Culp Inc (CULP) 2007 Q4 法說會逐字稿

Good day and welcome to the Culp, Inc. fourth-quarter 2007 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to [Drew Anderson]. Please go ahead.

Thank you. Good morning and welcome to the Culp conference call to review the Company's results for the fourth 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 a discussion of those factors that could affect Culp's operations and the forward-looking statements made in this call.

The information being provided today is 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 website at www.culpinc.com.

I will now turn the call over to Frank Saxon, Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, 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 Ken Bowling, Chief Financial Officer of Culp.

I will begin the call with some brief comments about Culp today, and Ken will then review the financial results for the quarter and year. I will then update you on the strategic actions in each of our operating segments, and turn the call back over to Ken to discuss our first-quarter business outlook. And then before taking questions, I will have some closing remarks.

Our fourth-quarter performance marked a solid finish to a year of important strategic and operational changes at Culp. These results reflect the benefits of the aggressive steps we have taken this year to more effectively position Culp in the global marketplace.

Our Mattress Fabrics business has progressed well, with the addition of the Mattress Fabrics productline of ITG's Burlington House division, which we acquired near the end of the third quarter. This transition has gone well and we are excited about the opportunities ahead for Culp in Mattress Fabrics.

Although market conditions have continued to be extremely challenging in Upholstery Fabrics, we have worked hard to create a sustainable Upholstery Fabrics business model that will meet our current customer demand.

Our China platform has significantly enhanced our competitive position in the marketplace. We believe we have achieved solid leadership positions in both of our businesses, and we look forward to the year ahead.

I will now turn call over to Ken, who will review the financial results for the quarter and the year.

Thanks, Frank. Total sales for the quarter were $73.2 million, up 3.5% from the fourth quarter of last year. These results reflect strong growth in Mattress Ticking. However, our Upholstery Fabrics business reflects a very weak environment in the retail furniture business and soft demand for U.S.-produced upholstery fabrics. We will comment more specifically on each business segment in a moment.

Our overall gross profit margin was 15.6% compared with 12.2% in the fourth quarter of last year, excluding restructuring related charges for both periods. Operating income was $3.6 million compared with operating income of $2.0 million last year, an increase of 70% excluding restructuring and related charges for both periods.

We reported a small net loss of $40,000, or $0.00 per share, for the fourth quarter of fiscal 2007. The financial results for the fourth quarter of fiscal 2007 include $1.8 million, or $0.14 per share, in restructuring and related charges after taxes. Excluding these charges, net income for the fourth fiscal quarter was $1.8 million, or $0.14 per share.

These results compare with a net loss of $1.5 million, or $0.13 per share, for the fourth quarter of fiscal 2006. The financial results for the fourth quarter of fiscal 2006 include $3.2 million, or $0.27 per share, in restructuring and related charges after taxes. Excluding these charges, net income for the fourth quarter of fiscal 2006 was $1.7 million, or $0.14 per share. Included in the $1.7 million is an income tax benefit of $661,000, or $0.06 per share, that reflects losses from the Company's U.S. operations combined with lower tax rates on income from foreign sources.

For the year, net sales were $250.5 million, down 4% from $261.1 million last year. Operating income was $9 million compared with $2.6 million in fiscal 2006, excluding restructuring and related charges for both periods. Net loss for the year was $1.3 million, or $0.11 per share, compared with a net loss of $11.8 million, or $1.02 per share, last year. Excluding restructuring and related charges, net income for fiscal 2007 was $3.8 million, or $0.32 per share. Excluding restructuring and related charges, net loss for fiscal 2006 was $438,000, or $0.04 per share.

I would like to now review our results for our operating segments. With respect to Mattress Fabrics, also known as Mattress Ticking, we reported $38.1 million in sales for the quarter, a 58% increase compared with $24.1 million for the same period last year. These results include the additional incremental sales related to the Company's acquisition of ITG's mattress fabrics productline, completed during the third quarter of fiscal 2007, as well as some organic growth, especially in knitted ticking.

