Culp Inc (CULP) 2009 Q4 法說會逐字稿

Good day and welcome to the Culp, Inc. fourth quarter 2009 results conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn to 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 fourth 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 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 called the Company will be discussing non-GAAP financial measurements that exclude restructuring and 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 in 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.

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 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, and after that Ken will review our first quarter business outlook. We will then be happy to answer any of your questions.

Our fourth quarter performance reflects excellent progress and consistent execution through what has been an extremely challenging business environment. In spite of a decline in sales, both our mattress fabrics and upholstery fabrics businesses achieved significant gains in margin as we continue to realize the incremental benefit of a leaner and more agile operating platform. At the same time, we have been diligent in our efforts to carefully manage our working capital. To generate cash and reduce our debt substantially through this unprecedented economic downturn. As a result, we have strengthened our financial position considerably, which is an increasingly important competitive advantage in today's marketplace. We have also continued to make important investments in our businesses during the year, with a strategic acquisition and major capital expenditures in our mattress fabric segment, along with product and marketing initiatives in both segments. Most importantly, Culp continues to represent a financially strong and stable supplier for our customers.

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

Thanks, Frank. Total sales for the quarter were $47.8 million, down 25% from the fourth quarter of last year. We reported net income of $1.7 million or $0.13 per share for the fourth quarter of fiscal 2009, compared with net income of $2.1 million or $0.16 per share for the fourth quarter of last year. On a pretax basis, we reported income of $2.2 million or 4.6% of sales, compared with pretax income of $1.4 million or 2.2% of sales for last year. The pretax results for the fourth quarter fiscal 2009 and fiscal 2008 included restructuring and related charges in the upholstery fabric segment of $48,000, and $633,000 respectively.

Here are the results by operating segment. With respect to mattress fabrics, we reported $26.6 million in sales for the quarter, a 23% decline compared with $34.6 million for the same period last year. On a unit volume basis, total yards sold decreased by 21% compared with the fourth quarter of last year, while the average selling price of $2.43 per yard for the fourth quarter of this fiscal year was 3% lower than the same period a year ago. Operating income for this segment was $3.5 million compared with $3.9 million last year, an 8% decrease. Operating income margin improved to 13.3% of sales compared with 11.1% of sales for the same period a year ago.

Now turning to upholstery fabrics. Sales were $21.2 million, which includes both fabric and cut and sew cuts, representing a 28% decline from $29.4 million in the fourth quarter last year. Upholstery fabric sales reflect continued very soft demand industry-wide especially for US produced upholstery fabrics. Sales of non-US produced fabrics were $17.3 million in the fourth quarter, down 14% over the prior year period. Sales of US produced fabrics were $3.9 million, down 58% from the fourth quarter of last year. Total fabric yards sold declined by 34% while average selling prices were 2.8% higher than the same period a year ago. Overall, the upholstery fabric segment reported improved operating income of $667,000, or 3.1% of sales reversing operating losses of $2.2 million in the first half of this fiscal year.

Now let me turn to the balance sheet. A key priority for fiscal 2009 has been a very disciplined focus on strengthening our financial position and generating cash in light of the uncertain business climate. Cash flow from operations was $8 million for the fourth quarter and $22.8 million for the fiscal 2009 period, which compares with $16.4 million last year. Our balance sheet reflected $11.8 million in cash as of May 3, 2009, compared with $4.9 million at the end of last year. We made substantial improvement in our working capital management, especially inventories, which were down by over 11.4 million or 32% since the end of last fiscal year. Operating working capital, which is comprised of accounts receivable and inventory less accounts payable, was $23.5 million at the end of this fourth quarter, down $38.4 million a year ago. Working capital turnover was 6.4 for the fourth quarter compared with 5.8 for the same period last year. More specifically, inventory turns for the fourth quarter were 6.4 compared with 6.0 for the same period a year ago, and days sales outstanding, or DSOs, were 34 days for the fourth quarter compared with 38 days for the same period last year.

The Company expects cash, capital expenditures for fiscal 2010 to be approximately $3.5 million, and depreciation is expected to be approximately $4 million. For fiscal 2010, we expect cash flow generated from working capital improvement to be substantially lower than the last two fiscal years. Total debt, which includes current maturities of long-term debt and long-term debt, was $16.4 million at the end of this fiscal year, including the $11 million unsecured term loan added in the second quarter for the B&H acquisition, compared with $28.1 million at the end of the third quarter of this fiscal year. At the end of this fiscal year, net debt or total debt less cash, was $4.6 million compared with net debt of $12.3 million at the end of the third quarter and $23.7 million at the end of the second quarter. Four years ago at the end of fiscal 2005, net debt totaled $45 million. During the fourth quarter, we reduced long-term debt by $11.7 million, $7.1 million of which related to a schedule principal payment, and $4.6 million related to principal payments due in March and June of 2010 with no prepayment penalties.

