Culp Inc (CULP) 2007 Q2 法說會逐字稿

Good day and welcome to the Culp Incorporated second 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 Miss Drew Anderson. Please go ahead.

Thank you. Good morning and welcome to the Culp conference call to review the company's results for the second 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 for discussion of those factors that could affect Culp's operations in the forward-looking statements made in this call. The information being provided today is of this date only and Culp expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations. In addition, during this call the company will be discussing non-GAAP financial measurements that exclude restructuring and restructuring related charges. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included in the 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 will 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 second 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 sometime updating you on the strategic actions in each of our operating segments and our third quarter 2007 business outlook. We are pleased with our will solid execution during a challenging period for the the retail home furnishings industry. While our top line results for the second quarter reflect the furniture industry slow down and related inventory correction, we continue to make progress in improving operating performance in both mattress ticking and upholstery fabrics. The changes we have made in each of our operating segments have enabled us to operate more efficiently, even on lower volume. We are pleased to be profitable through the first half of this year and we are significantly up compared with the first half of last year. I will give you further details in a minute, but first I will ask Frank to comment on our results for the quarter.

Good morning everyone, and thanks for joining us as well. Total sales for the quarter were $59 million, down 12% from the the second quarter of last year. Although results for the second quarter reflect the industry wide slow down, we reported the best quarterly profit in over two years. We will comment more specifically on each business segment in a moment.

Overall our gross profit margin improved to 14% compared with 10.9% mountain second quarter of last year excluding restructuring charges in both periods. SG&A expenses declined 4% to $6.2 million for the quarter, compared with $6.5 million, again excluding some restructuring it charges. Operating income was $2 million or 3.5% of sales compared with operating income of $776,000 last year. Again, excluding restructuring charges. Net income for the quarter was $812,000 or $0.07 per share compared with a net loss of $4.2 million or $0.36 cents per share last year. The financial results for the second quarter of fiscal 2007 include $233,000 or $0.02 cents per share in restructuring charges on an after tax basis. Excluding these charges, net income for our second quarter was $1,045,000 or $0.09 cents per share. The results for the second quarter of last year included restructuring charges of $3.8 million or $0.33 cents per share. Excluding these charges the net loss for last year was $332,000 or $0.03 cents per share.

I would now like to review our results by operating segment. With respect to mattress ticking we reported $23.5 million in sales for the quarter, a 2% decline compared with $24 million for the same period last year. Mattress ticking sales accounted for approximately 40% of sales during the quarter. Total yards sold were $10.2 million down 8% compared with $11.1 million yards a year ago. This reflects a decline in demand for the printed ticking category, which has been less popular of late, while sales of knitted ticking continue to trend higher reflecting a change in customer demand. Although prices on key product lines have trended lower, the average selling price of $2.28 per yard for mattress ticking for the second quarter was slightly higher than the average selling price of $2.16 per yard for the second quarter of last year. Due to the shift in product mix to increased sales of substantially higher priced knitted ticking. We expect knitted ticking to account for an increasingly higher percentage of sales as demand for this category is expected to increase.

Operating income for this segment was $2.5 million or 10.5% of sales. For the prior year period operating income was $1.7 million or 6.9% of sales. We showed significant improvement in our operating performance over the same period a year ago with operating income up 48% and operating margins over 10% for the first time in two years. These results reflect solid productivity gains as we are now realizing full benefits of our $10 million capital project implemented over the past two years.

Now turning to the results of our second operating segment, upholstery fabrics. Sales were $35.5 million representing a 17% decline from $43 million in the second quarter of last year. As noted this trend reflects the overall industry slow down for furniture and the related inventory correction. Total yards sold were 8.4 million, down 18% compared with 10.3 million a year ago. The average selling price was $4.16 per yard compared with $4.19 per yard for the same period a year ago. Sales of upholstery fabrics reflect higher sales of non-U.S. produced fabrics and continued very weak demand industry wide for U.S. produced fabrics. Driven by consumer preference for leather and suede furniture and other imported fabrics, including an increasing amount of cut and sew kits. Sales of non-U.S. produced fabrics were $20.6 million in the second quarter, up 65% over the prior year period, while sales of U.S. produced fabrics were 14.9 %, down 51% from the second quarter of fiscal 2006. While we continued to see solid growth in sales of non-U.S. produced upholstery fabrics, continued substantial weakness in our U.S. business accounted for the overall segment sales decline in the second quarter. Sales of our non-U.S. produced fabrics represented 58% of total upholstery fabric sales for the second quarter compared with 29% a year ago. Overall the upholstery fabric segment reported operating income of $393,000 for the quarter, excluding restructuring charges, which compares with operating loss of $69,000 for the same period a year ago, also excluding restructuring charges. For the quarter, SG&A expenses declined by 8% and represented 10.5% of sales for this segment.

