Culp Inc (CULP) 2011 Q1 法說會逐字稿

Good day, and welcome to the Culp, Inc. first quarter 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 the first quarter of fiscal 2011. As we start, let me express that some statements made in this call will be forward-looking statements. Forward-looking statements are statements that includes projections, expectations, or beliefs about future events or results or other wise 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 and also available on www.Culp.com, 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 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 measurement 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 web site at www.Culp.com. In addition, a slide presentation with supporting summary financial information is available on the Company's web site as part of the web cast 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 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 today with some brief comments about Culp and then Ken will review the financial results for the quarter. I will then update you on the strategic actions in each of our operating segments. After that, Ken will review the second outlook, and we will be happy to answer your questions.

Our stronger sales for the first quarter of fiscal 2011 reflect better consumer demand trends than a year ago, particularly in the first two months of the quarter, as well as success from our sales and marketing initiatives. Our improved profitability reflects the higher sales volumes, as well as the benefits of a leaner and more cost efficient operating platform. Today, Culp has a strong competitive position in both mattress fabrics and upholstery fabrics, and as always, our primary focus is on outstanding execution for our customers as a financially stable and trusted supplier. 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 $55.9 million, up 23% from the first quarter of last year. On a pretax basis, we reported income of $4.3 million compared with $2 million in the first quarter of last year, an increase of 115%. We reported net income of $3.7 million or $0.28 per share for the first quarter of this fiscal year, compared with net income of $1.9 million or $0.15 per share for the same period a year ago.

Overall return on capital and pretax basis, or ROC, was 30% for this first quarter, compared with 19% for Q1 of last year. Capital employed was $65 million at quarter end, up from $55 million a year ago. It is important to note that 80% of our capital is invested in mattress fabrics, with the remaining 20% invested in upholstery fabrics. ROC is a key performance measurement, used by Management for evaluating overall Company and business segment performance. We also believe that the efficient use of capital contributes strongly to increased shareholder value.

Here are the results by operating segment. For mattress fabrics, we reported $30.9 million in sales for the quarter, an 18% increase over $26.3 million for the same period last year. Operating income from this segment was $4 million, up 35%, compared with $3 million a year ago. Operating income margin was 12.9% of sales, compared with 11.2% of sales for the prior year period. ROC for mattress fabric segment was 32% for the first quarter of this year, compared with 25% for the same period a year ago. Capital employed was $52 million, versus $48 million a year ago, reflecting higher working capital and fixed asset investments.

Now turning to upholstery fabrics. Sales for the first quarter were $25 million, which include both fabric and cut and sewing kits, representing a 30% increase from $19.2 million in the first quarter of last year. Sales of China-produced products were $22.1 million in the first quarter, up 37% over the prior year period. Sales of US-produced products were $2.9 million, down 5% from the first quarter of last year. Overall, the upholstery fabric segment reported improved operating income of $1.6 million, or 6.5% of sales, compared with operating income of $764,000, or 4% of sales for the first quarter of last year. ROC for the upholstery fabric was 52% for the first quarter of this year, compared with 31% for last year. Capital employed was $13 million at quarter end, versus $9 million a year ago, due to higher working capital to support our sales growth.

Now, turning to the balance sheet. A top priority for fiscal 2011 is to further strengthen our financial position, especially in light of the ongoing economic uncertainties. As of the first quarter, our balance sheet reflected $18.1 million in cash and cash equivalents in short-term investments. Total debt was $11.6 million, which includes current maturities of long-term debt and long-term debt. Our next scheduled principal payment of $2.2 million, is not due until August 2011. Recently we extended our bank line of credit agreement for two years with no material change in terms. We also continue to focus on managing our working capital well. Day sales and receivables, or DSOs, were 28 days compared to 32 days last fiscal year end, and inventory turnover was 6.4 for the first quarter of this year compared to 6.7 for the same time last year. Frank?

Thanks, Ken. I will provide you with an update on both of our businesses, and I will start with mattress fabrics.

Our mattress fabrics business delivered a solid performance, primarily driven by improved retail demand in the bedding industry in the first two months of the quarter. And by the closure of a key competitor at the end of calendar 2009. These results also reflect the benefits of our recent operating initiatives and ongoing investments to develop efficient and scalable manufacturing platform. We recently completed a capital project to expand the internal production of our knitted fabrics product line, which has been our fastest growing category. For fiscal 2011, we will continue to fund capital expenditures for maintenance and expansion-related projects in mattress fabrics.

While we are pleased with the Q1 results we are seeing some slow down in industry demand, as well as the effects of increased pricing pressures and higher raw material costs. Above all, we remain focused op execution for our customers, with outstanding service, reliable delivery performance and consistent quality and value.

