Culp Inc (CULP) 2008 Q4 法說會逐字稿

Good day everyone, and welcome to the Culp fourth-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 conference over to Ms. [Drew Anderson]. Please go ahead.

Good morning and welcome to the Culp conference call to review the Company's results for the fourth 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. The 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 restructuring-related charges. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is included as a schedule to the Company's press release and 8-K filed yesterday. This information is also available on the Investor Relations section of the Company's web site at www.CulpInc.com.

I will now turn the call over to Frank Saxon, President and 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 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 operating segments. After that, Ken will review our first-quarter 2009 business outlook. We will then be happy to take your questions.

We're pleased with our performance for the fourth quarter and year, considering the current challenges we are facing. The uncertain economy, housing crisis and high energy costs have continued to influence consumer demand for furniture and, to a lesser extent, bedding products. In spite of this environment, fiscal 2008 for us was an outstanding year, both in terms of our financial performance and the improvement in our competitive position.

For the year, overall sales, profitability and cash flow were up from fiscal 2007. And we are pleased with the progress we have made in our operations. Today, Culp is a much stronger company than a year ago with respect to our value proposition to customers and our ability, both operationally and financially, to take advantage of opportunities in the current competitive landscape.

We believe the business models in our businesses, mattress fabrics and upholstery fabrics, along with our improved financial position are providing increasing value and stability to our customers, especially in light of the challenges facing many industry participants and the highly uncertain outlook.

With that, I'll now turn the call over to Ken.

Total sales for the quarter were $64 million, down 12.6% from the fourth quarter of last year. Operating income for the fourth quarter was $2.7 million compared with operating income of $3.6 million last year, a decrease of 25%, excluding restructuring-related charges for both periods. Including restructuring-related charges, operating income for the fourth quarter was $2.1 million compared with operating income of $861,000 a year ago, an increase of 141%.

Sales for fiscal 2008 were $254 million compared with $250.5 million last year, an increase of almost 2%. For the year, operating income was $11.5 million compared with $9 million last year, an increase of 27%, excluding restructuring-related charges for both periods.

We reported net income of $2.1 million, or $0.16 per share, for the fourth quarter fiscal 2008. The financial results for the fourth quarter of fiscal 2008 included $186,000, or $0.01 per share, in restructuring-related charges after taxes. Excluding these charges, net income for the fourth quarter was $2.3 million or $0.18 per share.

The fourth quarter of fiscal 2008 results reflect a significantly lower tax rate, due primarily to higher-than-expected taxable income in China taxed at lower income tax rates, and lower-than-expected US taxable income taxed at higher income tax rates. The lower US taxable income was primarily due to restructuring-related charges incurred in the US. These rates are based on actual results for the full year.

It is important to note that, with respect to the US, we have a net operating loss carryforward of approximately $75 million; therefore, we will not incur cash income taxes in the US for the foreseeable future.

These results for the fourth quarter compare with a net loss of $40,000, or $0.00 per share, for the fourth quarter of fiscal 2007. The finance results for the fourth quarter of fiscal 2007 included $1.8 million or $0.14 per share in restructuring-related charges after taxes. Excluding these charges, net income for the fourth quarter of fiscal 2007 was $1.8 million, or $0.14 per share.

Net income for fiscal 2008 was $5.4 million, or $0.42 per share, compared with a net loss of $1.3 million, or $0.11 per share, for fiscal 2007. Excluding restructuring-related charges of $1.9 million after taxes, net income for fiscal 2008 was $7.3 million or $0.57 per share. Excluding restructuring and related charges, net income for fiscal 2007 was $3.8 million or $0.32 per share.

We estimate that our effective income tax rate for fiscal 2009 will be approximately 25%, half of which we are estimating will be non-cash. This estimated rate is based on facts and circumstances that we know today, and will be updated again for our fiscal Q1 results.