Let me now turn to the balance sheet. At the end of the second quarter our balance sheet reflects approximately $9.7 million in cash and cash equivalents. While we have built inventories through the first six months of fiscal 2007 in operating segments we are taking necessary steps to reduce these levels over the second half of this fiscal year. As of October 29th, the end of our second quarter, we also have $1.6 million in assets held for sale which we expect will be sold over the next 12 months. Additionally our capital spending plans for this fiscal year are modest and not expected to exceed $2.5 million with approximately $2 million already incurred during the first half of the fiscal year. Now I'll turn things back over to Rob.

Thanks and I'll now talk about the progress we are 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 and are the leader in our industry. Mattress ticking sales accounted for 40% of our total sales this quarter. 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 manufactures in favor of knits. We have seen a trend with our customers for using more knits on the panels of the mattresses and using primarily damask on the borders. Knitted ticking is accounting for an increasing percentage of our total mattress ticking sales. We have shown steady improvement in our operating margins with completion of our $10 million capital project over the past two years. 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 has further enhanced our globally competitive position in an industry facing pricing pressures. We have continued to see sequential gains each quarter and we achieved our target productivity levels. For the second quarter operating income was up approximately 48% and operating margin over 10% for the first time in two years.

Now I'll give you an update on our upholstery fabric segment. First of all our U.S. operation. The improved operating margins demonstrate the aggressive steps we have taken to revise our product strategy, reduce our manufacturing complexities, and improve our cost structure. However the lower sales volumes are having a significant impact on our expected operating results. During the quarter we made a decision to further reduce our employment levels across our remaining three U.S. manufacturing plants to more appropriately support current demand. Total U.S. manufacturing employment in the upholstery fabric segment is now 320 people compared with 534 people at the end of fiscal 2006. And 1484 at the end of fiscal 2005. In light of the continuing sharp declines in demand for U.S. produced fabrics we will continue to evaluate our domestic strategy and production requirements. We remain committed to taking whatever additional steps are necessary to achieve profitable U.S. upholstery fabric operation and the company could take additional restructuring actions in the near future.

Now let me turn to our non-U.S. operations, upholstery fabrics segment. We're very pleased with the trends we are seeing in this business. As Frank noted, sales of our upholstery fabrics produced outside of our U.S. manufacturing plants increased over 65% over the second quarter of last year and accounted for 58% of the sales. 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. Our customers have continued to aggressively source fabrics produced outside the U.S. and we believe Culp is well positioned to benefit from this growing demand.

Over the last three years we have built an industry leading operation with over 450 associates in China and have five buildings totaling approximately 300,000 square feet. The ongoing focus of this business will be on the aggressive development of innovative new products based on an understanding of our customers needs with a strong commitment to quality and global logistics. Additionally, we will continue to pursue opportunities to expand our capabilities and improve our performance to customers in our China operation. Overall our offshore produced business represents a significant growth opportunity in today's global marketplace and we have established a strong competitive position for Culp. Now I'll let Frank review the outlook for the third quarter of fiscal '07. Frank.

As Rob stated at the beginning of the call we are encouraged by the progress we have made in our operating performance for the first half of this year. However, we see a continuation of the slow down in the retail furniture market as high gas prices, shaky consumer confidence and a weaker housing market continue to adversely affect sales in the furniture industry. Additionally we believe there continue to be surplus inventories throughout the furniture retail and manufacturing supply chain as an increasing amount of products are sourced from Asia with much longer lead times. Overall we expect our third quarter sales to be approximately 12 to 15% lower than sales for the third quarter of last year. We expect sales in our mattress ticking segment will show about the same decline as the 2% decline we had in the second quarter of this year.

