Culp Inc (CULP) 2009 Q3 法說會逐字稿

Good day, and welcome to the Culp, Inc. third quarter 2009 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'll turn the call over to conference over to Ms. Drew Anderson. Please go ahead, ma'am.

Thank you. Good morning, and welcome to the Culp conference call to review the Company's results for the third 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 and the forward-looking statements made in this call. The information being provided today is as of this day only, and Culp expressly disclaims any obligation to release publicly any updated or revisions to these forward-looking statements to reflect any changes and 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 that was filed yesterday.

This information is also available on the Culp Investor Relations section of their website at www.CulpInc.com.

At this time, I'll turn the call over to Frank Saxon, President and Chief Executive Officer. Please go ahead, sir.

Thanks, Drew. Good morning, everyone, and thank you for joining us today. I would like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today is Ken Bowling, 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'll then update you on the strategic actions in each of our businesses. After that, Ken will review our fourth quarter outlook, and we'll be happy to take your questions.

We are pleased with our solid execution through what has been and continues to be an extremely challenging business environment. While our sales reflect the sharp decline in discretionary consumer spending, especially for furniture, we believe we have effectively managed our operations with a leaner and more agile operating platform.

Our Upholstery Fabrics sales have been the hardest hit by the economic downturn, but this segment was still able to produce a small operating profit in the third quarter, as a result of the successful implementation of our profit improvement plan, reversing a loss of $1.4 million in the first quarter of this year.

The Mattress Fabrics business has been much steadier throughout the downturn, and we had continued margin improvement compared with the prior-year period. Also importantly, we've been able to make a great acquisition in Mattress Fabrics this year, which is now fully integrated into our operations and contributing as expected.

Considering the challenging environment, we have been very focused on our working capital management. And as a result, we generated almost $8 million in cash flow from operations in the third quarter, bringing the year to date total to almost $15 million.

Our financial position has greatly improved this quarter by reducing our net debt in half to just over $12 million. We believe we have a strong and improving competitive position in both Mattress Fabrics and Upholstery Fabrics. More importantly, Culp continues to represent a financially stable and reliable supplier for our customers.

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

Thank you, Frank. Total sales for the quarter were $44.6 million, down 26% from the third quarter of last year, with Mattress Fabrics sales of $25.2 million, down 18%, and Upholstery Fabrics sales of $19.4 million, down 35%.

We reported a net loss of $450,000 or $0.04 per share for the third quarter of fiscal 2009, compared with net income of $903,000 or $0.07 per share for the third quarter of last year. The current quarter included income tax expense of $467,000, while the prior year's quarter included a tax benefit of $260,000, both principally due to foreign currency exchange in the Company's Canadian operation.

On a pretax basis, the Company reported income of $17,000 compared with pretax income of $643,000 for the third quarter of last year. The pretax results for the third quarter of this year included non-cash restructuring and related charges of approximately $504,000, related to fixed assets and inventories, and cash charges of $273,000 in restructuring and related charges, pertaining to assets disposal costs, and lease and employee terminations, both in the Upholstery Fabrics segment.

Excluding these charges in both periods, the Company reported pretax income of $794,000 for the third quarter of this year compared with pretax income of $1.4 million for the third quarter of fiscal 2008.

Here are the results by operating segment. With respect to Mattress Fabrics, also known as mattress ticking, we reported $25.2 million in sales for the quarter, an 18% decline compared with $30.9 million for the same period last year. Operating income for this segment was $2.2 million compared with $2.6 million last year, a 15% decrease. Operating income margin improved to 8.9% of sales compared with 8.5% for the prior-year period.

Now turning to Upholstery Fabrics. Sales were $19.4 million, which include both fabric, and cut and sewn kits, representing a 35% decline from $29.6 million in the third quarter of last year. Upholstery Fabrics sales reflect continued lower demand industry-wide, especially for US-produced upholstery fabrics.

Sales of non-US produced fabrics were $15.4 million for the third quarter, down 24% over the prior-year period. Sales of US-produced fabrics were $4 million, down 57% from the third quarter of last year.

Overall, the Upholstery Fabrics segment reported operating income of $51,000 compared with an operating loss of $804,000 in the second quarter and a $1.4 million loss in the first quarter. For the third quarter of last year, operating income in this segment was $395,000.

Now turning to the balance sheet. Strengthening the balance sheet continued to be one of our highest priorities. At the end of the third quarter, our balance sheet reflected $15.8 million in cash, compared with $8.5 million at the end of the second quarter, and $4.9 million at the end of last fiscal year.

