Culp Inc (CULP) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to this Culp Inc. conference call. As a reminder, today's call is bring recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Pat Lawson. Please go ahead.

Good morning, and welcome to the Culp conference call to review the company's results for the third quarter of fiscal year 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 and the forward-looking statements made in this call. The information being provided today is as of this date only, and Culp expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations.

In addition, during the 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 in 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'll now turn the call over to Rob Culp, Chief Executive Officer. Please go ahead, sir.

Good morning, and thank you for joining us today. I 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 results and operating trends reflected in the third 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 in each of our operating segments and our fourth quarter business outlook.

During this fiscal year, we have been implementing ambitious plans in each of our operating segments, mattress ticking and upholstery fabrics, in response to the significant industry-wide structural changes that are happening in the furniture and bedding markets. We have made solid progress in the first nine months of this year. While we're still working through this process, we are realizing the benefits of our actions and seeing improved operating results in both segments.

Although the transition to a leaner and more agile business model is affecting our reporting financial results, we believe we are taking the right steps to be competitive and position the Company for growth over the long-term in today's global marketplace. I would give you further details in a minute, but first I will ask Frank to comment on our financial results for the quarter. Frank?

Good morning, everyone, and thank you for joining us. Sales for the quarter were 61 million, a 12% decrease from the third quarter of last year. This overall sales decline is principally attributable to continued softness in our US produced upholstery fabric business and lower sales industry-wide in mattresses. We will comment more specifically on each business segment in a moment.

Our gross profit margin was 9%, compared with 9.9% in the third quarter of last year, excluding restructuring charges in both quarters. This overall decline is related to lower sales of US produced upholstery fabrics. SG&A expenses declined 26% to 6.1 million for the quarter, compared with 8.2 million last year, reflecting significant cost reduction efforts, mostly in the upholstery fabrics segment. Interest expense was 1.0 million, compared with 870,000 for the prior year quarter.

The third quarter results include after-tax restructuring charges of 1 million or $0.09 per diluted share after taxes. Excluding these charges, net loss was 1.1 million or $0.10 per share. The third quarter of 2005 also included restructuring charges of 3.4 million or $0.29 per share after taxes. Excluding these charges, net income for the -- net loss for the prior period was 1.5 million or $0.13 per diluted share.

I'd like now to review our results by operating segment. With respect to mattress ticking, we reported 22.7 million in sales for the quarter, an 11% decline compared with 25.6 million for the same quarter last year. Total yards sold were 9.6 million, down 12% compared with 10.9 million a year ago. This trend reflects an overall softness in industry-wide sales of mattresses, as well as a decline in demand for the printed ticking product line, a less popular category.

The average selling price was $2.35, basically the same as $2.34 for the same period a year ago. Operating income for this segment was 1.8 million or 7.9% of sales. For the prior year period, operating income was 1.6 million or 6.2% of sales. We are now realizing the benefits in terms of productivity gains from our capital project in mattress ticking. Looking at results on a sequential basis for this fiscal year, we were pleased to show continued improvement in operating margins from the first quarter margin of 5.9% and second quarter operating income margin of 6.9%.

Now turning to the results of our second operating segment, upholstery fabrics. Sales were 38.4 million, representing a 12% decline from 43.5 million in the third quarter of last year. Upholstery fabric sales for the quarter continued to reflect the significantly lower demand industry-wide for US produced fabrics, driven by the current consumer preference for leather and suede furniture and the increasing customer selection of other imported fabrics, including cut and sewn kits. These are driving this trend.

However, the lower sales of US produced fabrics were partially offset by significantly higher sales of offshore produced fabrics. Total yards sold were 9.1 million, down 13% compared to 10.4 million a year ago. The average selling price was $4.24 per yard, about 1.4% higher than $4.18 for the same period a year ago. We are pleased with the continued growth in sales of upholstery fabrics from offshore sources, which include fabrics produced at our China operation. These sales totaled almost 15 million, up 89% over the third quarter last year and accounted for 38% of overall upholstery fabric sales.

