absolutely. As we have said in our release and here, we believe there's going to be some level of production -- domestic fabric requirements our customers would like. And we're working on some products that can be produced in the US that are competitive with China in certain niches. But over time that's going to be a smaller piece. No, certainly the way we see it.

And then we've talked a lot about -- on this call about the mattress business in general, bedding in general, demand being weak. Why do you think that is, that the first half and particularly this first fiscal quarter for Culp, that bedding demand has been weak at the consumer level?

I just don't know. We talk with several of the largest bedding suppliers to the raw materials for the bedding industry. And for some reason usually the months of April, May, June are pretty strong months for bedding. And for whatever reason, the unit numbers were down double digits for all of the bedding manufacturers except one.

Along with that, I said earlier Serta went totally one-sided, and of course that affected the yardage. And then in addition to that, while we saw the selling price of the border material reducing. So all of that reflected in the lower sales that you saw.

Now the good news is we have seen bedding bounce back a little bit in August, and it appears like it is now more on track to what we thought it would be in June and July. So through August, the bedding business has definitely picked up and we're hearing that from our customers. And I would want to reemphasize to you that the bedding industry is a very small industry, and we feel like we have significant cost advantages with what we've done with our capital expenditures. We're really in a nice position to take advantage.

We really, when you look at the last nine months, and it will really be by the end of the second quarter a year, we've significantly changed our manufacturing footprint in Mattress Ticking. A year ago, we were -- of course had our Rainese (ph) operation in Canada. We sourced of significant portion out of upholstery fabric plant, which is a decorative fabric plant which inherently is higher cost. And of course we sourced a lot.

When we you look at where we are today, we are operating in just two plants, one in Stokesdale, North Carolina, one in Rainese. And the Rainese plant has more looms in it, more fully utilized. And the US plant, Stokesdale, North Carolina is really a replication on a smaller scale of our Canadian operation.

We're sourcing less as a result of this. And as we look at our cost structure -- and we think this is so important -- we've benchmarked the cost out of China in Mattress Ticking. We are as competitive in Rainese and the US as what we've benchmarked in China in the Mattress Ticking.

But my guess is that to get back to double-digit operating margins, you've got to continue to see the improvements in volumes in that business, and so that takes me back to the end market. What do you think are the primary drivers of end market demand in bedding? And what do current events suggest? Are higher energy and gas prices going to hurt bedding demand later this year? What's changing with the promotional activities of the manufacturers? Anything that can kind of give me a sense of what I should be thinking of in terms of mattress demand as we move through 2005.

In the short-term -- and this is not -- this is certainly not something we want -- we will see a tremendous surge in beds for Alabama, Mississippi and Louisiana in the next few months because the first thing people buy when they have that kind of disaster is they buy a mattress. So you will see tremendous demand from the bedding guys the next 60, 90 days because of that.

For the balance of the year, I think people feel that -- from what our large customers tell us, meaning Sealy and Simmons and Serta, and you can look at these numbers, they're all predicting pretty good balance of the year. They think the rest of the year is going to be good.

I also think when you look at the mattress business, over the past 20 years -- and I think Sealy and Simmons put this in their public documents -- you've seen a 6% annual growth rate over the last 20 years in the bedding business. It's been a consistent growth business in the US economy. So that certainly encourages us as well.

When you also look at the business, a percentage of the mattress business is replacement. So it's not necessarily as deferrable as a sofa or a recliner, for example. I think Sealy may have put in their documents it may be as much as 40 or 50% of the business is replacement. And so that's not tending to be tied to the performance of the economy.

Great. Thank you.

Budd Bugatch, Raymond James.

A couple of questions. I'm confused about a couple of things and hopefully you can help alleviate some of that confusion.

If I look at the individual margins getting inside each of the two businesses, you did a terrific job this quarter it looks like in taking SG&A costs out of the Upholstery segment. It went from -- down some 470 basis points year-over-year, but it is still 11% of sales. And Mattress Ticking is 7.6% of sales, even though that rose about 30 basis points this quarter. I'm just curious if there's any structural reason why those SG&A factors as percentages of sales aren't equivalent.

