Culp Inc (CULP) 2009 Q2 法說會逐字稿

Good day, everyone and welcome to the Culp Inc. second-quarter 2009 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 morning and welcome to the Culp conference call to review the Company's results for the second quarter of fiscal 2009.

As we start, let me express that some statements need 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 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, sir.

Good morning. 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 segments.

After that, Ken will review the third-quarter outlook and then we'll be glad to take any questions.

The results for your the second quarter include several substantial charges primarily related to the economic impact of the unprecedented business environment we are facing.

These charges are mostly non-cash and do not have any significant effect on our operations or compliance with our loan covenants. Our financial position remains solid and we have generated $6.9 million in cash flow from operations in the first six months of this fiscal year.

In this challenging environment, we are focused on strengthening our business models in both divisions, to ensure that we have operating platforms and cost structures that are agile and commensurate with expected demand levels.

At the same time, we believe we are enhancing our competitive position as the leader in mattress fabrics and upholstery fabrics.

In today's environment stability is especially critical and Culp continues to execute extremely well for our customers in terms of the reliability, value, innovation, and service commitment that we provide.

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

Okay. Thanks, Frank.

Total sales for the quarter were $52.3 million, down 19% from the second quarter of last year. We reported a net loss of $40.9 million or $3.23 per share for the second quarter of fiscal 2009, compared with net income of $1.6 million or $0.12 per diluted share for the second quarter of fiscal 2008.

Included in net loss for this quarter was a non-cash charge in the amount of $31.2 million for the establishment of a valuation allowance against all the Company's net deferred tax assets.

On a pretax basis, the Company reported a loss of $10.3 million, compared with pretax income of $1.5 million for the second quarter of last year.

The pretax results for this quarter included non-cash restructuring and asset impairment charges of $11 million of which $9.9 million related to fixed assets and $1.1 million related to inventories in the upholstery fabrics segment and cash restructuring charges of 800,000 related to lease and employee terminations also in the upholstery fabrics segment.

Excluding these charges for both periods, the Company reported pretax income of $1.5 million for the second quarter of this year, compared with $2 million for the second quarter of the previous year.

The significant uncertainty in current and expected demand for furniture and mattresses, along with the prevailing uncertainty in the overall economic environment has made it very difficult to forecast future performance, which would support the recoverability of the Company's net deferred tax assets.

Therefore, the Company concluded that a valuation allowance of $31.2 million should be recorded against its net deferred tax assets. This asset resulted primarily from recording the income tax benefit of US tax operating loss carry-forwards over the last several years, which totals approximately $75 million.

It's very important to keep in mind that this non-cash charge has no effect on the Company's operations, loan covenant compliance, or the possible utilization of the loss carry-forwards in the future. If and when the Company utilizes any of the loss carry-forwards to offset US taxable income, the income tax benefit would be recognized at that time.

We recorded restructuring and related charges, including asset impairment charges of $11.8 million, of which $11 million is non-cash, during the second quarter of fiscal 2009, related to upholstery fabrics.

Included in non-cash charges are fixed assets write-downs of $4.3 million, related to building consolidations in our China operations, $1.1 million of inventory write-downs, related to further streamlining of the upholstery fabrics product line and raw material components, and $0.8 million related to the write-down of the Company's corporate headquarters building in connection with its sale, as we'll discuss further in a moment.

In addition, we recorded a $4.8 million asset impairment charge as a result of the carrying value of upholstery fabric fixed assets exceeding their fair value as calculated under statement of financial accounting standards number 144.

The cash charges incurred include $0.4 million in lease termination expense related to the consolidations in our China operations, and $0.4 million in employee termination costs related to SG&A staffing reductions.

As reported in our press release, we signed a contract dated December 4th, 2008, providing for the sale of our office building in High Point, North Carolina for a purchase price of $4 million.

The contract also contemplates that we would lease the building back from the purchaser for an initial term of three years. The contract is subject to the purchaser's ability to obtain financing and right to terminate during a due diligence period ending January 9th, 2009. And is also subject to approval by Culp's lenders. The proceeds of the sale will be used to pay down the bank loan that is currently secured by the building, which is a balance of approximately $6.2 million.