Overall, the upholstery fabrics segment reported an operating loss of 1.6 million for the third quarter, compared with an operating loss of 2.0 million for the same quarter last year. These results reflect significantly lower gross profit in our US operations, versus a year ago, due to lower sales volumes and higher manufacturing variances as the Company is incurring transitional costs with respect to restructuring our US operations.

However, for the first nine months of fiscal 2006, we have reduced our operating losses in this segment to a loss of 2.1 million compared with a loss of 4.4 million for the same quarter a year ago. For the quarter, SG&A expenses declined 31% and represented 9.7% of sales compared with 12.4% of sales a year ago. For the year-to-date quarter, SG & A expenses were down 33%.

Let me turn to the balance sheet now. At the end of the third quarter, our balance sheet reflected a cash position of 12.9 million compared with 5.1 million at the end of fiscal 2005. I would like to note that we have of March 15th principal payment of 7.5 million plus interest on our $50 million term loan, and we will not have any principal payments due on this loan for another year. Long-term debt stands at 55 million and our debt to capital ratio is 42%. I would also like to note that we have reduced inventories by 10 million or 19% since the end of our first quarter of this fiscal year, all of which relates to upholstery fabrics.

Now, I'll 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 will start with mattress ticking. As you know, mattress ticking has become an increasingly important part of our business, and we believe we have a strong competitive position in the marketplace. Mattress ticking sales accounted for 37% of our total sales this quarter.

As Frank mentioned, the decline of sales during the quarter is related to lower bedding sales industry-wide, and also to a decline in demand related to the printed ticking category, which is becoming a less-popular category. We have shown sequential improvement in our operating margins over the course of fiscal 2006, as we have completed our $7 million capital project, designed to improve our globally competitive cost structure in this segment. We were in full production on our new Stokesdale, North Carolina weaver operation during the third quarter and have made excellent progress. We expect to realize further productivity gains in this operation in the fourth quarter and move closer to our target productivity levels by the end of fiscal 2006.

Now, I'll give you an update on our Upholstery Fabrics segment. Let me first discuss our US operations for Upholstery Fabrics. During the third quarter, we continued to make progress in our efforts to bring our US manufacturing cost and capacity in line with current demand trends. As Frank noted, we have reduced our selling, general and administrative expenses in this segment by 33% year to date.

Since the beginning of fiscal 2006, we have worked diligently to revamp our US Upholstery Fabric product strategy by offering a more select group of attractively priced high volume, decorative, and velvet fabrics that are well-packaged by color and coordination that can be delivered in shorter lead times. We are beginning to see the benefits of this shipment strategy with higher placements of these products with our customers for the upcoming furniture market in High Point in April.

Also with this shift in product strategy, we have taken very aggressive steps since the beginning of the fiscal year to reduce manufacturing costs, capacity and SG&A. During this period, we have consolidated two velvet manufacturing operations, combined our finished goods distribution and design centers, closed two of our three yarn manufacturing plants, and have been implementing our plan to outsource finishing for decorative fabrics.

We've also combined our sales, design and customer service activities for Culp Decorative Fabrics and Culp Velvet/Prints, the two divisions which formerly existed within the Upholstery Fabrics segment resulting in a more unified approach for our customers. Once our outsourcing for finishing is completed, which is now expected by the end of fiscal 2006, Culp will have three manufacturing facilities operating in the Upholstery Fabrics segment, one for velvet fabrics, one for decorative fabrics, and one for specialty yarns.

As a result of these consolidations of earlier restructuring actions, the book value of our US-based upholstery fabrics fixed asset is projected to be 13 million by the end of fiscal 2006, compared with approximately 52 million at the end of fiscal 2004. Our goal is to obtain a sustainable and profitable business model in the US that in conjunction with our offshore operations will support our customers' fabric requirements.