There is probably I'd say really two factors in that, maybe three. The first is in the Upholstery Fabric area it is higher product development and design costs than the Mattress Ticking. The breadth of the lines, the differences, it's a higher product development cost.

Secondly, we have more warehousing cost in the Upholstery area. Remember, we have regional warehouses in Mississippi and California, and we do not have that in the Mattress Ticking area.

Can you quantify what you think that structurally those two differences would account for? Is it a couple of hundred basis points?

It's -- that's probably -- those two are probably -- and this is a guesstimate -- 70% of the difference. We also cover more customers than the Mattress Ticking area. Remember, Sealy, Simmons, Serta are 65 to 70% of the total marketplace, and our sales are equivalent to that internally. We do not have that kind of domination in the Upholstery Fabric area.

Do you measure on a sales per customer basis or expense per customer basis? Do you look at it that way? Do you look at that metric and see how you can remove costs out of the --?

You can see from our results and what we've done, we have taken a very hard look at our SG&A expenses in the Upholstery area and have reduced them significantly (multiple speakers) yes, and I will tell you we are looking at more. There's no -- we are continuing to look at -- whether it is US manufacturing or SG&A costs, how can we operate more efficiently.

So we're do you think that ultimately goes? What's the ultimate -- the true delta between Mattress and --

I think our model has always been what we'd like to have 7% in Ticking and 10% in Upholstery.

There we go. When you look at the gross margin it's kind of just the opposite. Even though mattress ticking dropped down 500 basis points this year quarter-over-quarter, and I take it most of that, if not all of it, was due to the couple project, is that right?

A lot of it, yes.

Was there a pricing impact too of going to lower costs (multiple speakers)

Certainly, yes. A pricing and volume issue -- volume related.

Maybe you could help elucidate that. Even so, at 13.5% this quarter it is still 350 basis points higher than Upholstery. I don't think you have parsed out the overseas gross margin from the domestic gross margin. That would of course be helpful if you would do that. But what -- where do the gross margins go?

The gross margins, obviously what we're saying is go north from here. When you look Upholstery Fabrics, the information we provide, Upholstery Fabric gross margins were up slightly for the first time in six quarters.

60 basis points, right.

The dollars were flat year-over-year, which is again the first time in six quarters excluding restructuring charges. And we said in our remarks that the significantly higher gross profit in offshore business offset the lower GP margin in the US. Again, --

Do you have a calculator that quantifies that word "significantly"? I've been trying to find that calculator.

You still haven't found that? Keep looking. Again, that is the first time this has happened since we've been pursuing a China strategy.

Let's ask the question this way. How much of the delta is due to the change in penetration of China and how much of it is due to anything you've done domestically to take some cost out? Or how much denigration was due to domestic inefficiency?

What we have said is we had lower gross profit year-over-year in Upholstery Fabrics. With a significant decline even with the cost reductions, we still have lower year-over-year gross profit. But this quarter, for the first quarter that was offset entirely by the growth in gross profit in China. And that probably is the most encouraging highlight of the quarter from our perspective (multiple speakers)

You've given us the 7 and 10 SG&A expectations between the two segments for Upholstery and Mattress. Can you give us kind of a gross margin gold for the two segments?

Yes, I think reasonably we're looking at -- we've always had 18 to 20% gross margin expectations.

Total Company?

No, and individual -- individual segments.

Each segment the same way?

Right. Now, I think given the dynamics of what we're seeing in Mattress Ticking, it's probably when you look at the future going to be harder to 20%. So I think maybe that's a harder target in Mattress Ticking as we look forward than Upholstery Fabrics. (multiple speakers)

Rob, how far are we through the border fabric issue in Upholstery? Can you quantify the yardage? We've had two structural changes in mattresses. I'm sorry. If I used the word upholstery, I meant mattresses. We've had the top of the bed issue or the one-sided mattress issue and now we have got the border fabric issue. We don't have a third shoe to drop, do we? I can't think of what it would be.

No, that's it. Now virtually 100% of the mattresses sold in the US are one-sided. So that uses one-third less fabric. And we're seeing -- I can't guess a percentage, but a huge percentage is now using common borders and then a pillow fabric or panel fabric going on top of the mattress. So that will continue.

