Culp Inc (CULP) 2009 Q1 法說會逐字稿

Good day, everyone. Welcome to the Culp, Inc. 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.

Thank you. Good morning, welcome to the Culp conference call to review the company's results for the first quarter of fiscal 2009. 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 in the forward-looking statements made in this call. The information being provided today is as of this date only and Culp expressly disclaims any obligations 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 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, President and Chief Executive Officer. Please go ahead.

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 CFO. 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. After that, Ken will review our second quarter business outlook, and then we'll be glad to take your questions.

The results for the first quarter of fiscal 2009 reflect outstanding performance in our mattress fabrics business, and a greater than expected loss in our upholstery fabrics business. The retail climate we are facing so far this year, particularly in the furniture industry, is as difficult as we have seen in decades. However, during these challenging times, we are working diligently to strengthen our business model in both divisions and increase the value we are providing the customers in terms of product innovation, delivery performance, and quality. Additionally, with the substantial debt reduction we have accomplished over the last several years, we now have a solid financial foundation that will help us navigate through this period of weaker demand in our end use markets. I'll now turn the call over to Ken, who will review the financial results for the quarter.

Thanks, Frank. The results for the first quarter fiscal 2009 reflect 14 weeks as compared to 13 weeks in the same period a year ago. Total sales for the quarter were $59.3 million, down 9% from the first quarter of last year. Operating income for the first quarter was $2 million, compared with operating income of $3.3 million last year, a decrease of 38% excluding restructuring charges for both periods. The primary reason for this decrease was a significant operating loss in the upholstery fabric segment. We reported net income of $781,000 or $0.06 per share for the first quarter fiscal 2009. The financial results for the first quarter of fiscal 2009 included $267,000, or$0.02 per share in restructuring charges after taxes. Excluding these charges, net income for the first quarter was $1 million, or $0.08 per share. These results for the first quarter compare with net income of $851,000 or $0.07 per share for the first quarter of last year. The financial results for the first quarter of last year included $624,000 or $0.05 per share in restructuring charges after taxes. Excluding these charges, net income for the first quarter was $1.5 million or $0.12 per share.

The results for Q1 reflect a more normalized 35% tax rate. However, the tax rate going forward will be difficult to predict because of the impact of restructuring charges to be incurred during the second quarter and changes in foreign currencies related to facilities located in China and Canada. These charges will be explained in later detail during the call. It is also important to note that with respect to the US, we have a net operating loss carry-forward of approximately $75 million. Therefore, we will not incur cash income taxes in the US for many years.

I would now like to review our results by operating segment. With respect to mattress fabrics, also known as mattress ticking, we reported $35.6 million sales for the quarter, a 2.7% decline compared with $36.5 million for the same period last year. Unit volume and average selling price was disclosed in the press release. Operating income for this segment was $4.2 million compared with $3.7 million last year, a 12% increase. Operating income margin improved to 11.9% 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 turning to the results of our upholstery fabrics segment, sales were $23.8 million, which include both fabric and cut and sewing kits, representing a 17% decline from $28.7 million in the first quarter of last year. Again, unit volume and average selling price for the upholstery fabrics can be found in the press release. Upholstery fabric sales reflect substantially lower demand industry-wide as well as continued very weak demand for US-produced upholstery fabrics driven by consumer preference for leather and suede furniture and other imported furniture and fabrics. Sales of non-US-produced fabrics were $17.4 million in the first quarter, down 8% over the prior year period. Sales of US-produced fabrics were $6.3 million, down 35% from the first quarter of last year. Overall, the upholstery fabric segment reported an operating loss of $1.4 million for the first quarter, compared with operating income of $450,000 for the same period last year.

Let me now turn to the balance sheet. Maintaining a solid balance sheet continues to be one of our top priorities. A solid balance sheet provides a firm foundation and the ability to execute our strategy in fiscal 2009. At the end of the first quarter, our balance sheet reflected $6.4 million in cash and cash equivalents compared with $4.9 million at the end of fiscal 2008. We were pleased with our cash flow from operations for the quarter, totaling $3.3 million, compared with $1.1 million for the first quarter of last year. This performance was due to improvement in operating working capital management. Our operating working capital management, which is comprised of accounts receivable and inventory, less accounts payable, was $35.5 million at the end of Q1, down from $48.1 million a year ago.

