Culp Inc (CULP) 2010 Q3 法說會逐字稿

Good day, and welcome to the Culp Incorporated third 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 Miss Drew Anderson. Please go ahead.

Thank you, good morning and welcome to Culp conference call to review the Company's results for the third quarter of fiscal 2010. 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 call, the Company will be discussing certain non-GAAP financial measurements. 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 8K 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, everyone, and thanks 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, and then Ken will review the results for the quarter. I will then update you on the strategic actions in each of our businesses, and after that Ken will review the fourth quarter outlook, and we'll be happy then to take questions.

We are pleased with Culp's strong performance for the third quarter. We achieved a 21% gain in overall sales for the third quarter, marking the first year-over-year sales gain for the Company in two years. Also, our earnings per share for the quarter were the highest in almost six years. We are encouraged that the consumer appears to be slowly returning to the market place. Our mattress fabrics business has continued to perform well with solid increases in sales and profitability. During the third quarter, we have seen a significant improvement in our Upholstery Fabrics performance, primarily due to a better macro economic environment and favorable results from our sales and marketing initiatives. We are also realizing the benefits of a lean and agile operating platform in both business segments, as well as recent capital expenditures in our Mattress Fabrics business. We have established a strong competitive position in both businesses. Culp represents a stable and reliable supplier in the marketplace with a proven ability to execute. Our strong position is another key advantage in these uncertain times and provides us with greater operating flexibility going forward. 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 $54 million, up 21% from the third quarter of last year. We reported net income of $3 million or $0.23 per diluted share for third quarter of this year compared with a net loss of $450 ,000, or $0.04 per share for the third quarter of last year. On a pretax basis, we reported income of $3 8 million or 7.1% of sales compared with $17,000 in the third quarter of last year. Our return on capital, or ROC was 27% for the first nine months of this year. We believe ROC is a key measurement, and it is 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 $27 million in sales for the quarter, a 7% increase over $25 .2 million for the same period last year with most of the increase coming from the Knit Fabrics product line. Operating income from this segment was $3.6 million, up 59%, $2.2 million last year. Operating income margin was 13.2% of sales compared with 8.9% of sales for the prior-year period. The increase in operating income dollars and margin was due to the significant increase in gross profit as compared to last year. Gross profit was higher due to the impact of increased sales, operational efficiency gains made possible by capital projects made since last year and the improving benefits from the B&H Knitted Fabrics acquisition made in August 2008. ROC for Mattress Fabrics segment was 30% for the first nine months of this year, capital employed at the quarter end was $48.5 million, up 3% from last year end.

Now turning to Upholstery Fabrics. Sales were $27 million, representing a 39% increase from $19.4 million in the third quarter of last year. This represents the first sales gain in Upholstery Fabrics in three years. Sale of China-produced fabrics were $23.5 million in the third quarter, up 53% over the prior-year period. Sales of non-US produced fabrics were $3.5 million, down 12% from the third quarter of last year. Included in the decline was the planned discontinuation of certain fabric styles as part of our profit improvement plan implemented last fiscal year. The Upholstery Fabric segment reported substantially improved operating income with $2.5 million, or 9.1% of sales compared with operating income of $51,000 for the third quarter of last year. The third quarter profit was the highest quarterly profit in over five years. It is also important to note that on a year-to-date basis, operating income was $4.3 million or 6.4% of sales, up from an operating loss of $2.2 million, representing a $6.5 million turn around. The main reason for the improvement in this quarter's operating income was the significant increase in gross profit over the prior-year period, offset somewhat by higher SG&A expenses this quarter.

Gross profit margin for the quarter was 18.9% compared with 10% last year. The favorable impact of higher sales, coupled with higher margins generated on our China-produced business led the substantial improvement in gross profit. The increase in SG&A expenses was primarily caused by higher incentive compensation expense. ROC for Upholstery Fabrics segment was 56 % for the first nine months of this year. Capital employed in Upholstery Fabrics at quarter end was $12.4 million, up 12% from last year end.

Now turning to the balance sheet. We have been diligent in our efforts to maintain a strong balance sheet and generate cash flow throughout this tough economic environment. At the end of the third quarter, our balance sheet reflected $19 million in cash compared with $11.8 million at the end of last fiscal year. Total debt of $16.4 million, which includes current maturities of long-term debt plus long-term debt, remain unchanged from the previous fiscal year.