What that allows the mattress manufacturer to do is put a less expensive fabric on the border and a more expensive fabric on the panel, and then average his cost down just like the furniture guys have done for years. That's why this capital expenditure that we put in in Mattress Ticking helps us so much with the border, because we are in a great position to really garner a lot of that border business and make money at it. So that's -- and then of course the panel part is just the gravy on the -- is the gravy.

So what do we have, about 22 million mattresses sold in a year -- per year in the country? What's the yardage market? The mattresses are where you really play. The foundations won't be where you play as much, because those are construction fabrics more often, right? (multiple speakers) is going to be a lower-priced fabric.

The border goes around the mattress and the box spring.

But that's a lower cost fabric, a lower-priced fabric. I would assume you get lower margin on that too.

The border -- the same border that goes around the mattress goes around the box spring.

I'm aware of that. What about the margin capability of that? I'm just trying to get the total number of yardage that we can expect to grow in this country and when we will be at a steady-state of that kind of yardage and we don't have a structural change in the way the market is structured.

I think I would guess probably six to nine more months to where this structural change to border, common borders, maybe anniversaries itself out.

My last question, and I don't want to dominate. I'm sorry I've taken too long anyway. $6.6 million in Q2 -- can you parse, the restructuring charge between the two segments?

It's all Upholstery Fabrics (multiple speakers)

(multiple speakers) nothing left in mattress?

Nothing in mattress (multiple speakers)

(multiple speakers) next couple of quarters what do we look like in total?

As far as?

Restructuring.

There's nothing we've announced. We continue to look at steps to reduce costs, but when you look at those restructuring costs, the vast majority of them -- I don't have it in front of me -- 80% plus of them are non-cash and they're write-offs of fixed assets.

If I read your statements right, you had about $26.7 million worth of fixed assets in Upholstered at end the fourth quarter --at the end of last year, and you're going to go to 17. Is that the right number?

That's correct.

What were you at the end of this quarter?

17 -- let's see, at the end of this quarter we were -- let me --

I don't think that is in the release.

No. We were 21 million at the end of this quarter.

So it would be 4 million of fixed assets write-off in the second quarter?

As well as depreciation (multiple speakers)

Thanks Frank, thanks Rob.

John Baugh, Legg Mason.

Budd kind of beat up on one of the things I was going to follow up on, but can you tell us with Upholstery Fabric -- you have very little fixed cost over there, very little assets and I assume very little fixed cost. I think you said you have gone profitable, or will, there. Is there some inflection point where it becomes much more profitable, which, I don't know, it would be counterintuitive if there's not some big fixed cost hurdle you have just gotten over. I'm really trying to drive at what is the profitability of the import model as you see it today. And has that changed, gotten better or worse from when you started out in this business a couple of years back?

The highlight of the first quarter clearly is the significant improvement in our gross profit in our offshore business. We have been -- as you know, we started production there in March of '04. And obviously it was a tough first year. We weren't making a lot of money as we increased the business. But the highlight definitely is the significant improvement in gross profit (multiple speakers)

Is that merely a function of volume, Frank?

It's both volume and getting better at what we're doing, the breadth of customers, the breadth of product. And you see the volume we're doing. Now it is 30% of our Upholstery Fabric sales. It's up 100% from a year ago. And remember, the model we've got is very low fixed cost. We have a finishing and inspection facility over there with strategic alignment with key suppliers that make fabric and yarn for us. So it's not a high fixed cost base. So there's good leverage, and we are very excited about what we're seeing in placements for this fall market coming up as well. We are getting better and better at the product development aspect.

If we took the US equation out of Upholstery, is the import model at a 10% EBIT? I think you said 20 -- 18 to 20% gross margin. I can't remember whether it's 10 (multiple speakers) so you really think it can be the 10% EBIT business, and then of course you've got to --

Yes, easily.

-- wind down this US thing. That could, I guess, take years.

I wouldn't say years. I think what we're encouraged about, look at the progress we've made certainly four years. We started the first rightsizing, if you will, in 2001. We began seeing the trends in the industry. And in 2003 we felt like we needed to move China. We did that. And we have continued to aggressively adjust and adapt to this changing environment. And today, we don't have a lot left. We have $17 million in fixed assets left versus four years ago we had almost 100. So we are near the tail end of what's left here (multiple speakers) we still believe there's going to be some level of business here that can be profitable.