Working capital turnover was 6.0 for the first quarter compared with 5.2 for the same period last year. More specifically, inventory turns for the first quarter were 5.9 compared with 5.4 for the same period a year ago. Total debt was $21.4 million, compared with $38.6 million at the end of the first quarter of last year. Debt to capital ratio was 20% compared with 32% a year ago. With respect to the recent B&H acquisition, the deal was financed by %11 million in unsecured senior notes, with no principle payments due for three years. The company expects cash, capital expenditures to be in the range of %4.7 million for fiscal 2009 based on our current estimate at this time. This includes approximately %2 million for deferred payments on equipment and depreciation that is expected to be approximately $6 million for the year.

The company continues to actively market the sale of our corporate headquarters. The carrying value of the building is approximately $4.8 million and is reported in assets held for sale on the balance sheet. Once sold, the proceeds from the sale will be used to repay the $6.3 million outstanding mortgage balance. I'll now turn the call back over to Frank.

Thanks, Ken. I'll now provide you with an update on each of our businesses and let's start with mattress fabrics. Mattress fabrics have been a driving force in our business and accounted for 60% of the company's revenues in the first quarter. Above all in this business, we are committed to building upon our value proposition to customers. We have just completed a $5 million capital project that significantly strengthened our woven mattress fabrics manufacturing operations, and provides further reactive capacity for our customers. The August 11 acquisition of the knitted mattress fabrics operation of Bodet & Horst USA will further enhance our strong service platform, with improved supply logistics, from pattern inception, to fabric delivery, and will allow us to provide accelerated responsiveness and greater stability in this major product category.

With our woven fabrics expansion and the completion of the B&H acquisition, we are now positioned with a large and modern vertically integrated manufacturing platform in all major product categories of the mattress fabrics industry. For fiscal 2009 in this business, we are focused on improving the value we deliver to customers in terms of innovation, 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're operating in.

Now I'll turn to the upholstery fabrics segment. While we expected industry conditions for upholstery fabrics to be challenging for the first quarter of this year, they have proven to be more severe than we initially expected. The weakening economy, housing crisis, and high energy cost have continued to significantly influence consumer demand for furniture and have adversely effected our sales in this business, both US-produced and non-US-produced fabrics. In response to this environment and our first quarter results, we are immediately putting into operation a profit improvement plan, which includes the following major actions: implementing a modest price increase on certain upholstery fabrics during the second quarter and wherever possible, obtaining price concessions from suppliers on certain high volume items where we could not increase our selling prices. Second, implementing a 20% reduction in SG&A expenses which totals approximately $2 million on an annual basis. This initiative was completed by the end of August. Number three, consolidating our China operations into fewer facilities and reducing excess manufacturing capacity, which will lower costs by about $2 million on an annual basis.

These actions, which will be implemented over the next five months, are expected to result in a pretax charge during the second and third quarter of approximately $3.9 million, of which $3.5 million reflects noncash charges for fixed assets. Although necessary, these decisions were extremely difficult, especially the personnel reductions. Unfortunately, the declining level of industry demand has required us to adjust our cost structure once again. This involved the dismissal of a number of long-term outstanding associates. We are grateful for their many years of excellent service to Culp.

As difficult as these decisions were, we remain cautiously optimistic about our longer-term prospects because of the following. We have been receiving significantly higher fabric placements, including cut and sew kit programs with a broader base of customers. There is a declining base of competitors due to the challenging economic environment we've been in. We are improving the value we are providing to our customers from both our China operations and our US operations. We are realizing benefits in the marketing and operational areas being made in our Anderson, South Carolina velvet facility. And the expected results for our profit improvement plan. These are all favorable indicators for improving results over the long-term as the eventual recovery in consumer demand for furniture takes place. We are committed to taking the necessary steps to achieve profitability in upholstery fabrics, regardless of prevailing economic and business conditions. For this fiscal year in upholstery fabrics, we are focused on restoring profitability, increasing market share with our key customers, growing business in non-US markets, building our cut and sew business, and offering more products for faster delivery times. We continue to believe that we are well positioned to benefit considerably with any upturn in demand.

Ken will now review the outlook for the second quarter and then I'll have a few concluding remarks.

