Culp Inc (CULP) 2016 Q4 法說會逐字稿

Welcome to the Culp Incorporated FY16 fourth-quarter conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Drew Anderson. Please go ahead, ma'am.

Thank you. Good morning. Welcome to the Cult conference call to review the Company's results for the fourth quarter of FY16.

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, 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 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 Investor Relations section of the Company's website at culp.com.

A slide presentation with supporting summary financial information and additional annual performance charts are 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 of Culp. 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 with some brief comments and Ken will review the financial results for the quarter. I will then update you on the strategic actions in each of our businesses. After that, Ken will review our first-quarter business outlook and then I will be happy to take your questions.

Culp delivered another solid performance in FY16, as we reported our seventh consecutive year of overall annual sales growth. Both of our businesses achieved a strong operating performance with significantly improved margins, profitability and return on capital over the prior year. Notably, our pretax income for the year was the highest in the Company's history.

Further, we achieved excellent free cash flow of $15.2 million, slightly above last year's $15.1 million, after spending $11.5 million on CapEx. Throughout this fiscal year, we have continued our long-term focus on design creativity and product innovation, supported by exceptional customer service.

Our ability to sustain excellence in creating innovative fabrics and offering a product mix that makes changing customer demands is a key success factor in a product-driven business. As a result, we have further enhanced our competitive position in both businesses and we look forward to continued success in the year ahead.

We are pleased to announce today that our Board of Directors approved a special cash dividend of $0.21 per share, in line with our capital allocation strategy, as well as approved our regular quarterly cash dividend of $0.07 per share. This action, together with our $2.4 million in share repurchases during the third quarter of this year, totaled $5 million on funds returned to shareholders related to FY16, which is consistent with the prior two years.

This reflects our commitment to delivering value to our shareholders. At the same time, we have the financial strength to make the strategic investments necessary to further enhance our production capabilities and take advantage of additional growth opportunities in the coming year.

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

Thanks, Frank. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website to cover key annual performance measures. We have also posted our capital and allocation strategy. Total sales for this quarter were $77.3 million, down 2% from the fourth quarter of last year; total sales for the fiscal year were $312.9 million, up 1% over last fiscal year.

On a pretax basis for the quarter, we reported income of $7.2 million compared with $6.7 million, reflecting a 7% year-over-year increase. Pretax income for FY16 was $27.9 million, up 22% compared with the previous year and the highest annual pretax income in Culp's history.

Adjusted net income for the quarter, a non-GAAP measure, was $5.8 million, or $0.47 per share, up 4% from the prior-year period. Adjusted net income for the fiscal year was $22.7 million, up 17% over last year. Overall return on capital was 32%, the highest return in the Company's history, compared with 28% last fiscal year.

The Company's overall adjusted effective income tax rate through the fourth quarter of FY16 was 18.6%, up from the 15.7% for the same period last year due to taxable foreign exchange gains associated with our China operation and the mix of earnings between the Company's US parent and foreign subsidiaries. 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 we do expect to for two to three more years due to approximately $18 million in loss carry forwards, or NOLs, as of the end of FY16. Importantly, our NOL balance has been reduced by around $33 million over the last three fiscal years at an average of just over $10.5 million or year.

Here are the results for our two business. For mattress fabrics, we reported $48.9 million in sales, up 1.5% compared with the fourth quarter of last year. For the full year, mattress fabrics sales were $186.4 million, a new record and up 3.7% over the prior year.

Operating income for the segment was $7.2 million for the quarter, up 2% from the same period last year. Operating income margin was 14.8% of sales compared with 14.7% a year ago. For the year, operating income was $26.5 million, a 22% increase over the previous fiscal year and also a record performance.

Operating income margin was 14.2% compared with 12.1% last year. Contributing to this margin improvement are the benefits coming from our capital investment programs. Over the last two fiscal years, we have invested approximately $20 million in capital expenditures in this business.

We also benefited from lower raw material costs and lower operating expenses due to more favorable exchange rates in Canada, offset somewhat by increased customer pricing pressures. Return on capital for the mattress fabrics business was 37%, a new record compared with 34% a year ago, an impressive accomplishment given a capital intensive business.

Although capital employed for this business did increase from the previous year due primarily to higher inventory balances, operating income improved at a faster pace, thereby contributing to the improvement in return on capital. Inventory balances have trended higher in this business as customers are requiring us to hold higher inventory levels of key products.

Now let's look at upholstery fabrics. Sales for the quarter were $28.4 million compared with $30.7 million in the fourth quarter of last year, representing a 7.5% decline. This reduction was primarily due to our customer mix strategy and softer retail demand for furniture.

