Culp Inc (CULP) 2015 Q4 法說會逐字稿

Good day and welcome to the Culp, Incorporated, fourth-quarter 2015 conference call. Today's call is being recorded. At this time, for opening remarks in 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 2015.

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 SEC, including the Form 8-K filed yesterday, 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 of 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 Culp.com.

A slide presentation with supporting summary financial information and additional quarterly performance charts are also available on the Company's website and 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 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, and Ken will then update everyone on the financial results for the quarter and the year. I will then update you on the strategic actions in each of our businesses; and after that Ken will review the first-quarter business outlook.

Culp delivered another solid performance in 2015 as we achieved higher sales, reported a 21% increase in pretax income, and earned a return on capital of 29%. Notably, this is the sixth consecutive year of overall sales growth and a new record year for mattress fabric sales.

Throughout the year we have continued to execute our strategy, with a focus on design creativity and product innovation supported by exceptional service for our customers. Together these efforts have driven our sales performance, both with existing customers and new customers.

Our ability to sustain excellence in creating innovative fabrics that meet changing customer demand is an important advantage for us. We remind ourselves every day that we compete in a fashion- and product-driven business. As a result of our progress over the last year, we believe we have enhanced our leadership position in both businesses, and we look forward to continued success in the year ahead.

Importantly, we achieved excellent free cash flow of $15.1 million in the year just ended, up from $13.8 million. As a result we were pleased to announce yesterday that our Board of Directors approved a special cash dividend of $0.40 per share, which is in line with our capital allocation strategy.

Also, the Board approved our regular quarterly cash dividend of $0.06 per share. This action reflects our strong financial performance and our commitment to delivering value to our shareholders.

At the same time, we have the financial strength to make strategic investments necessary to enhance and expand our production capabilities and take advantage of additional growth opportunities this coming year and in the future. I'll now turn the call over to Ken, who will review the financial results for the quarter.

Thank you, Frank. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website that cover key quarterly and annual performance measures. We have also posted our capital allocation strategy.

Total sales for this quarter were $78.8 million, up 6.5% from the fourth quarter of last year. For the year, sales were $310 million, up 8% over last year. It is important to note that this fiscal year had 53 weeks, compared with 52 weeks the year before.

On a pretax basis for the quarter we reported income of $6.7 million or 8.5% of sales, compared with $4.1 million last year, reflecting a 62% increase. For the year we reported pretax income of $23 million or 7.4% of sales, compared with $19 million the year earlier, or 6.6% of sales last year.

Adjusted net income for the quarter, a non-GAAP measure, was $5.6 million or $0.45 per share, up 67% from the prior-year period. For the year, adjusted net income was $19.4 million, up 23% compared with last year.

Overall annualized return on capital was 29%, compared with 26% last fiscal year.

The Company's overall adjusted effective income tax rate for fiscal 2015 was 15.7%, compared with 17.6% for the same period last year. This adjusted effective income tax rate or ongoing estimated cash tax rate represents income tax expense for Culp's non-US entities divided by consolidated income before taxes.

This information is important because the Company currently does not pay cash taxes in the US, nor do we expect to for a number of years, due to approximately $32 million in loss carryforwards as of the end of fiscal 2015. It is important to note that our NOL balance has been reduced by $31 million over the last four fiscal years at an average of close to $8 million per year.

Here are the results for our two businesses. For mattress fabrics, we reported $48.2 million in sales for the fourth quarter, up 10.4% as compared with the fourth quarter of last year. We experienced sales gains in all three of our key product categories including our mattress cover business.

For the year mattress fabric sales were $179.7 million, up 11.8% over last fiscal year, setting a new sales record. Operating income for this segment was $7.1 million for the fourth quarter, up 58% from the same period last year. Operating income margin was 14.7% of sales, compared with 10.3% a year ago.