Looking ahead, scheduled principal payments for fiscal 2010, 2011 and 2012 are $4.8 million, $169,000, and $2.4 million, respectively. All of Culp's debt remains unsecured, including lines of credit totally $10.5 million in the US and China, with no borrowings outstanding at this time. Overall, our financial position has strengthened considerably during this fiscal year, and is providing us with an important competitive advantage in light of the challenges facing our industry today. One other item before I turn the call back over to Frank. Earlier this fiscal year, we reported that the Company had fallen below the New York Stock Exchanges continued listing price criteria that requires thirty-day average market capitalization of not less than $75 million or total stockholders equity of not less than $75 million. This month we received notification that the NYSE had received approval from the SEC for a pilot program effective retroactively to May of this year that would lower the numeric thresholds in this requirement to $50 million. This pilot program would be effective through October 31, 2009, with a subsequent rule filing anticipated prior to this date to make this a permanent continued listing standard change. This is very good news for Culp, because as of the end of fiscal 2009 our shareholder equity was $48 million, and as of yesterday, our market cap exceeded $50 million. Frank.

Thank you, Ken. I will now provide you an update on both of our operating segments. I will start with mattress fabric. While the sales environment has been very challenging, we are pleased with the strong operating performance in this business. The continued solid margin improvement reflects the implementation of the $5 million capital project completed earlier this year. As well as the successful integration of the mattress fabrics operation of B&H, acquired in August 2008. Together, these investments have significantly enhanced our operating platform in mattress fabrics, with more efficient, vertically integrated manufacturing capabilities now in all major product categories. We believe we are well-positioned to effectively compete during the downturn in the bedding industry. And benefit very well from any upside in demand when it occurs. More importantly, we continue to improve upon our excellent service capability, with outstanding delivery performance, quality, innovation, and value. And as always, our top priority is meeting the needs of our customers.

Now I will turn to upholstery fabrics. The implementation of our profit improvement plan, which was initiated during the second quarter of this fiscal year, has exceeded our expectations. And we have realized significant benefits from our actions during the fourth quarter. The consolidation of our China operations during the second and third quarters, along with significant reductions in SG&A expenses, have lowered our cost in this business by at least $6 million on an annual basis. Further, the upholstery fabrics division has contributed substantially to our strong cash flow this year through excellent working capital management, especially with inventory. Inventory levels have been lowered to just over $9 million, a 56% decrease from the previous year of $21 million. Inventory turnover has improved significantly 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 have a significantly improved our competitive position by pursuing a strategy to dramatically lower the capital invested in the business and transition to a highly variable cost model. In reaching this point, we had to make a number of very difficult decisions in this business during the year. However, as a result of these actions, we are cautiously optimistic about our prospects in the upholstery fabric business because of the following. Number one, we have been receiving significantly higher placement including cut and sew kits, with a broader base of key customers. Number two, we have established a mature, scalable, and low cost model in China that is vertically integrated by way of a network of key manufacturing partners that we have developed over the last several years. We have made significant progress in the competitive position of our US facility this year. Also, in April 2009, we received copyright registration on three of our best selling patterns over the last two years. All of which we believe have been copied or knocked off in large quantity over this same time period. We are now keenly focused on sales and marketing initiatives rather than on restructuring actions. These are all favorable indicators for improving results over the medium term as the eventual recovery in demand for furniture takes place.

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

We expect prevailing economic uncertainties and issues surrounding the housing and credit crisis will continue to unfavorably affect consumer demands for furniture and bedding products. Also, the first quarter of last year had 14 weeks compared with 13 weeks of the first quarter of fiscal 2010. Overall, we expect our first quarter fiscal 2010 sales to be down approximately 21% to 26% from the first quarter of last year. We expect sales in our mattress fabrics segment to be down approximately 22% to 27% for the first quarter. Even with the lower sales, operating income margin in this segment is expected to be in the range of last year's first quarter operating margin.

In our upholstery fabrics segment, we expect sales to be down approximately 20% to 25% for the first quarter, mostly from the decline in sales of US produced fabrics. In spite of considerably lower expected sales, we believe the upholstery fabrics segments results reflect a small operating profit. Considering these factors, the Company expects to report pretax income for the first quarter of 2010 in the range of $1.4 million to $2.2 million. Given the volatility in the income tax area during fiscal 2009 year, the income tax expense or benefit and related tax rate for the first quarter of fiscal 2010 are two uncertain to estimate. This is Management's best estimate at present, recognizing that future financial results are difficult to predict because of the severe economic uncertainties and demand challenges facing upholstery and mattress fabrics industries.

I will now turn the call back over to Frank.

We believe that Culp has demonstrated solid execution in fiscal 2009 in spite of unprecedented challenges related to the economic downturn. We've made measurable progress throughout the year in developing a leaner, more efficient operating platform in reducing our cost and at the same time strengthening our financial position considerably. As we begin 2010, we believe we are well-positioned as the market leader in both of our businesses. We have a focused strategy, and the financial strength to build upon our competitive position. With the improvements in our manufacturing platform for both woven and knit mattress fabric categories, we are excited about the additional opportunities in this business to develop further product offerings and enhance our value proposition to customers. Our upholstery fabric business has come through a long period of restructuring and is now well-positioned for sustained profitability. Above all, we are focused on execution for our customers as a financially stable and reliable source of innovative fabrics, delivery performance, and quality.

