Culp Inc (CULP) 2007 Q1 法說會逐字稿

Good day. Welcome to the Culp, Inc. first quarter 2007 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 Ms. Drew Anderson. Please go ahead, ma'am.

Thank you. Good morning and welcome to the Culp conference call to review the Company's results for the first quarter of fiscal 2007.

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 including the Risk Factors section of the most recent Annual Report on Form 10-K 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 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 Web site at www.culpinc.com.

I'll now turn the call over to Rob Culp, Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning. I would like to welcome you to the Culp quarterly conference call 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 first quarter of fiscal 2007. 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 second quarter 2007 business outlook.

We're off to a good start for fiscal 2007. We're pleased with our overall year-over-year quarterly sales gain. These results reflect the benefits of Culp's transition to a more marketing oriented company focused on product innovation and changing customer needs.

As a result of our strategic initiatives over the last two years in both the mattress fabrics and upholstery fabrics businesses we've achieved improved profitability in each operating segment. We're encouraged by the progress we have made and continue to make as we adapt to a more agile and global business model.

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

Good morning, everyone, and thanks for joining us as well.

Total sales for the quarter were $62.6 million, a slight increase from the first quarter of last year. This increase is attributable to growth in our upholstery fabrics business. We will comment more specifically on each business segment in a moment.

Our gross profit margin improved to 14.1 compared with 11.3 in the first quarter of last year excluding restructuring charges in both periods. The increase is primarily related to the upholstery fabrics business.

SG&A expenses declined 3.8% to $6.6 million for the quarter compared with $6.8 million last year excluding restructuring related charges in both periods. This decline reflects our cost reduction efforts, particularly in the upholstery fabrics segment.

As a result operating income was $2.2 million compared with an operating loss of $216,000 last year. Again, including restructuring charges in both periods.

The first quarter of this fiscal year included restructuring charges of $1.2 million. These charges primarily include asset movement costs and operating costs for closed facilities. Financial results for the first quarter of last year included restructuring charges of $5.3 million.

Net income for the quarter was $132,000, or $0.01 per share compared with a loss of $3.9 million, or $0.34 a share a year ago. Excluding the charges in both periods, net income for the first quarter of this year was $1.1 million, or $0.09 a share compared with a net loss of $628,000, or a nickel a share for the first quarter of last year.

I'd like to now review results by operating segment. With respect to mattress ticking, we reported $21.8 million in sales for the quarter, a 4.7% decline compared with 22.9 for the same period a year ago. Mattress ticking sales accounted for 35% of sales during the quarter.

Total yards sold were 9.5 million down 5.6% compared with 10.1 million yards 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 $2.30, up slightly from $2.28 for the same period last year. While prices in key product lines have continued to trend lower, the product mix has changed with a higher percentage of sales of knitted ticking which has a substantially higher average selling price.

Operating income for this segment was $1.9 million, or 8.5% of sales. For the prior year period operating income was 1.4, or 5.9% of sales.

We are now realizing the full benefits in terms of productivity gains from the $10 million capital project implemented over the last eighteen months to two years. We also continue to see higher sales and profits in knitted ticking, and we expect this product line to represent a higher percentage of our mattress ticking business in fiscal '07.

We are experiencing a growing trend with our customers to use more knits on the top of mattresses and woven jacquards on the sides as common border ticking. We are well positioned to benefit from this trend, and we will continue to focus on offering the right product mix to meet our customer's demand.

Now turning to the results from our second segment, upholstery fabrics. Sales were $40.7 million representing a 3.3% improvement from $39.4 million in the first quarter of last year. Upholstery fabric sales for the quarter reflect significantly higher sales of non-U.S. produced fabrics.

At the same time we had lower sales of U.S. produced fabrics reflecting the current consumer preference for leather and suede furniture and the increasing customer selection of other imported fabrics including an increasing amount of cut and sewn kits. This was the first quarter where sales of non-U.S. produced fabrics exceeded sales of U.S. produced fabrics.