For the year, operating income was $21.7 million, compared with $17.5 million last fiscal year, a 24% improvement. Operating income margin for fiscal 2015 was 12.1%, compared with 10.9% last year.

The overall operating margin for mattress fabric showed steady sequential improvement during fiscal 2015, beginning with 10.8% in the first quarter and increasing to 14.7% in the fourth quarter. Contributing to this margin improvement has been the growth in sales, along with the benefits coming from the capital investment program.

Also contributing to the income and margin improvement, especially for this quarter as compared to last year, was the significant operational improvement coming from our mattress cover business. We are also seeing some raw material price reductions, although recently prices have become more stable.

Annualized return on capital for the mattress fabric business was 34%, compared to 29% for last fiscal year. Although capital employed for the mattress fabric business did increase from the previous year due in large part to sales growth, operating income grew at a faster pace, thus contributing to the improvement in return on capital.

Now let's look at upholstery fabrics. Sales for the fourth quarter were $30.7 million, compared with $30.4 million in the fourth quarter of last year. For the year, upholstery fabric sales were $130.4 million, up 3% over last fiscal year.

The upholstery fabrics business reported operating income of $1.9 million, a 53% improvement over the fourth quarter of last fiscal year. Operating income margin was 6% of sales, compared with 4% in last year's fourth quarter. A key factor in this improvement has been the higher margins achieved on new product introductions.

For the year, operating income was $8.1 million, compared with $8 million a year ago. Our operating income margin for the year was 6.2%, compared with 6.4% for last year.

Annualized return on capital was 49%, compared with 41% last fiscal year. The return on capital in this business continues to be impressive, with growth in operating income while capital employed decreased compared to the previous year.

Before I move on to the balance sheet, let me briefly comment on SG&A. Overall SG&A increased 31% over fourth quarter of last year.

Although some of the increase can be attributed to revenue growth and other factors, the majority of the increase was due to higher incentive compensation expense. Given the close to 50% increase in operating income over last year's fourth-quarter results, coupled with a significant increase in economic value added, or EVA, which is the metric that drives our incentive and compensation program, additional bonus expense needed to be recorded in the fourth quarter.

Now turning to the balance sheet, we are pleased to end the fiscal year with a strong financial position. The Company generated $15.1 million in free cash flow after investing $10.5 million in CapEx. The $15.1 million is above last year's free cash flow of $13.8 million.

Both of our businesses did an outstanding job in managing working capital, which contributed to the strong free cash flow this fiscal year. During the year we used the free cash flow to build our net cash position by approximately $7 million and to return $8.3 million of cash to shareholders through dividends and share repurchases.

Looking ahead to fiscal 2016, we expect another good year of free cash flow, with capital expenditures projected to be $7.5 million to $9 million and modest growth in working capital.

As of year-end we reported $39.7 million in cash and cash equivalents and short-term investments. Our cash position broken down by country at year-end is as follows: cash located in the US was approximately $4 million, while cash located outside the US totaled $36 million.

Total debt at the end of fiscal 2015 was $2.2 million, which represents the final installment on our term loan due in a couple of months. Notably, our net cash position, or cash minus total debt, was $37.5 million at the end of the year, the highest net cash level in Culp's history.

With regard to our share repurchase program, during this fiscal year the Company purchased 43,000 shares of Culp common stock for $745,000 at an average price of $17.30. All these shares were purchased in the first half of the year. We have $4.3 million available for share repurchases under our current authorization.

Importantly, since June 2011 and including the special and regular dividends to be paid next month, the Company will have returned approximately $35 million to shareholders in the form of regular quarterly and special dividends and share repurchases. Frank?

Thank you, Ken. I'll now provide you an update on both of our operating segments. We'll start with mattress fabrics. Our mattress fabrics business had another strong performance in the fourth quarter, pushing our annual sales to a new record level in fiscal 2015.

