Culp Inc (CULP) 2008 Q1 法說會逐字稿

Good day, and welcome to the Culp, Inc. first-quarter 2008 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.

Thank you. Good afternoon, and welcome to the Culp conference call to review the Company's results for the first quarter of fiscal 2008.

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 expectation. 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 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 afternoon, everyone, and thank you for joining us today. I would like to welcome you to the Culp quarterly call with analysts and investors. With me on the call today is Ken Bowling, our Chief Financial Officer.

I will begin the call with some brief comments about Culp today, and Ken will then review the financial results for the quarter. I will then update you on the strategic actions in each of our businesses, and then Ken will discuss the second-quarter business outlook. Then we will be happy to take questions.

We are off to an encouraging start for the first quarter of fiscal 2008, with overall higher sales and improved profitability compared with the same period last year. Our performance primarily reflects the significant gains made in our mattress fabrics business. The acquisition of the mattress fabrics business from International Textile Group, or ITG, acquired at the end of the third quarter of last year has furthered our growth strategy in this segment.

Our upholstery fabrics business continued to face significant industrywide challenges during the quarter. However, with our China platform and the aggressive restructuring of our U.S. upholstery operations, we believe we are now better position to meet these challenges, remain profitable, and benefit from any upturn in overall demand.

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

Thanks, Frank. Total sales for the quarter were $65.2 million, up 4.2% from the fourth quarter of last year. These results reflect strong growth in our mattress fabrics segment. However, our upholstery fabrics business reflects a very weak operating environment in the retail furniture industry and continued soft demand for U.S. produced upholstery fabrics. We will comment more specifically on each business segment in a moment.

Operating income was $3.3 million or 5% of sales compared with operating income of $2.2 million or 3.6% of sales last year, an increase of 47%, excluding restructuring and related charges for both periods. Income before income taxes, excluding restructuring and related charges, was $2.3 million compared with $1.3 million in the first quarter of last year, an increase of 76%. After-tax restructuring and related charges for both the first quarter of fiscal 2008 were $624,000 or $0.05 per share, compared with $984,000 or $985,000 (sic - see press release) or $0.08 per share the previous year.

Excluding restructuring and related charges for the periods, net income for the first quarter of fiscal 2008 was $1.5 million or $0.12 per share, compared with net income of $1.1 million or $0.09 per share. Including restructuring and related charges, we reported net income of $851,000 or $0.07 per share for the first quarter of fiscal 2008. These results compare with net income of $132,000 or $0.01 per share for the first quarter of fiscal 2007.

It is important to note that for the first quarter of fiscal 2008, results reflect a significantly higher tax rate due primarily to higher taxable income from the Company's U.S. operations compared with the prior year period.

Our overall effective tax rate was 35.1% for the first quarter of fiscal 2008, of which approximately half represents taxes that we will pay in cash. The taxes we pay in cash result from income generated from our Canadian and China operations. With respect to the U.S., we have a net operating loss carryforward of $72 million, and thus, we will not incur cash income taxes in the U.S. for the foreseeable future.

I would like to now review our results by operating segment. With respect to mattress fabrics, also known as mattress ticking, we reported $36.5 million in sales for the quarter, a 67% increase compared with $21.8 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 product line and organic growth, especially in knitted fabrics.

Mattress fabrics sales accounted for 56% of overall sales during the quarter as compared to 35% for the same period a year ago. Total yards sold were 15 million, up 58% compared with 9.5 million yards a year ago. The average selling price of $2.44 per yard for mattress fabrics for the first quarter of fiscal 2008 was 6% higher than the average selling price for the first quarter of last year, reflecting a shift in product mix toward more knitted fabrics.

Operating income for this segment was $3.8 million or 10.3% of sales. For the prior-year period, operating income was $1.9 million or 8.5% of sales. These results include transition costs of approximately $500,000 incurred during the quarter.

Now I'll turn to the results of our other operating segment, upholstery fabrics. Sales were $28.7 million, which include both fabric and cut and sewn kits, representing a 30% decline from $40.7 million in the first quarter of last year. Sales of cut and sewn kits were up significantly over the same period last year.

Total fabric yards sold were 6 million, down 38% compared with 9.6 million a year ago. The average selling price was flat compared with the same period a year ago.

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

Sales of non-U.S.-produced fabrics, which accounted for 66% of segment sales, were $18.9 million in the first quarter, down 20% over the prior-year period. Sales of U.S.-produced fabrics were $9.8 million, down 43% from the first quarter of fiscal 2007.

Overall, the upholstery fabrics segment reported operating income of $450,000 for the first quarter compared with $1.6 million for the same period last year.