Total yards sold were 9.6 million, up 6.3% compared with 8.9 million a year ago. The average selling price was $4.21 per yard compared with $4.38 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 at our China operation. These sales totaled $23.5 million, up 103% over the first quarter of last year and they accounted for 58% of overall upholstery fabric sales.

To put this in perspective, last year during the first quarter our offshore sales accounted for 30% of overall upholstery fabric sales, and two years ago in the first quarter non-U.S. produced sales were 11%. Sales of U.S. produced fabrics for the first quarter were $17.2 million and were down 38% from the first quarter of last year.

The upholstery fabric segment reported operating income of $1.6 million for the quarter, or 3.9% operating margin which is a significant improvement compared with an operating loss of $380,000 for the same period last year. These results reflect continued strong growth in sales and profits of non-U.S. produced fabrics, significantly lower U.S. manufacturing fixed costs and variances and lower selling, general and administrative expenses.

Let me now turn to the balance sheet. At the end of the first fiscal quarter our balance sheet reflects $8.4 million in cash and cash equivalents. Long-term debt stands at 47.3 compared with 50.6 a year ago.

As of July 30, at the end of the first quarter, we also have $2.5 million in assets held for sale which we expect will be sold during the balance of this fiscal year. Additionally, as previously noted, our capital spending plans for this fiscal year are modest and are not expected to exceed $2 million.

Now I'll turn things back over to Rob.

Thanks. Let me now talk about the progress we're making in both of our operating segments. I'll start with mattress ticking.

Mattress ticking is an important part of our business, and we believe we are strengthening our competitive position in the marketplace as the design leader and low cost producer. As Frank mentioned, the decline in sales during the quarter is related to lower demand for the printed ticking which has become a less popular category for mattress manufacturers in favor of knits.

We're seeing a trend with our customers for using more knits on the panels, or the top of the mattress, and using primarily woven jacquards as common SKUs on the borders. Knitted ticking is accounting for an increasing percentage of our total mattress ticking sales. We continue to focus on offering the right product mix to meet customer demand.

We have shown steady improvement in operating margins with the completion of our $10 million capital project over the last eighteen months. This project was designed to improve our globally competitive cost structure in this segment.

We believe this investment confirms our commitment to leadership in this business and will further enhance our competitive position in an industry facing pricing pressure. We have continued to see sequential gains in our operating margins each quarter as we move closer to our targeted productivity levels.

Now we'll give you an update on our upholstery fabrics segment. Let me first discuss our U.S. operations for upholstery fabrics.

We continue to make progress in our efforts to bring our U.S. manufacturing costs and capacity in line with current demand trends. We have significantly reduced our selling, general and administrative expenses in this segment. Also fixed manufacturing costs in our U.S. operations are down 59% year-over-year.

With respect to U.S. upholstery fabric operation, the improved operating margins also reflect the aggressive steps we have taken to reduce our manufacturing complexities and improve our cost structure. We continue to focus on creating a sustainable business model that will support the lower customer demand for U.S. produced fabrics.

After several years of consolidation activities, Culp has now become a more market-driven company with fewer fixed assets and substantially less operating risk going forward.

We believe we have made considerable progress toward reaching our target operating model and enhancing our competitive position. However, if demand for U.S. produced upholstery fabrics continues to decline at rates experienced so far this fiscal year, additional restructuring actions could be required at one or more of our three U.S. upholstery fabric plants.

Now let me turn to our non-U.S. operations in the upholstery fabric segment. Sales of upholstery fabrics produced outside of our U.S. manufacturing plants increased by over 100% over the first quarter of last year and now account for 58% of sales. Customer response has been very favorable to our new products.

We are excited about the innovative products that we are now offering and believe the continued development of our China operation represents an exciting opportunity for Culp. Our customers have continued to aggressively source fabrics and cut and sewn kits produced outside the U.S., and we believe Culp is well positioned to benefit from this growing demand.

The ongoing focus of this business will be on the aggressive development of new products based on understanding our customer's needs. We will also continue to vigorously pursue opportunities to expand our capability and improve our performance to customers in our China operation.