Operating income in mattress ticking is expected to improve over the same period last year, due on our growing knit ticking business and the benefits from our capital project. In the upholstery fabric segment we expect continued growth in sales of fabrics produced outside the United States, although the year over year growth rate is expected to be be considerably lower than the previous quarter. Sales of domestically produced upholstery fabrics are expected to reflect very weak demand, resulting in an overall segment decline in the range of 15 to 20%. Due to continued substantial weakness in U.S. produced sales and a lower growth rate in non-U.S. produced sales we believe the upholstery fabrics segments operating results for the third quarter will show year over year improvement, but will reflect a significant operating loss for the quarter. Operating loss for the upholstery fabric segment for last year's third quarter was $1.7 million. Considering these factors, we expect to report a net loss in the third quarter in the range of $0.06 to $0.10 per share excluding restructuring charges related to previously announced restructuring initiatives.

This is management's best estimate at present recognizing that future financial results are difficult to predict because the upholstery fabric 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 in our U.S. operations, and the impact of raw material cost. We estimate that restructuring charges for previously announced initiatives will approximately be $200,000 or $160,000 net of taxes or $0.01 cents per share. Including these restructuring charges we expect to report a net loss for the third quarter in the range of $0.07 to $0.11 cents per share. This range does not include additional charges that could be incurred related to any new restructuring initiatives. While the furniture industry is going through a very difficult cycle we continue to move Culp forward and believe we are taking the right steps to extend the leadership positions we enjoy in both of our businesses. The diversity of our business is a key strength for Culp with 75% of the company's total sales coming from mattress fabrics and non-U.S. produced upholstery fabrics. We have built a solid competitive position in mattress ticking and continue to expand our relationships with key customers. Our non-U.S. produced upholstery fabrics are now the driving force behind our upholstery fabrics business and we are aggressively expanding our capabilities and pursuing opportunities for further innovation. We continue to evaluate our U.S. upholstery fabric strategy and operations and believe we are making progress toward creating a sustainable model that will meet current customer demand. Our primary objective is to restore Culp to profitability in fiscal 2007 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]Our first question comes from Budd Bugatch, please go ahead.

Good morning Rob, good morning Frank.

Good morning Budd.

A couple questions, first talk about inventory, where are you over-inventoried, what -- can you quantify what you're thinking about in terms of reducing inventories.

Inventory is up in both segments, probably the maj -- two thirds of the increase is in upholstery, one third is in mattress ticking and this has been a trend over the last several years. The industry slow down, you know, obviously it contributed to the inventory build. And we are working it it down with, we will make good progress, we're seeing already in Q3 and should be close to last year's level by the end of the fourth quarter. Which of course will be a very nice boost to cash flow during the second half of this year.

You're $1 million over what you were at this time last year, what's the goal to get inventory down.

You know, I would like to see, I would like to see it very close to last year end's level.

Okay. Talk about mattress ticking, we have had a bunch of things that make the comparisons harder over the last couple of years. One sided, border, the whole now printed, when do we start to get some easier comparisons in mattress ticking and we will start to see some revenue growth.

I mean we're, except for the printed mattress ticking area, you know, we have had pretty solid performance there in terms of sales. And that's the only area we're declining in. And that's a much smaller piece of the business today, so very soon within, you know, revenue growth within, you know, early next fiscal year.

So you don't see -- I know you guided down, down the same level as you had in the second quarter for third quarter, is there any chance you get a better utilization out of the third quarter.

I mean, it's possible, but I would still think the guidance is about right since we put it out, I would say, I think that's about where it's going to be. We should see growth over the, some time over the next several quarters. The printed mattress ticking is now less than, it's less than around 10% of the business. So it's getting to be a much smaller piece.

Just two more questions if I might. In upholstered here, what looks like the capacity utilization in the three facilities you have got, where are you now.

Capacity utilization, of course that's a moving target Budd, because we continue to reduce our capacity in terms of taking equipment out of service and reducing the staff associated with that.

How many looms are left at Graham for example.

