Culp Inc (CULP) 2012 Q1 法說會逐字稿

Good day. Welcome to the Culp Inc. first-quarter results conference call or. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Ms. Drew Anderson.

Thank you. Good morning and welcome to the Culp conference call to review the Company's results for the first quarter of fiscal 2012. 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 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 Company's 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. Please go ahead sir.

Good morning everyone. 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'll begin the call with some brief comments and then Ken will review the financial results for the quarter. I'll then update you on the strategic actions in each of our businesses. After that, Ken will review our second-quarter business outlook and then we'll be happy to take your questions.

Now, looking at the first quarter, we are pleased with our year-over-year sales improvement for the first quarter, especially in the face of an uncertain economy. As a result of our sales and marketing initiatives, we expect this sales momentum to continue into the second quarter and the full year compared with the same periods of last year.

Both of our businesses continued to deliver solid results even though profitability is down somewhat from the same quarter of last year primarily due to higher raw material costs at Mattress Fabrics and lower-than-expected results in our US Upholstery Fabrics operation. Over the last several months, we have announced price increases in both segments that are expected to absorb some of these additional costs going forward. We are beginning to see signs of raw material prices stabilizing in our Mattress Fabrics business, and even moving down somewhat with new purchases.

Our financial position remains strong and supports our ability to invest in growing our businesses this year while also creating value for our shareholders through share repurchases. Overall, we have a solid competitive position in both Mattress Fabrics and Upholstery Fabrics. As always, our primary focus is on outstanding performance for our customers as a financially stable and trusted supplier.

We also announced yesterday that our Board of Directors has authorized the expenditure of an additional $2 million for a total authorization of $7 million as part of the share repurchase program originally announced on June 16. Since announcing the repurchase program, the Company has used $3.2 million to purchase approximately 364,000 shares through last Friday, which represents about 2.7% of the outstanding shares at the beginning of the program. Based on the current market value of our stock and together with the shares already purchased, the expanded authorization from the Board will allow the Company to repurchase up to approximately 6.5% of our shares outstanding at the beginning of the program. The amount of shares purchased and the timing of such purchases will continue to be based on working capital requirements, market and general business conditions, and other factors, including alternative investment opportunities. The expansion of this share repurchase program reflects our confidence in Culp's long-term prospects.

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

Thanks Frank.

Total sales for this quarter were $60.3 million, up 8% from the first quarter of last year. On a pretax basis, we reported income of $3 million compared with $4.3 million first quarter of last year. We reported net income of $1.8 million or $0.14 per share for the first quarter of this fiscal year compared with net income of $3.7 million or $0.28 per share for the first quarter of last fiscal year.

The first-quarter 39% income tax rate was significantly higher than the same period last fiscal year primarily due to non-cash US tax expense. It is important to note that the Company does not pay cash taxes in the US, nor does it expect to in the foreseeable future, due to its $60 million in US federal and state loss carry-forwards.

Overall return on capital was 19% through the first quarter of this fiscal year compared with 30% in the same period a year ago. Capital employed at the end of this quarter was $69.5 million compared with $64.5 million for the same time last year. Return on capital is a key performance measurement used by management for evaluating overall Company and business segment performance.

Here are the results for our operating segment. For Mattress Fabrics, we reported $32.2 million in sales for the first quarter, up 4% compared with sales of $30.9 million for the same period last year. Operating income for this segment was $3.1 million compared with $4 million last year. Operating income margin was 9.8% of sales compared with 12.9% of sales for the prior-year period.

Return on capital for the Mattress Fabrics segment was 23% for the first quarter this fiscal year, compared with 32% for the same period a year ago. Capital employed for Mattress Fabrics was $56 million at the end of this quarter compared with $52 million a year ago.