Mattress Ticking sales accounted for approximately 52% of the overall sales during the quarter. Total yards sold were 15.6 million, up 45% compare with 10.7 million yards a year ago. The average selling price was $2.45 per yard for Mattress Ticking for the fourth quarter of fiscal 2007, was 9% higher than the average selling price for the fourth quarter of last year, reflecting a shift in product mix to increased sales of substantially higher-priced knitted ticking.

Operating income for this segment was $3.9 million, or 10.3% of sales. For the prior-year period, operating income was $2 million, or 8.4% of sales. This improvement in our operating performance in Mattress Ticking over the same period a year ago reflects higher volumes, increased knitted ticking sales and full plant utilization. These results also include ITG transition costs of $740,000 incurred during the quarter.

For fiscal 2007, Mattress Ticking sales totaled $107.8 million, an increase of 15% over fiscal 2006, and operating income was $10.8 million, up 57% from $6.9 million in the prior year.

Now turning to the results of our other operating segment, Upholstery Fabrics. Sales were $35.1 million, representing a 25% decline from $46.6 million in the fourth quarter last year. Total yards sold were 8.3 million, down 25% compared with 11.1 million a year ago. The average selling price was relatively flat compared with the same period a year ago.

Sales of Upholstery Fabrics reflect very weak overall industry demand, as well as continued soft demand industrywide for U.S.-produced fabrics, driven by consumer preference for leather- and suede-covered furniture and other imported fabrics, including cut-and-sewn kits.

While we continue to see growth in sales of non-U.S.-produced upholstery fabrics, the pace of growth has slowed down, reflecting the overall softness in the furniture industry. Sales of non-U.S.-produced fabrics were $20.9 million in the fourth quarter, up 3% over the prior-year period. Sales of our non-U.S.-produced fabrics represented 60% of total Upholstery Fabrics sales for the fourth quarter compared with 43% a year ago.

Sales of U.S.-produced fabrics were $14.2 million, down 46% from the fourth quarter of fiscal 2006. Overall, the Upholstery Fabrics segment reported operating income of $863,000 for the fourth quarter compared with $1.1 million for the same period last year.

For fiscal 2007, sales of Upholstery Fabrics were $142.7 million, a decline of 15% compared with fiscal 2006. Operating income for the year was $2.3 million, reversing the previous year's operating loss of $954,000. These results reflect higher gross profit on non-U.S.-produced fabrics, but continued low gross profit levels related to sales of U.S.-produced fabrics.

Now let me turn to the balance sheet. One of our primary objectives for fiscal 2007 was to maintain a strong financial position as we continued to make important strategic changes in our operations. At the end of fiscal 2007, our balance sheet reflected $10.2 million in cash and cash equivalents, even as we expanded our Mattress Fabrics business. Total debt was $40.8 million compared with $47.7 million at the end of fiscal 2006.

During the fourth quarter of fiscal 2007 and in May, we prepaid a total of $6.2 million in long-term debt scheduled for payment in March 2008. Our debt-to-capital ratio has improved significantly and is now 34%, down from 39% at the end of last year.

As of April 29, 2007, we also have $2.5 million in assets held for sale, which we expect will be sold in fiscal 2008. Our current capital expenditure budget for fiscal 2008 is $4 million, and depreciation is expected to be approximately $6 million.

I will now turn the call back over to Frank.

Thank you, Ken. I will now talk about the progress we are making in both of our operating segments, and I will start with Mattress Ticking. Mattress Ticking has become increasingly important part of our business. We believe we have a strong competitive position in the marketplace and are the leader in our industry. Our Mattress Fabrics business was exceptionally strong in the fourth quarter and accounted for more than half of total Company sales for the first time in Culp's history.

