Culp Inc (CULP) 2006 Q4 法說會逐字稿

Good day and welcome to the Culp Incorporated fourth quarter 2006 results 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 Dru Anderson. Please go ahead.

Good morning and thank you for joining us. Welcome to the Culp conference call to review the Company's results for the fourth 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 publicly release any updates or revisions to these forward-looking statements to reflect any changes and expectations.

In addition, during this call the Company will be discussing non-GAAP financial measurements that exclude restructuring and related charges. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement 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 Web site 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 of analysts and investors.

With me on the call today is Frank Saxon, President of Culp. The purpose of this call is to review financial results and operating trends reflected in the fourth 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 at each of our operating segments and our first quarter 2007 business outlook.

Throughout fiscal 2006 we've 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.

With this year now behind us, we believe we've made considerable progress on many fronts as we transition Culp to a leaner, a more agile business model. While we have made many tough decisions and are still working through this progress, we are now realizing the benefits of our actions and seeing improved operating results in both segments.

The fourth quarter proved to be a defining point in this process with our best operating performance in two years. We remain confident that we are taking the right steps to be competitive and to position the Company for growth over the long-term in today's global dynamic marketplace.

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

Good morning, everyone, and thanks for joining us.

Total sales for the quarter were 70.7 million, a 4.7% decrease from the fourth quarter of last year reflecting mattress ticking sales down 10.8% and upholstery fabric sales off only 1.2% This represents our lowest overall quarterly sales decline this year.

I will comment more specifically on each business segment in a moment.

Our gross profit increased 16% to 8.6 million, or 12.2% of sales compared with 7.4 million, or 10% of sales excluding restructuring charges in both periods. This reflects substantially higher gross profit in our upholstery fabric business.

SG&A expenses declined 28% to 6.5 million for the quarter compared with 9 million in the same quarter of last year. This reflects significant cost reduction efforts in the upholstery fabrics segment.

Operating income, excluding restructuring charges, was 2.1 million, or 3% of sales compared with an operating loss of 1.5 million primarily as a result of improved profitability in upholstery fabrics.

Interest expense was 1.0 million compared with 924,000 for the prior year quarter. Therefore, the Company reported a net loss of 1.5 million, or $0.13 per share for the fourth quarter compared with a net loss of 7.7 million, or $0.67 per share of fourth quarter of last year. This includes restructuring charges.

The fourth quarter results include restructuring and related charges of 4.7 million of which 4.1 million were non-cash. On an after-tax basis these charges were 3.2 million and $0.27 per share.

Excluding the restructuring charges net income was 1.7 million, or $0.14 per share. Included in the net income of 1.7 million is an income tax benefit of 661,000 that reflects losses from U.S. operations combined with income from foreign sources taxed at lower rates.

I'd like now to review our results by operating segment.

With respect to mattress ticking, we reported 24.1 million in sales for the quarter, a 10.8% decline compared with 27 million for the same period last year. Mattress ticking sales accounted for 34% of sales of the Company during the quarter.

Total yards sold were 10.7 million, down 9.5% compared with 11.8 million a year ago. This trend reflects a decline in demand for printed ticking, a less popular category, while sales of knitted ticking continue to trend higher, reflecting a change in customer demand.

The average selling price was $2.25, unchanged from the same period a year ago. While prices in all product lines have continued to trend lower, the product makes a change with significantly higher percentage of sales of knitted ticking, which has a higher average selling price.

We expect knitted ticking to account for an increasingly higher percentage of sales in this segment as demand for this category is expected to increase.

Operating income for mattress ticking was 2.0 million, or 8.4% of sales. For the prior year period, operating income was 2.2 million, or 8.2% of sales.

The improved operating margin reflects the higher sales and profitability on knitted ticking and the productivity gains from the current year 7 million capital project. Looking at margins on a sequential basis for fiscal 2006, we were pleased to show continued improvement from the first quarter operating margin of 5.9, second quarter of 6.9% and third quarter of 7.9.

Now turning to the results of our second operating segment, upholstery fabrics.

Sales were 46.6 million representing a 1.2% decline from 47.2 in the fourth quarter. Again, this was the smallest quarterly sales decline since the July 2001 quarter.

