Culp Inc (CULP) 2010 Q4 法說會逐字稿

Good day everyone, and welcome to the Culp, Inc. fourth quarter and fiscal 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. Ms. Anderson, pleas go ahead ma'am.

Thank you. Good morning and welcome to the Culp conference call to review the Company's results for the fourth quarter and for 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 discussion of those factors that could affect Culp's operation and the forward looking statements made in this call.

The information being proved 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. 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. Additionally a slide presentation with supporting summary financial information is available on the Company's website for the first time as part of the webcast of today's call.

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 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 and Ken will then review the financial results for the quarter. I will then update you on the strategic actions in each of our businesses. After that, Ken will review our first quarter business outlook and then we will wrap up with any questions.

We are pleased with our performance for the fourth quarter. Capping off a year of significant growth and progress for Culp. We are encouraged by the recent improvement in consumer demand trends as evidenced by an overall 20% sales gain compared with a year ago in our third quarter -- in our fourth quarter. In particular, our mattress fabric business has benefited from a recent up-tick in consumer demand in the bedding industry. We have also continued to see favorable growth trends in our upholstery fabric business. Although not to the same level as bedding.

Overall, our improved performance for the quarter and year reflects the benefits of a lean and agile operating platform and a strong competitive position in both businesses. Culp represents a stable, and trusted supplier for our customers with a proven ability to execute. Our strong financial position is a key advantage in these uncertain economic times and provides us with greater operating flexibility to pursue our growth initiatives.

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

Thank you, Frank.

Total sales for this quarter were $57.2 million, up 20% from the fourth quarter of last year. Sales for fiscal 2010 were $206.4 million, up 1% over last year. On a pre-tax basis, we reported income of $5 million compared with $2.2 million in the fourth quarter of last year. We reported net income of $5.4 million or $0.41 per diluted share for the fourth quarter of this year compared with net income of $1.7 million, or $0.13 per diluted share for the same time last year.

Overall return on capital, or ROC, was 31% for fiscal 2010. ROC is a key performance measurement and it is used by management for evaluating overall Company and business segment performance. We believe that the efficient use of capital contributes strongly to increase shareholder value.

Here are the results for operating segment. For mattress fabrics, we reported $33.4 million in sales for the quarter, a 26% increase over $26.6 million for the same period last year. For the year, mattress fabric sales were $114.8 million, relatively flat compared with $115.4 million last year. Operating income for this segment was $4.9 million for the quarter, up 39% compared with $3.5 million last year. Operating income margin was 14.7% of sales compared with 13.3% of sales for the same period a year ago.

For the year, operating income in mattress fabrics was $15.5 million, up 17% over fiscal 2009. Operating income margin was 13.5% compared with 11.5% in fiscal 2009. ROC for mattress fabric segment was 33% for fiscal 2010. Capital employed totalled $47.2 million compared with $47.3 million in fiscal 2009.

Now turning to upholstery fabrics. Sales for the fourth quarter were $23.8 million which include both fabric and cut and sewn kits, representing a 13% increase from $21.2 million in the fourth quarter of last year. For the year upholstery fabric sales were $91.6 million, up 3% from 2009 sales of $88.5 million. It is important to note that this is the first annual sales gain for this segment in ten years.

Sales of China produced products were $19.8 million in the fourth quarter, up 15% over the prior year period. Sales of US produced products were $4 million, up 3% from the fourth quarter of last year. For the year, sales of China produced fabrics were $77.3 million, up 14%, and sales of US produced fabrics were $14.3 million, down 30% from fiscal 2009. Overall, the upholstery fabric segment reported improved operating income of $1.6 million for the quarter, or 6.8% of sales, compared with operating income of $666,000, or 3.1% of sales for the fourth quarter of last year.

Operating income for fiscal 2010 was $6 million, reversing the prior year operating loss of $1.5 million, representing a $7.5 million turnaround. ROC for the upholstery fabric segment was 56% for fiscal 2010. Capital employed for upholstery fabrics was $11.9 million in fiscal 2010, a slight increase compared with $11.1 million last year.