The acquisition of ITG's Mattress Fabrics productline has enhanced our leadership position, and we have been pleased with our progress in integrating the additional production and sales. Customer response has also generally been favorable, and we believe this transaction provides the opportunity to increase our annual sales in Mattress Fabrics by approximately 40 million.

We were also pleased to achieve improved operating margins in Mattress Fabrics, even with the transition costs during the fourth quarter. With the integration now substantially complete, we are well-positioned to solidify the gains we have achieved and continue to build a sustained level of execution and service for our customers.

It is important to note that the ITG acquisition was made possible in large part because of the groundwork we laid in fiscal 2005 and fiscal 2006, during which we made capital investments of approximately $10 million in this business. These projects included the purchase of faster, more efficient weaving machines, the relocation of looms from a higher-cost upholstery fabric plant, and a significant enhancement to our finishing capabilities.

As a result of these investments, we improved our globally competitive cost position in the industry, with stronger manufacturing capabilities and capacity. This investment, made during a very difficult and uncertain time in our Upholstery Fabrics business, has allowed us to incorporate the ITG acquisition in a very timely, cost-effective, and high-return fashion.

We are excited about the incremental value and synergy this acquisition brings to our business.

We believe that trends in the U.S. bedding industry should provide a favorable environment for Culp in the future. According to ISPA, the bedding trade association, the U.S. wholesale bedding market has averaged about 6% annual growth over the past 20 years, with only one year experiencing a decline in sales volume. It has proven to be a stable and mature industry, and has grown despite several economic downturns over this period.

In addition, we believe the bedding industry has done an excellent job of promoting the health benefits of a good night's sleep by focusing attention on the role that a new mattress plays in the quality of sleep.

Further, several important demographic factors also help to support the positive outlook for the bedding industry. These include the growth of an aging and affluent segment of the population, the increasing size of homes, and growth in the number of vacation and second homes.

Also important, and unlike the residential furniture industry, which has faced intense competition from imports, the bedding industry has experienced only limited competition from imports at this point. The primary reason for this fact includes a very short leadtime provided to mattress retailers, the limited inventories carried by such retailers, the customized nature of each retailers' productlines, high shipping costs for mattresses, the relatively low labor content in mattress manufacturing, and strong brand recognition.

In fiscal 2008, we hope to capitalize on Culp's solid competitive position in this business as Mattress Fabrics becomes a greater proportion of our overall sales. We will also continue to look for opportunities to build upon our leadership position in this business.

Now, I will give you an update on our Upholstery Fabrics business, and I will start with our U.S. operations. Since the beginning of fiscal 2007, we have made considerable progress in building new capabilities in our China platform, improving our product development efforts, reducing U.S. manufacturing capacity, and improving our cost structure. However, business conditions in the retail furniture business have been extremely soft, as a weak housing market and higher gas prices are affecting consumer demand.

With respect to our U.S. operations, we have continued to take steps to reduce cost and align our operations with current level of business. As of the end of fiscal '07, we have one U.S. upholstery plant in Anderson, South Carolina, which produces velvets and a limited amount of decorative fabrics. Culp is now the only U.S. company producing velvet fabrics for furniture manufacturers, and we believe the Anderson plant will continue to play an important role in our Upholstery Fabrics business.

The book value of our U.S. Upholstery Fabrics fixed assets is now $3.4 million, down from $52 million three years ago. With our restructuring activities substantially complete, we believe we now have the appropriate U.S. manufacturing capacity to support current demand.

Now, let me give you some information about our Upholstery Fabrics segment in our non-U.S. operations. As Ken noted, sales of non-U.S.-produced fabrics grew 3% and represented 60% of our Upholstery Fabrics sales for the fourth quarter, compared with 43% a year ago. However, sales of non-U.S.-fabrics are also beginning to reflect the overall softness in the furniture industry.