Now, I will comment on upholstery fabrics. We are encouraged by the strong sales growth for the upholstery fabric business. Our sales gain was driven by the growth from our China operation. While most of our China-produced products are sold to US customers, we are also pleased with the increase in sales to the local China market, and to other international customers. Additionally, the broad-based sales gains among different customer segments, reflect the success of our product development, sales, and marketing initiatives.

The response from both existing and new customers has been very favorable to our products. We will continue to focus on expanding these important initiatives to drive our growth in the current year. While we are pleased with the first quarter results in upholstery fabrics, we are also experiencing the effects of higher raw material costs in this segment. We are implementing a price increase of certain products during the second quarter, to help offset some of these increases.

I would also like to comment on our financial position and capital allocation strategy. We worked hard to build our cash position to over $18 million, and reduce our total debt to just under $12 million. Even with the significant CapEx spending in fiscal 2010, and in the quarter just ended. We no have a solid net cash position, and we are set to build upon this further in the foreseeable future.

As US consumer spending for furniture and bedding is weakening, we are very encouraged that we have the financial ability to be opportunistic, as we look at our growth initiatives in both businesses. For well capitalized companies, such as Culp, we believe there are more opportunities for long-term market share gains during periods of economic weakness, as opposed to gaining share in the good times, as weaker competitors often struggle with their finances and operations. As we consider our capital allocation going forward, a key objective to build shareholder value is to deploy internally generated capital in our two businesses at high rates of return.

For the current year, our specific capital allocation priorities are as follows, first, and most importantly, we will fund working capital requirements for organic growth. Both domestic and international. Growing internally with adequate margins usually offers the highest returns on capital with the least risk. Second, we intend to fund capital expenditures in mattress fabrics, both for maintenance and expansion projects, as we did in the prior year. Over the last several years, we have earned excellent returns on our capital expenditure projects in this business. However, after the current year, we do see substantially lower CapEx spending in mattress fabrics.

For our upholstery fabric business, we expect only minimal CapEx requirements in the future, because our business model is not capital-intensive. Rather it is based upon a net work of long-term vertically integrated mill partners in China. Third, we will continue to carefully evaluate additional strategic acquisition opportunities for our mattress fabrics business. Over the past four years, we have spent approximately $20 million, for two successful acquisitions in this area, which have added significantly to shareholder value. We will be patient and disciplined with any capital committed in this manner.

Fourth, we believe it is prudent strategy to continue building our cash position, because we see organic growth opportunities throughout the world, and potential external growth investments. Now Ken, I will turn it over to Ken for second quarter outlook

We expect that the economic uncertainties and ongoing issues surrounding the housing market and high unemployment will continue to affect consumer demand for furniture and bedding products. Overall, we expect our sales for the second quarter of fiscal 2011 to be 5% to 10% higher than the second quarter of last year. We expect sales in our mattress fabric segment to be flat to up 5%, compared with the same period a year ago. Operating income in this segment is expected to be flat to slightly down, compared with the same period a year ago, primarily due to higher raw material costs, and increased competitive pricing pressure. In our upholstery fabric segment, we expect sales to be up approximately 10% to 15% for the second quarter. We believe the upholstery fabric segment's operating income will reflect moderate improvement over the same period a year ago, due to higher sales.

Considering these factors, we expect to report pretax income for the second fiscal quarter of 2011 in the range of $3.5 million to $4 million. Given the volatility in the income tax area during fiscal 2010, and during fiscal 2011, the income tax expense or benefit and related tax rate for the second quarter of fiscal 2011, are just 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?

Even with the increasing economic headwinds, we are optimistic about our prospects for fiscal 2011 as we have the key advantages of a lean and agile manufacturing platform, a strong balance sheet and a leading competitive position in both businesses. We see additional opportunities in mattress fabrics to refine and expand our product offerings, and further enhance our value proposition to customers. We are also pleased with the momentum in our upholstery fabric sale,s as we continue to see positive results from our product development and sales and marketing initiatives. With our global business models, and strong financial resources, we are well positioned to make good progress in both of our businesses this year, regardless of the economic environment we face. With that, we will now take your questions.

Thank you. (Operator Instructions). We will go first to Budd Bugatch with Raymond James.

Good morning Frank, good morning Ken. Can you hear me all right?

Good morning, Budd.

Sure can. Good morning. Thank you.

My first question is, talk a little bit about the price increase, and maybe get you to quantify it a tad if you would?

The comments we will make, Budd, were selective price increases on certain products in the upholstery fabric business, and I would characterize it as small.

Would they be sufficient to offset the cost increases that you're seeing?

Not totally but the majority.

Okay.

I think it's probably important to also note that we are beginning to see some signs that raw material prices could come down in the second half of our year. With the slow down, global slow down that appears to be going on, we are seeing some signs that prices might abate.