Although we have taken decisive actions and made considerable progress in our US operations, we're taking some additional steps to help us meet our objectives. During the fourth quarter of fiscal 2006, we are dropping a number of low-volume products that do not fit our US operating model of more focused volume-oriented products. By the end of fourth quarter, we are also discontinuing the production of our US-produced printed upholstery fabrics, due to the substantial decline in sales in this product category. Sales of this category accounted for 3.7% of our overall upholstery fabric sales through the first nine months of fiscal 2006. We believe these steps will move us closer to reaching our target operating model and will further reduce our US manufacturing costs.

Now, let me to turn to our non-US operations in the Upholstery Fabric segment. We're pleased with the positive trends we are seeing in this business. As Frank noted, sales of upholstery fabrics produced outside of our US manufacturing plants increased by 89% over the third quarter of last year and accounted for 38% of sales. Customer response has been favorable and we are excited about the innovative products that we are now offering. Our most recent introduction of offshore-produced fabrics were well placed at the Las Vegas furniture market in late January and we are seeing solid placements with customers for the spring furniture market in High Point.

We believe the ongoing development of our China operation represents an important 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 designed to meet their fabric needs. The cornerstone of our China strategy is our state-of-the-art fabric finishing and inspection facility located near Shanghai. With specialized equipment, we have the control -- we have the capability to control the value-added finishing process, thereby assuring our customers that our fabrics will meet or exceed US quality standards.

By providing our innovative fabrics and value-added technology in a low cost environment, Culp offers differentiated products and value to our customers. We have a growing upholstery fabric operation in China with approximately 200 associates. We are continuing to expand our capabilities and to leverage this platform as customers continue to source more of their fabric requirements outside the US.

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

We expect to see further progress during the fourth quarter with respect to the many strategic initiatives that are underway at Culp. Overall, we anticipate a similar year-over-year decline in sales as we had in the third quarter. We also expect sales in our Mattress Ticking segment will show about the same year-over-year decline as we had in the third quarter. Operating income margins in this segment are expected to improve slightly over the same period last year, due to the benefits from our capital project.

In the Upholstery Fabric segment, we expect continued growth in sales of fabrics produced outside the United States. However, we believe sales of domestically produced upholstery fabrics will continue to reflect weak demand, which will result in a similar overall segment year-over-year decline as we had in the third quarter. Even with lower US sales, however, we believe the Upholstery Fabric segment's operating results will show substantial year-over-year improvement, due to less manufacturing variances in the US and higher profitability in our non-US operations. As a result, we expect to report a modest operating loss in upholstery fabrics in our fourth quarter, compared with an operating loss of 2 million for the same period of last year.

Considering these factors, we expect to report fourth quarter results in the range of minus $0.04 to $0.02 positive per share, excluding restructuring and related 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 still 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 impact of raw material costs. We estimate that restructuring charges of approximately 1 million, or 650,000 after-tax, or $0.06 a share after-tax, will be incurred during the fourth quarter. Including the restructuring charges, the Company expects to report a net loss for the quarter in the range of minus-10 to minus-4 loss per share.

We remain focused on our primary objective to restore Culp to profitability. The past year has been an important period of transition, and we have continued to make measurable progress. We are close to realizing the full benefits of the capital project in the Mattress Ticking segment and, as a result, have enhanced our cost competitive position on a global basis.

Our non-US upholstery fabrics business, which includes our China platform, is gaining momentum, and we are continuing to expand our capabilities and our global market reach. We believe the strategic steps we have take in our US upholstery fabrics business to revamp our product strategy and substantially reduced operating costs and capacity will move us closer to our goal of being profitable in this segment.

Overall, we believe, the fourth quarter will continue to reflect the benefits of our efforts over the past year, and we expect to see improved operating results over the same period last year.

With that, we will now take any of your questions.

Thank you, gentlemen. [Operator Instructions].

