Culp Inc (CULP) 2011 Q4 法說會逐字稿

Good day, and welcome to the Culp Inc fourth-quarter and year-end 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 fourth-quarter and fiscal year-end 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 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 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 to these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included as a schedule to the Company's 8-K filed yesterday. This information is also available on the Investor Relations section of the Company's website at www.culp.com. A slide presentation with supporting summary financial information is also available on the website as part of the webcast of today's call.

I will now turn the call over to Frank Saxon, President and Chief Executive Officer of Culp. Please go ahead, sir.

Thank you, Drew. Good morning, everyone, and thanks for joining us today. I'd 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'll begin the call with some brief comments about Culp, and then Ken will review the financial results for the quarter. I'll then update on some strategic actions in each of our businesses. And after that, Ken will review our first-quarter outlook, and then we'll be happy to take questions.

We are pleased with our fourth-quarter performance, concluding a year of sound growth and progress for Culp. These results are especially noteworthy in light of the economic headwinds and significant raw material cost and selling price pressures we faced during the year. Although our operating margins are slightly down for the year due to these factors, we are encouraged that both our Mattress Fabrics and Upholstery Fabrics divisions increased sales, and we reported higher pretax income as compared with the previous year. Overall, our solid performance reflects the benefits of a lean and agile operating platform, and a strong competitive position in both businesses.

Our financial position continues to be the strongest in the Company's history. This represents an important competitive advantage in these highly uncertain times. And provides us not only with greater flexibility to pursue our growth initiatives, but also an opportunity to enhance shareholder value through the share repurchase program we announced yesterday. Above all, Culp represents a stable and trusted supplier for our customers, with a proven ability to execute.

As stated in our press release, our Board of Directors has authorized the expenditure of up to $5 million for the repurchase of shares of the Company's common stock. Based on the current market value of this stock, this will allow the Company to repurchase just under 5% of the 13 million shares outstanding. Under this program, shares may be purchased from time to time in open market transactions, block trades through plans established under the SEC Act and Rule 10b5-1 or otherwise.

The amount of shares purchased and the timing of purchases will be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities. This share repurchase program reflects the Company's strong financial position, and our confidence in our long-term prospects. Our healthy balance sheet and ample liquidity provide us the opportunity to continue investing in our businesses, while also creating value for our shareholders through share repurchases.

I'll 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 $60.4 million, up 5.5% from the fourth quarter of last year. On a pretax basis, we reported income of $4.7 million, compared with $5 million in the fourth quarter of last year. We reported net income of $6 million or $0.45 per share for the fourth quarter this fiscal year, compared with net income of $5.4 million or $0.41 per share for the fourth quarter of last fiscal year.

Net income for the fourth quarter of fiscal 2011 includes a $1.3 million income tax benefit, while net income for the previous-year period included an income tax benefit of $436,000. The income tax benefit for the fourth quarter of this fiscal year includes a non-cash reversal of a portion of our valuation allowance against our US net deferred tax assets in the amount of $2.3 million.

For fiscal 2011, total sales were $216.8 million, up 5% over the same period last year. Pretax income was $15.1 million, compared with $14.3 million for the prior year, a 5.2% increase. We reported net income of $16.2 million or $1.22 per share, compared with $13.2 million or $1.01 per share for the same period last year. Net income for fiscal 2011 included a $1.1 million income tax benefit, while net income for fiscal 2010 included income tax expense of $1.1 million. The income tax benefit for fiscal 2011 includes a non-cash reversal of our valuation allowance against our US and China net deferred tax assets relating to future earnings in the amount of $3.6 million.

Overall return on capital was 25% through the fourth quarter of this fiscal year, compared with 28% for the same period a year ago. Capital employed at the end of this quarter was $63 million, compared with $53 million for the same time last year. We believe return on capital is a key performance measure, and it is used by management for evaluating overall Company and business segment performance. We also believe that the efficient use of capital contributes strongly to increase shareholder value.

Here are the results by operating segment. For Mattress Fabrics, we reported $35.2 million in sales for the fourth quarter, up 5.3% compared with sales of $33.4 million for the same period last year. Operating income for this segment was $5.2 million, compared with $4.9 million last year. Operating income margin was 14.9% of sales, compared with 14.7% of sales for the prior-year period. This quarter did include some nonrecurring items totaling approximately $300,000, which had a positive impact on operating income.