Upholstery fabric sales for the quarter continue to reflect weak demand industry-wide for U.S.-produced fabrics, driven by the current consumer preference for leather and suede furniture and the increasing selection of imported fabrics, including a higher level of cut and sewn kits. However, the lower sales of U.S.-produced fabrics were mostly offset by higher sales of offshore produced fabrics.

Total yards sold were 11.1 million, down 3.6% compared with 11.5 million a year ago. The average selling price was $4.21 per yard, up 2% compared with $4.14 for the same period a year ago.

We are pleased with the continued growth in sales of upholstery fabrics from offshore sources, including fabrics produced in our China operation. These sales totaled 20.3 million, up 85% over the fourth quarter of last year and accounted for 44% of overall upholstery fabric sales.

To put this in perspective, last year during the fourth quarter our offshore sales accounted for 23% of upholstery fabric sales.

The upholstery fabric segment reported operating income of 1.2 million, or 2.4% of sales for the fourth quarter. A significant improvement over the operating loss of 2 million for the same period last year.

These results reflect continued strong growth in sales and profits of non-U.S. produced fabrics, lower U.S. manufacturing fixed cost and variances, and lower SG&A expenses.

Fixed manufacturing costs in our U.S. upholstery fabric operations were down 46% for the quarter and SG&A expenses were reduced by 30%. Further, SG&A expenses represented only 8% of sales for the quarter compared with 11.3% of sales for the year earlier quarter.

Let me now turn to the balance sheet.

We began fiscal 2006 with key goals to improve cash flow from operations, reduce debt and build our cash position even with significant restructuring activities. We are pleased with the progress during the year and as a result, we ended the year in a stronger financial position.

We improved cash flow from operations to 10.3 million in fiscal 2006 compared with 4 million in fiscal 2005. We reduced our long-term debt to 47.7 million at the end of the year compared with 50.6 million a year ago and we improved our cash position to 9.7 million compared with 5.1 million at the end of last fiscal year.

Throughout the year, we have continued to closely monitor our inventory levels and have reduced them by almost 14 million, or 27% which was primarily in our upholstery fabrics segment. As of April 30, 2006, we also had 3.1 million in assets held for sale which we expect will be sold in fiscal 2007 for this amount.

Additionally, our capital spending plans for fiscal '07 are modest and are not expected to exceed 2 million. It is also important to note that our principal loan agreements, a 42.5 million term loan and an $8 million line of bank credit remain unsecured.

Now I'll turn things back over to Rob.

Thanks, Frank.

Let me now talk about the progress we're making in both of our operating segments. First of all, mattress ticking.

Mattress ticking is an important part of our business and we believe we have a strong competitive position in the marketplace as a globally low-cost producer. Mattress ticking sales accounted for 34% of our total sales this quarter.

As Frank mentioned, the decline in sales during the quarter is primarily related to lower demand for the printed ticking, which has become a less popular category for mattress manufacturers in favor of knits. We have been seeing a trend with our customers for using more kits on the panels of mattresses and using damask on the borders.

As Frank noted, knitted ticking is accounting for an increasing percentage of our total mattress ticking sales.

We've shown steady improvement in our operating margins over the course of fiscal '06 as we have completed our $7 million capital project. We believe this investment demonstrates our commitment to this business and will further enhance our globally cost competitive position in an industry facing significant pricing pressures.

As Frank noted, we have continued to see sequential gains each quarter as we move closer to our targeted productivity levels.

Now I'll give you an update on our upholstery fabrics section. We are encouraged by the improved results in the fourth quarter as we experienced our lowest quarterly sales decline since July 2001 and the first quarterly operating profit in two years.

Sales of non-U.S. produced fabrics continue to show strong growth trends as we reported the highest quarterly sales from our China operations. As our customers have continued to aggressively source fabrics produced outside of the U.S., incoming orders for China produced goods outpaced orders for domestically produced goods during the fourth quarter.

With respect to our U.S. upholstery fabric, we continue to demonstrate [ample] progress in creating a substantial business model that will support the lower customer demand for U.S.-produced fabrics, especially decorative fabrics.

Since the beginning of fiscal 2006, we have worked diligently to revamp our U.S. upholstery fabrics 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 utilizing an increasing amount of lower cost imported yarns.