It is important to note that Culp's debt remains unsecured, including lines of credit with no borrowings outstanding. We have a scheduled principal payment of $4.8 million due in mid-March, only a couple weeks away, which will reduce our total debt to $11.6 million. Our next scheduled principal payment of $2.2 million is not due until August of 2011, 18 months away. This is the first of five annual payments on the $11 million note related to the B&H acquisition. We continue to make improvements in our working capital management as compared to previous years. Working capital -- operating working capital which is comprised of accounts receivable and inventory, less accounts payable was $25 .6 million at the end of this quarter, down 27 -- down from $27 million a year ago.

Working capital turnover was $8.3 for the third quarter compared with $6.2 million for the same period last year. More specifically, inventory turns for the third quarter were 7 compared with 6 for the same period a year ago. The Company expects cash capital expenditures for fiscal 2010 to be approximately $7 million. Additionally, the Company expected to have approximately $1.6 million for deferred payments on equipment, including capital lease obligations, and depreciation is expected to be approximately $4 million. For next fiscal year, we expect capital expenditures to be approximately $4 million, mostly for the Mattress Fabrics segment with appreciation projected to be approximately $4.5 million. I'll now turn the call back over to Frank.

Thanks, Ken. I'll now provide you with an update on both of our operating segments. Our Mattress Fabrics business has continued to be a strong performer with higher sales and improved profitability this quarter compared with a challenging third quarter last year. These results reflect the benefits of the ongoing investments we've made to develop an efficient and scalable manufacturing platform. In addition, we also benefited from other operational initiatives. During the third quarter, we began the installation of state of the art finishing equipment for our growing knit business, and we will complete the project during the fourth quarter. We are very excited about this initiative because it represents the final step in our strategy to become fully vertical in our manufacturing platform for the knit product category, just like we have been for years in the wovens product category. Benefits of this investment are faster response time, quality enhancements and fabric innovation opportunities.

During the next four months, we are making additional capital investments including expanding capacity for our knit and woven product lines, as well as completing an energy efficiency initiative in our Canadian operation that will also have an environmental benefit and reduce operating costs going forward. Capital expenditures for this fiscal year in Mattress Fabrics are expected to total $6.6 million, reflecting our continued commitment to the bedding industry. These initiatives, complemented by our unrelenting focus on execution for our customers, are further enhancing our strong capability to provide outstanding service, reliable delivery performance and consistent quality.

Now let me comment on our Upholstery Fabrics business. We are pleased with the substantial improvement in sales and profitability in this area. The third quarter marks the first year-over-year sales increase for this business in three years, and the operating income margin was the highest in over a decade. We are especially encouraged by the extent of our sales gains throughout our customer base. We are realizing the benefits of our long-term strategy to build a wholly owned and low-cost China manufacturing platform that is scalable and vertical, but not capital intensive.

We began our small China operation just over six years ago. Additionally, we are beginning to benefit from a complimentary strategy to grow business in our one remaining US facility based upon a model of utilizing China-sourced yarns, a very lean overhead structure and a focused and volume oriented product strategy. Also, with the multi-year restructuring activities finally behind us, we have been able to shift our focus this fiscal year to product development, sales and marketing initiatives and delivery performance. I'm pleased that we are making excellent progress in each of these areas. Further, we are aggressively defending our design copy rights and we will do whatever is necessary to protect our creativity. Most importantly, our goal remains to provide our customers with innovative products from China or the US, along with reliable delivery and quality performance, all at excellent values.

I would also like to comment briefly on our financial position. We are fortunate to have built our cash position to almost $20 million at the end of the quarter, and we've reduced our total debt to $16 million, even with substantial investments in capital projects this year. As Ken noted earlier, in just a few weeks, we'll reduce our total debt to just over $11 million with no payments on remaining notes until August 2011. We will continue to be excellent stewards of our cash position and our overall capital allocation decisions. We also believe our sound financial position is providing us with an important competitive advantage because we have the resources to invest significantly in our businesses during this economic downturn in terms of capital projects and working capital growth. Ken will now review the outlook for the fourth quarter, and then I'll have a few concluding remarks.

We expect the prevailing economic uncertainties and unemployment issues will continue to influence consumer demand for furniture and bedding through the end of our fiscal year, however we are encouraged by the improving trends in both of our businesses and expect that overall sales will be up 12% to 16% compared with the same quarter of fiscal 2009. We expect sales in our Mattress Fabrics segment to be up approximately 10% to 14% for the fourth quarter with improved operating profit compared with last year's fourth quarter results.