For fiscal 2011, Mattress Fabrics sales were $122.4 million, up 6.6% from the prior year. Operating income was $15.4 million compared with $15.5 million, relatively flat compared with last year. Operating income margin for the year was 12.6%, compared with 13.5% for the same period last year. Return on capital for the Mattress Fabrics segment was 30% through the fourth quarter of this fiscal year, compared with 33% for the same period a year ago. Capital employed for Mattress Fabrics was $53 million at the end of this quarter, compared with $47 million a year ago.

Now, turning to Upholstery Fabrics. Sales for the fourth quarter were $25.2 million, representing a 5.7% increase from $23.8 million in the fourth quarter of last year. Sales of China-produced fabrics were $21.2 million in the fourth quarter of this year, a 7% increase over the prior-year period, while sales of US-produced fabrics were $4 million, down 2% from the prior-year period. Overall, the Upholstery Fabrics segment reported operating income of $813,000 or 3.2% of sales, compared with operating income of $1.6 million or 6.8% of sales for the fourth quarter of last year.

For fiscal 2011, Upholstery Fabrics sales were $94.4 million, up 3.1% over last year. Operating income was $4.4 million, down 27% from $6 million for fiscal 2010. Operating income margin was 4.6%, compared with 6.5% for last year. Return on capital for the Upholstery Fabrics segment was 36% through the fourth quarter of this year, compared with 56% for the same period a year ago. Capital employed at the end of this quarter of this year was $10 million, compared with $12 million a year ago.

Now, turning to the balance sheet. During fiscal 2011, we have strengthened our balance sheet considerably, and generated significant cash flow in this tough economic environment. As of May 1, 2011, we reported $30.9 million in cash and cash equivalents and short-term investments, compared with $21.3 million at the end of last year, an increase of almost $10 million. This increase is especially noteworthy considering the $6.4 million in capital expenditures and the $3.6 million build of working capital to support higher sales. After several years of high levels of capital expenditures, almost all of which related to Mattress Fabrics' multi-year investment program, we are expecting significantly lower levels of capital spending for the foreseeable future.

Total debt was $11.5 million. Our next major scheduled principal payment of $2.2 million is due August 2011. The $2.2 million is the first of 5 annual installment payments on our $11 million private placement debt. Our shareholders' equity has grown to $80.3 million at the end of this fiscal year, up 27% from last fiscal year, and up 67% from $48 million at the end of fiscal 2009. Our strong financial position provides us with a competitive advantage, especially in this uncertain economy, as well as sufficient capital and flexibility to support our growth strategy in the upcoming year.

Key working capital measurements were as follows. Days sales and receivables were 30 days, compared to 32 days a year ago. Inventory turnover was 7.3 for the fourth quarter of this fiscal year, compared to 7.5 for the same time last year. Working capital turnover as of this quarter was 9, which is comparable to last year.

As we look forward to next fiscal year, we are encouraged by the positive outlook for generating cash. We expect continued solid cash flow from net income plus non-cash expenses. With respect to uses of cash for next year, we expect lower CapEx spending, in the $4 million range, modest working capital investment to support sales growth, debt repayments of $2.4 million, and whatever cash is required for the share repurchase program.

Frank?

Thank you, Ken. I'll now provide you with an update on both of our segments. I'll start with Mattress Fabrics. This business had a solid fourth-quarter performance, with the highest quarterly sales of the year. Notably, sales were higher compared with a strong fourth quarter of last year. We are continuing to benefit from our capital investments and recent operating initiatives to build further upon our efficient and scalable manufacturing platform, especially in our knitted fabrics area. Capital expenditures for the year were $6.1 million. However, our operating margins for the year were slightly lower, due to significantly higher raw material cost and selling price pressures.

Although we are beginning to see some stabilization in raw material prices, these costs remain significantly higher than this time last year. In response to these increases, management has taken steps to re-engineer products and yarns where possible without sacrificing quality, enhance our production efficiencies, and implement price increases to offset a portion of the most significant cost increases. We are pleased with our operating performance in Mattress Fabrics, and look forward to additional opportunities to leverage our success in the year ahead.