Now, turning to Upholstery Fabrics, sales for the first quarter were $28.1 million, representing a 12% increase from $25 million in the first quarter of last year. Sales of China produced fabrics were $24.8 million in the first quarter this fiscal year, a 12% gain over the prior-year period, while sales of US produced fabrics were $3.3 million, up 14% from the first quarter of last fiscal year.

Overall, the Upholstery Fabrics segment reported operating income of $1 million or 3.5% of sales compared with operating income of $1.6 million or 6.5% of sales for the first quarter of last year. Return on capital for the Upholstery Fabrics segment was 33% for the first quarter of this fiscal year compared with 52% for the same period a year ago. Capital employed at the end of the first quarter this year was $13.2 million compared with $13.3 million a year ago.

Now turn to the balance sheet. A key area of focus for Culp in fiscal 2012 was to maintain our strong financial position, especially in light of the ongoing economic uncertainties. As of July 31, our balance sheet reflected $25 million in cash and cash equivalents and short-term investments.

As previously announced in June, our Board of Directors authorized the expenditure of up to $5 million for the repurchase of shares of the Company's outstanding common stock. As announced yesterday, the Board has authorized the addition of $2 million to this program. As of July 31, we spent approximately $1.1 million or for 119,000 shares of Culp common stock, and as of August 26, we spent approximately $3.2 million for 364,000 shares for an average price of $8.91.

Our balance sheet also reflects a somewhat higher than normal working capital level in the first quarter this fiscal year which is related to higher sales volumes. An important priority for fiscal 2012 will be to bring working capital back to historical levels.

Total debt at the end of the first quarter of fiscal 2012 was $11.5 million, which includes current maturities of long-term debt and long-term debt. Our strong financial position provides us with a competitive advantage, giving us sufficient capital and flexibility to support our growth strategy and reward our shareholders through share repurchases.

Going forward, in fiscal 2012, we are encouraged by the opportunity for generating free cash flow principally from net income plus depreciation and other non-cash expenses. With respect to uses of cash for this fiscal year, we expect lower CapEx spending in the $4 million range, modest working capital investment to support higher sales, debt repayments of $2.4 million, and cash requirements for the share repurchase program.

Frank?

Thank you Ken. Now, I'll provide you with an update on our operating segments. I'll start with Mattress Fabrics.

Our Mattress Fabrics business delivered a solid performance in the first quarter, largely driven by sales of knitted fabrics, our fastest-growing product category. We're especially pleased with the increased sales to many key customers who are leaders in the bedding industry. We continue to benefit from our recent investments to expand and modernize the internal production capacity of both knitted and damask product lines. This enhanced manufacturing platform has allowed us to better serve our customers in each of these major product categories. We've also had favorable customer response to our innovative designs, which is creating additional sales opportunities for us in fiscal 2012.

While we are pleased with our sales results for the first quarter, our profitability was affected by significantly higher raw material costs versus the same quarter a year ago. To help address these higher costs, we previously announced price increases that will be in effect for our second quarter. We have also continued to reengineer raw materials and yarns wherever possible without affecting our quality or production efficiencies.

We're also encouraged that raw material prices are stabilizing following recent periods of upward volatility. In some cases, we're even seeing decline in prices with new purchases.

We have a strong competitive position with the ability to further leverage our efficient and scalable operating platform and with our outstanding design capabilities. Above all, we continue to provide our customers with the same outstanding service, reliable delivery performance, and consistent quality and value that are associated with the Culp name.

Now, I'll comment on Upholstery Fabrics. We are encouraged by the sales growth for this business. These results reflect a combination of new product introductions, outstanding design, sales and marketing initiatives, and the launch of our new Culp Europe platform.

Our higher sales were primarily driven by the growth of our China produced products with increased sales to key US customers, along with sales to the local China market and a growing list of international customers. The response to the innovative designs of our China products from both existing and new customers has been very favorable. We are excited about this continued success of these various sales and marketing initiatives.