We generated $14.8 million in cash flow from operations through the first nine months of this fiscal year, which is equal to the amount generated through this time last fiscal year. This reflects consistent profitability in Mattress Fabrics and significant improvement in working capital management, especially inventories, which were down by over $12.5 million or 33% since the third quarter of last year. Even more impressive was the $11 million reduction in inventory as compared to the second quarter of this fiscal year.

In late January, we completed the sale of our corporate headquarters building, located in High Point, North Carolina, to a local business partnership for a purchase price of $4 million. Pursuant to the terms of the sale, we reduced our ongoing operating costs by leasing the existing space from the new owners for the next three years, with renew options at that time.

The proceeds from the building sale were used to retire $4 million of the $6.1 million outstanding mortgage with the remaining $2.1 million balance, now part of the Company's unsecured long-term debt. This remaining amount is not amortizing and is not due until June 2010.

Total debt, which includes current maturities of [long-term debt and long-term debt] was $28.1 million at the end of this quarter, including the $11 million unsecured term loan added in the second quarter for the B&H acquisition. This $28.1 million compares with $33.4 million a year ago.

For the quarter, total debt -- less cash, net debt -- was $12.3 million compared with net debt of $23.7 million at the end of the second quarter. In early February, the Company made a $4 million pre-payment on its $7.1 million principal payment due in March of this year, reducing our total debt to $24.1 million.

Following the remaining $3.1 million payment due in March, just a couple of weeks from now, Culp's total debt will be $21 million at the end of fiscal 2009, which was the approximate debt level prior to the B&H acquisition. Including this payment, the Company will have paid off approximately $31 million in total debt over the last two fiscal years. The next scheduled principal payment is $7.1 million due in March 2010.

All of Culp's debt is now unsecured. In addition, the Company has a $6.5 million unsecured line of credit in the US, with no borrowings outstanding, and a $4 million unsecured line of credit in China, again, with no borrowings outstanding.

Operating working capital, which is comprised of accounts receivable and inventory, less accounts payable, was $27 million at the end of the third quarter, down from $42 million a year ago. Working capital turnover was $6.2 million for the third quarter, compared with $5.7 million for the same period last year. More specifically, inventory turns for the third quarter were 6 compared with 5.6 in the same period a year ago, and days sales outstanding, or DSOs, were 27 days for the third quarter compared with 33 days for the same period last year.

The Company expects cash capital expenditures for fiscal 2010 to be approximately $3.5 million, including approximately $1.5 million for deferred payments on equipment, and depreciation for 2010 is expected to be approximately $4 million.

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

Thanks, Ken. I will now update you on both of our operating segments.

The Mattress Fabrics business had a solid quarter, as bedding products continued to outperform other durable consumer product categories in the difficult business environment. The Mattress business is driven much more by replacement purchases and consumer need, and is not as closely related to housing demand, which is the primary driver of our Upholstery Fabrics business.

Our Mattress Fabrics operations are running well, as we have now successfully completed the integration of the Knitted Mattress Fabrics operation of Bodet & Horst USA -- or B&H, as we call it -- and are beginning to realize the incremental value of this $11 million investment, which we made in August 2008. This acquisition has significantly enhanced our strong service platform for our customers.

Earlier in this fiscal year, we also completed a $5 million capital project that significantly strengthened our woven mattress fabrics manufacturing operations, and further provided reactive capacity for servicing our customers. With these investments in place and contributing, we are well-positioned with a large and modern, vertically-integrated manufacturing platform in the major product categories of the Mattress Fabrics industry.

Our capital invested in this business is now $50 million. Also importantly, we are beginning to see, during this fiscal year, financial strains with certain competitors. We believe we have a solid leadership position in this business, and our strategic focus continues to be strengthening our business model and providing our customers with outstanding delivery performance, quality, innovation and value.

Now I'll turn to the Upholstery Fabrics segment. We have taken major actions this year to address the $1.4 million loss realized during the first quarter. Early in the second quarter, we initiated an aggressive profit improvement plan that included substantial cost reductions in the US and China, price reductions from suppliers, and selective price increases, along with a sharp focus on inventory management.

The benefits of our actions were reflected in the third quarter operating profit of $51,000, a nice turnaround from the first quarter results. The consolidation of our China operations, an important element of this plan, has had measurable impact, and we now expect to realize annual savings of over $3 million. Additionally, for the third quarter of this year, SG&A expenses for the business were down 33% or $3.6 million on an annual basis compared with the third quarter a year ago.

Further, the Upholstery Fabrics division has contributed substantially to our strong cash flow this year through outstanding working capital management, especially with inventories. Inventory levels for the division have been lowered to $10.1 million, a 52% decrease from the year-in level of $20.8 million. Inventory turnover has improved 20% in a declining sales environment.