Even though we are facing a difficult macroeconomic environment in the furniture industry that may well last into calendar 2008, we are optimistic that we can compete effectively and make Upholstery Fabrics a profitable part of our business over the long-term. The reasons for optimism lie with our China platform, our position as the sole supplier of velvet fabrics, and the substantial completion of our U.S. restructuring.

Our China operation, which we have continued to successfully build upon since 2003, is the cornerstone of our long-term strategy to improve our competitive position by utilizing opportunities available in the fastest-growing economy in the world today. We call it innovation in a low-cost environment.

Simply put, our China platform has positioned us to not only survive and compete in a difficult marketplace, but also to be an industry leader. Our strategy is to take advantage of the variety of products and lower-cost manufacturing available in China, while still maintaining control of the value-added processes where Culp has a competitive advantage, such as design, proprietary fiber and yarn development, finishing, quality control, and logistics.

This strategic approach has allowed us to limit our investment of capital in fixed assets and to lower the cost of our products, while continuing to leverage our design and finishing expertise, our industry knowledge and important customer relationships. In this way, we have maintained our ability to provide our customers with products from every category of Upholstery Fabrics and to continually meet changing consumer preferences.

It is our China platform that differentiates Culp from most other companies doing business in Asia. We believe many of our competitors are following a Marco Polo approach, i.e., go to China, look for products that customers want and then bring them back to the U.S. market. These companies are competing primarily on cost, with much less emphasis on product innovation, American design and color.

In contrast, we did not go to China just to buy cheap products. Rather, we have embraced China and integrated it into our overall strategy. We have done this by working with strategic mill partners in China to find product capabilities where we could add value, not just find a low-cost supplier. We then worked with these partners to produce innovative and differentiated products.

We believe that our China operation provides us with a sustainable business model that better meets our customers' needs and positions us to compete more effectively in this dynamic, global marketplace. In this business, we have transformed ourselves from a manufacturing-oriented company to an innovative, marketing-oriented firm that competes with a first mover advantage on new products.

We have done this by utilizing Culp's strengths in product design and textile engineering, areas where we believe Culp has a considerable advantage. Moreover, this strategy has allowed us to avoid the significant capital investments necessary to manufacture upholstery fabrics, while still controlling the important components of the production and supply chain processes.

We are excited about our progress to date in China. As our customers have continued to move more of their fabric and furniture purchases to Asia, Culp has moved with them, and we have responded with a state-of-the-art operation designed to meet their fabric needs. Our vision for this global platform has evolved over the last several years, and today, we have a substantial, wholly-owned operation, with about 500 associates, along with a network of strategic mill partners.

Our focus in this business will continue to be on the development of new and exciting products, world-class logistics and quality, and further building upon our capabilities in the China platform. We believe Culp is well-positioned to meet customer demand when the market conditions improve.

With that, I will now turn it over to Ken to review the outlook for the first quarter.

As noted in the beginning of this call, we are pleased with our performance in the fourth quarter. The current trends in our Mattress Fabrics segment continue to be favorable, while business conditions remain very soft in our Upholstery Fabrics segment due to weak retail furniture demand and sharply lower demand for U.S.-produced fabrics.

Overall, we expect our first-quarter sales to be about the same as the first quarter of last year. We expect sales in our Mattress Fabrics segment to be up 55% to 60% for the first quarter, reflecting the incremental ITG sale and some organic growth. Operating income in this segment is also expected to improve substantially compared with the prior-year period due to higher sales volume, strong knitted ticking business, full production schedules and the completion of the integration of the ITG business. We do expect some transition costs during the first quarter.

In our Upholstery Fabrics segment, we expect to be down approximately 30% to 35% for the first quarter, with a modest decline in sales of non-U.S.-produced fabrics and sharply lower sales of U.S.-produced fabrics. We believe the Upholstery Fabrics segment's operating results will reflect a small operating loss due to lower sales and continued low gross profit margins in U.S.-produced fabrics.

However, we are expecting continued solid gross profit margins in our non-U.S. produced business, and lower selling, general and administrative expenses on a sequential basis for this segment, as we have recently taken additional cost reduction actions in this area.