Now Frank will review the outlook for the second quarter of fiscal 2007.

As Rob stated at the beginning of the call, we had a good start to fiscal 2007 and we are encouraged by the progress we have made. However, we are concerned about the sluggish retail furniture market and so far this quarter we are not seeing a pickup in incoming orders as normally happens in this business.

This softness is significantly affecting our upholstery fabric business and the furniture industry in general. Therefore, on an overall basis we expect our second quarter sales to be approximately 10% lower than sales for the second quarter of fiscal 2006.

In the mattress ticking area, we expect sales will show a slightly greater decline than the 4.7% decline we had in the first quarter. Operating income in this segment, however, is expected to improve over the same period last year due to our growing knitted ticking business and the benefits from our capital project.

In the upholstery fabrics segment we expect continued growth in sales of fabrics produced outside the U.S. although not at the same rate as the previous two quarters, both of which were over 100%. However, sales of domestically produced upholstery fabrics will continue to reflect very weak demand resulting in an estimated 10 to 15% overall segment decline year-over-year.

Even with sharply lower U.S. sales we believe the upholstery fabric segment's operating results for the second quarter will show improvement due to higher sales and profitability in our non-U.S. operations, lower fixed costs and variances in our U.S. plants and reduced SG&A expenses.

As a result we expect to report an operating profit in upholstery fabrics in the second quarter although at a lower operating margin than the first quarter of this fiscal year. This compares with an operating loss of $69,000 for the second quarter of last year.

Considering these factors, we expect to report second quarter results in the range of 5 to $0.08 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 activity for our domestic operations and the impact of raw material costs. We estimate that restructuring charges of approximately $500,000, or 310 after taxes or $0.03 a share will be incurred during the second fiscal quarter.

Including the restructuring charges, we expect to report net income for the second quarter in the range of 2 to $0.05. However, if further restructuring actions would be required, we could incur additional restructuring costs.

Culp is moving forward in fiscal 2007 with a number of difficult steps behind us and a leaner structure on which to operate more profitably. While the marketplace remains very challenging, we believe we are pursuing the right strategies to further 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 business and are encouraged by the growth tends in the knitted ticking area. Our non-U.S. produced upholstery fabrics business, including our China platform, continues to show significant sales growth, and we are aggressively pursuing opportunities for extending our capabilities there.

With the strategic steps we've taken in our U.S. upholstery operations, we have created a better model to hopefully sustain our domestic operations. Our primary objective in fiscal 2007 is to restore Culp to profitability and position the Company for growth over the long-term in today's global marketplace.

With that, we will now take your questions.

[OPERATOR INSTRUCTIONS] We'll go first to Todd Shule with Raymond James.

Good morning.

Good morning, Todd.

My first question was with regard to your tax rate. It looks like your tax rate came in right around 14%. What was the particular reason why it was so low?

As has been the case in the fourth quarter of last year, the tax rate is a combination of taxable losses in the U.S. combined with lower tax rates on foreign income.

Okay. Perfect.

And then another question I had for you is how many employees do you actually have currently working in the U.S. now, and how are they kind of divided out? I know you had mentioned previously that a certain amount of them were working specifically with SG&A, but how many actually employees are involved in manufacturing in the U.S. now?

Let me try to remember that. I don't have that in front of me. But at the end of the year we reported approximately 660 U.S. employees in our upholstery fabric area.

Okay.

As of now that number is closer to 570.

Okay.

And then my last question would be could you maybe talk a little bit about what's going on at your Graham and your Anderson facilities?

As we said in the call, the domestic operations are facing significant sales declines like most everyone in the U.S. -- who is manufacturing fabric in the U.S.

The first quarter, as we stated, was 38% down and we are projecting continuation in our second quarter of significant declines. We continue to evaluate our cost structure both variable and fixed, and as we have done for several years, continue to look at ways to scale our domestic operation to the level of demand that we have.