I agree with you. Is it all cut and sewn pretty much that's coming in through on your program? And is there -- are the Lane's of the world and La-Z-Boys of the world telling you we are going to get to this level of our business being cut and sewn, and then that's probably it, implying the rest of it would either be made domestically or come in finished form from Asia, which I don't think there's going to be a lot of. What's your sense, Rob, of where we are in that migration?

The good news for us is I think we're just at the start. And I say just at the start for a couple reasons. The good news for Culp, so far we're the only Company that I know of that is producing US-designed quality, finishing fabrics in China today. There's a lot of Chinese people doing it, but they don't produce what we produce. Our product is different.

We're seeing all of the big manufacturers, because of competitive reasons, more and more competition, having to go to cut and sew kits. And what we're seeing and what we've learned, when a manufacturer goes to Asia, or specifically China, for a cut and sew kit, we know one thing -- it's going to be big because it has to be big for him to make it work in his system. So we're seeing all of the volume items we think are going to move offshore.

What that will leave in the US is what we call that neckties, the pillow patterns, the highly decorative goods. Culp, as you know -- John, you have us a long time. We were always a volume producer. That was our strength. So we feel like we're just at the start of what can happen with the cut and sew China.

And another important fact, keep in mind the very best way for us to sell in China is the cut and sew because we produce the fabric, finish it, inspect it. And guess what? We ship it to a cut and sew guy 30 miles away and we have no inventory obsolescence risk whatsoever of that fabric.

So, Rob, for the industry, not Culp, when you talk to your major customers, what do you think in yardage is going to go cut and sewn? 20% of the industry, 40, 60? You mentioned you're at the volume end. In yardage what do you think is going to (multiple speakers)

I will answer your question this way. Several large customers that I visited with break their business down into two categories. They have 60% of their business is special order -- 50 to 60% is special order; 40 to 50% is what they call volume business, the runner business. We think -- you ask my opinion. I think all of the volume business is going to move offshore. And what will be left in the US is the necktie business, the more decorative fabrics. I hope I'm wrong, but that's my gut feeling.

, Great, that's wonderful clarity. Thank you.

One other thing, to agree with you on something, we do not see as much finished upholstery furniture coming in.

Super. Thank you.

John Balm (ph), private investor.

Look forward to seeing you at the annual meeting. Most of my questions will be -- most of these might be some balance sheet related. Inventory of 52 million at the end of the quarter, do you see that reducing from here with the sale to American Fiber?

Yes we do. We have -- along with the reduction of yarn manufacturing, we have a significant inventory reduction goal initiative under way. You will see that come down.

Will that be at the end of the second quarter, the end of the fiscal year? And can you quantify that (multiple speakers)

You will see significant progress for the second quarter and continued progress through the balance of the fiscal year.

Very good. And does this have -- is there any tangential benefit by your American Fiber sale? Does this dovetail at all to the Solutia yarn? Is there any crossover right there, or is that totally separate inventory issues?

Totally separate inventory issues.

Fair enough.

But by being in the yarn manufacturing business like we were, you have to carry certain amounts of fiber and filament inventory that we no longer have to carry. So they will be worked down.

And that will be a source of cash?

That will be a -- yes.

The Shelby warehouse, is that going to be sold, or what's your plans for that?

The Shelby plant will be sold, although it's an older facility. We do not expect a lot from that.

I'm sorry. When would you put that up for sale? Is the approximate selling price equal to book value?

No. It would be -- you're looking at at best $2 a square foot for old textile buildings at best.

And the remaining book value you have of the Upholstery Fabrics fixed assets of 17 million, does that approximate fair market value, do you know, or is it higher or lower? I'm just trying to get some guess of where we're looking at with -- if you -- is this kind of equal to current value.

Textile equipment is probably at best selling for 10 to 20% on the dollar, at best. The majority of the 17 million is not buildings, it's equipment.

How much of that 17 million is realty and how much is equipment?

Not a lot of building in there. But the equipment we do have left -- I will say this, though. The equipment that is left is all very modern because after we downsized, we kept the best equipment, obviously.