These results reflect solid execution of the strategic plan that we laid out at the beginning of the year, with consistent growth and progress throughout the year. The fourth-quarter results clearly demonstrate the success of this plan, as we more fully realize the benefits of the $9.5 million capital investment program.

We are very pleased with our sales growth this year, which has outpaced the overall industry growth. Our focus on design and innovation sets us apart in the mattress fabric marketplace, and we continue to have favorable placements, with new product rollouts to our customers.

Our product mix of mattress fabrics and sewn mattress covers across all price points and style trends has allowed us to execute our vision to deliver a full design package from fabric to finished covers. Our design team has done an excellent job, and we have continued to support these efforts with investments in the latest technologies and software, including an enhanced new website to leverage our talents and our Culp Home Fashions brand.

We also made notable progress in our operating performance during fiscal 2015, with the most significant improvement evident in the fourth quarter as we neared completion of our expansion projects. In addition to the greater operating efficiencies, we were able to benefit from some lower input cost and fewer weather disruptions than we experienced during the fourth quarter of the previous year.

While we still have some work to do to complete with the new equipment, our capital investments have already met our expectations, with added capacity, enhanced finishing capability, and better overall efficiency and throughput. Importantly, we've also created a longer-term strategic infrastructure that will support our future growth initiatives, and we will continue to make sound investments to improve our competitive advantage.

We're especially pleased with the year-over-year evolution of our mattress sewn cover business, which further supports our diversification strategy and enhances our strong value proposition. We look forward to opportunities ahead for another strong performance in both of these areas during the coming year.

Now I'll comment on upholstery fabrics. Overall, we are also pleased with the steady growth in sales and improved profitability in this business for the past year. Notably, this marks the sixth straight year of annual sales improvement.

These results reflect the continued success of our product-driven strategy with a focus on design and innovation. This strategy has allowed us to diversify our customer base and target additional end-user markets, including the hospitality market and the lifestyle retail category. Additionally, we experienced higher demand for our cut and sewn kits in the last year, which further supported our sales for the year.

Our global platform provides significant manufacturing flexibility, and we have continued to leverage this capability to meet changing customer demand. Sales of China-produced fabrics accounted for approximately 92% of upholstery fabric sales in fiscal 2015, providing a diverse product mix of fabric styles and price points with outstanding service and quality.

Culp has a proven reputation as an industry leader known for innovative products and creative fabric designs. Our ability to keep pace with current style trends is a critical advantage for our customers, and we are encouraged by the favorable showing at the recent April Furniture Market, with significant new placements. We believe Culp is well positioned for sustained growth in upholstery fabrics, especially as the overall economy improves, with a more stable US housing market and higher consumer spending for home furnishings.

I would now like to review again with you our capital allocation strategy. We have been and continue to be in the very fortunate position of generating significant free cash flow, above the requirements to grow our business organically and maintain a strong net cash position. Therefore, I would like to review how we prioritize our use of capital and what you can expect from us.

The first priority for us is investing in our existing businesses with working capital and capital expenditures to grow organically. We strongly believe that building our business internally with existing and new customers and new customer segments offers the highest return with the least risk.

Secondly, we initiated a regular quarterly dividend three years ago at an annualized rate of $0.12 per share and we've increased it 3 times to its current level of $0.24 per share on an annual basis. Our goal is to grow the regular dividend annually on a moderate basis over the years ahead, based on our performance.

Third, we are open to strategic acquisitions in our mattress fabrics business. As you may remember, we've invested $22 million in three great acquisitions in this segment in fiscal 2007, fiscal 2009, and fiscal 2014, all of which added significant value to our business. We will continue to be disciplined and patient, however, with any acquisition in this area that we consider.

Fourth, with respect to share repurchases, because we do not want to decrease our available float we are only interested if the market is valuing Culp at what we would consider an opportunistic price.

Fifth, we want to maintain a net cash position at a level that reflects 10% of annual sales; or currently, that is $31 million. Importantly, this cash level helps Rob and me sleep very well at night and always have the dry powder to be opportunistic.