The remaining balance of the loan would become an unsecured term loan from the same bank lender subject to a 1% increase in the interest rate of the loan and due in one payment on June 30th, 2010.

The closing on the sale is anticipated to occur on or before January 30th, 2009.

Now let's turn to the results by operating segment.

With respect to mattress fabrics, also known as mattress ticking, we reported $28. million in sales for the quarter, a 22% decline compared with $36 million for the same period last year. Operating income for this segment was $3.3 million, compared with $3.9 million last year, a 16% decrease.

However, our operating income margin was higher than last year, coming in at 11.6% of sales compared with 10.8 for the same period last year.

For upholstery fabrics, sales were $24.2 million, which included both fabric and cut and sewn kits representing a 15% decline from $28.3 million in the second quarter of last year.

Upholstery fabric sales reflected 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 $18.1 million in the second quarter, up 7% over the prior year period driven by a significant gains in cut and stone kits. Sales of US produced fabrics were $6.1 million, down 46% from the second quarter of last year, but down only slightly from the first quarter of this year.

Overall, the upholstery fabric segment reported an operating loss of $804,000 for the second quarter of this year, which is significantly lower than the $1.4 million loss incurred during our first quarter of this year.

Now let's turn to the balance sheet.

We are very focused on maintaining a solid financial position and generating free cash flow in this environment.

At the end of the second quarter, our balance sheet reflected $8.5 million in cash and cash equivalents, compared with $6.5 million at the end of Q1, and $4.9 million at the end of our last fiscal year.

We are pleased with our cash flow from operations, as Frank indicated earlier, which totaled $6.9 million through the first six months of this fiscal year. Total debt was $32.2 million at the end of the second quarter, compared with $39 million a year earlier.

During the second quarter, we added an $11 million unsecured term loan to finance the B&H acquisition. An important accomplishment this quarter was the signing of an extension of our $6.5 million unsecured bank line of credit through December 2009. The credit line facility has had no borrowings outstanding since the original agreement was signed in 2002.

We believe these new debt arrangements reflect the confidence of our lenders, especially, notable in light of the current economic and credit situation. As of the end of the second quarter, Culp was in compliance with all loan covenants.

Operating working capital management, which is comprised of accounts receivable and inventory less accounts payable was $33.4 million at the end of the second quarter down almost $10 million from a year ago. Working capital turnover was 6.1 for the second quarter compared with 5.4 for the same period last year.

The Company expects cash, capital expenditures to be $4 million for this fiscal year, including approximately $2 million for deferred payments on equipment and depreciation is expected to be approximately $7 million, of which $2.1 million relates to accelerated depreciation.

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

Thanks, Ken. I will now provide you with an update on both of our businesses.

I'll start with mattress fabrics. Mattress fabrics accounted for 54% of the Company's sales in the second quarter. We were pleased with the profitability in mattress fabrics, in spite of a larger than expected decline in sales for the second quarter. This decline reflected the extremely weak retail environment for the mattress industry, as consumers are holding off on discretionary spending.

In light of this environment, we are carefully managing our inventories and are taking the necessary steps to reduce operating cost. While market conditions remain very challenging, Culp continues to enjoy the leadership position in mattress fabrics.

The acquisition of the knitted mattress fabrics operation of Bodet & Horst completed during our second quarter has gone very well.

We believe we have enhanced Culp's excellent service platform with improved supply logistics from pattern inception to fabric delivery, allowing for greater responsiveness and stability.

With this acquisition, along with our recent woven fabrics expansion and finishing enhancements, Culp is now positioned with a large and modern vertically integrated manufacturing platform in all major product categories of the mattress fabrics industry.

This platform provides us with a strong competitive advantage as we aggressively pursue new business opportunities. And it also positions us well when the industry eventually recovers. Our strategic focus in mattress fabrics continues to be on providing our customers with outstanding delivery performance, quality and innovative fabrics.

As we have been doing, we will continue to drive operational and working capital improvements. We will also be prepared to take advantage of any opportunities that may arise, given the difficult economic environment we're operating in.