With that, we will now take your questions.

(Operator Instructions). We will take our first question from Budd Bugatch from Raymond James.

Good morning, Frank, and good morning, Ken. This is actually Chad filling in for Budd.

Good morning Chad.

A couple of questions. Sometimes -- I know we ask this question a lot and I don't meet to beat a dead horse, but you continued to do a very, very good job on working capita,l and I know you said you expect that benefit to be substantially less than it has been. How much more room for improvement do you have maybe in terms of days, if you can give us any thoughts there?

Chad, the improvement this coming year -- we expect to make some improvements but they will most likely be more incremental than as significant as the prior two years. We will not stop working on working capital management. It's very important for the businesses we are in, but there's just not as much left to reduce working capital. So I do expect some, but not a lot.

Okay. Are you seeing -- what are you seeing in terms of input and material costs? Are you getting a benefit there? How do you expect that to play out through the rest of the fiscal year?

At this point we are still seeing a little, beginning of a little upward pressure on input materials, and particularly fiber. Polyester being the key fiber we use, and globally we are beginning to see some upward pressure, not a lot, but certainly some.

And in upholstery fabric, obviously the bulk of that business is coming from overseas. Could you talk to us a little bit about the remaining domestic production there? How is that plant performing? What are your thoughts in the long-term viability of that operation?

As far as the US facility, we believe it is important as part of our business model in upholstery fabrics to have not only the China but a US presence. We have endeavored to create a very low cost model in Anderson, South Carolina, that in some ways as best we can, parallels our China operations. We are cautiously optimistic about that operation. They have made great progress -- we have made great progress in that business segment for us this year. In fact, probably better than we expected. So we also, they are the only producer worldwide of velvet. So it's a unique product category which no one else makes, certainly in the US, and to only a very limited extent in China. So we absolutely are committed to that facility if we can. And we are pleased with the result this year.

Okay. And the last two questions have got a really longer term in nature. You may need to dust off the old crystal ball, but it seems that while we haven't gotten a lot of improvement in industry demand to speak of, that things have stabilized somewhat since the leg down that we saw last Fall with the financial crisis and whatnot. With what you are seeing and what you are hearing out there, what's your sense for industry demand and how are you thinking about sort of the timing and the shape of the eventual recovery? We are in the camp that we will begin, sometime over the next 12 months, to see a gradual recovery. And our plans are taking that into account. We are expecting some gradual improvement in the Fall, as is seasonally normal. And therefore we are planning for some uptick in that business in the Fall in the upholstery fabric area. But over the next year or two, we believe it's going to be a slow gradual recovery in both bedding and furniture. And finally kind of assuming a more normal demand environment and considering all the improvements you made to the cost structure and changes that you made to the business, what do you think the long-term margin potential is maybe by segment looking at mattress fabrics and upholstery. How do we think about that?

I would say we have good margin improvement opportunities in both businesses. And we've been focused on in the past five years, as you well know, been focused on acquisitions, major capital projects, restructuring activities in upholstery fabrics, and for the first time in maybe five, six, seven years, we have been able to focus on sales and marketing initiatives and it's very exciting. We are having a good time. We've done all the heavy lifting so to speak, over a number of years, and both of our businesses can focus on, how do we grow our business, and how do we become better suppliers for our customers.

Got you. Well, thanks very much for taking my questions. Congratulations on a very, very good quarter in a tough environment and good luck in fiscal 2010.

Thank you.

(Operator Instructions). We will take our next question from [Stanley Elliot] with Stifel Nicolaus.

Good morning. Thank you all for taking my call. I apologize if you touched on this , I had to hop off the call for a second, but the guidance you gave for Q1 with revenue being down 21%, 26% that included the extra week. Is that

That is correct. The extra week, Stanley, was in last year.

Yes, yes. Okay. So actually it look like it would be --

We don't make a big deal of that. We didn't make a big deal of that last year when we had the extra week. That's the way it goes.

On an apples-to-apples comparison, it's more like 20% to 24%, something like that, does that sound reasonable?

Correct.

Then for the mattress standpoint, ASP was down 3%. Is that a trend that you guys are continuing to see as price points are moving lower in the mattress industry, or how are you guys thinking about ASP moving into the next quarter?

It's been fairly stable in that range for a number of quarters and some quarters it's up a few pennies, some quarters down. I wouldn't read anything in that at this point. Okay. very good. Very stable.

Very good. Thank you very much for your time. Good luck. Nice quarter.

Okay. Thank you.

(Operator Instructions) With no further questions in the queue, I'd like to turn the call back over to Ken and Frank for any additional or closing remarks.

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

This does conclude today's conference. We thank you for your participation.