It also gives our customers confidence that Culp will be around for many years and can and will invest as necessary to provide more value to our customers and support their growth. Also, having a strong financial position is contributing significantly to our thinking about and running our businesses for the long term.

After the above-mentioned priorities and assuming an acquisition does not materialize, we expect to continue generating free cash flow that exceeds our net cash target level. Therefore, the Board will consider returning funds above our net cash target level, as measured at fiscal year-end, by way of a special dividend. Importantly, considerations for such distribution would include cash availability in the US, the economic and business outlook at the time, as well as the possibility of funds being required for an acquisition in the near or medium term.

Now I would like to link our capital allocation strategy to what we accomplished in fiscal 2015. First, with respect to investing in organic growth, we built working capital less than $2 million for the year, which supported the growth of both of our businesses. Additionally, we spent $10.5 million in CapEx, most of which in our mattress fabric area.

Second, as implemented this past November, we increased our regular quarterly dividend by 20% to the current level of $0.24 a share on an annual basis. Third, we repurchased 43,000 shares.

Fourth, we built our net cash position to $37.5 million at year-end, well above the $31 million target level. And therefore, as announced yesterday, the Board approved a $0.40 per share special dividend to be paid next month.

Looking ahead to the coming fiscal year, here are our thoughts as to how we see things. We expect another year of strong gross cash flow, which we defined as net income plus depreciation and amortization and other non-cash items.

With respect to free cash flow, which includes investments in working capital and CapEx, we expect the amount generated to approximate the previous two years' level. Therefore, as outlined in our capital allocation strategy, and assuming no acquisitions, we are optimistic that the Company will again be in a position to return funds to shareholders.

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

At this time we expect overall sales to be up 1% to 4% as compared with the first quarter of fiscal 2015. It is important to note that the first quarter of fiscal 2016 will have one less week than the first quarter of the previous year, or 13 weeks compared with 14 weeks.

We expect first-quarter sales in our mattress fabrics business to be up 4% to 8% as compared with the same period a year ago. Operating income and margins in this segment are expected to be moderately higher compared with the same period a year ago.

In our upholstery fabrics business we expect first-quarter sales to be slightly lower compared with the first quarter of last year. We believe the upholstery fabrics segment's operating income and margins will be flat when compared with the same quarter of last year.

Considering these factors we expect to report pretax income for the first quarter of fiscal 2016 in the range of $5.2 million to $5.7 million. Pretax income for last year's first quarter was $5.5 million.

In addition, based on our current budget, capital expenditures for fiscal 2016 are expected to be approximately $7.5 million to $9 million, primarily related to our mattress fabrics business. Depreciation and amortization, including stock-based compensation, is expected to be approximately $7 million.

Finally, the Company expects, as Frank indicated earlier, another good year of free cash flow even after a higher than normal level of capital expenditures and modest growth in working capital. Frank?

We are pleased with Culp's performance in fiscal 2015 and our ability to execute our strategy and enhance our leadership position in a global marketplace. Our consistent top-line growth reflects our ability to leverage our outstanding design capability and deliver a wide range of innovative fabrics that keep pace with customer demand and style trends.

We are well positioned to support this continued growth in both businesses with our flexible and scalable global manufacturing platform, backed by exceptional customer service. At the same time we've maintained a solid financial position and generated strong free cash flow, allowing us to reward our shareholders with significant dividend payments and share repurchases.

Above all, we're committed to outstanding performance for our customers as a financially stable and trusted source for innovative fabrics. We are very excited about the opportunities before us as we look ahead to fiscal 2016 and beyond.

With that, we'll now take your questions.

(Operator Instructions) Kevin Tracey, Oberon Asset Management.

First, could you help me break down the growth in your mattress fabrics segment for the year? Maybe first between growth in terms of unit sales versus pricing; and then secondly how many points of growth you think are being added from your mattress covers business.