Now, I'll turn to upholstery fabrics. Industry conditions in this area have continued to be extremely challenging through the first half of this fiscal year. The uncertain economy, challenging housing market and credit crisis are significantly influencing consumer demand for furniture. And are affecting Culp's upholstery fabric sales, mostly for US produced goods.

In response to this environment during the second quarter, we initiated a profit-improvement plan, which now includes the following major actions.

Consolidated our China operations into fewer facilities, and reduced excess manufacturing capacity which reduces our cost on an annual basis by at least 3 -- by $2 million.

Implemented a 30% reduction in SG&A expenses, which reduced these costs by $3 million on an annual basis.

We have reduced compensation for executive and senior management and the Company's Board of Directors. We have significantly reduced the cost structure of our US velvet operation to keep those costs in line with demand.

We implemented a modest price increase on certain fabrics and wherever possible, obtained price concessions from suppliers on certain higher volume items where we could not increase the selling price.

We are pleased with the implementation of the profit improvement plan to date. And believe our leaner operations provide us with a competitive advantage. Especially, in light of this difficult environment.

We are already realizing the benefits of these actions as reflected in the sequential improvement in our segment results this quarter. For the second quarter of this year, SG&A expenses were down 25% over the second quarter of last year.

As a result of these, we remain cautiously optimistic about our longer-term prospects in the upholstery fabric business, primarily due to the very favorable response we are getting from customers through significantly higher fabric placements, including cut and sew kits.

Our China produced fabrics provide a higher value to our customers and have been especially popular of late. We've established a mature and scalable operation in China that will allow us to capitalize on this demand when the industry recovers. These are all favorable indicators for improving results in this business over the long term.

However, we do remain committed to taking the necessary steps to achieve profitability in upholstery fabrics, regardless of the prevailing economic and business conditions.

For this fiscal year, in upholstery fabrics, we are focused on restoring profitability, increasing market share with key customers, growing business in non-US markets, especially within China, building our cut and sew kit business, and offering more products with faster delivery times.

We continue to believe that we are very well-positioned to benefit considerably with any uptick in demand.

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

We expect the prevailing economic uncertainties and issues surrounding the housing and credit crisis will continue to adversely affect consumer demand for furniture and bedding products.

We expect sales in our mattress fabric segment to be down approximately 25 to 30% for the third quarter due to weak overall industry demand.

Even with the unprecedented industry softness, operating income margin in this segment is expected to remain in the mid to upper single-digit percent range depending upon actual volume during the quarter.

In our upholstery fabrics segment, we expect sales to be down approximately 25 to 30% for the third quarter, due primarily to very weak demand in the retail furniture business.

We believe the upholstery fabric segment's results reflect performance in the range of break even to a moderate operating loss and thus, will show measurable improvement over the second quarter fiscal 2009 operating loss of $804,000, due in very large parts to profit improvement plans that we discussed earlier and were initiated in the second quarter.

Considering these factors, we expect to report a pretax loss in the third quarter in the range of $600,000 to a $300,000 profit, excluding restructuring and related charges.

Given the volatility and charges in the income tax area during this fiscal year, the income tax expense or benefit and related tax rate for the third quarter are too uncertain to estimate.

Therefore, we have focused our guidance on pretax earnings rather than net income and earnings per share. We expect to have minimal restructuring charges of approximately $100,000 in the third fiscal quarter.

Including the restructuring and related charges, the Company expect to report a pretax loss for the third fiscal quarter of 2009 in the range of $700,000 loss to a $200,000 profit.

This is management's best estimate at present, recognizing that future financial results are difficult to predict because of the severe economic uncertainties, the difficulties facing the upholstery fabrics and mattress fabrics industries and the internal changes under way within the Company.

The actual results will depend primarily upon the level of demand throughout the quarter.

I'll now turn the call back to Frank for a final comment before we take your questions.

We will continue to manage our business to improve profitability and generate cash flow. Regardless of the current challenges, we and our customers are facing. We have a solid leadership position in both of our businesses.