We will first go to Laura Champine from Morgan Keegan.

Hi, Rob and Frank.

Good morning.

Morning, Laura.

Could you comment on, in both segments, on how sales trends are developing at your larger customers versus the smaller customers? Are you seeing growth at smaller customers that are quicker to pivot to imported products relative to your bigger customers? And who is using more of Culp's products?

Actually, Laura, our Upholstery Fabrics achieved -- well, let's start with Mattress Ticking. That business is still dominated by the Sealy, Simmons, and Serta of the world, plus some large regional chains. And the business is continuing to grow a little bit with those customers. I think, overall, the effect in the Mattress Ticking business has to do with the lower selling prices of the fabrics, overall, versus the last couple of years.

And then, number two, I think, we're close to a 100% one-sided mattress, and that is affecting that business. So we don't notice any trend, either way, on the Mattress Ticking side. But certainly, business is softer in addition to the lower selling price. The one-sided mattress business seems to be softer in the mattress category this last quarter.

On the Upholstery Fabrics side, because of the great success of our China platform, really the best people available to take advantage of that are the ones that have established their cut and sell operations in China. So our business in Hsinchu, which is our operation, is being heavily dominated by the large players in the US. And that is growing very nicely and, in fact, if anything, it's growing too nicely. It's growing very rapidly.

Are you saying much growth in your product being used for upholstery -- in your Hsinchu product being used for upholstery that's fully finished in China or is it still just cut and sew?

It's vastly still cut and sew. There is some finished furniture being made in China. The folks that have -- there have been a few that have been successful, lots of leather-finished furniture being made in China, some suede-finished furniture being made in China. But by and large, furniture under retail and under 799, because of the freight factor and speed of delivery, it's still a cut and sew business.

Do you think it will stay that way, Rob?

Laura, we see that continuing. We don't see, at the mid price points and below, lots of finished furniture coming in from China. There is just not enough difference in the price point because of the freight factor.

Got it. Thank you.

Laura, I'll add. This is Frank. I'll add to that. We have seen, even know what Rob said is exactly right, there's certainly a number of people over there that have implemented or put in a lot of capacity to make finished furniture. We've seen that at a number of locations.

Since you chimed in, Frank, I'm going to ask you, if you -- if Culp has thought about or has started its own cut and sew operations in China?

Laura, as we said in our press release and in our conference script here, we intend to expand our capabilities. We've said that all along and build on our China platform. But to echo what Rob said, it's -- when you're growing 80% plus quarter-over-quarter, that puts a lot of operational challenges on the system, in our supply chain, in our capabilities. So we've got to be cautious with how we expand carefully and under control.

Okay. So cut and sew is not a sure thing at this point, is that the way to read that statement?

No. The way to read that is we intend to expand our capabilities at that platform.

Okay. Thank you.

That could include cut and sew and other things.

Got it.

Thank you. Next we'll hear from Budd Bugatch from Raymond James.

Good morning. How are you doing?

Hi, Budd. Good morning.

Good morning, Rob. Good morning, Frank. A couple of questions. One, do we have a time frame for the domestic decisions that you can talk to us about?

First, I'd like to answer that. Budd, what we're trying to do is we've outlined in our release and today, we are transitioning our US business to a different operating model that includes a revamping of our product strategy to a more select group of attractively priced, higher volume, more focused products, so we can have more streamlined operations here with fast delivery.

Early results on those products that were introduced in December are encouraging. Now, so once you understand that the US strategy, I mean, we're certainly, if you do it in a baseball analogy, I would say we're probably in the seventh inning of what we see with US. And which means we should know by the end of next year how the business levels out.

What year are we talking -- fiscal, calendar or what?

Fiscal year 2007.

Fiscal year 2007.

Fiscal year 2007, which is our next fiscal year and as we said, we only have, after we complete the outsourcing of our finishing of decorative fabrics. We only have three plants left, one for decorative fabrics, one for velvets and our specialty yarns plan.