While we are pleased with the first-quarter results and the profitability of our China produced fabrics, we experienced significantly lower profitability in our velvet fabrics product line which is manufactured in our US operation. Higher raw material costs and lower demand for the velvet product category are pressuring our results. To help address these issues, we announced a significant price increase during July which will be realized midway through the second quarter. In addition, we're taking further steps to align our velvet capacity with expected demand during the second quarter.

Further, we are encouraged about the opportunity to grow our small sales base of woven textured products which we began manufacturing in our US facility just over two years ago. Notably, current costs to produce this particular category of fabric in the US are now similar to costs in China.

The first quarter represented the first full quarter of sales from Culp Europe, which is located in Poland. This distribution operation established in the fourth quarter of last year is in its early stages and is experiencing the usual startup activities and costs associated with a new venture. We expect sales to develop gradually over the next year. However, we are encouraged by the level of interest from many customers, especially in Poland. This location offers a number of advantages for us, including the highest concentration of furniture and bedding suppliers to the European market, low operating costs 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. We are making excellent progress building a solid foundation and we look forward to the additional growth opportunities with Culp Europe.

As we move forward in this fiscal year, our key goals in the Upholstery Fabrics business 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 view the outlook for the second quarter and then I will have a few concluding comments.

We expect our sales for the second quarter of fiscal 2012 to be up approximately 4% to 8% from the second quarter of last year, even though we see the overall economic uncertainties and issues surrounding the housing market and high unemployment continuing to influence consumer demand for furniture and bedding. We expect sales in our Mattress Fabrics segment to be approximately 4% to 8% higher compared with the same period a year ago. Operating income in this segment is expected to be flat to slightly higher compared with the same period a year ago.

In our Upholstery Fabrics segment, we expect sales to increase about 5% to 9% compared with the second quarter of last year. Operating income is expected to be flat to slightly down as compared to the same period a year ago, due primarily to the pressures in the velvet product category in our US operation.

Considering these factors, we expect to report pretax income for the second fiscal quarter of 2012 in the range of $2.6 million to $3.5 million. This is management's best estimate at present, recognizing that future financial results are difficult to predict because of overall economic uncertainties. Also, given the volatility in the income tax area during fiscal 2011 and continuing in the first quarter this fiscal year, the income tax expense or benefit and related tax rate for the second quarter of this fiscal year are too uncertain to project.

Frank?

We are excited about the many positive initiatives we have underway and the progress we are making with a number of key customers around the world. We've made great strides enhancing the design and creative side of our businesses. Although strong head winds and uncertainty remain throughout the economy and in our industry, we'll continue to execute against our global strategic initiatives in this fiscal year. We believe Culp has demonstrated resilience in a challenging marketplace with the ability to leverage our lean and agile manufacturing platform, outstanding design capabilities, and a leading competitive position in both businesses. We are well positioned to expand our market reach in both segments this fiscal year and grow our business profitably as the environment improves.

With that, we will now take your questions.

(Operator Instructions). Barry Vogel, Barry Vogel and Associates.

Good morning. I'm calling from North Carolina (technical difficulty) out of Cape Cod. I was fighting two battles simultaneously. Anyway, I've got a couple of questions for you, Frank. In terms of the cost (technical difficulty) Mattress Fabrics in the first quarter, could you give us some idea, just some range of what might -- how it might affect (inaudible) Mattress Fabrics in the quarter?

I think the best I can tell you is, to put it in general terms, this quarter we just ended, we had the most impact from the price increases we've seen over the last six months. Our -- we began seeing raw material prices go up probably six to nine months ago, mostly six months ago, and we have some leadtime on purchases, anywhere from a month to three months. So the first quarter had our highest effect of raw material prices compared with last year, and it was significant, several hundred basis points in terms of impact.

Can you give us the range of dollar impact on that --

That's difficult. I cannot do that, but what I can tell you is that we're now seeing, as I mentioned earlier, these prices stabilizing and in certain cases start to move down. And so the balance of the year, particularly Q3 and Q4, look a lot more favorable on the raw material front.