For the second quarter, we believe our mattress fabrics segment will continue to perform well, but we do not expect any meaningful change in demand trends in our upholstery fabric segment. We expect sales in our mattress fabric segment to be down approximately 6 to 10% for the second quarter, due to lower demand as a result of the slowdown in the bedding industry and the planned discontinuation of certain products from the ICG acquisition. However, operating income in this segment is expected to improve slightly compared with the prior year period, due primarily to the B&H acquisition. In our upholstery fabric segment, we expect sales to be down approximately 20 to 25% for the second quarter, due primarily to very weak demand in the retail furniture business. We believe the upholstery fabric segment's results will reflect an operating loss, but will show measurable improvement over the first quarter of fiscal 2009. We are estimating approximately $3.2 million of pretax restructuring charges, of which $2.9 million are noncash charges, during the second fiscal quarter, primarily for the cost reduction actions being taken in our China operations. Considering these factors, we expect net income in the second quarter in the range of $0.06 to $0.10 per share, excluding restructuring charges.

The expected tax rate for the second quarter will be significantly higher compared with the tax benefit reflected in the results of the second quarter of last year. The company estimates that restructuring charges of approximately $3.2 million, or $1.9 million net of taxes, or $0.15 per share, will be incurred during the second quarter. Including the restructuring charges, the company expects to report a net loss for the second quarter in the range of $0.09 to $0.05 per share. This is management's best estimate at present, recognizing that future finance results are difficult to predict. The actual results will depend primarily upon the level of demand throughout the quarter.

I'll now turn the call back over to Frank for final comments.

Looking ahead, our mattress fabrics business will be the key contributor to our profitability in fiscal 2009. We believe there are opportunities to continue to develop our mattress fabrics business with our improved manufacturing platform in both woven and knit product categories, and our strong focus on delivering exceptional customer service. However, the challenging conditions in the retail furniture industry will continue to influence our results in the upholstery fabrics business. We will continue to make the changes necessary to align our cost structure with expected demand. We'll continue to strengthen our business model and take advantage of the retail furniture industry's inevitable recovery when it occurs. With that, we will now take your questions.

(OPERATOR INSTRUCTIONS) We do have a question from Budd Bugatch from Raymond James. Please go ahead.

Good morning.

Good morning.

I just want to focus on the upholstery segment. Congratulations on mattress and continued congratulations on that. Obviously upholstery is where you got to take some pretty unpleasant and difficult actions and I understand those. The area that I want to focus on is I think this, if I remember right, the upholstery gross margin in this quarter was like 4.5%, which is pretty, pretty depressing. Can you kind of give us a feel of where that came from, how that may have varied geography by geography?

Budd, continued weakness in the US-produced side of things, and of course I told you guys over the last couple quarters what we're doing there, but some decline in the margins on the China-produced goods as well. But still more significantly, the US-produced business.

Was the US-produced business at least positive in a gross margin level, then, or not? We have not broken those numbers out, as you know, and I'll just say that it's not an acceptable level of gross profit in the US-produced operations and we are working on a number of actions to improve that.

And refresh me, in the upholstery volume, how much is China produced and how much of the revenues are US? Two-thirds is China-produced, something, we put that in the press release. Like two-thirds is China-produced.

So -- well, the math would lead you to believe there's zero or somewhat negative at the gross margin line in the US, so the area that I'm trying to focus on then is point one of the plan which is to institute modest price increases and in this demand environment, that's got to be a huge challenge, even if they are modest. Can you talk about the realistic, how you get there?

We, we are getting most of the price increases that we have announced. They are products that we just had to have increases on. Mostly on China products, we have absorbed over the last year and a half, all of the currency strengthening over the last year and the value-added tax reductions in China. We've absorbed those costs, so we had to have some. However, on certain volume items, we were able to get some price concessions where we felt competitively we just didn't want to raise the price. So we still got the margin up on a number of items.

When you look out, what would be the kind of appropriate longer-term business model for upholstery? What's the kind of maintained gross margin that it can have and what kind of op margin do you think it can have?

I think longer-term, given our model of -- that's based on agility, low capital investment, that you're looking at 15% gross margin and 9 to 10% SG&A, possibly a little lower, with wind behind our sails on the top line and you're looking at--

5 to 6%?