As a result of our multi-year, $45 million capital investment initiatives, which were completed during last year, Culp has a strong competitive position with a large and modern vertically integrated manufacturing platform in the major decorative product categories, woven and knitted fabrics. We have also substantially improved upon our supply logistics from pattern inception to fabric delivery. Looking ahead to next year, we expect to have lower CapEx in the mattress area, with a core strategic focus on product development, along with sales and marketing initiatives. Most importantly, we remain committed to providing our customers with outstanding service, reliable delivery performance, and consistent quality and value.

Now, turning to Upholstery Fabrics. We were pleased with the sales trends in this business for the fourth quarter, with our highest quarterly sales for the year. However, our profitability for the quarter and year was primarily affected by significantly higher raw material costs, which began to increase in the second quarter. We implemented price increases with effective dates in the fourth quarter to offset as much of these costs as possible.

In addition, we are constantly introducing new fabrics that take into account the higher raw material costs. And we have re-engineered certain products, where possible, without affecting quality. With respect to our 1 remaining US fabrics facility, higher raw material costs, along with lower sales, resulted in weaker performance as compared with the prior year. Also, we are announcing a price increase for certain US-produced fabrics this quarter.

China-produced products accounted for 86% of our sales in this business this year. Our China platform has played a significant role in the ongoing development of our Upholstery Fabrics business in today's global marketplace. Customer response to these products continues to be very favorable, as we have further enhanced our reputation for product innovation, quality, and value. We have continued to look for additional sales opportunities to leverage our success with US customers, and we are expanding sales of these products to both local China market and to other international customers.

As previously announced in our third quarter, we established a wholly owned subsidiary in Poland called Culp Europe to sell and distribute fabrics, and to make cut-and-sew kits. We began sales activities from this location late in the fourth quarter. Culp Europe offers a number of advantages for us, including the highest concentration of furniture suppliers to the European market, low operating costs, an experienced workforce, and close proximity for shipping to customers in most European countries. Europe as a whole represents the second largest furniture market in the world, behind North America. This operation is still in its early stages, and we expect sales to develop gradually over the coming year. We are encouraged by the initial level of interest from our customers.

Looking ahead to next fiscal year, our priorities are to improve the results of our US operation, make meaningful progress in Culp Europe, and continue the excellent performance of our China-produced fabrics business.

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

In spite of the macroeconomic trends, including persistently high unemployment, consumer credit and leverage concerns, as well as a weak housing market, we are encouraged by the sales trends we are seeing in both of our segments, especially in our bedding business. Overall, we expect our sales in the first quarter of fiscal 2012 to be 1% to 5% higher than the first quarter of last year.

We expect sales in our Mattress Fabrics segment to be 2% to 5% higher than the same period a year ago. Operating income in this segment is expected to be somewhat lower than the same period a year ago, due primarily to higher raw material costs and increased pricing pressure.

In our Upholstery Fabrics segment, we expect sales to be flat to slightly higher as compared with the previous year's first quarter. We believe the Upholstery Fabrics segment's operating income will be somewhat lower than the same time last year, due to higher raw material cost and lower profitability in our US operation.

Considering these factors, we expect to report pretax income for the first fiscal quarter of 2012 in the range of $3.5 million to $4 million. Given the volatility in the income tax area, the income tax expense or benefit, and related tax rate for the first quarter of fiscal 2012, 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 for fiscal '11 demonstrate that we are successfully navigating through this challenging period of economic weakness and uncertainty. We have worked hard to create scalable and sustainable manufacturing platforms in both businesses. This strategy is allowing us to serve our customers very well, and achieve increasing profitability in a difficult environment. At the same time, Culp is well positioned for further profitable growth as the home furnishings industry eventually recovers and our international sales opportunities develop.

As we begin fiscal 2012, we have a focused strategy and the financial strength to not only fund our growth initiatives, but also to begin to return funds to shareholders through share repurchases, as market conditions allow. Above all, we are committed to outstanding performance for our customers as a financially stable and trusted source for innovative fabrics.

With that, we'll now take your questions.

(Operator Instructions). Budd Bugatch with Raymond James.

Hi, good morning, Frank, good morning, Ken. This is actually Chad pinch-hitting for Budd. First of all, congratulations again on another very solid quarter. My first question, guys, you beat your revenue guidance and our estimates pretty handily in both the Mattress and the Upholstery segments. Could you share with us what specifically drove the positive variance versus what you were expecting when you gave guidance?