Kevin, it's a very good question. Unfortunately, none of that do we break out. Let me give you -- Ken and I both will give you some overall comments.

Most of the growth in the year is with unit growth rather than ASPs, and then we did have -- the growth in the mattress cover business was up marginally for the year. So not a lot for the year. Certainly for the fourth quarter, but not for the year.

Okay, that's helpful. Thanks. Then can you just help us understand what we should expect going forward? Because it would seem like you're growing, I guess, well above market growth rates.

You've pointed us towards GDP growth in the past as a good metric for tracking the market growth. And the growth was just very strong this year, and the forecast for the first quarter is for more good growth. So how should we think about the, I guess, growth over the next three to five years in this business?

Well, that's another very good question. What we've indicated before to all of the investment community is that, with the share that we already have in the industry, we believe we would grow certainly at least at industry growth plus some market share.

Obviously, you point out correctly, we seem to be growing faster than that. And while I certainly hope that will continue, I think I would stick with the comments we've made that we plan and hope to grow at somewhat more than the industry growth.

I think the factors that are contributing to us performing above those, that longer-term guidance we've given, is the success from our innovative fabrics. We're just simply getting better at that than maybe -- and as a result we are getting more placements with more suppliers -- with more customers, I'm sorry.

Then when you couple that with the exceptional service we're providing, the customers come to trust us. And as the industry players are getting bigger and consolidating more among fewer, larger people, they need large suppliers that they can trust and rely on.

The demands also from the larger customers are getting more. They're not going to be less. So it takes a larger, well-capitalized company with modern equipment and the resources we have to take care of them.

Maybe Kevin, the strategy of focusing on innovation and modernizing our equipment is -- appears to be working pretty well and at a level higher than our expectations.

Okay, great. What do you reckon your, I guess, market share is at today?

That's not a number we publish and that's -- there's no market -- there is no really private or public data on that. So I would just say that it's a significant piece of that market. I would tell you we believe we are equal to -- our size is equal to the combined size of number two and number three competitors.

Okay; great. Then just a last quick question on the margin. Is it a reasonable expectation for the mattress business, 11.5% to 12.5%, still? You cited raw material prices have improved, and you certainly did a lot better than that in the fourth quarter. Just wanted to check in on that.

Yes, I think I would still stay with the 11.5% to 12.5% over the long haul. Last year 12.1% margin, as you note; and this year certainly looks like growth in margin with the CapEx program we're doing, with the benefit of the lower input cost.

But we do have to remember we're benefiting from these lower oil prices right now. We've been in this business a long time, and we've seen a lot of volatility in oil over the years.

Maybe we're now in a period where the trading range of oil isn't going to be so volatile. Maybe it's $45 to $75 a barrel instead of $40 to $150.

So I hesitate to up that target range because we're certainly now benefiting from the lower input cost that the lower energy prices are bringing to us.

The other thing, too, is when you look at how we've been performing, I mean, the 11.5% to 12.5% margin, I mean that -- we have to remember that we've got to stay competitive. Also, I mean, a 35% or so return on capital -- those together is really outstanding performance.

So we have to measure all that, plus we have to -- from time to time we'll get pressure from our customers on pricing pressure. So all those mix in to our pricing and our projected margin as we look out in the future.

Yes. I think, Kevin, we definitely -- as these -- there's a lot of advantages to our key customers getting larger. But as they get larger they demand more, and that does include price.

Nevertheless, I think there is an opportunity, while oil prices are favorable, to exceed that long-term margin target range.

Okay, great. Well, thank you very much and keep up the good work.

(Operator Instructions) We have no further phone questions at this time.

Thank you, operator. And again, thank everyone for your participation and your interest in Culp. We look forward to updating you on our progress next quarter. Have a great day and a good weekend.

And that concludes today's call. Thank you for your participation. You may now disconnect.