I'd like to now review our results for our operating segments. With respect to mattress fabrics, also known as mattress ticking, we reported $34.6 million in sales for the quarter, a 9% decline compared with $38.1 million for the same period last year. These results reflect softer consumer demand and the planned discontinuation of certain ITG products that did not fit Culp's business model. Unit volume and average selling price was disclosed in the press release, so I will not go into detail here.

Operating income for this segment was $3.9 million, comparable to the same period last year. However, operating income margin improved to 11% of sales compared with 10.3% of sales for the prior-year period. Frank will comment more specifically on operating results in a moment.

Now I'll turn to the results of our other operating segment, upholstery fabrics. Sales were $29.4 million, which includes both fabric and cut and sewn kits, representing a 16% decline from $35.1 million in the fourth quarter of last year. Again, unit volume and average selling price for upholstered fabrics can be found in the press release.

Upholstery fabrics sales reflect continued soft demand industrywide, as well as continued very weak demand for US-produced fabrics, driven by consumer preference for leather and suede furniture and other imported furniture and fabrics.

Sales of non-US produced fabrics were $19.9 million in the fourth quarter, down 4.5% over the prior-year period. Sales of US-produced fabrics were $9.5 million, down 34% from the fourth quarter of fiscal 2007. Overall, the upholstered fabrics segment reported operating income of $134,000 for the fourth quarter compared with operating income of $863,000 for the same period last year.

Now let me turn to the balance sheet. Keeping our financial position and cash flow strong has been a top priority for fiscal 2008. We were especially pleased with our strong cash flow from operations for the year, totaling $16.4 million for fiscal 2008 compared with $11.5 million for fiscal 2007.

This performance is due to increased profitability in mattress fabrics and significant improvement in working capital management. Most importantly, this level of cash flow enabled us to substantially reduce our long-term debt during this fiscal year.

Total debt was $21.4 million at the end of fiscal 2008 compared with $40.8 million a year earlier, an almost $20 million or 48% reduction. Our debt-to-capital ratio has improved substantially and was 20% at the end of the year compared with a 34% a year earlier.

Working capital turns increased to 5.8 this quarter compared with 5.3 last year, due primarily to lower inventory balances.

The Company expects cash capital expenditures to be around $4.5 million for fiscal 2009, including approximately $2 million for deferred payments on equipment, and depreciation expected to be approximately $6 million.

During the fourth quarter the Company's contract to sell its corporate headquarters was terminated by the buyer. The Company continues to actively market the building for sale. The carrying value of the Company's headquarters is approximately $4.8 million, and is recorded in assets held for sale on the balance sheet. Once sold, the Company expects to receive proceeds in excess of the carrying value, and such proceeds will be used to repay the $6.3 million outstanding mortgage balance on the building.

I will now turn the call back over to Frank.

I will now provide an update on both of our operating segments, and I'll start with mattress fabrics. We had a great year in this business. The key highlight was the successful integration of our acquisition of ITG's mattress fabrics business, which we made in January 2007. This purchase added approximately $35 million in sales, with minimal additions to staffing and fixed assets. We worked diligently to maintain our outstanding delivery performance to customers throughout this process, which we were able to do.

Another key highlight is the fact that, even with a significantly higher level of business, we were able to reduce the capital invested in mattress fabrics to $39 million at year end from $44 million at the beginning of the year. This was primarily due to excellent working capital management. One of our most important operational goals is to continually improve our inventory management, which is essential in a just-in-time delivery business like we are in.

For the year, sales increased 28% to $138 million from $108 million, and operating income improved to $14.1 million or 10.2% of sales, up from $10.8 million or 10% of sales a year ago. The increases were primarily as a result of the acquisition.

Our fourth quarter was the first quarter that had the ITG acquired business in the same quarter of the prior year. Culp's mattress fabrics sales for the fourth quarter were affected by softer consumer bedding demand, as well as the discontinuation of certain ITG products that did not fit our business model.