Now let me turn to the balance sheet. Maintaining a strong balance sheet will continue to be an important priority for Culp in fiscal 2008. At the end of the first fiscal quarter, our balance sheet reflected $9 million in cash and cash equivalents. Total debt, including outstanding balances on our lines of credit, was $38.6 million compared with $47.3 million a year earlier.

During the first quarter of fiscal 2008, we prepaid $2.2 million in long-term debt scheduled for payment in March 2008. We also prepaid an additional $1 million in early August. Our debt-to-capital ratio has improved significantly, and was 32% at the end of the first quarter compared with 39% a year earlier.

As of July 29, 2007, we also had $1.9 million in assets held for sale, which we expect will be sold in fiscal 2008.

I will now turn the call back over to Frank.

Thanks, Ken. I will now talk about the progress we're making in both of our operating segments.

Let's start with mattress fabrics. The mattress fabrics business continues to be a bright spot for us, with sales up 67% over the same period a year ago.

The bedding industry has remained strong in spite of the ongoing issues in the housing industry, primarily due to a steady replacement business. The integration of the additional production and sales have gone well, and we are pleased with the customer retention rate following the ITG acquisition. We have also experienced meaningful organic growth, especially with knitted fabrics, which is a growing product category and has a higher average selling price.

The results for the quarter were affected by modestly higher raw materials cost and the strengthening of the Canadian currency as compared to the same period of last year. These items impacted gross margin by approximately 100 basis points.

We were pleased that selling, general, and administrative costs were 5.6% of sales for the quarter, down from 7.6% of sales for the same period a year ago. For the full fiscal year, we are focused on maintaining our high level of execution and service for our customers; effectively managing an increased amount of working capital; and pursuing opportunities to enhance our leadership position in the mattress fabrics industry.

Now I will give you an update on our upholstery fabrics business. The first-quarter results for the upholstery fabrics segment reflect the very difficult operating environment for the retail furniture industry. Discretionary consumer spending for furniture continues to be very soft due to a slowing economy, weak housing market, and high energy prices. Likewise, the demand for upholstery fabrics has continued to decline, especially for U.S.-produced fabrics. While our non-U.S. operations now account for over 65% of all upholstery fabric sales, those sales have also been affected by the overall lead demand.

However, considering the tough market conditions, we were pleased to report a profitable performance in upholstery fabrics, primarily driven by non-U.S. operations. We have significantly improved our cost structure, with substantially lower U.S. manufacturing cost and lower SG&A expenses for the first quarter of this year, which were down 14% from the fourth quarter of last year.

For the second quarter ahead, we expect to see further meaningful reductions in our SG&A expenses. We have also reduced our inventory levels in this segment by almost $10 million or 31% since the first quarter of last year.

In addition, we are encouraged by the favorable trends we are seeing in fabric placement with many customers for the upcoming furniture market in October. We are also encouraged by an increase in our incoming orders over the last few weeks, which are comparable to last year's levels.

We are excited about our progress in China, and today, we have a substantial and wholly-owned operation with five facilities and over 450 associates. In fiscal 2008, our focus will continue to be on improving profitability in our U.S. operations; developing differentiated products; building upon our capabilities in our China platform; and improving our supply-chain performance.

Ken will now review the outlook for the second quarter, and then I will have a few concluding comments.

Thanks, Frank. We believe our mattress fabrics segment will continue to perform well. However, we see little indication for a meaningful change in the trends in our upholstery fabrics segment. Overall, we expect our second-quarter sales to be slightly higher than the second quarter of last year.

We expect sales in our mattress fabrics segment to be up 50 to 55% for the second quarter. Operating income in this segment is also expected to improve substantially comparable to the prior-year period due to higher sales volume, full production schedules, and the completion of the ITG integration.

In our upholstery fabrics segment, we expect sales to be down approximately 20 to 25% for the second quarter due primarily to lower sales of U.S.-produced fabrics. We believe the upholstery fabrics segment's operating results will reflect a small operating profit with continued solid gross profit margins in our non-U.S.-produced business, and lower SG&A expenses as compared to the first quarter of the current fiscal year.

We are estimating approximately $450,000 of restructuring and related charges during the second fiscal quarter for the continued operating costs of closed U.S. facilities. However, these charges are expected to continue to decline over the course of fiscal 2008 as these facilities are sold and as leases expire.

At this point, we estimate that we will incur an additional $200,000 of restructuring and related charges over the second half of fiscal 2008 for previously announced restructuring initiatives.

Considering these factors, we expect to report net income in the second quarter in the range of $0.12 to $0.15 per share, excluding restructuring and related charges for previously announced restructuring initiatives. The second-quarter fiscal 2008 results will reflect a significantly higher tax rate compared to the previous year, due primarily to higher taxable income from the Company's U.S. operations compared with the prior-year period.