4 to 6% operating margin. While that may sound, and it does sound lower, you got to remember in this business, we have a very low capital base. So that will still yield a nice return on capital.

What will that capital base be after all these actions are booked in upholstery?

Close to $25 million.

Of what, about--

$20 million. After those, you're looking at 19, around 20 for working capital and around 6 of fixed assets.

Got you. Okay.

So the business is, as you know, we don't have much fixed asset investment anymore and is mostly working capital. So a, the sales in first quarter were just under $22 million, so on an annual run rate, just under $90 million in sales, 85 to 90. So, a 4 to -- even a 3 to 6% operating range could yield a reasonable return on capital.

When does longer term become nearer term?

I think the key factor, there's one key factor, Budd, and it's the upturn in this downturn we're in. I mean we have to keep in mind that we are in an unprecedented environment with the consumer buying furniture. It is as tough as anybody can ever remember, and we see it in the announcements almost daily, with other industry participants, but we have to remember this will change and my sense, it's going to change next calendar year. We're already seeing very positive developments in the commodities market, in the value of the dollar, in financial stocks. So I -- many people are thinking we're near the bottom, so we get through the election, we see these improvements. In 2009, we'll start seeing some upturn. Now, it won't take much upturn to benefit, and what we do during these -- within the down times, of course, as everyone knows, that defies what you'll do on the upside. And we're continuing to focus on keeping our costs as low as we possibly can get them, improving our service levels, product innovation, delivery, shortening lead times, doing everything possible to increase the value we provide to the key customers, the ones that we believe will be here over the longer term.

Couple of other areas, just if I could, we haven't talked about this before, but many companies look at what they call a new product vitality index and I don't know whether you do as well, and particularly I guess in upholstery where you've been an innovator. You've been an innovator in mattress fabrics as well, but in upholstery, you've been an innovator. The more products that come from new products, those introduced in the last one or two or three years, the higher the gross margin potential typically. Do you track that?

Absolutely, absolutely, and it is encouraging.

Can you give us -- can you disclose maybe what that index might be and -- for us?

I would just say, I would just say a number of our sales are in recently introduced. Certainly a satisfactory level. We always would like that to be higher, but our placement and market share gains with key customers are good, of the customers we go after and target. So I--

Is it greater than 30% new products?

I don't know that I would quantify it like -- for you, but it's good. I mean, we have been an innovator in upholstery fabrics. We were constantly faced with knock-offs of our innovations, as you may know. And we talked about from time to time. That remains a challenge. So I'm not, I'm not displeased at all with that side of our business. I think we'll see that -- that's certainly a key factor when the -- when our customers begin selling more furniture. That will flow to us, quickly.

Understood. And Ken, if you could, can you parse the day sales outstanding and receivables? What is the health of your customers, and if you could give us maybe some color by segment. Obviously the bedding customers are different than the upholstered fabric customers and what's happened to the day sales outstanding in each of the segments?

I think right now Budd, obviously our credit department's focusing on both segments, paying very close to our customers, talking with them. Any time we see trouble, we communicate. But our day sales have been pretty consistent. We haven't -- we have had certain customers on the ticking side that have stopped discounting and they have started again, so that's certainly affected the days, the number, but all in all, we've stayed very close to that. We haven't had any significant charges to date. That said, it's something that it's constantly on our radar, so I would say right now, it's something that is very in front of us and our credit department focuses on it every day and they are doing a great job.

So you haven't had to add markedly to the allowance?

No, no.

Okay.

Budd, over the last couple of years, we've done an outstanding job, but we've also been -- we've always been tight on credit. We've -- that just has been a policy for many, many years and it's serving us particularly well during this time.

Got you. And finally, so you're not alone in that categorization, but a number of companies in our industry, in this industry, have had to become serial restructurers, and I guess with this latest news, you are a serial restructurer. Are we done, do you think this is kind of last piece of it, offer can you tell?

Well, Budd, we were not expecting the retail to go down another notch that it went down this summer. And, it appears we're in today. But as far for the foreseeable future, yes. I think we've got, after this, only got a little over $6 million in fixed assets left.

And -- where are you in capacity utilization then, for, after this is done?

Well, we're in very good shape, still, you know, I would like to one day get to a point where we're capacity constrained, but I really don't foresee that.

Okay.