Especially, as we are seeing a declining base of competitors. We believe there are opportunities to further develop our mattress fabrics business, with our improved manufacturing platform in both product categories and our strong focus on delivering exceptional customer service.

Although, we face extraordinarily challenging conditions in the retail furniture industry, we are cautiously optimistic about the progress being realized with many major customers and also the progress from our profit improvement plans. We continue to be enthusiastic about the opportunities from our China platform. Especially, when demand improves. Above all, we are focused on execution for our customers as a reliable and trusted source of innovative products, delivery performance and quality. With that, we will now take your questions.

Thank you, sir. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll go first to Budd Bugatch with Raymond James.

Hey, Frank, good morning.

Good morning.

I'm curious about mattress ticking. Your sales were down about 25% and I think year-over-year in the quarter. Huh?

22.

In yards. In units.

Oh, in units, okay.

I'm looking at the ISPA data and it was 23% down in October and 15 or 16% down in September. It wasn't that far down on August. August was -- I don't remember for sure but I think it was closer to flattish or down modestly.

Are you losing share in that? What's going on in mattresses or mattress ticking that's different than what the industry numbers are showing?

Budd, we don't believe we're losing any market share from what we look at every month on placements with all the key customers. You know, the ISPA data, I think certainly is questionable sometimes.

It's not a complete sample of all of the customers, as you know. We think it's probably the data -- the industry is probably somewhat worse than that data. So there's no market share that we believe we're losing.

And can you see that persisting for how long now in the future?

In terms of?

Year-over-year declines like that.

I think you saw in the third quarter, we've provided guidance of 25 to 30% in the third quarter. You may have seen the recent ISPA numbers that came out in November. I mean, again, it's not a full -- it's a sample, not a full list.

The entire industry was worse than the 23% that ISPA just showed for October?

Yes, and we're -- what we're hearing, the industry is -- the latest numbers were a little worse than that. I don't see any -- we just don't see any market share losses. We just don't see them.

Obviously, we're looking for them and something we pay very close attention to, you know, our placements with customers and we don't see it. In fact, we see the reverse. We see we're picking up due to some difficulties of some of the competition.

Okay. All right. And when you look --

I guess one other point, Budd, we would say, as of now, we are seeing sales that are better than the October period. So just to give you a comparison.

So it appears that things are -- in our case, somewhat -- a little bit better than the October, late September time frame.

So are you telling us you're starting to see stabilization or a little modest improvement?

I'm not sure. We're not sure what it's telling us but it's certainly -- it's better than it was in October.

The level of demand in October and late September, when things really began to fall off and the consumer seemed to freeze. Now the consumer is still not spending a great deal, but it appears to be a little better than the October time frame.

So your guidance for your third quarter of 25 to 30% --

Still comfortable with the guidance but the start of the quarter looks towards the lower end of that range.

But again, no guarantee that that continues for the whole third quarter. It's hard to have much forward visibility in mattress fabrics or the mattress industry because it's all JIT, as you know.

How concentrated are your sales in that segment and do you worry about the financial health of any of your customers? I know that they've got to be worried about the financial health of the ultimate retailer, but how do you translate that?

This is something we obviously continually monitor and evaluate. And we believe, we're in good shape on that end.

Okay. You made a comment in the press release and the early part of the 8-K about your NYSE positioning. Can you elucidate on that? What's going on?

Yes. The NYSE, there are two thresholds that are required to remain lifted and $75 million for shareholders equity and $75 million of market cap. So we are below both of those as of now.

So we have disclosed that we would expect to hear from the NYSE that we are indeed below both of those and then, as happened to us a couple years ago, the procedure is an 18 month time period to improve over either of those thresholds. So which we believe will happen.

All right. Thank you very much.

All right. Thank you, Budd.

(OPERATOR INSTRUCTIONS). It appears that we have to further questions. I would like to turn the call back to Mr. Frank Saxon for any additional or closing comments.

Okay. Thank you. And again, thanks to all for your participation and your interest in Culp. We look forward to updating you on our progress next quarter. Have a good day.

That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.