The results for the quarter also reflect higher raw material costs and increased Canadian operating costs due to the strengthening of the Canadian currency as compared with the same period a year ago. As previously announced, we implemented a small price increase on selected products during the quarter to help offset these costs.

We have also continued to improve our operating efficiencies with respect to the integration of the ITG operations, and we are pleased with the improvement in our operating margins over the prior-year quarter.

During the fourth quarter we began implementing a $5 million capital project to enhance our manufacturing platform and provide additional reactive capacity in mattress fabrics. This project, which involves the expansion of our weaving and finishing operations in our Stokesdale, North Carolina facility, is expected to be completed by the end of July 2008. The new state-of-to-art equipment and additional capacity will allow us to provide even faster response times and improved productivity. Our primary focus is on maintaining a very high level of service for our customers.

At the same time, we have enhanced our ability to pursue additional growth opportunities as they present themselves, and extend our leadership position in mattress fabrics.

For fiscal 2009 we are focused on improving the value we deliver to customers in terms of product innovation and outstanding service and quality. As we have been doing, we will continue to drive operational and working capital improvements. We will also be prepared to take advantage of opportunities that may arise, given the difficult economic environment we are operating in.

I will now turn to our upholstery fabrics segment. The key highlight for this business for the year is that we remained profitable and generated significant free cash flow in the face of the most challenging furniture industry conditions in many years. In fact, over the last five fiscal years, our upholstery fabric business has generated approximately $41 million in free cash flow. These funds have contributed importantly to our substantial debt reduction over the timeframe.

Additionally, we have successfully executed a multi-year restructuring of our upholstery fabrics business, which began in fiscal 2001. It included the aggressive development of our China operation and the substantial downsizing of our US manufacturing operations to just one facility, down from 14 in 2001.

Our upholstered fabrics sales for the fourth quarter reflect the challenging operating environment across the retail furniture industry. As consumer spending for furniture has reached very low levels, the overall demand for upholstery fabrics has also continue to decline. However, in spite of the lower sales, we were pleased to report another profitable quarter in upholstered fabrics.

While sales produced from our China operations accounted for 68% of all upholstery fabrics sales, those sales have also been affected by the weaker demand. Our China platform, which marked its full-year anniversary during fiscal 2008, remains the cornerstone of Culp's upholstery fabric business, and we are pleased with the performance of this operation. Our strategy to more aggressively pursue the cut and sew business is going well, and we're attracting sizable new customers to Culp in this product area.

Additionally, we're expanding our marketing efforts to sell our products to other countries, including the local Chinese market. We have continued to face significant challenges with respect to the underperformance and lower sales volume of our remaining US manufacturing operations, which produces primarily velvet fabrics and some decorative fabrics. In response, we have implemented a revised marketing strategy that provides customers with very quick delivery on targeted products at key price points. This strategy allows us to drive more business on fewer products. These products are constructed primarily with China-sourced yarns.

We're encouraged with the customer placement and response to date of this new approach, which is expected to result in improved manufacturing performance and lower unit costs.

We also implemented a meaningful price increase on our US-produced products during the fourth quarter. We believe it is strategically important to find a way to keep our one remaining US upholstery fabrics facility open, especially considering Culp is now the sole manufacturer of velvet upholstery fabrics.

Overall, we have lowered our cost structure and SG&A expenses for the fourth quarter, down approximately $1.1 million, or 28%, from the same period a year ago. For the full year SG&A expenses were down $3.4 million, or 23%, compared to last year. As difficult as it is to achieve, we must continue to keep costs and inventories in line with demand.

Even though the demand environment is as tough as it has been in many years or even decades and will likely remain difficult for the foreseeable future, we are cautiously optimistic. We believe we have significantly improved our competitive position in the industry during these times, as we are delivering more value to customers in terms of product innovation, service and stability. And as a number of our competitors have gone out of business, it would not be surprising to see more competitors, either in the US or China, to exit the business over the next year.