I think the fourth quarter developed -- our fiscal fourth, which is February, March and April, stayed strong through the whole quarter. And when we gave guidance we normally see a little downturn, a little softer results from March and April, from February. But we did not see that. It stayed strong in really both businesses. And we finished up with a much stronger April than we expected.

So should I read that as, were the year over year percent changes relatively stable in each month, or can you give us a sense of how that trended?

Reasonably stable, maybe a little higher in April. Maybe a little higher.

All right. And Frank, in the press release you talked about some selling price pressure in Mattress Fabrics. Could you give us an update or your thoughts on the competitive environment there? Is it getting more competitive? Is it getting more challenging? Are you seeing any competitors that are struggling and could be vulnerable here?

This business as well as the Upholstery Fabrics business, has always been very price competitive. And I don't see it today any different than it was last year. And there were a couple of situations last year that developed that caused some of the selling price pressure. And that, combined with the raw material increases, presented some tough challenges. And consequently, we continue to work on various things, as I outlined in my comments, from price increases to reconstructing fabrics to constantly introducing new products that take into account the higher raw material cost. But I don't see anything this year, any different or worse than last year, for example.

As far as competitor situations, it feels better right now. It feels like we are picking up market share in various slots. Not sure I can put my finger on it, but we certainly like what we're seeing in terms of the demand side and are forecasting demand increases, as you see, in the first quarter.

Got you. And we were very pleased, obviously, to see the buyback announcement, particularly given how strong your free cash flow has been. Just a couple of follow-ups or questions on that. Obviously, this is a cyclical industry. Is there a specific safety net or minimum level of either cash or net debt that you're looking to maintain? And the second question, maybe just some insight into how the Board's thinking about a buy back versus a dividend. Obviously you opted to go with a buyback now. Why did you go with a buyback versus a dividend? Is a dividend a possibility down the road?

Okay. I would say as we look at this, our cash flow, as you know from following us, has been consistently pretty good for a number of years. The last 2 years after the global financial crisis, we've also had some good years in tough economic climates, even when margins are lower than we would like. I see that continuing. So as we look at it with the cash flow projections that we have and feel good about, and the net cash position is now $19 million, as you see, we feel like we've got a pretty good cushion, given being in a cyclical industry. And the balance sheet is significantly stronger. As we look at a dividend or share repurchase, currently as we see the stock price, what we would consider lower levels, it made a lot of sense to, looking at our earnings and valuation and alternative investments, to start a stock repurchase program. And stock repurchase program in this case, of course, is $5 million. Not a large commitment, given our cash position, but a meaningful one, nonetheless, possibly repurchasing up to 5 million shares out of our share count. So it seemed like that's the best way to go today with the attractiveness of the value of the stock.

Okay. And last question from me, we have seen a bit of a soft patch in some of the recent data as regards to the broader economy, the consumer and obviously housing. What are the latest things that you're hearing from your customers, from retail, regarding the current tone of demand? And if I could ask you to put on your economist hat for a second, how do you think that the year's going to shape up for the bedding and furniture industries?

Our view is that bedding will be better than furniture. Furniture is more related to housing than the bedding. Bedding is, according to the big mattress makers, it's about 70% replacement. So we expect to see reasonably good demand in Mattress Fabrics. And furniture is, of course, more cyclical, and it's more cyclical within a year, as well. But it seems pretty good for us right now. And I think a lot of that is market share gains. I think we're seeing with our customer base, really, a bifurcation in furniture. The better, stronger companies are continuing to hang in there and do pretty well, and some of the weaker ones aren't. So we expect a better climate in our fiscal year ahead in mattress business than furniture.

(Operator Instructions). Michael Corelli with Barry Vogel & Associates.

Hi, good morning. I just had 2 questions. First, a question about your SG&A expenses in the upholstery segment. They seem to be a reasonable amount higher than a year ago. Could you talk about that?

One factor in there is the start-up expenses for our Culp Europe operation in Poland during the fourth quarter. That's probably a key factor in there.

Okay. Would you expect those to come off or would those just be sustainable costs that hopefully will be followed by increased revenues? Correct. As I said, we just opened the operation in the fourth quarter and had our initial sales in April, as a matter of fact. So we are having some expenses ahead of the revenue and profit, gross profit at this point. But not a lot. Okay. And then just a question about the cash uses, balance sheet. Obviously you're in a great position with the cash balance you have and should continue to generate some nice cash going forward. You have a lot of flexibility. I applaud you on the share repurchase announcement. Obviously the other options, as the previous gentleman mentioned, are the dividend and also, obviously, growth initiatives. I would imagine there's no major spending you're going to be doing on growth initiatives. So I would think you probably have a lot of flexibility. Is it possible that maybe you would consider in the future paying a dividend in addition to the share repurchase and spending some dollars on organic growth?