The same question for Upholstery -- (technical difficulty) or is it similar?

Similar but Upholstery is different. We are in a -- we introduce products every six months there, so we have more of an opportunity to increase prices and to replace products that may go up in price, for example from China. So our China produced products, while having price pressure there, we were able either to raise the price, bring a more competitive product to the customer, or reengineer. Where it hurt us in Upholstery Fabrics was the yarns that we bring in for our US facility. That's where it hurt the most and where we had to raise prices significantly in July.

Would you say overall the price cost (inaudible) for Upholstery was less than the price cost (inaudible) in Mattress Fabrics?

Yes. but it's different because in Mattress Fabrics where it's mostly yarn, we're a vertically integrated operation and in Upholstery, we're more of a marketing sourcing situation, so we have more flexibility and products change faster. But I think the key point is we're seeing prices moderate on certainly polyester, which is the key fiber that we use in both businesses. That price has begun to moderate, which is certainly very good news and welcome.

Could you give us some idea of what the startup cost impact you had in the first quarter, and what might it be for the year on the European adventure?

On the European platform, as I said, we are expecting gradual sales over the course of this year as we build that business. It's still small, and the first quarter was our first full quarter of sales and operations, and we did okay. It's a startup operation. We did okay. The second quarter, we will see further growth in that operation, and I think by the end of the year, we'll have made very good progress for a greenfield operation of what we're doing. But I would not -- I think the guidance I would give does not expect any meaningful sales contribution until next fiscal year.

And no meaningful startup costs?

No meaningful startup costs, no. I think what we saw in the first quarter -- and it was less than $100,000 to put a number on it. So we're pleased with the startup situation, very minimal startup, and I believe that's past us. So we're very encouraged with Europe, although I don't want to get ahead of us. It's going to grow gradually over the next 18 months as we learn the market and learn the customers.

One other question, on (inaudible) stock purchase program, your balance sheet is great. You're going to be probably generate cash this year when the year is said and done. How -- would you say that the authorization that you have currently in the first one and the second one combined, would you say that you'd be reluctant, given the caution in the economy, etc., of increasing it in any major way above and beyond the 6.5% of the shares outstanding?

I think, first of all, as we look at that very question, the first thing is we do not want to jeopardize in any way the strong balance sheet we have, especially in the climate we're in. Having said that, we are open, as long as the price represents a value to us, to continue in that program for the foreseeable future. But we just don't know how many shares we'll be able to repurchase. We've had pretty good success in the first 2.5 months of the program of repurchasing 2.7% of the shares. There's no guarantee we'll be able to acquire that many at reasonable prices at the next three-month period.

Thank you very much. I appreciate it.

Steve Shaw, Sidoti & Co.

Just regarding the velvet production in the US facility, is there a point where you guys sort of step back and evaluate it and ask yourselves if it still makes sense to compete against the imitation velvet? If so, will you guys scrap the facility altogether or will you switch to making another product there?

That's a good question. We make the best kind of velvets there are, and the demand for them has just continued to decline over the last number of years. We're the only producer of that. But that's a good question, whether customers will continue buying these woven velvets in the quantity needed to support the operation at these higher prices. The indication so far since the price increase is more yes than no, but time will tell. But I can tell you though we'll do whatever we need to do in that facility to shore up the profitability.

The velvet category has been an important category for Culp for a number of years. We're the only one in it, so we've been a bit reluctant to take any major moves. We are -- it's turning into more of a niche product category rather than a volume product category as it's been over a number of years. We're still optimistic that this category, although it will be smaller volume with higher prices, can still work. But if it doesn't work, for example, we've got the woven texture capacity at that plant that can be just fine in that plant. We'd like to keep a US one plant US presence if any way possible. We think that's a wise thing to do in this environment.

Thank you guys.

At this time, we have no further questions.

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

Thank you.

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