Considering these factors, we expect to report net income in the first quarter in the range of $0.08 to $0.12 per share, excluding restructuring and related charges from previously announced restructuring initiatives. This is management's best estimate at present, recognizing that future financial results are difficult to predict because the upholstery fabrics and furniture industries are undergoing dramatic transitions, and some internal changes are still underway within the Company. The actual results will depend primarily upon the level of demand throughout the quarter.

We estimate that restructuring and related charges for previously announced restructuring initiatives of approximately $500,000, $375,000 net of taxes, or $0.03 per share, will be incurred during the first quarter. Including these restructuring and related charges, the Company expects to report results for the first quarter in the range of net income of $0.05 to $0.09 per share.

I will now turn things back over to Frank for closing remarks.

We look forward to the opportunities ahead for Culp in fiscal 2008. We believe we have made considerable progress over the past year in moving the Company forward in both business segments. With the addition of the ITG business, we have achieved a stronger competitive position in Mattress Fabrics, and this business will be the key driver of Culp's growth for fiscal 2008.

We have developed a growing global platform in our Upholstery Fabrics business and will continue to enhance our capabilities in China. With the aggressive strategic steps we have taken in our U.S. Upholstery Fabrics business, we have created a model to keep our domestic capacity appropriately sized for the current business environment. We are now focused on our position as the sole U.S. manufacturer of velvet upholstery fabrics.

As we began fiscal 2008, we are confident that Culp can approach both the opportunities and challenges in today's global marketplace from a stronger position.

In closing, over the past several years, Culp has undergone a very difficult and challenging transformation in response to fundamental changes in our markets. These changes were possible in large part due to the dedicated and diligent efforts of our associates, especially our management team, who have been remarkably loyal and understanding during these challenging times. With their efforts and commitment, we have taken the actions necessary to ensure Culp's position as a leading participant in the bedding and furniture industries.

With that, we will now take your questions.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) Budd Bugatch, Raymond James.

Good morning, Frank. Good morning, Ken. I have three questions. If you do the math, I think, on gross profit contribution margin in Mattress Fabrics, you get 21%, I think, without the transition costs, and maybe 27% if you take the transition costs out. What is the right way to think about that going forward? What do you think the contribution margin is on an incremental dollar of revenue for Mattress?

Budd, of course, as you know, that is really not information we would give out. We provided you the onetime cost of transition costs that we incurred during the fourth quarter, and we have indicated we will have some in the first quarter as well as we finalize the integration.

Obviously, we were able to -- in this acquisition, we were able to incorporate this business in a relatively short amount of time, four or five months, without buying any plants and equipment, without hiring any people. So obviously, there is some contribution margin there.

(multiple speakers) question on the variable SG&A, which looks like -- variable SG&A in that segment's around 8%. Is that the right way to think about that going forward? Is that kind of the right variable?

I think SG&A is certainly more fixed in that business, with the exception of sales commissions, which are generally variable.

And those sales commissions are at a mid-single-digit kind of level?

That's probably again not something we will disclose, to that level of detail.

My last question is on just gross profit differential in Upholstery Fabrics between the U.S. and the Asian platform. Would it be reasonable to assume that the U.S. gross margin in that area is in the upper-single-digit or mid-single-digit level? Is that a sustainable level of gross margin for the Anderson plant?

Again, we are not providing any information regarding gross profit levels of either. But we have certainly indicated that the U.S. is a low gross profit margin, and the China gross profit is certainly solid and reasonably good.

How about differential between the two, can you give us any feel on that?

You know, I am going to have to leave that to your -- your good job that you always do.

Why, thank you very much. It is easier if I get a little help, okay. Thank you very much. Good luck on the future.

(OPERATOR INSTRUCTIONS) Danna Getske, Morgan, Keegan.