Over this time period, we have significantly reduced our stockkeeping unit, or SKUs, of lower volume products that do not fit our U.S. operated models, including the discontinuation of our U.S.-produced printed upholstery fabrics. As a result, we have also substantially reduced our product complexity going forward.

Along with this shift in product strategy, we've also taken very aggressive steps since the beginning of this fiscal year to reduce manufacturing costs, capacity, and deployment levels. During this period, we consolidated two velvet manufacturing operations, consolidated our finished goods distribution and design centers, closed two yarn manufacturing plants and completed the plan to outsource finishing of our decorative fabrics and closed this plant by the end of the fiscal year.

As a result of these activities, Culp now has three U.S. manufacturing facilities operating in the upholstery fabrics segment. One for velvet fabrics, one for decorative fabrics and one for specialty yards.

As of April 30, 2006 the book value of our U.S.-based upholstery fabric fixed assets is now less than $10 million compared with approximately 32 million at the end of fiscal '05.

U.S. employment totaled 660 at the end of fiscal 2006 compared with 1404 at the end of the prior year.

While we have made many tough decisions to reduce our costs and capacity in the U.S., we have created a more market-driven business and have substantially reduced our fixed assets with less operating risk going forward. Our objective has been to develop a sustainable business [inaudible] in the U.S. that will support our customers, reduce U.S. fabric [inaudible] especially decorative fabrics.

Although we have made considerable progress, we continue to evaluate U.S. operations and look for additional steps to help us meet our objectives. We made the decision in May to stop manufacturing chenille yarn and outsource these products to a current supplier.

Additionally, we are further reducing our capacity and related costs in our decorative fabrics operation. We believe these steps will allow us to further reduce U.S. manufacturing costs and move us closer to reaching our target operating model.

Now let me turn to our non-U.S. operations in the U.S. upholstery fabrics segment.

As Frank noted, sales of upholstery fabrics produced offshore increased by 85% over the fourth quarter of last year and accounted for 44% of this segment's sales. Customer response has been favorable to our recently introduced product from China.

We are excited about the innovative products that we're now offering and believe the continued development of our China operation represents an exciting opportunity for Culp. As our U.S. customers have moved an increasing amount of their fabric purchase 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 finished fabric, finishing and inspection facility located near Shanghai. By providing our innovative fabrics and value added technology in a low cost production environment, Culp offers differentiated products and value to our customers.

We have a growing upholstery fabric operation in China with approximately 300 associates today. We are expanding our capabilities in China and are pursuing a focused, offshore product strategy.

Overall, our offshore produced business represents a significant growth opportunity for Culp and we believe by moving early to establish a wholly owned operation in China that we are building a strong competitive position in this marketplace.

Now I'll turn it back over to Frank for a review of the outlook for the first quarter '07.

As Rob stated at the beginning of this call, we are encouraged by the progress we have made and expect to realize more benefits from the many strategic initiatives that are underway at Culp.

Overall, we expect our first quarter sales decline to be slightly greater than the 4.7% decline we had in the fourth quarter. We expect sales in our mattress ticking segment will show a substantially smaller year-over-year decline than the 10.8% decline we had in the fourth quarter.

Operating income in this segment is expected to improve over the same period last year due to our growing knitted ticking business and the continuing benefits from our recent capital project.

In the upholstery fabrics segment, we should note that the Summer months are typically the slowest season of the fiscal year. However, we expect continued strong growth in sales of fabrics produced outside the United States.

We believe sales of domestically produced upholstery fabrics will continue to reflect very weak demand, resulting in a greater overall segment quarterly decline than 1.2% decline we had in the fourth quarter.

Even with lower U.S. sales, however, we believe the upholstery fabrics segment's operating results for the first quarter will show improvement due to higher sales and profitability in our non-U.S. operations, lower U.S. manufacturing fixed costs and variances and reduced SG&A expenses. As a result, we expect to report a small operating profit in upholstery fabrics in our first quarter compared with an operating loss of 380,000 for the first quarter of fiscal 2006.

Considering these factors, we expect to report first quarter results in the range of breakeven to a net income of $0.03 per share, excluding 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 still 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 for our domestic upholstery fabric operation and the impact of raw material cost.

We estimate that restructuring and related charges of approximately 500,000, or 440,000 net of taxes, or $0.04 a share will be incurred during the first quarter. Including the restructuring related charges, the Company expects to report a net loss for the first quarter in the range of minus 4 to minus 1 per share.