Now, turn to the balance sheet. We have strengthened our balance sheet and generated significant cash flow throughout this tough economic environment. At the end of this fiscal year, 2010, our balance sheet reflected $21.3 million in cash and cash equivalents and short-term investments, up from $11.8 million at the end of last fiscal year. Over this same period we have reduced our total debt to $11.7 million from $16.4 million at the end of fiscal 2009 and incurred $9 million in capital expenditures and deferred payments on equipment. It is important to note that all Culp's debt remains unsecured including lines of credit totaling $12.5 million in the US and China with no borrowings outstanding. Our next major scheduled principal payment of $2.2 million is not due until August 2011, more than a year away. We also continue to make improvements in our working capital management. Days sales and receivables were 31 days compared to 35 days last year end. And inventory turnover is 7.5 for the quarter compared to 6.4 for the same period last year.

I will now turn it back over to Frank.

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

I will start with mattress fabrics. Our mattress fabrics business had a great fourth quarter with sales, profitability and return on capital all up meaningfully. The sales gain was primarily driven by significant improvement in consumer demand in the bedding industry. Additionally, we are benefiting from the closure of a key competitor in late calendar 2009. These results also reflect the benefits of recent operating initiatives and the ongoing investments we have made to develop an efficient and scalable manufacturing platform.

During the fourth quarter, we completed the installation of state of the art finishing equipment for our growing knit business. This important project has completed the vertical integration of our knit fabric manufacturing platform, just as we have had in place in the woven fabrics area for many years. During the first quarter we are also in the process of further expanding our capacity for both knit and woven product lines as well as completing an energy efficiency initiative in our Canadian operation.

Our capital expenditures in mattress fabrics for fiscal 2010 totaled $6.6 million, reflecting our continued commitment to the industry. While we are pleased with the trends in this business, we are also facing increased pricing pressures and higher material costs which will make it more challenging this year to improve operating margins. As we move into fiscal 2011, we are continuing our high level of capital spending for modernizing and expanding our woven and knit capacities. Above all, however, we will focus on execution for our customers with outstanding service, reliable delivery performance and consistent quality and value.

Now, I will comment on our upholstery fabrics business. Our upholstery fabrics business has made substantial progress this fiscal year. And we are pleased with the improvement in sales and profitability. Our sales results for the year marked the first annual sales gain in this business in ten years. We are gradually building long-term relationships with many customers, both large and small. Additionally, while still a small percentage of our sales, we are seeing nice growth with the local China market initiative that we began a couple of years ago.

At the same time we have returned Culp's upholstery fabric business to solid profitability. After a multi year restructuring process, we have established a leaner and more agile manufacturing platform, including a wholly owned China operation that is scalable and vertical, but not capital intensive. We also have one remaining US manufacturing facility that supports our customer needs.

Our top priorities for upholstery fabrics in fiscal 2010 were to place a greater emphasis on product development, sales and marketing initiatives and delivery performance. Customer response has been very favorable and we believe we have made excellent progress in each of these areas.

We are seeing higher material costs beginning late in the fourth quarter. During the first and second quarter of this new year, we are taking steps to mitigate these increases including some price increases where needed and product re-engineering wherever possible. For fiscal 2011, we will continue to focus on these same key objective in product development, sales and marketing, which are all as relevant today as they were a year ago.

I would also like to comment on our financial position and capital allocation strategy. We are fortunate to have built our cash position to over $21 million and reduced our total debt to under $12 million, even with $7 million in CapEx for this last fiscal year. We now have the highest net cash position in the Company's history. And we are set to build upon this further. We have excellent liquidity which we believe is absolutely critical considering the global economic uncertainties around us. This is a time, maybe like no other in recent memory, to have a strong and growing cash position.

As we look ahead and consider our capital allocation strategy, a key objective to build shareholder value is to deploy our increasing amounts of internally generated capital in our two existing businesses at the same high rates of return.

For fiscal 2011, our specific capital allocation priorities are as follows. First, and most importantly, fund working capital requirements for organic growth, which we believe we have an excellent opportunity to achieve in both businesses. Growing internally, with adequate margins, usually offers the best returns on capital with the least risk.