So your guidance, I think, includes the impact on upholstery fabrics of those cost increases.

The price increases are implemented in the second quarter, not much benefit in the second quarter from the price increases, that will be the second half of the year.

I was trying to get you to quantify how much of the net -- what's the net drag on earnings in the quarter to your pretax of the difference between price and cost?

Not something we will quantify for you but I think if you look at in our guidance, we did say that in the upholstery fabric business, we expect our operating income for the quarter to reflect moderate improvement over a year ago, and of course, that's even with the price increases.

Okay. If I'm hearing you correctly, my second question goes in to the global platform or the international business, more than just the sourcing side you started to sell in to China domestically, and I think you said other places around the world, I haven't heard Culp really talk about international as a major part of the business for maybe five or ten years. So can you kind of give us a game plan of where you think the volume will be over the next couple of years and what the ultimate mix might look like?

Sure. That's a very good question. As you know, we probably a year and a half ago, we completed -- maybe two, we completed our restructuring initiatives which were significant over many years, and we stabilized the profitability in upholstery fabrics and began earning some very nice returns on capital. At the time, we said also, that we would begin to focus on -- and had the time to direct most of our efforts to sales and marketing initiatives. Part of those initiatives begun a year and a half ago were the local China market, which we are very optimistic in for over the long haul, because we have a substantial platform there, and we are seeing nice progress, particularly in the last two quarters, and starting to bear fruit. It's still small, and it's a long-term initiative, but we are encouraged by what we see.

Also, we are beginning to look, and you're right, look at other international customers, Europe, Australia, South Africa, Middle East. Increasingly, we are seeing opportunities and we are more aggressive now. We don't have restructuring to do. We are stable. We are performing pretty well in the US, with our sales initiatives here, so we were ready to broaden our focus to international.

I think we are still in the very early stages of these, the percentage of sales are still small. But we are certainly encouraged by the receptivity of not only our products, but our platforms. And we are learning as we are getting more on the international, that our products that we have been selling in the US, are perfect for many of the international markets as well. Which is a pleasant surprise. So we don't have to create necessarily new products for Europe or South Africa or wherever.

You did talk however about--?

We are encouraged by these efforts, but I do need to emphasize it's still a small portion of our sales and our primary market is the US. For upholstery fabrics.

Okay. Is this -- the international, make sure I understand, international is primarily upholstery, is it also mattress?

No, it's primarily upholstery. Mattress is mostly, is almost exclusively North America.

Got you. You talked about a priority for capital to be organic growth around the world. How would that be manifested?

That is principally, would be working capital. Would be working capital. To fund the growth that we hope to see in the various areas.

So essentially inventory and receivables dedicated to the overseas -- the inventory, may be in place, and receivables after sales?

That is correct. That is correct. Then as we have gained more experience, I guess we regained the experience that we had from the 1990s, we shipped, we were up to over $100 million internationally in the 1990s as you may remember, Budd, you were with us then, and we had extensive international sales all shipped from the US. But we are also encouraged a lot by, it does appear that China is, every month and every quarter, it's confirmed that that's really a good place for us to be in upholstery fabrics. It's a low cost producer you've got the most variety of product capabilities. So that's encouraging, and we got a platform that really can make products for these various markets.

You wouldn't want to quantify for us any additional capital you'd have to spend off shore, would you?

No. I don't think the international. I think you are exactly right, what we would see today, would be working capital. For the foreseeable future. We are not going to put plants anywhere in the world. We have got upholstery fabric, as I said, the beauty of the model is it's non-capital intensive. We've got a great group of partners in China that we're very pleased with.

And my last question talks about the fact that you talked also about some additional capital for mattress fabrics in North America. Can you give us a feeling of what kind of capacity you have now to ship in North America? I think you will do somewhere around 120 or so million this year in mattress fabrics? Looking at our numbers.

I would say today, Budd, I would say this is a rough estimate that we could handle 20%, 25% sales growth.

With no additional capital used?

With no additional capital. I might comment, the mattress fabric area, beginning in August of 2008 we made the acquisition of our knit supplier, Bodet & Horst, and since that time, we have been aggressive in further building our platform in both the knit category and the woven category. That spending is really coming to an end by the end of second quarter. We have the capacity, we have that vertical capabilities that we had desired and so now capital spending is going to start going down in mattress fabrics after the second quarter. That's why I mentioned it in my comments earlier.

Thank you, Frank, very much.

Thank you.

(Operator Instructions). Gentlemen, at this time, there are no further questions.

Okay. Well, thank you, everyone, for joining us today. We look forward to updating you after the second quarter. Have a good day.

Thank you.

That does conclude today's conference, thank you for your participation.