Additionally, as we've stated before, we have drastically simplified our U.S. operations in both plants, our decorative fabrics plant and the velvet plant, and we have begun sourcing yarns from offshore to help lower our cost and provide value to our customers. All in an attempt to create a sustainable business model in the U.S.

In the U.S., of course, we have the advantage of shorter lead-times that we can offer to customers. So that's sort of where we are.

Okay.

Could you talk a little bit about your capacity utilization there? Is that something you're willing to talk about?

Well, what we say about every quarter, Todd, is capacity has been lowered every year for the last five years.

Okay.

So it's not much of a relevant number. We have demonstrated clearly over many years now, our resolve to adjust our U.S. operations to whatever level of demand that we receive.

Okay. Fair enough.

And I would reaffirm that commitment.

Okay. Thank you.

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

Thank you. Good morning, guys.

Good morning.

Let's see, I guess we'll stay on the restructuring potential theme for just a moment if you don't mind. Educate me if you would on whether or not any combination of the remaining decorative, velvet or yarn operations could be consolidated yet again?

Do these things lend themselves to only really running efficiently on a standalone basis or is there any way to have the decorative portion of a plant and the yarn portion of a plant and the velvet portion or -- seems like velvet sort of the one where you've got the most significant remaining competitive advantage versus the marketplace. I'll let you explore that if you would.

Joel, good question. Internally over the past four years we have decided not to leave any stone unturned in regards to our domestic restructuring. We are doing things today that probably we would not have thought possible several years ago.

Good. Okay.

So along that same line we will evaluate anything and everything to adjust our fixed cost structure and to keep our operation in the U.S. We believe it is very important if there is any way possible to keep producing fabric in the United States, but we recognize we've got to be profitable, so there is no stone left unturned in looking at possible ways to restructure the business and downsize.

Okay.

To put that in context versus your, or relative to your earlier remarks about lead-times, give us a sense if you would, please, of what lead-times are on U.S. plant sourced fabrics versus overseas sourced fabrics, and if you want to keep it roll goods to roll goods or if it's more typical now that it's rolled goods U.S. versus cut and sew, Asia, I'll let you clarify that.

Joel, this is Rob.

I think on our goods produced offshore we're somewhere between 12 to 16 weeks depending on demand, and that would also be the same figure for a cut and sew kit. It just depends on level of demand. If you break that down, you've got four to five weeks on the ocean so you can sort of back into what the lead-time is offshore.

On our domestic produced product, the lead-time is somewhere around six to eight weeks. It should be lower than that, but we're just continuing to have an awful hard time sourcing raw materials in the U.S.

We continue to face shortages of acrylic yarn, polypropylene yarn and other type yarns we use, decorative yarns in the U.S. So our issue with the U.S. is not one of capacity, of being able to deliver quickly, our issue in the U.S. is can we get the proper yarns to weave the fabrics that our customers want.

What we've done to help lower lead-times in the U.S. over the last several years is drastically reduce our manufacturing complexities and our product line complexities so we can have fewer yarn SKUs and as a result be able to offer customers shorter lead-times.

I remember going through this acrylic and polypropylene issue, I guess, more than a year ago now. I assume that that's not getting a whole lot better, or is it that the last remaining sources have fewer customers so you're sort of at the front of the line, or is there something at risk here that maybe the industry, that portion of the industry, that upstream portion of the industry, isn't going to be around and that would obviously change your perspective on having domestic capacity? Is that a real risk yet?

Well, we're -- let me answer your question this way. We're a huge acrylic user and there is no acrylic producer in North America.

Okay.

So that's a problem.

Yep.

To begin with. From the polypropylene, there is only one supplier left in North America, and as a result his business is very strong, demand from lots of places, and so that's been an issue as well.

We think over time that will all work itself out. The market has a wonderful capability of when there's more demand than there is supply people pop up to meet the increased supply.

But that has not occurred yet, so our big problem, and I think our industry's big problem in the U.S., is not a capacity issue for us to deliver fabric, it's a question of can we get the yarns on time to give quick delivery to our customers, and yes, that will work out over time. It is still a problem today, though.

Yep.