We have many reasons to be optimistic about our prospects for the next fiscal year. Fiscal 2006 has been an important period of transition for us, and we believe we have taken the right steps to enhance the leadership positions we enjoy in both of our operating segments.

We are realizing the full benefits of the capital project in the mattress ticking segment, and as a result have further enhanced our globally cost competitive position in a business currently facing pricing pressures. Our non-U.S. produced upholstery fabric business, including our China platform, is gaining momentum and we're excited about the opportunities to extend our global reach.

With the aggressive strategic steps we've taken in our upholstery fabric business in the U.S. to revise our product strategy and substantially reduce operating cost and capacity, we have created a better model to sustain our domestic operations. As we begin fiscal 2007, we are confident that Culp can approach both the opportunities and challenges in today's global marketplace from a stronger position.

With that, we will now take your questions.

Thank you. [OPERATOR INSTRUCTIONS] And we will go to Joel Havard, BB&T Capital Markets.

Thank you. Good morning, guys.

Hey, Joel.

Early on you talked about the growth of knitted. Could you explain to us the manufacturing differences, and I don't mean knit verses weave, Rob, I've been paying more attention, but more a matter of I assume this is a different machine base, and what percent of your capacity is capable of handling that or is it all imported now? Could you elaborate please?

Yeah, Joel, this is Rob.

We have a, what happened in the mattress business is the top of the mattresses are the panels and then the border, of course, the sides and the box springs, on the borders and the box springs are now 100% damask fabrics, which we make in our plants either in Canada or in the U.S. or with our partner in the Middle East. The panel fabrics on the top of the mattress increasingly on the higher end, more knits are being used and the knits are being supplied by our partner who has a location in the U.S. and we have a partnership with him where we sell his knitted products in the U.S. and that's proved to be a very important part of our business.

That business has grown and as it has grown, we have continued to add capacity in the U.S. and we are continuing to have capacity at this time.

Now, Rob, that's you're, right now acting as an agent on all the knit material. Did I hear that part right?

Yes. We do not make the mattress ticking, the knitted mattress ticking ourselves.

Yes. Okay. All right.

And when you say you're adding to your capacity to handle this, is that selling capacity or are you all going to start manufacturing on a--

He is adding capacity so we can sell more. We have no capital expenditures in that area.

Okay. All right.

And what percent of the market is in this knitted product now verses, you know, two years, five years ago, where do you think it's going?

Well, it's growing very rapidly, Joel, and it's going on the top of the mattress to the panel and it could be as much, a third to 50% of the panels.

Right.

Of all mattresses in the marketplace. Usually at middle to upper price points.

Okay. So it's --

And the damask ticking has been on the lower to medium price points. Joel, it's about two-thirds of the mattress is the border and the box spring and about a third is the panel. So it could be 50% of the third.

Okay. All right.

Do you think this is a fashion shift that, you know, this will stay popular for, you know, 3 to 5 years and then you'll migrate back to your core? I'm assuming that you're generating probably a slightly more modest EBIT on these kind of third party sales than if you're doing it yourself.

Joel, we don't comment, as you know on individual product lines, but we'd -- let's say we'd do just fine on that one. On that product category.

Okay. All right.

In both segments, pricing is showing, finally, a little consistency in firming up here. Now, just a little bit.

Do you think we've gotten through the migration issues in both or is there some product dynamic that's, and again, not looking for a product margin point, Frank, but you know is there, is there an internal dynamic or a marketplace dynamic that's been more behind that?

Let's take them individually. In the mattress ticking area, average selling prices are going down in every product line.

The overall average is $2.25 equal to last year, and that's only equal to last year because we have a higher percentage of knitted ticking business which carries a selling price substantially higher than the other product lines.

Okay.

So it's kind of an anomaly going on but prices are still trending down in mattress ticking.

But we're probably fairly far along in that trend. We've seen that for probably almost three years now.

In the upholstery fabric area, I think we are seeing more stable in those products and what we're doing from the China side is bringing better values to customers at the same, essentially same selling prices.