For fiscal 2009 we are focused on increasing market share with our key customers, growing business in non-US markets, building our cut and sew business, offering more products with faster delivery times, and improving the profitability of our US operations. We believe we are very well-positioned to benefit considerably with any uptick in consumer demand.

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

Looking ahead to the first quarter of fiscal 2009, we believe our mattress fabrics segment will continue to perform well, even though bedding industry demand is softening. Industry conditions for upholstery fabrics have been extremely difficult all year, reflecting very weak consumer demand, and we expect this trend to continue for the foreseeable future. Overall, we expect our first quarter of fiscal 2009 sales to be down approximately 10 to 15% from the first quarter of last year.

We expect sales in our mattress fabrics segment to be down approximately 3 to 7% for the first quarter, primarily due to the planned discontinuation of certain ITG products and softening overall demand. Operating income in this segment is expected to approximate the prior-year period, although we expect margins to improve.

In our upholstery fabrics segment we expect sales to be down approximately 20 to 25% for the first quarter, due mostly to lower sales of US-produced fabrics. We believe the upholstery fabrics segment's operating results will reflect a moderate operating loss, due primarily to weak gross profits in our US operations. However, we still expect continued solid gross profit margins in our non-US-produced business and substantially lower SG&A expenses as compared to the first quarter of the prior year.

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 for 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 industry is continuing to undergo a dramatic transition, and foreign currency fluctuations may continue. The actual results will depend primarily upon the level of demand throughout the quarter.

We estimate that restructuring and related charges of approximately $100,000, or $75,000 net of taxes, or $0.01 per share, from previously announced restructuring initiatives will be incurred during the first fiscal quarter. Including the restructuring and related charges, net income for the first quarter of fiscal 2009 will be in the range of $0.07 to $0.11 per share.

I will now turn the call back over to Frank for concluding comments.

We are pleased with our solid execution over the past year, and are confident that we have the business models and management teams in place that will allow us to be solidly profitable in this challenging environment, and be well-positioned to benefit from any upturn in consumer demand. We are a significantly stronger Company today, with a keen focus on driving improvement in the value we provide to our customers.

Looking ahead, our mattress fabric business will continue to be the key contributor to our profitability in fiscal 2009. With the capital improvements under way to enhance manufacturing capability and improve our customer service, we believe we have additional opportunities to grow this business.

While challenging conditions in the retail furniture industry are affecting our upholstery fabric business, we believe we are strengthening our competitive position. Our China platform is maturing and continues to provide a sustainable business model for Culp to compute effectively in today's upholstery fabrics global marketplace.

Overall, we're optimistic about our opportunities for the coming year and remain focused on achieving profitable growth over the long term.

With that, we will now take your questions.

(OPERATOR INSTRUCTIONS). Ike Boruchow, Morgan Keegan.

You had mentioned about the raw material cost you saw in Q4, and I wanted to ask you what you're seeing so far in Q1 in terms of your total raw material cost inflation?

Just a little bit up from Q4, not much. The overall demand is holding the price down some as well.

Can you give what raw materials as a percentage of your total COGS are?

That would be difficult.

In terms of the trends in the mattress ticking segment, did you see any pickup in May relative to the demand you saw in Q4?

So far this quarter, probably about the same, maybe a little better because we're heading into the seasonally stronger period for mattresses. The summer season is always the best season for mattresses.

Did you say that sales in the mattress ticking segment were going to be down 3 to 7% in the quarter, and is some of that attributable to exiting some of the products from ITG?

Yes, and a good estimate may be half and half of the 3 to 7% estimated decline, half from softening demand, half from discontinued products.

So, if you X out the discontinued products, you would get stronger topline assumption in terms of a percentage?

Yes.

(OPERATOR INSTRUCTIONS). Gentlemen, there appear to be no further questions at this time. I would like to turn things back to Mr. Saxon for any additional or closing comments.

Thank you for joining us today, and we will look forward to updating you on our first-quarter results. Thanks and have a good day.

Once again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.