Culp Inc (CULP) 2010 Q2 法說會逐字稿

Good day. Welcome to the Culp, Inc. second quarter 2010 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 second quarter fiscal 2010. As we start, let me express that some statements expressed 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 Company with the Securities and Exchange Commission for a discussion of these 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 publicly release 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 certain non-GAAP 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 Company's website at the Investor Relations section 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 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 will then update you on the strategic actions in each of our segments, and after that Ken will review our third quarter outlook, and then we'll be happy to take your questions.

Our improved performance for the second quarter reflects the benefits of a leaner and more efficient operating platform, and aggressive marketing initiatives. We are especially pleased with the strong turnaround in profitability for our upholstery fabrics business, and the continued solid gains and profitability in our mattress fabrics business, in spite of ongoing industrywide demand challenges facing both of our businesses.

We have further enhanced Culp's competitive position in both segments, with a keen focus on execution for our customers, and additional investments in our mattress fabrics business. Our financial position is the strongest in the Company's history, and is providing us with a sound foundation in these uncertain economic times. I'll turn turn the call over to Ken who will review the financial results for the quarter.

Thanks, Frank. Total sales for the quarter were $49.7 million, down 5% from the second quarter of last year. This is the smallest year-over-year decline since the third quarter of fiscal 2008. We reported net income of $2.9 million or $0.22 per share for the second quarter, representing the highest per-share result in five and a half years. This performance compares with a net loss of $40.9 million or or $3.23 per share for the second quarter of last year.

Included in the net loss for the second quarter of last year was a charge in the amount of $31.2 million for the establishment of evaluation allowance against substantially all the Company's net [deferred] tax assets, and $11.8 million in restructuring charges. On a pretax and ex-restructuring basis we reported income of $3.4 million compared with $1.5 million in the second quarter of last year, representing 120% year-over-year increase.

Overall return on capital, or ROC, was 25% for the first half of this year. We believe ROC is a key performance measurement used by management for evaluating overall Company and business segment performance. It is also an important measure used in our incentive compensation program. We believe that the efficient use of capital contributes strongly to increased shareholder value.

Here are the results by operating segment. With respect to Mattress Fabrics, we reported $28.2 million in sales for the quarter, a 1% increase over $28 million for the same period last year. Operating income for this segment was $4 million, compared with $3.3 million last year.

Operating income margin was 14.3% of sales, compared with 11.8% of sales for the prior year period. Total units sold were 11.3 million, and average selling price was $2.49. ROC for the Mattress Fabrics segment was 30% for the first half of this year.

Now turning to Upholstery Fabrics. Sales were $21.5 million, which include both fabric and cut and sewn kits, representing a 11% decline from $24.2 million in the second quarter of last year. Sales of non-US produced fabrics were $17.9 million in the second quarter, down 1% over the prior-year period. Sales of US-produced fabrics were $3.6 million, down 41% from the second quarter of last year.

Included in this decline was a planned discontinuation of certain fabric styles as part of our profit improvement plan implemented last fiscal year. Overall the Upholstery Fabrics segment reported improved operating income of $1.1 million, or 5.1% of sales, reversing an operating loss of $804,000 for the second quarter of last year. Units sold were 4.8 million, and average selling price was $4.09. ROC for the Upholstery Fabrics segment was 39% for the first half of this year.

Now I'll turn to the balance sheet. We continue to focus on further strengthening our financial position and generating cash, in light of the uncertain business climate. Cash flow from operations was $6.1 million for the second quarter of fiscal 2010, and $10.7 million for the first six months of this year. Our balance sheet reflected $19.6 million in as of this quarter end, compared with $15.5 million at the end of our first quarter of fiscal 2010, and $11.8 million at the end of fiscal 2009.

Total debt, which includes current maturities of long-term debt, plus long-term debt, is $16.4 million, unchanged since the end of fiscal 2009. This is the first time in over 30 years where our cash position exceeds total debt. It is important to note that all Culp's debt remains unsecured, including lines of credit totaling $10.5 million in the US and China, with no borrowings outstanding.