And that all we have. We're pretty much had all that in the last quarter, too, right?

Pardon

We were there - pretty much there at the end of last quarter?

Well, except for this finishing plant.

Yes.

We have a plant that was taking as about six months to transition to outsource finishing of decorative fabrics.

That's all done now?

No. It'd be done by the end of April.

Okay.

By the end of April. But we're getting down to where there, you know, there is no more opportunities to consolidate plants, so any further reductions have to be minor plans.

And they are binary from here on out, right?

Yes. That is correct.

Yes. And that was my question. I mean what we have two different -- excluding the yarn we have basically two different operations -- of velvet and a decorative fabric operation, right?

Exactly.

Okay.

Now, what have we done --?

What are criteria for each of those?

Well, in the velvet area, as you know, there's a lot less competition there. There's only one other principal competitor in the United States.

That's good, right?

That's very good. Obviously, as long as customers will choose to buy velvets in the United States, that's very good. And we have been the leader in the velvet side for a number of years. And we've got some new products that we've introduced under the business model that I've just spoke about that you know, early signs are encouraging.

Now, you moved your -- is that your woven velvets or is that more than that capacity been moved to Anderson?

Well, we have two kinds of velvet. In that Anderson plant we consolidated the velvet operations in the first quarter of this year.

that's what I thought but punch velvet is in there as well, right?

That's correct.

So you got woven and the punch. Okay And the decorative fabrics is all now--?

Decorative fabrics is -- you know than that -- well, that has more competition. You've got plenty of competition in domestic decorative fabrics. And as we all know, there are probably -- and there are more weaving machines chasing a declining amount of business.

So we are excited about our new product offerings there that are more focused, attractively priced. But is probably more of a challenge in that area with the extent of competition.

So it's a higher probability of non-success or a low probability of success. Okay. There because of the additional competition and the additional available capacity for people who may not know their costs as well as you might.

Yes. But we've done everything we know to do to move more of the costs structure to a variable basis, with moving yarn outside, moving finishing outside, reducing our fixed costs, revamping the product strategy to -- so we're doing all the things -- and -- that we know to do.

And so of the remaining US capacity, what is it, about 40% of velvet and 60% is the decorative textiles?

Something in that range.

Okay. Did you disclose -- I do not think you did in the release, the average selling price per yard of the upholstery fabrics?

We did this morning in my comments. I will give that to you again.

Well, that shows you how...

4.24 per yard this quarter versus 4.18 per yard same quarter of last year.

And if look at that domestic versus our friends over -- across the large pond, how does that differ?

The -- somewhat less in China. Obviously, somewhat less in China...

So the China...

China prices are 3 average from, I'd say, $3 to $4.

Okay.

You know we of course have targeted the volume price categories.

Okay. All right. My last area of question is did you disclose also the profitability of China versus the US?

You know we still haven't done that, Budd. That's something you ask about every quarter, and that's just something we haven't done yet.

I'm glad I am consistent.

You are consistent. I wouldn't hold your breath. I would not hold your breath on that one, though.

Okay. Thank you very much. I'd go back and breathe.

Okay.

Thank you very much.

[Operator Instructions].

Next, we'll hear from Joel Havard of BB&T Capital Markets.

Thank you. Good morning, guys.

Hi, Joel.

Good morning, Joe.

Lot of good questions thus far regarding progress on the consolidations and overseas initiatives. I wanted to follow those up with a clarification on the SG&A side. Great progress thus far. If I recall right, this was blending the back-office sales and marketing efforts, et cetera, of CDF and CVP. Is that done or is there further work to do? And are you fully realizing yet the cost benefits? Clearly a big year-over-year change here in Q3. Is there more to come?