Fair enough. CapEx I see year-to-date was 3.8 million, and you've got a CapEx budget I saw of -- is it 5 million -- at least you espoused (ph) that to the bank. Does that leave 1.2 million left? And if so, when will that be expended, in what quarter?

That will be expended over the balance of the year.

Ratably?

I would say ratably.

Okay. I understand the public nature of this conference call, but there was some EBITDA projections in the (indiscernible) projections, minimum levels in the fixed amendment to the credit agreement. Can you tell me is that a target? Are you going to meet that by a wide berth, or what --?

I think the way I will answer you is you can look at our earnings per share forecast that we've given in the press release and fairly easily back into an EBITDA number for the quarter.

Fair enough. On the depreciation amortization, there was like 2.65 million for the second quarter. Will that be declining this year due to all of the substantial write-offs?

Yes.

And if so, can you quantify your full-year depreciation and amortization? Are we down to 11 million right now, or is it going to be less than that?

It's below that. We're more likely like 10 -- 9 to 10.

I was about to say. That will be 9 to 10 million going forward, correct? (multiple speakers) 2.6 the first quarter.

That is correct.

Cash interest paid and cash taxes paid for the first quarter please?

I do not have that right in front of me. We can get back with you (multiple speakers). The interest expense --

Is that pretty close to cash interest then?

No, because the interest payments are not made during the first quarter.

Okay, fair enough.

And taxes are only what we pay in Canada.

Just Canadian taxes, right? (multiple speakers) I think I did here before that even though you've got state and federal substantial tax loss carryforwards there is no further tax refunds due.

That is correct, no immediate. But in the US we have substantial operating loss carryforwards so we won't pay taxes in the US for a long time. And in China we have tax holidays for the next I think four or five years.

I did see in your 10-K that you tested -- this always gets a bit, I won't say touchy, but the utilization of your tax loss carryforwards in order to leave them reflected on the balance sheet, what is the GAAP rule more likely than not they're going to be consumed? Are you guys still standing by that?

We sure are.

Okay. One last one here. That may have been -- I think it was probably hit already with respect to how many basis points was the Mattress Ticking restructuring and what would the Mattress Ticking operating margin have been without the capital project in place. But you said that those are going to be substantially complete by the second quarter, correct?

That is correct. By the end of the second quarter. We're ramping up that production as we speak.

So I expect to use the baseball scenario. On the Mattress Ticking capital project side are we eighth inning right now, ninth inning? Where are we at there?

I would say we're in the bottom of the eight inning.

And the game is still wide open on the Upholstery Fabrics side, at least over in China. Is that correct?

By that you mean?

In terms of is that -- you said that the growth opportunities over there, you phrased those as pretty exciting, and as far as what remains here in the US, was the terminology the necktie, which is kind of the finishing operations?

No, John, on the necktie, we talked about more decorative fabrics left in the US, the pillow patterns.

I think those questions were adequately addressed previously. Thanks guys. Again, looking forward to meeting you at the annual meeting.

Jeff Yamain (ph), RRH Capital.

A question about your offshore operations. Have they grown sequentially from the fourth quarter of '05 through the first quarter of '06?

What was the question again?

Your offshore operations for Upholstery Fabrics, did it grow sequentially from the fourth quarter of '05 to the first quarter of '06?

Yes it did.

Further, in regard to the yarn restructuring that you guys just announced, was that part of the restructuring you guys have sort of forecast in the fourth quarter of '05? I think that sort of lead to something like 20 million in SG&A annualized savings going forward.

No, that was not.

So that is in addition to that?

Yes, and those restructuring charges will be reflected in our second quarter. Again, most of which are non-cash.

Do you guys have any projections for what kind of annualized savings might result in yarn restructuring?

No, we don't.

Okay. That's all my questions. Thank you very much.

Budd Bugatch, Raymond James.

Very quickly. I'm confused about something. I think you said that you had 9.8 million yards of upholstery in last year and 9.1 million this year, and yet the Q of last year said 9.3 million. Is there a reason for that difference, Frank?

I will have to look into that. I don't know.

Maybe we can talk about that. Thank you very much.

Gentlemen, at this time there are no further questions. Mr. Culp, I will turn the conference back over to you, sir.

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

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