And from China, we're selling as you know, a mix of products that we deliver in China, and we deliver products here in roll goods to customers. So prices are holding, you know, just over in the to $4.10 to $4.25 range fluctuating in there on the upholstery fabric side. I believe we see that staying in that range.

Okay. All right.

And then, velvets specifically, that was a product area that over the last year or so, I believe you all have made some comments about maybe fashion coming back your way a little bit. Does that trend seem intact or is it still sort of nascent at this point?

Yeah, Joel, this is Rob.

Velvets, we think of all of our U.S. assets we think the velvet might be the most sustainable over a period of time because it is a niche product, it's, the only people buying velvets are the motion manufacturers now, and we hear that velvets seem to be somewhat coming back a little bit. So that's good news and we think that that will continue.

We also have less competition worldwide in the U.S. in velvet so it's a nice niche market that we feel pretty good about. And assuming we can solve the supply chain issues, there have been a lots of yarn issues domestically on velvets, on all products, velvets should be okay.

Okay.

And then kind of a big picture question to finish, Rob. You all, do you all supply all four of the Big S's to some degree?

In the mattress side?

Yes, sir.

Yes we do.

Okay.

And this volume pullback in Q4, would you ascribe that more to the industry softness or sort of the lingering, let's call it the hangover from the sort of no flip migration and all of those sorts of things?

Joel, the decline in the fourth quarter in mattress ticking is really totally related to the less emphasis in printed mattress ticking. And on a unit basis, we're up in all of our product lines except printed mattress ticking which is, we're de-emphasizing and the marketplace is de-emphasizing.

I'm sorry, you had made that comment earlier. You were up in everything but printed.

Yes, on a unit basis. In our damask, in our knits, which are two key product lines. But the printed ticking is an area that we are de-emphasizing.

And, of course, you know we exited that business in upholstery fabrics in the fourth quarter. And we're not planning on doing that in mattress ticking, but it's certainly a area, not a area of emphasis.

How big a part of it, of home was printed a year ago for instance?

Oh, a year ago it was probably 25% of the business. And, you know, more than that in units. So, but it's swinging to knits and damask.

So it's -- I'm just trying to make sure --

Overall then, the other thing affecting the mattress ticking is the average selling prices.

Yeah.

Continue to decline. But again, we're towards the end of that.

I was really focused on yards to try to determine if this gave us an insight into bedding in general, but it sounds like it is more fashion-oriented than industry demand oriented.

Yes, it's more fashion-oriented, it's also, we've probably see the end of the transition to one-sided mattresses. Most everybody now makes one-sided mattresses. And that transition took a couple years to maybe three years to get there.

Okay. And I misspoke, guys. One more question, please.

You look to be in pretty good shape from a cash and cash flow big bogie hanging out there March '08. Now that we're in the new fiscal year, I'm kind of having to start thinking about that. Very early in the process, but you know, what sort of lead-time to do you need to kind of work your way around that, via some sort of refinancing or whatever?

I'd say just a few months, not long by that time, Joel. No, by that time, Joel, the term loan that you're referring to, which is now 42.5 million will be 35 million.

Yes.

So I would not think we need that much time. 3, 4 months.

Okay. All right. Good. That's encouraging. Guys, thank you. Good work and good luck.

Thank you.

We'll go next to Laura Champine, Morgan Keegan.

Good morning.

Hey, Laura.

Good morning, Laura.

Could you comment on how much of that 20.3 million you're doing in imported upholstery business, how much of that is actually finished in Qingpu?

You know, let's say, Laura, let's say it this way, all of those products come through our Qingpu facility. I don't think we really want to get into how much we add value to and how much we don't. But we inspect all of them, they all come through our facility, the Qingpu facility manages all of that.

Okay.

What I'm trying to get at is how relevant your utilization rate would be in your Qingpu business, and if you're just inspecting, then certainly you would have more capacity. Can you give us a sense on is the majority of your product finished in Qingpu or is the majority inspected in Qingpu?

Well, of course, everything's inspected and we have been running that facility flat out for well over a year now. And during this past year, we added capacity throughout our Qingpu operation and anticipate adding capacity in the next fiscal year. There's no lack of utilization in that operation.

And we had heard during the quarter about some delivery issues and I didn't know if those delivery issues were driven by not having enough capacity in Qingpu or if they're more related to the velvet yarn issue. If you could comment on any delivery issues that you've had in the most recent quarter and sort of how that's tracking for this quarter.