As a result of our aggressive actions this year and in previous years, we have established a very lean and agile platform with our China operation and our one remaining US facility. We believe we have significantly minimized the operating risk in the Upholstery Fabric business by pursuing a strategy to dramatically lower the capital invested, and transition to a highly-variable cost model. Capital invested in our Upholstery Fabric business is now only $14 million, most of which represents working capital.

We have had to make a number of very difficult decisions in this business this fiscal year. However, as a result of these actions and those in earlier years, we remain cautiously optimistic about our longer-term prospects in this business because of the following.

Number one, we have been receiving significantly higher fabric placements, including cut and sew kits, with a broader base of key customers.

Number two, a declining and weakening set of competitors, both in the US and in China. Number three, we have established a mature and scalable model in China, that is vertically integrated by way of a network of key manufacturing partners that we have developed over several years now.

Number four, we are encouraged by the results achieved to date for our profit improvement plan. And finally, we believe the housing activity in the US will pick up sometime over the next year, and this will -- should increase demand for furniture.

These are all favorable indicators for improving results over the longer-term in this business, as the eventual recovery and demand takes place.

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

We expect the prevailing economic uncertainties and issues surrounding the housing and credit crisis will continue to affect consumer demand for furniture, and to a lesser extent, bedding products. We expect sales in our Mattress Fabrics segment to be down approximately 13% to 18% for the fourth quarter. Even with the lower sales, operating income margin in this segment is expected to approximate last year's fourth quarter operating margin.

In our Upholstery Fabrics segment, we expect sales to be down approximately 35% to 40% for the fourth quarter, due primarily to very weak demand in the retail furniture business, especially for US-produced fabrics. A portion of this decrease is due to the discontinuation of certain product lines over the last year, primarily in US-produced decorative fabrics.

In spite of a considerably lower expected sales, we believe the Upholstery Fabrics segment results will reflect performance in the range of breakeven to a moderate operating loss, due to the profit improvement plans and significant reductions in SG&A. Considering these factors, we expect to report pretax income in the fourth quarter in the range of $1.2 million to $2 million, excluding restructuring and related charges.

With the volatility and substantial charges in the income tax area during this fiscal year, the income tax expense or benefit and related tax rate for the fourth quarter are just too uncertain to estimate at this time.

We currently expect to have restructuring charges of approximately $100,000 in the fourth fiscal quarter. Included in the structuring and related charges, the Company expects to report a pretax income for the fourth quarter of 2009 in the range of $1.1 million to $1.9 million.

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 both of our businesses, and the internal changes still underway within the Company. The actual results will depend primarily upon the level of demand throughout the quarter.

Frank?

We believe we have positioned Culp to continue to operate effectively through this extremely challenging period. In times of economic weakness, there is always significantly increased opportunities to gain market share and build upon competitive position.

We have created lean and agile business models in both businesses that are commensurate with current demand levels, and also position us very well for the eventual industry recovery. We believe we are the market leader in both of our business segments, and we have the financial strength necessary to not only sustain our position but build upon it.

We expect further opportunities to develop for our Mattress Fabrics business, with our strong manufacturing platform and our focus on delivering exceptional customer service. Although business conditions in the retail furniture industry are very difficult, we are confident that we will continue to successfully confront these near-term challenges and pursue the opportunities before us, especially as demand improves.

With our transition to a primarily China-based model in Upholstery Fabrics, we believe our value proposition to customers has improved significantly. Above all, we are optimistic about our future, and we will remain focused on outstanding execution for our customers as a financially stable and reliable source of innovative products, delivery performance, and quality.

Thank you. Operator, we will now turn the call over for questions.

Thank you, Mr. Bowling. (Operator Instructions). Budd Bugatch, Raymond James.

A couple of questions. One, on -- just make sure I understand the debt paydown, you're going to pay how much in the fourth quarter and what's beyond that?

Well, we've already paid the -- in February, but we paid the $4 million as a pre-payment and then the remaining $3.1 million is due on March 15. So we'll make total payments of $7.1 million during the fourth quarter.

Okay. And next year?

And next year, we have the final payment on that installment is $7.1 million, which is due in March of 2010.

How much will you pay then? Another $7.1 million?

$7.1 million.

Okay. And then beyond that?

Beyond that, we have the $11 million of debt related to the B&H acquisition. That doesn't start amortizing until 2012. And then we have a small Canadian loan that will begin amortizing in December of this year, but that's $600,000 over 48 months. And then the $2.1 million that's left from the building mortgage is due in June of 2010.

Okay. $6.1 million to the mortgage?

Yes, the mortgage -- we had $6.1 million. We paid $4 million off with the sale of the building, which leaves $2.1 million.

Okay. And that's due in 2010?

Correct.