Hi, guys. I'm on the call for Laura this morning. I was wondering if you could give us a sense of what factors are driving your outlook for the modest decline in foreign sourced -- in your foreign business in the first quarter.

What the factors -- in the Upholstery Fabrics area, you are referring to?

Yes, you know, if you can give us any color on perhaps as a function of units versus pricing, or just a sense of what is going on there that makes you think that business is going to be lower year-over-year?

Well, what is happening -- what we are finally feeling the effects of is a very weak retail furniture business, and due to the housing slump and higher gas prices. And we are seeing this throughout China -- not only us, but throughout China, with our competition and others -- with our competitors and others.

We have enjoyed year-over-year sales gains in our China business for the last three years. But finally, the weakness that we are seeing at retail here is affecting China, our business and others.

Okay, just as a follow on that, if you can give any sort of an estimate of what you guys believe overall the percent of upholstery sourced in China that is being used here in the U.S. market. You know, like presently, perhaps, versus a year ago -- just any sense you have on that.

That is a tough one. Really not good data, but it is clearly increasing, due to leather, suede, imported fabrics, cut-and-sew kits, finished furniture. It could easily be 60% to 70% out of China, when you take all of those collectively -- and increasing.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Kevin Oram, Praesidium.

Hey guys. The Marco Polo approach, Frank?

(Laughter)

Just a couple questions. I don't know if you can -- or that you will answer. If I were to look at just the working capital relating to the upholstery business, do you have that number or could you give us that number?

Probably -- we can follow up and probably give you that.

Okay. And then, what is the size of the NOL at the end of the quarter?

The NOL is in the range of $70 million.

70 million? Okay. And if -- I'm not saying you would -- but if you were to sell the upholstery business at some point, the NOL would stay with the Company?

Yes, the NOL always stays with the Corporation it belongs to, and that is in a very general sense. NOLs do not usually go with a division. And the Upholstery Fabrics business is part of our U.S. corporation.

Right, okay. And then on the ticking business, with this acquisition, obviously, you see some of the numbers, the fixed cost absorption and the improved profitability from the immediate effect on earnings. But I guess longer-term, does it change the environment now that you have kind of combined the number one and number two players here in a significant way? Can you comment yet on how that will change the overall industry going forward? I guess in terms of is it through pricing. Is there anything you can comment on?

Certainly, the -- let me answer you this way. The mattress ticking industry has generally been a concentrated group of suppliers, along with a customer base as well, as contrasted with our Upholstery Fabrics side. In the mattress ticking area, you know, it has been us and Bekaert Textiles, ITG, Blumenthal, and probably another six or so companies, smaller companies.

I think there is plenty of competition out there. I would certainly indicate that. There is still plenty of competition. But it probably -- I think it is a positive factor on our business. Culp has always done a very good job in service and quality in that business, and providing pretty good values to people, because we have had such globally low-cost situation in our U.S. manufacturing.

Yes. And has there been any resistance from customers related to the acquisition?

We have really been very pleased. We have worked so hard from day one -- you know, the number one objective here was to keep servicing customers well in incorporating this large amount of business. We are up 50% -- over 50%, as you know, and we have done that in under five months. So the number one objective of our management group up there has been keep the continued high level of service that Culp has always done well on.

And for the most part, with just a few hitches, our team has done that. And I believe customers have recognized that, and they have come to rely on it. And that is a key, key element in this business. As you know, J.I.T. service is just mandatory; it is imperative. You just cannot miss deliveries. And we have done a good job, and I think customers know that and have seen us do that. We have done whatever it takes over the past four months, five months to incorporate that business and stay on time.

All right, good. Great job, guys. Thanks again.

And at this time, we have no further questions. I will turn the conference back over to Mr. Frank Saxon for any additional or closing remarks.

Again, thank you for your participation, everyone, and interest in Culp, and we will look forward to updating you on our next quarterly call.

That concludes today's conference. You may disconnect at this time. We do appreciate your participation.