Yeah, I think, Laura, this is Rob, we need to break it down in two categories, non-U.S. and U.S.

First of all non-U.S. And at our last management meeting and board meeting we promised that we'd never say again how hard things are in China and here I am telling you again how hard it is in China.

We have made tremendous progress. Our innovation has just been fabulous and the products we brought to market with the innovation, the yarns, the creativity, et cetera in a low-cost environment have been accepted wonderfully by the U.S. customer probably better than we anticipated.

The issue has been -- it is very hard to execute in some cases all of that innovation. And we're dealing in China the best way, now this is not scientific, but in our little part of the world, not the apparel business but in the upholstery business where it's got to be consistent and repeatable each and every time, we're dealing in an industry in the 1950s in China, not as it was in the U.S., so we're dealing in an environment that consistency, repeatability, on time delivery is something that they're way behind where we go to in the U.S. And we struggle with that every day.

It is not a capacity issue of number of looms or finishing, it's just that we're dealing with a very elementary supply chain in upholstery fabrics in China. And we have fought that very hard. We're making great progress.

Our key emphasis in '07 is to have the execution catch up with the innovation. And if we can do that, and I believe Frank and our whole team has plans to do that, we should be very successful.

So, you know, China is, we like to say we're a victim of our own success. And that pretty much points it.

On the domestic side, as tough as it is in China, the supply chain might be in more disruption domestically. We have only one polypropylene supplier left who is terribly oversold and having a hard time making deliveries.

Polyester businesses, only a few of them left, no acrylic supplier left, very few spinners, very few novelty spinners are here. We are having a very hard time securing enough yarns to run our U.S. operations effectively. We are making progress, we're working every day on the supply chain.

One of our answers has been is to bring yarns in from offshore to supplement yarns we can't get in the U.S. but when we start bringing yarns in from offshore, we run into the same problems we have in sourcing fabric offshore. It's a very rudimentary supply chain and our industry's big challenge is to manage the logistic and supply chain.

We work on it every day and we think we're way ahead of the curve, but it's a different world today and our customers and our retail partners it's not easy. This whole supply chain in today's world is not easy.

Frank, you got anything you want to add?

Laura, I'll add a few comments to that.

In China our sales this year for the year as we've reported are $59 million up from 31 million a year ago, so we're almost double what we were last year. And we've obviously to produce that and in the fourth quarter we were $20 million. So you might say an annual run rate of 80 million.

So we have been growing rapidly there. In all aspects of the supply chain, we've had to expand our own finishing inspection capability in Qingpu, our yarn suppliers in China and our weaving partners in China.

So that's just the way it is over there. Everyone's making progress, but with that kind of growth rate, it certainly put challenges on the supply chain.

We are taking a number of steps to improve execution throughout this year.

In the domestic side, as Rob said, the yarn industry is just in turmoil and we don't think it probably will get much better in fiscal '07. You know, people just don't have the volume they used to have, companies are closing, and businesses consolidating into fewer and fewer suppliers. We are concentrating our yarn business on those few suppliers, which we believe will be survivors.

Additionally, as Rob said, we began a very important initiative to include lower cost, innovative yarns from offshore in our U.S. products. And we are very optimistic that these products are carrying excellent values produced in the U.S.

So in some, yes, we are having some more delivery issues that we would like to see, but that is a major focus in the next fiscal year.

I guess the key question for me is, if your big customers are complaining about deliveries and supply issues, do they have better options? I mean is this an industry supply chain issue or is there something specific at Culp? What kind of -- how do you think that your delivery and supply chain challenges might compare to your competition?

In the U.S., and Rob, you may comment, too, in U.S. customers are having lots of problems. As you know, there is significant financial difficulties with numerous parts of the U.S. supply chain with companies.

So it's tough all around for most upholstery fabric suppliers supplying in the U.S. market. And we hear from customers and others that most people sourcing from China are having similar logistic issues from China.

Got it. Great. Thank you.

As a reminder, press star one for questions. We'll go next to Budd Bugatch with Raymond James.

Good morning.

Good morning, Budd.

A couple of questions.

Did you comment at all about, was the U.S. upholstery business profitable in the quarter? At the operating line?