We have an agile, flexible model. We're writing off in fixed assets some excess equipment that we had moved to China from the US and we were probably more aggressive in hindsight in moving equipment from here to there, and when you move it, you move it at your book value plus the costs to get it there and install it. And maybe we're guilty of moving too much over there, but we didn't have any use for it here, and over the past several years, it certainly looked like China could have a very strong growth. So we're not hurting our current or even foreseeable manufacturing capacity with the moves we're taking. In fact, even one of the facilities that we're exiting is really an open facility that we had moved our sell operation to the export processing zone in our [Cheng Pu] development over there, so we had a vacant facility that we were keeping just for growth and we have short-term leases and now obviously with the level of demand, we don't have the luxury to keep an excess facility for growth one day. So we're having to make a move like that. And that doesn't affect our capacity near-term.

Thank you very much.

There are currently no further questions in the queue. (OPERATOR INSTRUCTIONS) We do have a question from Stanley Elliott, Stifel Nicolaus.

Good morning. Thank you for taking my call. On the mattress outlook down 6 to 10, how much of that is related to discontinued products from the ITT and how much of that is just kind of ongoing?

Probably half and half would be a, would be an estimate.

And that was it. Thank you very much.

All right, thank you.

We'll go next to Michael Wasserman, Wasserman Morris Capital.

Good morning. Could you comment please on the status of the sale of the headquarters building?

Yes, it's still up for sale. Ken mentioned some of that in his remarks. It is still up for sale. The carrying value of the building is $4.8 million and we have debt of 6.3 on the building and it is still up for sale. It is certainly a slow market on our area of North Carolina as it is many areas and -- but we're still aggressively marketing the building. But we do not want to sell it for a fire sale. It's just -- that's not worth it to us, but we'll just keep it listed and keep marketing it.

Okay. I may--

It's a great building and it will -- it's one of the best facilities in the Triad in our area in North Carolina and it will eventually sell, 55,000 square feet, and it will eventually sell at a reasonable price.

Right. I'm not a fan of fire sales, so that's fine with me. You may have mentioned this, but I may have missed it. What was the interest rate you paid on the $11 million unsecured senior note?

8.01 to be exact.

Okay, and does that have any refinancing penalties, if you're able to get that capital at a lower rate at some point in the future?

Yeah, there are prepayment penalties. Of course you have to calculate that based on the interest rate at the time, but, yes, there is a prepayment penalty.

Yes.

I think it would be likely to assume that's debt we will have with us for the seven-year term.

Yes.

This debt is with an insurance company and what's called private placement and these generally have pretty hefty prepayment penalties and most of the times companies keep that debt to maturity.

Yes. Any longer-term thoughts on CapEx beyond -- you were quoting fiscal 2009 CapEx, right, not calendar 2009?

Correct.

Yeah, any thoughts beyond that?

I would give this general beyond Michael, and I would say upholstery fabric, no capital expenditures, maybe up a little, but our model is not one that requires much capital expenditures from here on out. Mattress fabric is in the 2 to $3 million range from here on out, and a good bit of that is maintenance CapEx.

Okay, and is this fair to say that your mattress ticking operations are the most efficient in the world?

Our operations is pretty darn good. It's one of the best, if not the best. We don't get to go into everybody else's, but we're pretty darn good in the levels of manufacturing performance that our group achieves there are quite impressive, and they have done it for a number of years, so there's consistency with it and with the recent capital projects, we've improved on what we were already doing. So I continue to be extremely impressed with the operational excellence in that business.

Okay. Last question, have you cut back on any sales to any of the mattress companies of size, given worries about their financial health?

That's another very good question and Michael, as we have done for years and years in the credit process, if there's some customers that we have a concern about, we will limit our exposure and we will -- and that's all we will do. And that's a common thing we do in upholstery and mattress fabrics. So -- but in general, that's -- that would be -- our credit limit that we do have, and if a company is struggling more, the credit limit will be lower.

Yes. All right. Well, thank you, and congratulations on running this thing extremely well in a difficult environment.

Super. Thank you very much. We appreciate your support.

And at this time, there appear to be no further questions. I would like to turn things back over to management for any additional or closing comments.

That's all that we have. Thank you for your participation, as always, and we look forward to reporting to you next quarter.

Yes, thank you very much.

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