We implemented some very difficult and painful actions last -- early first quarter of this year. And we combined those divisions, including all operation sales, design, distribution, back office. We took all that medicine in the first quarter of this year. And you have seen that low SG&A significantly each quarter. Year-to-date, we are down 33%. So we -- the approach Rob and I took was we needed to do it all once, instead of dribbling it out on a quarter-by-quarter basis. And we do not -- we got down to a very lean level and we do not see a lot more.

Okay. So these steps are complete and the benefits are being realized. And this is kind of the new platform going forward?

Yes.

Okay, good. And --

We always -- having said that, Joel, we are always looking at every area of SG&A going forward and where we can operate with less cost. I mean, in all honesty, we do not see a lot more lowering of SG&A.

Sure. Well, you guys have done a good job managing your way down through this. We're looking forward to when it starts to get a little stronger again. A follow -- like Budd, I wasn't listening close enough to have caught the average price per yard on ticking. I know you said it, but I did not write it down quick enough.

All right. Ticking, to repeat that, was 235 per yard this quarter versus 234 a yard in same quarter a year ago -- so basically, the same.

Okay.

And we are seeing that is a change from previous quarters, where we've had lower average selling prices year-over-year. And that's due to the fact that our knitted ticking business is growing, increasing its growth rate, which carries higher selling prices. So it's helping the overall mix.

As well as, we're getting closer to the end of the structural change in the mattress business, converting to the more single-sided mattresses as well as common-border ticking.

Yes, Joel. This is Rob. I might add, in the Ticking area, a couple points that are positive for us. We're -- still we're seeing very less view in our Spring Mattresses come into the US from China because of the shipping issues and the freight issues. We are seeing lots of Disco Mattresses come in, but that's still a smaller part of the business.

So that's good news for us. And maybe, just as important, some of you may be aware that the US government instituted some quota requirements on certain categories of textile fabrics to protect the apparel or what's left of the apparel business. That has impacted us somewhat negatively on the Upholstery side.

That's the bad news. The good news is all of the Ticking fabrics fall under the quota categories. So for the next three years, it appears there'll be very little off chance of any imported fabrics coming in from China of Ticking-like fabrics. So that's certainly good news for our ticking business.

Yes.

And then we saw some threats, as you know, what we've disclosed every quarter for a while. We didn't see a lot of threat. Some people were trying some things. But with the implementation this quota regulations, it's over. There's not any chance for ticking coming from China.

And that's probably word from our additional conversation later as well. Well, the knitted ticking -- what is the application for that? I'm unfamiliar with the product.

The knitted ticking is going all over paddle off the top of the mattress scope. You know, the mattress guys have gotten very smart in the last couple of years. They're doing just what the furniture guys did, with the body clout and a pillow. That's the good analogy.

The ticking has a low-priced border on it, which is about two-thirds of the fabric used or one-half of the fabric used. And then the top part of it is the panel, which is what you actually sleep on, and they're using higher priced knit goods on the panel and trying to lower the cost as much as they can on the common border.

And of course, they've probably got a cheap non-woven or something on the bottom, since it is a no-flip there.

That is correct. We don't notice it, but there's not much on the bottom.

Yes. That's it, guys.

Thanks, Joel.

Thank you.

And next, we'll hear from Sam Bergman of Bayberry Capital Management.

Morning, gentlemen. How are you?

Good morning, Sam.

Morning.

Several questions. First of all, who is the nearest competitor in the Mattress Ticking business?

We have really three competitors, I guess, in the Mattress Ticking business. What's left of the Burlington business that was bought by Wilbur Ross, they are -- they still have -- they are still a factor in the Mattress Ticking business. A private company, called Blumenthal, is active in that business. And then a Belgian company called Gamma Holding, G-A-M-M-A Holding has a Bekaert division, which has a ticking plant in the US. And those are the three main competitors in the US mattress ticking world.

Now the capital project that you did for $7 million, was that mostly for the ticking business?

All -- it was all for the ticking business.