We do not -- have not broken that out. We only break out the overall segment, Budd.

I know you do, but you've kind of gotten some nuances there in the past, and I was curious if you would nuance us again?

Well I think we've said overall the progress we've made in the U.S. with cost and capacity to deployment levels, and we are doing literally everything we know to do to create a sustainable, domestic fabric operation.

We want to continue in the U.S. with an operation. We think that's vitally important for our customers and for us to have production facilities in China and here.

And if you look at the capacity utilization in the U.S. now, what are you running at and what's the delivery time?

Because we've been scaling back all year as you know, we're now down only to three plants. One decorative fabrics plant, one velvet plant and one small yarn plant.

So utilization is pretty good at the levels we are, we downsized to. You, pretty good, put a number on that?

Well, 80, 90%. We're scaling back our capacity to the level of demand.

And at that run rate, you should be able to turn an operating profit. Is that correct?

That is the goal. That's certainly the goal.

Okay.

Now in the third quarter if I read the Qs right, you had $21 million of fixed assets left in the domestic upholstery business left. And I know we had talked about I think previously like $13 million of book value. Is that correct?

That is correct. We have now left just under 10 million in book value at the end of the year.

And if I look at that on the K, when will you release the K, but on the K I believe you'll disclose what the gross assets are in upholstered U.S. geography. What does that look like today? Is all the restructuring in there?

Well, I'm not sure I understand. Gross fixed assets verses net book value of fixed assets?

Right. Yeah, what's on the balance sheet?

On the balance sheet is just in U.S. fixed assets is just under 10 million, but in total you've got assets in China, you've got assets in our mattress ticking segment. I'm not sure, you know --

Well is there anything against the book, against the gross assets? I mean, there is in the Q because you've got 21 million of gross PP&E in the U.S.

I do not have the gross numbers. Gross PP&E before accumulated depreciation---

No, no, you have accumulated depreciation in that as well. I'm talking about the liability side of the balance sheet on that because that's, what I was looking for was what's left to write-down here, just $10 million, I understand that. Right?

Well, that's what we said, 10 million is left. That's the only, U.S. upholstery fabric fixed assets are just under 10 million.

And that's of the $44 million of assets on the balance sheet.

That is correct. So if all of it went away, you would have a write-down to your fair market value of those assets. And I will tell you that those assets have a reasonable fair market value.

Okay.

So the potential worse case restructuring write-offs is not nearly what it used to be.

And the restructuring activity in the fourth quarter was all at the upholstery level?

Yes.

Nothing left to do in mattress ticking?

Right. Nothing there.

And the first and second quarter you've got a half a million dollars you're looking at in the first quarter, is that to account for the sale of that plant or the closing of that yarn plant?

Well, the restructuring in the first quarter really related to two things we mentioned, number one, exiting or discontinuing the production of chenille yarns and outsourcing that to a current supplier. And number two, further adjusting our capacity levels and related costs in our decorative fabrics operation which is our [Grand] facility.

Okay.

And we've got, additionally, we've got some equipment moving costs that are being moved to China during the first quarter.

Okay.

And do you see restructuring activity. I know you won't quantify it, but beyond Q1?

Substantially less.

Substantially less than a half a million?

Substantially less than this past year and as of right now, we do not see any. We've only got three plants left in the U.S. The decorative fabrics plant, the velvet plant and the yarn plant.

Okay.

Now we're doing our best to create a model to sustain each of those operations.

Okay.

And the exposure is what you may be getting to, is much, much less. With net book value just under 10 million and fair market value of those assets, a considerable amount, there's not a lot of fixed asset write-off left.

Okay. All right.

And on the future restructuring and the half a million, did you break out cash verses non-cash on that?

Most of that is cash.

Oh, so the half million will be cash. Okay. All right. Thanks Frank. Thank you, Rob.

Wanted to ask about the domestic supply chain but I think you answered that question, too. We're becoming quickly third world in that level.

Worst than third world.

Thanks a lot.

Thank you.

And having no further questions, I'd like to turn the conference over to Rob Culp for any additional or closing comments.

Thank you very much and again, thanks to each of you for your participation and we look forward to updating you on our progress and hope you have a great July 4th holiday. Thanks, again.

This does conclude today's conference. Thank you for your participation. You may now disconnect.