We also continue to make improvements in our working capital management. Day sales and receivables and inventory turnover have also steadily improved, even with declining sales. Despite the continued improvement in working capital management achieved thus far in fiscal 2010, we expect cash flow generated from working capital improvements to be substantially lower than last two fiscal years.

Operating working capital, which is comprised of accounts receivable and inventory less accounts payable, was $21.6 million at the end of this quarter, down from $33.9 million a year ago. Working capital turnover was 7.4 for this quarter, compared with 6.1 for the same period last year. More specifically, inventory turns for the second quarter were 7.5, compared with 5.1 for the same period a year ago, and day sales outstanding or DSO's were 31 days for the second quarter, compared with 33 days for the same period last year. The Company expects cash, capital expenditures for fiscal 2010 to be approximately $5.3 million, including approximately $1.6 million for deferred payments on equipment, and depreciation is expected to be approximately $4 million. And I'll turn it over to Frank for his comments.

Thank you, Ken. I'll now provide you with an update on both of our operating segments. I'll start with Mattress Fabrics. Our improved performance in Mattress Fabrics reflects benefit of the ongoing investments we have made to develop an efficient and scalable manufacturing platform. We have continued to enhance our competitive position, with improved reactive capacity and a strong focus on execution for our customers.

We continue to be very pleased with the results from the acquisition of the Knitted Mattress Fabrics operation just over a year ago. During the second quarter, we completed the installation of additional equipment to further expand our knit capacity and improve our production capabilities for both knits and wovens. We have also initiated the purchase of state of the art finishing equipment for our growing knit business to be installed during our third quarter. As a result, Culp will then be fully vertically integrated in both product lines.

In the second half of this year, we plan to make additional capital investments, including expanding capacity for both knits and wovens, as well as implementing an energy efficiency initiative in our Canadian operation that will have an environmental benefit and reduce our operating costs going forward. We are committed to the growth of our Mattress Fabrics business, and will continue to make the necessary investments to meet the needs of our customers with outstanding service, reliable delivery performance and consistent quality and value.

Now I'll turn to our Upholstery Fabrics segment. We are very encouraged by the improved operating performance this business. We are realizing the incremental benefits of the profit improvement plan completed last year, and a leaner and more agile operating platform.

With the completion of these initiatives, we have shifted our focus this year to product development, sales and marketing initiatives, and delivery performance. In particular, the innovative fabrics produced at our China operation offer exceptional quality and value, and customer response has been very favorable.

We are pleased with the breadth of incoming business currently, across more customers for both fabrics and kits. Additionally, our China operation, now in its sixth year, continues to mature. We are also pleased with the solid progress in our Anderson South Carolina facility, and are optimistic that we will build business in that operation.

It is increasingly apparent that customers want to buy from both China and US locations. More importantly, we believe that we are well-positioned to capitalize on improved demand, as the economy stabilizes and consumer spending resumes.

I would also like to comment on our financial position. We are fortunate to have built our cash position to almost $20 million and reduced our total debt substantially, to $16 million. We will use $5 million of our cash next March for a principal payment, and then not have any scheduled principal payments for a year and a half. At that time, we will begin paying $2.2 million per year for five years on our remaining $11 million note.

We now have excellent liquidity, which we believe is more important than ever with all the economic uncertainties around us. We believe the economic recovery in Bedding and Furniture will be gradual and spotty at best over the next two years; therefore, the stronger the balance street, the better. I want to assure you that we will continue to be good stewards of our cash position and overall capital. Ken will now review the outlook for the third quarter, and then I'll have a few concluding remarks.

While we expect the economic uncertainties and issues surrounding the housing market will continue to affect customer demand for Furniture and Bedding products, we are encouraged by the gradually increasing order trends in our business. Overall, we expect our sales for the third quarter fiscal 2010 to be up approximately 5%, as compared to the third quarter of last year. This would be the Company's first overall sales gain in two years.