Secondly, fund capital expenditures in our mattress fabrics business, both for maintenance and cap -- and expansion related projects as we did last year and plan to do in the coming year. Over the last several years, we have earned excellent returns on CapEx projects in this business. We have only minimal capital expenditure requirements for upholstery fabrics. Because our business model is not capital intensive, rather it is based upon a network of long-term, vertically integrated mill partners in China.

Third, we are open to opportunities for strategic acquisitions in our mattress fabrics business. We have spent about $20 million for two successful acquisitions in the last four years which have added significantly to shareholder value. We intend to be patient and disciplined with any capital committed in this manner.

Fourth, with excellent organic growth opportunity and potential external growth investments, we believe it is prudent to build our cash position further.

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

We believe that the macroeconomic trends, including high unemployment, consumer credit concerns, and a volatile housing market, will continue to influence consumer behavior. As a result of these factors, the demand outlook for furniture and bedding remains difficult to predict. However, we are encouraged by trends in both of our businesses as compared with this time last year and currently expect that overall sales will be up 11% to 16% compared with the same quarter of fiscal 2010. We believe our profitability will be somewhat affected by higher material costs in both segments and increased pricing pressure in mattress fabrics.

Sales in our mattress fabrics segment are expected to be up approximately 15% to 20% for the first quarter with operating profits significantly higher compared with last year's first quarter.

In our upholstery fabrics segment we expect sales to be approximately 5% to 10% higher for the first quarter as compared to a year ago. Accordingly, we expect the upholstery fabrics segment to report a profit that is higher than the first quarter of last year.

Considering these factors, we expect to report pre-tax income in the first quarter in the range of $3.6 million to $4.0 million. Given the volatility in the income taxed area during fiscal 2010 and continuing into fiscal 2011, the income tax expense and related tax rate for the first quarter fiscal 2011 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?

We have demonstrated strong execution and favorable results in fiscal 2010. Even in the face of ongoing challenges in the economy. We have worked hard to create a scalable and sustainable manufacturing platform in both businesses that allows us to serve our customers very well, achieve increasing profitability and returns on our capital, and at the same time positions Culp for further profitable growth as the home furnishing industry recovers.

As we begin the new year, we have a focused strategy and the financial strength to fund our growth initiatives. Our mattress fabrics business has shown consistent operational improvement and we believe Culp is well positioned to capitalize on additional growth opportunity with our enhanced manufacturing capability.

In the upholstery fabrics business, our sales and marketing initiatives are producing favorable results. With our China and US manufacturing platforms, we have a balanced strategy that will support our continued growth and profitability. Above all, though, we are focused on outstanding execution for our customers as a financially stable and trusted source of innovative fabrics, delivery, performance and quality.

With that, we will now take your questions.

Thank you, sir. Ladies and gentlemen, our question and answer session will be conducted electronically. (Operator Instructions) And for our first question, we go to Craig Sirois with Value Line.

Wow. Very nice quarter.

Thank you, Craig.

Can you add a little color to the price cost relationship. Particularly for mattress fabrics? I'm a little surprised that you are seeing pricing pressure given demand such as it is, and given the exit of a competitor. So, if you can add something to that?

We are seeing raw material price increases particularly in polyester and polypropylene fibers. And we are seeing that globally. Those markets, those raw material yarn market are -- have much more demand globally than they had a year ago. So, I believe that's what is driving the price increases even though the oil price has remained relatively stable, as you know. Pricing pressures are something we always have in the business, and something we just continue to face and deal with.

Okay. Next, what is the total capital spending budget -- maybe preliminary -- for this year, the new year?

The budget for the new year is $7.5 million. Mostly to be spent in mattress fabrics.

Okay. One more thing to tidy up this, can you at least approximate an effective tax rate? I know the difficulty, but -- I'm assuming -- is it fair to assume that the credits in the fourth, the tax credits, were one-time in nature?

That is a really difficult thing. Maybe the guidance I would give you is -- there are so many moving parts. We have tax responsibilities in the US, Canada and China. And I guess if we were to put a number it's just it's --

It is very difficult.

it is just very difficult. But I -- it's -- I would at best say it is not higher than 20%.

Okay. That's fair enough. Thank you very much. Good luck in the new year.

Thank you.

Thank you, Craig.