We don't usually get into that detail, but obviously they're considerably less than they have been over the previous years and we continue to take looms out of service. And sell looms as necessary, as they become available, and reduce the staff.

So you have not only got the looms mothballed, but they're gone from the facility.

We have sold, yes, we've sold at least half of the looms in that plant over the last year and a half. That we had at one time there and Pageland, yes, we have sold a lot of them.

So that's in the $2.7 million proceeds of sales.

Yeah, this year and last year, we sold some last year, yes.

And last question is upholstery lead times, can can you comment on what they are for you. That's a worry for, that's a worry for the manufacturers is it not?

Yes, we continue to work on lead times in all areas. Domestically, we're six to eight, China ten to twelve. And of course we have got several more in-stock programs with shorter lead times.

Bud, this is Rob. In China, for China to China, for a cut and sew kit the lead times is around four weeks. So - and what we're seeing, I don't think it's any surprise to you of the major customers they're telling us as much as 70 to 80% of their production and/or kits is now offshore. So...

Interesting. All right, thank you guys, good luck.

Yeah, thanks.

And we will move on to our next question from Joel Havard with BB&T Capital Markets, please go ahead.

Thank you. Guys, can you all hear me okay?

Sure can. Good morning Joel.

I'm out of the office, so I'm never sure I trust myself technologically. The guidance, you know, I realize you all are just talking a quarter out, but Rob, and I wanted to get your thoughts, Frank please chime in, on sort of the workout of the industry situation. I'll concur that, you know, bedding is probably a little smoother, but with the sort of overall imbalance in, you know, core furniture, is that where this wording is cropping up that, you know, you're hoping to stay profitable for the year, you know, granting your guidance for Q3, does that mean it kind of carries into the spring.

We certainly hope not. In the past Joel, you know, beginning January with what we call tax season, from January through April business normally picks up a little bit. And because of the tax refunds and, you know, winter sales, etc., so we're hoping this third quarter is what it is. Certainly in the fall we all saw a slowdown of business and it was compounded in the lead times are so long that people first of all business slowed down, second of all they had a lot of inventory, third of all a lot of inventory was coming in.

Yeah.

And so all of that together made it just a really tough two or three month period. As Frank said earlier, we're beginning to see the inventory come down. And we're also will beginning to see orders pick up slightly. And so we hope that the fourth quarter will be more like the fourth quarter was last year as far as business goes. And if that's the case, you know, we will all be very pleased. But right now it's just too hard for us to predict. Right now business was very tough during our second quarter. Business is going to, the end of the second quarter, business is going to be tough third quarter. We're starting to see some signs that fourth quarter could be a little bit better, but these orders feed to start coming in because of lead times, you know, if you're looking anywhere 10 to 12 week lead times, if we're going to have a good fourth quarter orders need to start coming in. So does that answer your question somewhat?

For an answer to that, you know what, I guess we're all kind of grasping for what historical perspective we can yet.

Joel, I would add over the last four to five weeks, two of those weeks have been our best order weeks for this fiscal year-to-date. So as Rob mentioned we're seeing some pickup in orders, and, you know, that's certainly encouraging. But we're not seeing it every week. But clearly it's beginning to trend up. Second point I'd make, this is the same, almost the same sort of conversation we had this time last year. We had a very tough third quarter to go through and then the fourth quarter ended up much better than we thought. A very strong demand in the fourth quarter. So we've got to keep in mind this industry is highly cyclical.

You all made some comments earlier I think on Bud's question and then separately in your comments about the China to China side of things. Have you disclosed or can you share some perspective on how much of Shanghai is staying. I guess initially shipping intra-China regardless of where it goes after that, I know you probably don't even know.

Sure. It's about, of course we disclosed that our China sales for the second quarter were 58% of total upholstery and we're just over $20 million. 40% to 50% of it stays China to China. You know, it swings, it does swing a little bit 40 and 50%, so is it clear customers want to bring a lot of roll goods still back to the U.S.

Joel, we're also, I might add to that, we're also seeing for the first time, which is good news for us, we're seeing some sales to China manufacturers who are then producing finished furniture for sale back to the U.S. Not specified by U.S., you know, manufacturers.