All. Let me ask you then if that was all for the ticking business, the declining of sales quarter after quarter, how could you spend that kind of money on capital projects when the returns just don't seem to be there because of decline in sales?

The capital project was designed to lower our costs domestically in North America and be sure we are positioned to compete effectively globally. And that capital project, so far with implementation this year, has done that. We did not increase capacity with that capital project. That was something we were careful not to do.

When do you foresee full implementation of that project?

The project that was fully implemented, we were running all of the equipment by the end of the second quarter, end of October, and throughout our third quarter, we are improving the productivity of that investment and those operations. And believe we will reach full standard operating efficiencies by the end of our fourth quarter, which is the end of April.

And this was a clear message to our customers and our competitors that Culp intends to be globally cost competitive in North America. There are no other of our competitors that are making the kind of investment we are. Bekaert Textiles, as Rob mentioned, has made some investments over the past five years.

Would it have been better, though, to take out one of the other competitors and consolidate or not?

No, and that's something we carefully looked at. But the other competitors have very old equipment, except for Bekaert.

I see.

And it would not have made sense. These days, Sam, we must approach the competitive landscape from a global basis. To remain viable over the long haul, we got to be able to compete with Turkey and China and India and wherever.

Going to the ticking business still with one more question, it was down 11% for the quarter, do you see any light at the end of the tunnel for the drops to narrow and perhaps become positive sometime in the future?

Yes, we do. I think the ticking -- the bedding market has been soft, as Rob mentioned, over the third quarter, and the early part of our fourth quarter, remaining softer as well. But we definitely see those declines in sales narrowing next year.

So what does the capital project unable to do for you in the ticking business? Is it getting out product faster? Is it less waste? Can you explain that to me?

Yes, we had some of our equipment in the mattress ticking business located in one of our upholstery fabric plants. Upholstery fabric plants, but inherently are higher cost. So we consolidated some weaving machines in our mattress ticking plants as well as replaced older equipment with new equipment. And we have increased our productivity, lowered variable cost and lowered our fixed cost in that operation. And this has really helped us -- it's helped us tremendously compete in the world we're in.

As Rob talked about, the conversion of customer to buying more common-bordered tickings, which go around the mattress and the box springs, those average selling prices have fallen significantly over the last two years. Because we had the foresight to, you know, make the capital investment and lower our cost structure in North America, we've been able to compete very effectively given that trend. And we believe some of our competitors have not been able to compete as effectively.

I mean one of your competitors, Quaker Fabrics, I guess, has outsourced some of their products in South Korea. Is there a cost advantage to do that instead of China?

Sam, the cost -- the clear cost advantage that we see is in China.

Yes. I would think so. Okay. CapEx for this coming year, do you have a number?

Not to exceed 3 million.

Okay. How and -- just going back to the SG&A, is there any room on the SG&A to make some changes, to get that down a little further or would it have to result in letting go some people?

I mean as I said earlier, Sam, we've taken huge steps in the first quarter of this year, and we're down 33% in our upholstery fabric business year-to-date. We're down in the mattress ticking area. We're down 10% year-to-date. So -- I mean we've really taken some very difficult steps this fiscal year. And as I also said, we are continuing to closely scrutinize and monitor, look for ways we can be more efficient in both our businesses. I would say overtime, we probably have some room to move it down some more, but we don't see a lot. We're not looking at 20% and 30% numbers declines.

No, I wouldn't think so. What is, at this point, your breakeven number on the topline?

Obviously with the fourth quarter guidance we're giving, we're very close to that on the upholstery side.

On the upholstery side. What about on the ticking side?

Ticking side, we've been increasing our gross -- our operating margins throughout this year, and we're well past breakeven there.

Okay. Thank you very much for the time. Good luck in the upcoming quarters.

Thank you, sir.

And gentlemen, there appears to be no further questions. Mr. Culp, I'll turn the conference back over to you for any additional or closing remarks.

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

That does conclude today's conference. We thank you for your participation.