We estimate that restructuring and related charges of approximately $450,000, as indicated earlier, or $293,000 net of taxes, $0.02 per share, will be incurred during the second fiscal quarter. Including the restructuring and related charges, the Company expects to report net income for the second fiscal quarter in the range of $0.10 to $0.13 per share.

This is management's best estimate at present, recognizing that the 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.

I'll now turn it back over to Frank for closing comments.

Thanks, Ken. We are optimistic about Culp's prospects for fiscal 2008. We are beginning to benefit from the important strategic decisions made and implemented during the past few years.

Most of the difficult, yet necessary, restructuring moves in upholstery fabrics are now behind us. The ITG acquisition has significantly enhanced our competitive position in mattress fabrics. As a result, we enter fiscal 2008 a leaner, more efficient operation, with leadership positions in both of our businesses.

Mattress fabrics will be the key driver of our growth and profitability in the current fiscal year. While our upholstery fabrics business is being affected by extremely challenging conditions in the furniture industry, we believe we have the right strategy in place to meet these challenges and benefit from any upturn in business.

Our China platform has positioned us to be competitive in a changing global marketplace and to be the leader in our industry. We are now the sole U.S. supplier of velvet fabrics, and believe we can continue to maintain a U.S. upholstery fabric operation that supports customer demand.

Overall, we remain confident in our ability to execute our strategy and deliver value to our customers and our shareholders. With that, we will now take your questions.

(OPERATOR INSTRUCTIONS). Chad Bolen, Raymond James.

We are encouraged to see that you have seen some positive trends emerging in the near-term in regards to orders and placements. What do you think is driving that, and have you seen any incremental orders due to the troubles of some of your competitors?

A good question. It's hard to discern between the two of those. But clearly, orders have ticked up in the last several weeks. We guess that is probably due to seasonal uptick, anyway, that we get in the fall. And we believe we are doing a better job for many of our customers on product, delivery, service, etc.

It's probably, though, some benefit from the problems of a couple of competitors that are no longer in the business, as well -- hard to tell how much from each. But there certainly are some encouraging signs that we are seeing recently.

Okay. And mattress fabric sales have been very strong due to the big contribution from the ITG acquisition. Once we have four full quarters under our belts with ITG revenue, what do you think the right way to think about the long-term kind of growth rate is for mattress fabric? Is it similar to the bedding industry, or should it be higher, lower -- what are kind of the puts and the takes there?

I would say right now, equal to the growth in the industry, because our market share with the acquisition of ITG is substantial in this business. And I think we would be in line with the overall industry.

Okay. And are we done with the ITG transition costs, or should we expect anymore in this quarter?

We are done with them.

Okay. And one more quick question, and I will give up the floor. SG&A in the mattress segment improved pretty substantially as a percentage of sales. What's the kind of right run rate to think about there going forward?

The SG&A in mattress fabrics (multiple speakers) 5.6 for the quarter, down 200 basis points from the year earlier period. Clearly, we are at about the level you need to look at in absolute dollars going forward. But our team there has been able to add only a small amount of SG&A, and take on 60-plus percent more business.

And they've really done a great job. In two quarters we have consolidated that business. So I would say the current run rate for Q1 is a good estimate for quarterly SG&A expenses.

(OPERATOR INSTRUCTIONS) Ike Boruchow, Morgan Keegan.

I'm calling in for Laura Champine this afternoon, who is traveling today. I see that the non-U.S.-produced upholstery fabrics were down 20% in the quarter.

My question is what are you expecting in terms of the operations in China? Are you expecting those operations to have year-over-year declines in the next coming quarters?

I think what -- our guidance for the Q2 is down 20 to 25%. And most of that comes from the U.S. operation. But some of it is coming from the China -- goods produced in China.

The weak retail environment is affecting both areas of our upholstery fabric business. (multiple speakers) it's as -- the guidance we're providing now is somewhat lower sales also in China-produced goods, but more so with U.S.-produced goods.

Do you feel you are losing market share in Asia to local fabric producers?

Oh, no, we do not at all. I think it is the result of just the very challenging and weak conditions at retail.

And also, can you characterize the impact of higher raw material costs in Q1, and comment on how these costs are behaving in the current quarter?

Okay. As we indicated, approximately 100 basis points of gross margin in the mattress fabrics business was the effect of those two items -- higher raw material costs, and the strengthening of the Canadian currency because of our operation in Montreal.

The raw material increases are principally polyester- and rayon-related, and about the same impact in the second quarter, Ike, versus year-over-year.

Okay.

We have the ability, though, and are doing as we introduced new products -- in this business, we have the ability to change fiber constructions. And we are in the process of doing that.

At this time, we have no further questions in the queue. I'll turn the conference back over to Mr. Frank Saxon for any additional or closing remarks.

Thanks again, operator, and thanks to all of you for your participation and your interest in Culp. And we'll look forward to updating you on our progress next quarter.

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