And each quarter we are seeing there's one or more yarn vendors that go out of business.

Right.

Yeah. Is that more --

This is just a result of an industry in contraction.

Sure. Is that more on the commodity yarn side? What is it you always have to remind me?

It's all. I would say all, Joel. We would say all categories of yarn. Therefore, as you might guess, we are selecting our yarn vendors very, very carefully.

Okay.

These days, and focusing as much business on the people we believe that are survivors.

Joel, one more point because I think you made a good point. Really, on the commodity yarns, they're okay because we can source them worldwide. That's working fine, so anything that's quote a commodity, we're buying all over the world, and we've been able to, you know, that works fine.

Our problem is the decorative yarns, the yarns that make the pattern special. That's what we have a hard time getting.

We're seeing the prices domestically go up because the fewer people that are left have less business and less overhead absorption, and so prices continue to go up which certainly doesn't help the U.S. fabrics be competitive with China produced fabrics.

Plenty to think about there. Just two other things, guys.

Frank, you had mentioned the differential between, I guess, a more traditional woven ticking fabric and the newer category of the knitteds. What is a rough price differential on a per yard basis?

The woven jacquard is in the $2.10 to $0.20 range to - and that's an average selling price of that category.

Okay.

And the knitted is above $4.

Okay.

And finally, the corporate overhead component of your EBIT looks like it's been kind of popping back up here a little bit the last couple of quarters. Is there some cleanup effort sort of rolled into that number or what does look like a sustainable corporate expenditure level?

Sustainable level would be more in the $700,000 per quarter range.

Okay. And then what was --

We had some professional fees in the first quarter that we accrued.

Okay. Okay.

And of course, we had to implement the new FAS -- the new stock option FAS 123 in the first quarter, too.

Okay. So you sort of year-end and starting the year and now we ratchet back down to the quote more normalized figure?

Yes.

The 700 to 800 range would include any FAS 123 impact.

Yes.

All right. Very good. Thank you, guys. Best of luck.

Thank you.

[OPERATOR INSTRUCTIONS] Go next to Laura Champine with Morgan Keegan.

Hi. This is Danna Getske, actually. Laura had to hop on a flight this morning. Just have a quick question for you.

In regards to your Q2 top line guidance, it seems like it points to some fairly erratic trends, and I was just wondering if there was something going on, something special going on that drove sales in Q1?

Yeah. You know, this is Rob, and I think Q1 we benefited, if you remember last winter and through the spring, we had the foam shortage that caused the manufacturers to not be able to make as much furniture as they had programmed, and so when that got worked out, then we had some longer lead-times because of the products that we're sourcing out of China, I believe customers called up through the summer, through the spring and summer, and maybe during that timeframe they ordered more goods than they needed because of the longer supply chain and the fact that they had run out of foam and they didn't want to have a problem with fabric.

Our guess is they ordered more fabric than they needed, and now their inventory is a little higher than what it needs to be, and then in addition we've had a significant slowdown at retail during the summer, and it's all consumer goods are being hit, but furniture is being hit as well, and so if you take the fact that most of our large customers were over inventoried and their business fell off more than they thought it would through the summer, that results in just a very significant fall off in orders at this time.

It's going to take, we think, a few months to get it back in balance. The length of time will depend on what happens in retail sales during the fall. Usually Labor Day is a good weekend and through the fall business gets progressively better, and we hope that will be the case.

Okay. Okay. Just a quick follow-on to that.

In the upholstery segment in particular, your average selling price is down 4% this quarter. Your guidance for Q2, just, do you see the average selling price declining by about the same magnitude, would you say in Q2 or can you give any color?

They will probably be more in the Q1 range, you know, the $4.20 range for Q2.

Okay. Okay. Thanks very much.

[OPERATOR INSTRUCTIONS] It appears we have no further questions at this time. I'll turn the call back over to management for any additional or closing remarks.

Thank you. And thanks again for your participation and your interest in Culp. We look forward to updating you on our progress next quarter. Have a great day.

That does conclude today's conference call. You may disconnect at this time.