And of course we're beginning to see sales of our cut and sew kits as well, you know, that's starting to gear up very nicely over the first half of this fiscal year and sequentially is beginning to be, you know, some nice contribution to our sales.

Was that part of this more recent square footage increase out of Shanghai, we didn't realize it had gotten up to 300, was it 300,000 feet yet, is that a function of the cut and sew initiative really starting to get up and running.

Yes, that's certainly part of it. One of the five facilities we're dedicating to our cut and sew operation. And we can do a rather large amount of cut and sew kits on a weekly basis out of that facility. And of course we didn't start cutting and sewing until February of this calendar year.

I know we will all be anxiously listening for more insight into how that business is continuing.

I think Rob and I see that we would -- there's no doubt we're going to see significant growth in cut and sew kits.

Significant growth in the kits we make there over the foreseeable future.

Well, guys, I think that's all I've got today. Thanks for the update, good luck.

Thanks Joel.

We're moving on to Laura Champine with Morgan Keegan, please go ahead.

Good morning.

Hi, Laura.

Good morning Laura.

You mentioned that on the upholstery segment the imported product was up 35%, and upholstery was down -- I'm sorry domestic was down 51%. Can you do the same kind of analysis with the mattress ticking segment, including St. Jerome and your domestic and, say, you know, domestic including Canada is up X percent or down X percent and that's being offset by an increase in imported products.

No, we really don't see that, you know, we're fortunate in mattress ticking that we have got a, you know, what we call mirrored manufacturing exactly the same manufacturing capabilities in each of our operations. So we can be very flexible in where we make any of our products. So we're not seeing that. The demand still, that business is, continues to be a just-in-time business and it is very essential to have production in our home market to meet the service requirements. And Laura, I think it's also real important on the mattresses to note that as we talk, you know, because your question we certainly look at every day, as Frank said it has remained a U.S. business. But the large retailers tell us that because of the brand names, because of the tremendous amount of money they make selling mattresses, it's the most profitable part of their floor. And third of all maybe most important if they started importing mattresses they would have to build huge warehouses to hold the mattresses. And now these large retailers for example sell a mattress today, deliver it in 24 to 48 hours, and don't pay for it, and so in other words they're working on their suppliers' capital. And it just doesn't seem to work for them to get into the import business. So we're seeing - if anything we're seeing less talk about imports the last few months than we did a year ago on the mattress side.

Rob, I'm not hearing much except at the low end about imported mattresses, I'm hearing more about containers of cut and sewn ticking kits. And I'm wondering if you're involved in that business. And then secondarily I'm just wondering what the growth of your source business is in CHF relative to the decline in manufactured business.

Yes, when you hear more kits coming in I think what you're referring to is the Visco kits. And yes. I mean, not inner spring, but more specialty bedding and yes, we are participating in that. We have got several quotes out on that and if that continues to grow we will certainly, you know, take part in it.

We're not seeing the growth in our source ticking like we are in upholstery.

Okay. And then you mentioned, I can almost hear another restructuring coming from your 8-K filing, is there any more detail you can give us about what you might need to do additionally on the upholstery side.

Laura, what we, what we, you know, consistently said is that we over the past several years we are constantly every quarter evaluating our domestic platform versus the current demand and the projected demand. And as everyone has seen we have taken action as required to adjust our capacity and cost structure to stay in line with whatever demand trends we have. I will note however, that we also announced with the 8-K the completion of a loan amendment to our major term notes. And, you know, a key provision of this amendment does give the company more flexibility in its loan covenants to take action that it might deem appropriate.

All right. Okay. Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Sam Bergman with Bayberry Capital Management. Please go ahead.

Good morning gentlemen. Nice job on getting the company to profitability. Continue the good work.

Thank you.

Several questions. Total U.S. employment in the upholstery division is 320, what was it last quarter?

I think we disclosed in the press release that it was 534 at the end of the fiscal year. I don't have in front of me what it was at the end of the first quarter.

Can you get back to me Frank on that.

Yeah, Ken Bowling, our VP of Finance, I know Ken will get that.

Okay. And also in regard to mattress ticking there was a comment made that demand is going to increase, so there's going to be some growth in '07 in that area. Yet you gave us some guidance for the next quarter and it seems like it's again going to be down 2, 3%. When do you foresee that growth to begin in that particular area. Second half of '07 or --

Fiscal '08.