And we go next to Budd Bugatch with Raymond James.

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

Good morning Chad.

Good morning Chad.

Let me add my congratulations on another very good quarter out of Culp, and I just got a couple questions if I could.

Okay.

The expense control at the corporate level I thought was, was very impressive. The unallocated expense was quite a bit lower than what we were looking for. Frank, can you give us a sense of maybe what the right run rate for that line item would be? Either for fiscal '11 or kind of on a quarterly basis? How should we think about that?

I would probably say somewhere in the quarterly run rate of 1.3 or 4.

Yes. That's about -- yes.

There is a number of accruals and things. So that is going to fluctuate quarter to quarter. That's going to be fairly consistent. So I would agree with that.

Okay, good.

(Inaudible)

And another kind of follow-up regarding the raw material pricing pressure, all that. Frank, you mentioned some price increases and other initiatives like product engineering, or you already tried to offset that. Do you expect that you would be able to completely offset the raw material inflation with all the benefits from that? Is it half of that? Can you give us a flavor of how much you can do?

In upholstery fabrics, our objective in the first two quarter is to offset all of it. That is the objective. We are in process of those several initiatives. But, that is our goal.

But, I will say, though, when you look at our first quarter guidance, we do have some headwinds going into this year. But nevertheless, even with those headwinds guidance was significantly above a year ago quarter. So I -- we do have a few of those things, but I think we are effectively dealing with them.

Okay. And if I missed it, I apologize. But, I think typically Ken has given us the yardage and price per yard in the conference call comments. Could you provide us with that today?

I think maybe off line we can --

Yes, do that.

We can figure out something to do there.

Yes.

I appreciate that. Okay, And can you give us a sense of -- you gave us in upholstery, the China growth and US growth. Can you give us a sense of what cut and sewn kits look like on a year to year basis?

That's just -- cut and sew kits are up. And, why don't we just say we are very pleased with that business. It is a critical piece of our upholstery fabric platform and we are up. So let's just leave it at that.

Sounds good, guys. Congratulations again. That does it for me and good luck on the rest of the year.

Thank you Chad.

Thanks. Appreciate it.

(Operator instructions) We go next to Ethan Steinberg with Friess Associates

Hi guys. Thanks for taking the question.

Good morning.

I think I understand it as far as what is implied in the guidance. But I am sort of curious what you are hearing from some of the mattress or bedding customers. It sounds like you are pretty favorable on that. But since the end of last quarter we've seen some bad housing data and some pressure perhaps from the tax credit going away. I'm just wondering if you are seeing any negative trends there? Or accelerating trends there as far as customer feedback to you?

Yes, you see our guidance for the first quarter. It is up nicely from last year as you can see. And the business is still -- this is the high season and it is still pretty good. We are also --

Does it feel like it is accelerating, or decelerating?

I would not say that. We really look at year-over-year is really what you have to look at. And we are up significantly over a year ago as you see in the guidance. We are also benefiting some from the closure of a key competitor in late fall of last year also.

Do you have any guess of how much of the ten to twenty that competitor or market share take might account for?

Small piece. Small.

Okay. And then is that, is that all volume? Or is some of that price?

Volume.

Okay.

Volume related.

And how do you feel about your potential ability to push some of the cost increases through in price, and over what time period?

We -- you know, the fortunate thing in each of our businesses, we are always introducing new products in both businesses. And when we get price increases, you are able to build that into future products as you construct them. So -- but there usually is some period of time where you absorb some increases. But, we are fortunate we are introducing products all the time.

Okay.

As far as the timeframe, I think you see from the guidance from the first quarter, even with the raw material increases and the pressures we are having, still -- still pretty good results.

Yes. Great results. Okay, thanks for taking the question.

Okay. Thank you.

Thanks.

(Operator Instructions) And with that, ladies and gentlemen, we have no further questions on our roster Therefore, Mr. Saxon, I will turn the conference back over to you for any closing remarks.

Thank you, Operator. And again, thanks, everyone for your participation and your interest in Culp. We look forward to updating you next quarter. Have a good day.

Thank you.

And, ladies and gentlemen, that does conclude today's conference. Thank you for your participation.