I think to answer your question, the great position we're in with the cash we've built and the cash we continue to generate is we have that flexibility. We can really choose to do any of those options that you mentioned. And as we have mentioned before, we are open to acquisitions in the mattress fabric area. We would be very disciplined on any price we pay, but we are open to that. So that could be a use of cash. Nothing has obviously come along over the last couple years. We've done 2 highly successful acquisitions over the last 4 years in that business, as you may know. All options are open, and that's the great position we're in.

Okay. Because it seems like you probably could pursue all options. If you're going to be a sustainable cash generating company with the balance sheet you have and limited capital needs, a dividend might make sense also.

We have a lot of flexibility. That's exactly right.

Ethan Steinberg with Friess Associates.

Congrats. I don't mean to beat that last question over the head, but, yes, I'm wondering, given the drop in CapEx you're seeing, and it doesn't sound like anything is imminent on the acquisition front, is there a reason you don't want to do a dividend right now, given what the balance sheet looks like and what the cash flows are likely to look like?

I think this is our first step. We've just taken a major step of $5 million to return to shareholders and that's a pretty significant step for us. I wouldn't say on acquisitions, you never know when that could come about. Nothing happened this year. I don't know of anything. But you never know when something could happen. So it's important to have some reserves for that, as well. But again, I'll repeat, I think all options are open to the Company in terms of creating value for shareholders, including share repurchases, dividends, growth initiatives, all of the above are open.

Okay. And then you mentioned that the numbers were better in both divisions because you had assumed that things would slow down as you got into March and April, if I heard you right. And it sounds like April actually might have picked up a little bit year over year. Can you talk about what you're assuming demand does relative to what we've seen or what it looks like today for what you implied on the revenues for this quarter?

We are seeing improved demand in the first quarter so far. And we have put increased guidance in there, sales to increase in the first quarter, and we're halfway through the quarter now. So we've seen pretty good growth. Despite what we hear and read on the news, it seems pretty good. How much of this is market share gain, how much is overall industry, it's hard to tell. I think some is definitely market share gains.

Okay. And I would have thought on the operating profit -- I haven't had enough time to crunch everything yet, but given how you got squeezed in the quarter, how the COGs saw pressure from rising materials, and then there's a lag on the pricing increase, given that you started to get those through now, I would have thought there would be a better impact to operating profit in the following quarter. But it sounds like you still think that's going to pressure those pretax numbers. Can you talk about that dynamic?

Yes, the price increases did not really come into effect until later in the fourth quarter. And it's difficult to get all the price increases in both of our businesses to cover all of the raw material cost increases, because they really shot up so much last year. So that's why we've really taken really a multi-facetted approach to it, get the price increases we can. And combining that with the reconstructing of fabrics, reengineering of fabrics and yarns, as well as the production efficiencies we were able to do in Mattress Fabrics, and constantly introducing new products. We're fortunate that in both businesses, particularly Upholstery Fabrics, we introduce new products every 6 months. So you're able to incorporate whatever level of raw material costs we face into new products. But raw materials is really the significant factor of last year. They went up a lot. And while we're seeing some stabilization today, it's still up significantly from a year ago.

And can you give us some sense of how much you think those pressured the $4.7 million. And I'm just looking at it, let's say you were able to have the price increases you put through in the quarter for all of the fourth quarter. How much do you think that would have helped the net income?

I think it would definitely have helped on the Upholstery Fabrics side. On the Mattress Fabrics side, the fourth quarter is our highest sales quarter of the year. And we really run flat-out. So we get all the benefit of the fixed cost absorption in the fourth quarter. Plus, we had $300,000 or so of some nonrecurring items that Ken mentioned that helped the Mattress Fabrics area in the fourth quarter, which probably accounted for around 100 basis points of their margin. So I still think it's probably the top issue, outside of continuing to grow the business, that we face this year. How do we recoup and deal with a higher level of raw material costs.

At this time, there are no further questions.

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

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