Fiscal '08.

Fiscal '08, several quarters out.

And where is that growth going to come from?

It is going to come from our knitted ticking business as we consistently said is growing very nicely. That's one area. Number two, there's not much printed ticking left, so that decline that we're seeing there is not going to offset the other gains we're having as much.

Okay. Regarding inventory, how many inventory turns were there this quarter?

Inventory turns overall were I think just, just consolidated around five turns.

Oh, five turns. Now, knowing that the market was getting a little softer even less quarter I think you had mentioned that, I'm just wondering why the inventory number was as high as it was.

As we said a little earlier in the call Sam, and Rob addressed this, we -- the business in the industry was very good in our fourth quarter of last fiscal year ended April and really continued through the first quarter.

Okay.

We reported a 3% gain. And then the business started slowing down in August. And when you have a lot of your product coming from Asia with longer lead times, us and our customers and retailers, that slow down hit, it takes a while to adjust the inventory.

Okay.

This is the first time the furniture industry has really had a significant slow down and so much of the production is coming from Asia throughout the supply chain. So it's going to take, you know, three plus months or so, three to six to work the excess inventory through the system.

Going to non-U.S. upholstery fabric, what was the sales for the first quarter in China versus this quarter, was there a sequential increase?

First quarter was just over $23 million and this quarter was $20.5 in non-U.S. produced sales.

Okay. Why the drop?

Well, again the slow down. The industry is slowing down overall, A, at retail and B, inventory correction. And that is affecting the China business. But even though it slowed we're still up 65% year-over-year.

Right, but it hasn't increased sequentially --

In all fairness probably some of the first quarter sales went into inventory sitting in customers inventory, so, you know, you almost got to look at the two quarters as a whole.

Okay. The last question I wanted to ask in regard to the U.S. upholstery fabric business, what, what things can you do to get this profitable even with the low rate of sales, besides restructuring the small amount mentioned.

Well, I mean we're doing what we have been trying to do. We have, we have reduced SKU's, we have taken out manufacturing complexity [cross conversation] we have, you know, importing yarn from China to have better values domestically, the same game plan we have been following for two to three years.

Thank you very much. Good luck in the upcoming quarter.

Thank you.

Our next question comes from Michael Wasserman with Moors and Cabot , please go ahead.

Morning. Rob, good morning.

Good morning.

Given the little additional capital expenditures planned for the second half as well as the reduction in inventory, any estimate of cash and equivalents at your fiscal year-end upcoming.

You know, Michael, we usually don't put out that information as you know. But I think as you can see from our comments already we will make good progress in inventories over the second half of the year, minimal Cap Ex, it's going to be a much better cash flow second half of the year than first half.

Okay. Is $12 to 15 million out of the -- is that too optimistic, or is that possible? Without making a prediction.

Again, we do not give out that estimate, but with the recent loan amendment that we put in place there is a provision in that amendment we put in place there is a provision in that amendment where the company can prepay without penalty, prepayment penalty, any amounts of the debt with excess cash flow above $8 million. So to the extent we generate surplus cash flow above $8 we will be retiring, you know, debt.

Uh-huh.

So, I mean, again, and I'm not going to predict the cash flow, but to the extent there is above $8 million we will be repaying our term notes.

Okay. Next question, if the weakness in demand persists for whatever reasons, you know, indefinitely, I presume we do further cutting in the U.S., and how do you think things go beyond that? We don't get the pickup in demand that should occur but has yet to occur. What is the company planning to do once it's cut further in the U.S., what's the next step?

First of all, we don't believe, we are very highly confident that the business is going to pick up. And we're seeing signs of it now. And I would almost guarantee you it would pick up throughout our fourth quarter. Where we're seeing continued weakness of course as we continue to disclose is for U.S. produced fabrics. We have three remaining U.S. plants, 320 employees, and we will continue to evaluate each of those operations in light of the demand currently and predicted. And take whatever action we need to keep, you know, our production requirements in line with demand.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] And it appears we have no further questions at this time.

Lisa, 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 holiday season. Thanks.

And that concludes today's teleconference. Thank you for your participation, have a good day.