Okay. When you look at the cash flow statement, you had terrific performance from working capital, something -- including some restructuring items of about $7.4 million year-to-date, if my numbers are right. How much of that continues? How do you see that going forward next year or even into the fourth quarter?

Bud, that's a great question and we've gotten that question every year for the last seven years. And every year we've said -- this working capital contraction and improved management is probably a one-year deal. And I certainly said that going into this year.

But both divisions have performed terrifically in the working capital management area and certainly better than our expectations -- although certainly some of it is due to lower sales volume. But I think the important point is, even though we're challenged sales-wise, it is extremely important to keep turning the inventory and keep the receivables down, especially during these times.

Now, going forward, clearly, with less working capital, we're not going to generate this kind of cash out of working capital next year. But I would still believe there's further improvement we can make, not to the degree of this year, but will still be an important focus for us.

If you look at the year-to-date numbers of almost $15 million in cash flow from operations, you can really separate that -- $7 million comes from changes in assets and liabilities, principally working capital changes; and $8 million is cash from earnings, so to speak -- everything else.

But over time, we believe, obviously, more of that, as there's more stability in the top line, we'll see more of that come from cash flow from earnings.

Okay. When you look at the operations, upholstery strikes me -- to see how much is now coming offshore and the amount of -- the paltry amount of volume coming from the US of $4 million in the quarter, what -- kind of characterize for me the revenues offshore.

I know you've got -- and you gave us percentage changes for cut and sewn kits, and overall, I think for yardage in mattresses, but if you look at that overseas volume, how much of it is cut and sewn and how much of it is fabric -- or can you give us any way to gauge the relative size of those two parts of that part of the business?

I guess we give the numbers and we break it out between US-produced and non-US produced, of course, which is all China produced. [In that piece] (multiple speakers) --

All right. Is that [.4] for offshore and (multiple speakers) --?

Right. And that produced -- that segment, as you mentioned, that part of the business is for kits and fabric. And that's for fabric we sell in China and that we sell in the US. That's not something we have broken out, but I will say we are pleased with the progress in our cut and sew volume. We are pleased with the broadening of the customer base.

We are close, if not the largest, now cut and sew operation making fabric kits in China -- not counting leather, but fabric only. We're pleased with that business and we are being awarded more programs from a broader step -- it's not that broad a step, because there are not that many people doing kits, as you know, but certainly a broader set of customers. And that is the best performing piece of our business today, in terms of year-over-year sales performance.

Is that a majority of -- is that more than 50% of the China volume?

I think I shouldn't go there yet, Bud, but we just started this 2.5 -- I guess, 2.5, three years ago. So, the customers -- the cut and sew kits work for customers for volume items. And they're becoming more diligent and careful on what things they do cut and sew, but the savings are still such that their larger volume items, they would like to bring from China in kit form.

But if you accept more programs, that requires kind of a horizontal increase in footprint, does it not? And workers?

Yes, we now have -- I think I can share this -- we now in China have -- it's 450 to 500 employees in our China operation. We have a substantial operation, even though we've consolidated into fewer facilities this year, we have a terrific cut and sew operation. I mean, we have -- very pleased; we believe we're competitive with our Chinese competitors, all of which are Chinese.

But you know, we've become Chinese too. So, we're on the same -- and the benefit of buying through Culp is you get the full package -- the design, the fabric, the cut and sew, the shipment. And you don't have to just buy a kit. If you want to have colors of a different -- of a same pattern that doesn't have enough volume, you can still buy that in the US. You know, those multiple delivery options that we offer, we believe are attractive to customers.

And you're not planning to inventory any of that domestically, though, right?

No kits are inventoried by anybody -- also our competitors -- they are made and shipped and invoiced.

I got you.

But we've reduced leadtime some, so we're working on that as well to help customers not carry so much kit inventory, which has been a problem for some of them over these last years.

My last question on that is -- do you only cut and sew your fabrics, Culp fabrics? Or do you -- will you procure other fabrics from other mills over there, to cut and sew?

I would say 98%, 99% our own fabrics and, of course, that's our preference. However, if there's a small pillow pattern that a customer has simply got to have from a competitor, and we have the body cloth, we work with folks. But there's not much of that, because we have such good pillows to go with the body cloth.

Okay. All right, thank you, Frank. Good work on -- certainly on the balance sheet and cash flow.

Super. Thank you, Budd.

(Operator Instructions). It appears there are no further questions in the queue at this time, Mr. Bowling. I'd like to turn the conference back over to you for additional or closing remarks.

We thank you for participating on the conference call. And we will be looking forward to updating you again at the end of our fiscal year coming up at the end of April. Thanks a lot.

This concludes today's conference. Thank you for your participation. You may now disconnect your lines.