It is important to note that the third quarter is our seasonally weakest quarter of the year. We expect sales in our Mattress Fabrics segment to show a modest improvement over the same period a year ago, while operating profit is expected to be higher.

In our Upholstery Fabrics segment, we currently expect sales to be up approximately 5% for the third quarter. This would represent the first sales gain in Upholstery Fabrics in three years. We also believe the Upholstery Fabrics' segments results will again reflect a significant gain in operating profit, as compared to the same period a year ago.

Considering these factors, we expect to report pre-tax income for third fiscal quarter of 2010 in the range of $2.1 million to $2.9 million. Given the volatility in the income tax area during fiscal 2009 and continuing into fiscal 2010, the income tax expense and related tax rate for the third quarter of fiscal 2010 are too uncertain to project. This is management's best estimate at present, recognizing that future financial results are difficult to predict because of economic uncertainties and demand challenges facing the Upholstery Fabrics and Mattress Fabrics industries. I'll now turn it back over to Frank.

We are very pleased with our results to date, and are optimistic that we will continue to see favorable results in the second half of this fiscal year. We are realizing the benefits of all the hard work we have done over the past several years to create a lean and agile manufacturing platform and enhance our competitive position in both businesses. Our Mattress Fabrics segment continues to perform well, and we are excited about the additional opportunities to expand our product offerings and further enhance our value proposition to customers. With the improvements in both our China platform and US facility, our Upholstery Fabrics business is gaining traction and is well-positioned for continued profitability. We have developed a scalable business model for both businesses, with the ability to meet increased demand as the economy improves. Finally we have the financial strength to support our growth strategy, and capitalize on the opportunities ahead for fiscal 2010 and beyond. Also, I would like to wish a happy birthday to John [Baum], one of our largest and longest term owners of Culp Stock. So John, we wish you a happy birthday. With that, we'll now take your questions.

(Operator Instructions) We'll take our first question from Budd Bugatch with Raymond James.

Good morning, Frank, good morning, Ken.

Good morning.

Good morning, Budd.

I'm interested in just talking a little bit about the forward guidance, particularly on the revenue side. Can you flesh out a little color on how you are feeling about that? I know you've given us up 5% in Upholstery and about 1% I think in Mattress Fabrics but what leads you to feel that way, other that just the comparisons? Can you talk a little bit about what you are seeing out there in the economy, and how about a comment, even qualitatively about beyond, other than just the difficult nature of the business?

Okay. First, for the specific guidance for the third quarter, as you know, we're guiding up 5% overall, and similar numbers for each segment. And as you mentioned, Budd, a key factor in that certainly is the weak comparison of that same quarter of last year. However, it's not only weak comparison. We are seeing somewhat better business than - - clearly the business is off the bottom, and our Upholstery Fabric business in particular seems to have a pretty good incoming order trend.

As for longer term, I believe it is very significant that, after many years, certainly in Upholstery Fabrics, of declining sales that we are beginning to see the sales trend change. We believe that has changed, and while we do not give guidance, of course, out past the third quarter, it seems reasonable that the sales trend has changed. And it is probably, as we see now, a combination of market share gains, as well as gradually improving industry demand.

The industry is still not very solid in either Bedding or Furniture, and we certainly hear a lot of weakness still being reported out there, but it is clearly better than it was. So this situation is how we sort of are looking at the next year, gradually improving, but could be spotty, depending on how things go.

And when you talk about market share gains, are they coming because competitors have gone out of business or just far weaker? What is the competitive landscape look like?

That's a good question. I think it's both. I believe that we have done a darn good job in both businesses in strengthening our business models.

We worked very hard over the last several years to do a good job for our customers on products, on service, delivery, et cetera, and value. And in conjunction with that, we are hearing about weakening competitors in both segments, so that probably is also helping things.

Thank you very much.

(Operator Instructions) There are no other questions coming into the cue at this time.

Okay. Well, with that, we thank you all for your participation today, and your interest in Culp, and we'll look forward to updating you on our progress next quarter.

This concludes today's conference call. Thank you for your participation.