In our Upholstery Fabrics segment, we expect sales to be approximately 13% to 17% higher than the fourth quarter than a year ago. It is important to note that the fourth quarter will be affected by at least a week of plant closures for the Chinese new year holiday. Accordingly, we expect the Upholstery Fabrics segment to report a profit that is substantially higher than the fourth quarter of last year, but lower than the operating profit achieved in the third quarter of this fiscal year. Considering these factors, we expect to report pretax income in the fourth quarter in the range of $3.5 million to $4.2 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 fourth 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 overall economic uncertainties. Frank?

Our results to date for this fiscal year demonstrate that we have positioned Culp to operate effectively and profitably through this challenging period. We have created lean and agile business models in both of our segments that are scalable and position us very well to handle significant growth as the home furnishings industry recovers. We believe we are the market leader in both of our businesses, and we have the financial strength necessary to build upon our position. Our Mattress Fabrics business has shown consistent improvement this fiscal year, even in a challenging environment. Further, we are excited about the additional growth opportunities related to our enhanced manufacturing capabilities in that area. In the Upholstery Fabrics business, our sales and marketing initiatives are producing favorable results. With our China and US manufacturing platforms, we believe we are well-positioned for continued profitability and sales growth. Above all, we are focused on outstanding performance for our customers as a financially strong and trusted supplier of innovative products with excellent quality and delivery performance. With that, we will be happy to take your questions.

Thank you. (Operator Instructions) We'll go first to Budd Bugatch of Raymond James.

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

Hey, Chad.

Good morning.

Let me start off -- let me start off by congratulating you guys on another very good quarter. First question, based on your results, it seems pretty clear that you guys are gaining market share in upholstery. I know that the third quarter results and potentially some of the fourth quarter results will be impacted by the timing of Chinese new year, but could you care to take a stab at what you think the overall industry is growing at versus the growth that you guys delivered both in the quarter and in your expectations for next quarter?

That is a tough one, Chad. It seems to us that the industry is on a gradual uptick. We've seen that in some of the other public companies reporting recently. And it does seem to us that our growth rate is exceeding the industry growth. However, we are coming off a very weak quarter a year ago and in our number, it certainly appears to be some inventory building, and we would not expect this kind of growth rate to continue at a 39% growth rate. But certainly seems to us faster than the industry growth rate, and it appears to us we're picking up market share. And as I mentioned in my comments, we're just very pleased that the gains -- customer gains, are broad-based. Not one or two particular customers, but really broad-based throughout our customer list.

Got you. Well, that's very helpful. And, Frank, were raw materials still favorable for you year-over-year in the third quarter? And assuming that we see some inflation, when do you think that might change, and any sense of magnitude of increases that you might be looking at?

Okay. We are beginning to see raw material prices go up in China, particularly acrylic and rayon fibers, less so on polyester and polypropylene, and so we are seeing that already. And we had some small impact in the third quarter. We'll begin to have some more impact in fourth and on into next year. In our Mattress Fabrics area, we're hearing about a lot of -- or some pressure in raw material prices, although we're not experiencing it yet. Our next fiscal year we are expecting some impact, and I thinks it's still a question mark, the extent of what price increases we'll have. We do believe a -- the polyester and poly propylene may not be as much increases as acrylics and rayons.

Okay. And you did talk about some of the projects that have you going on in the mattress segment and the expectations for CapEx in fiscal 2010. And I might have missed it in Ken's comments, but did you guys give us a target for capital expenditures in fiscal 2011?

Yes. $4 million is a good target for now, mostly in the Mattress Fabrics business.

Right.

Okay. And the -- given the improving profitability, given the balance sheet right now, I mean you are in a net cash position, you've got plenty of cash on hand to take care of your principal payment. I would imagine that cash flow is going to be pretty meaningly positive going forward. What are your priorities for that cash? How are you thinking about what you want to do with that money?

Chad, our first priority in our capital allocation process is to fund working capital to support sales growth. Secondly would be to continue finding high return projects to invest in, principally capital expenditures, mostly in our Mattress Fabrics business. And we've been able to do that, as you've seen. And then after that, we will plan to continue building our cash position. As you mentioned, while we're very pleased with the cash position exceeding debt, at the end of the third quarter, it's only $3 million cash over debt. So we would not mind having a bigger cushion of cash exceeding debt throughout next fiscal year. But I think that you are right when you look at things, it is a reasonable expectation that our cash position will build next year with a -- looking at some working capital growth and $4 million of capital expenditures and no principal payments.

Great. Well, thanks guys for taking my questions, congratulations again and good luck on the rest of the year .

Thank you.

All right, thank you.

(Operator Instructions) And we'll pause for just a moment to assemble a roster. And it appears we have no further questions at this time, so I'll turn it back over to you for any closing comments or remarks.

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

And that concludes today's conference. We thank you for your participation.