Sales for the year were $126.4 million, down 3.1% as compared to the previous fiscal year. The upholstery fabrics business reported operating income of $2.3 million, a 24% improvement over the fourth quarter of last fiscal year. Operating income margin was 8.1% of sales compared with 6% for the fourth quarter of last year.

For the full year, operating income was $11.3 million, up 39%, and operating income margin was 8.9% compared with 6.2% last fiscal year. An important factor in the improved profitability in this business has been the higher margins achieved on new product introductions.

We continue to stress the importance of innovation and the improved margins reflect the success of that strategy. We also benefited from a more stable cost environment in China, with lower input costs, with raw materials and the favorable currency impact more than offsetting the continued increases in labor and other operating costs. It is important to note that we are also starting to see some pricing pressures from key customers.

Return on capital was 65%, a new record compared with 49% last fiscal year. The return on capital in this business continues to be impressive, with significant growth in operating income while capital employed increased only moderately compared to the previous year.

One final comment regarding our operating performance. As stated earlier, both divisions benefited from favorable currency rates as compared to the previous year. A key point to consider in looking at our favorable currency impact is the fact that both our Canadian and Chinese operations bill mostly in US dollars, while operating expenses are paid in the local currency. Thus as the Yuan or Canadian dollar weakens relative to the US dollar, our operating costs go down. Of course, the opposite is true if the currency strengthens.

Now let me turn to the balance sheet. We are pleased in FY16 with a strong financial position. As of year-end, we reported $42.1 million in cash and cash equivalents and short-term investments, up from the previous year's ending balance of $39.7 million with no debt.

This year-over-year increase in cash was achieved despite spending $11.5 million in capital expenditures, $8.1 million in dividends, and $4.6 million on debt repayments and share repurchases, for a total of $24.2 million spent during the fiscal year. Free cash flow for the year was $15.2 million, slightly up from last year's $15.1 million, after spending $11.5 million in capital expenditures.

As we look to FY17, we expect another good year of free cash flow, with capital expenditures projected approximate $11.5 million spent during FY16 and modest growth in working capital. We are well-positioned to make the capital investments to support our growth strategy and continue to return funds to shareholders.

As of year end, our cash position in short-term investments broken down by country is as follows: cash located in the US, Canada and the Cayman Islands was approximately $34 million, while cash located in China was approximately $8 million. This is a reversal from just 16 months ago, when in January 2015, we had $21 million in cash located in China, representing almost 60% of our total cash and short-term investments balance and those funds were mostly in Yuan deposits.

With respect to our share repurchase program, the Board has approved an increase in the authorization for the Company to acquire its own common stock from the $1.9 million currently available back to a total of $5 million. Notably, since FY12 the Company has repurchased approximately 10% of its outstanding shares at an average price of $10.66. Since June 2011, and including the special and regular dividends to be paid in July, the Company will have returned approximately $43 million to shareholders in the form of regular quarterly and special dividends and share repurchases.

Before turning the call back to Frank, let me make a few more comments about our balance sheet. As we've reported in the past, we have been very successful in our strategy to mitigate foreign exchange, or FX, exposure. Through maintaining a natural hedge, with respect to assets and liabilities denominated in Canadian dollars and Chinese Yuan, we have been successful in keeping FX charges very low this fiscal year, totaling just $6,000 despite significant weakening of both currencies over the past year.

We have also mitigated further FX exposure in China by making the strategic decision to move significant amounts of earnings and profits from Culp China to our international holding company located in the Cayman Islands. Since April 2015 and through this month, we have moved almost $36 million from Culp China to our Cayman Company. Accordingly, our cash balance in China has been reduced to approximately $5 million as of today.

We believe that moving excess funds out of Culp China to our Cayman Company not only mitigates our foreign exchange exposure going forward but also provides substantially increased flexibility to use those funds for various strategic purposes with minimal administrative hassle.

Obviously, a major point of consideration in this strategy has been the potential impact to our US NOLs. It is important to note that there is no impact to our NOLs unless we bring funds from Cayman to the US. As such, the plan is to hold these funds in Cayman until the NOLs are fully utilized through normal US earnings which, at our recent earnings rate, we estimate could take two or three years.

Frank?

Thank you, Ken. I will now provide you with an update on both of our businesses. Let's start with mattress fabrics.

Our results for the fourth quarter were in line with expectations, reflecting consistent execution of our strategy throughout the year. Notably, we delivered another record performance for the year, topping the previous year's record with the highest annual mattress fabric sales and profits in Culp's history. We are especially pleased with our steady sales growth this year, which has outperformed overall industry trends.

In addition, we have continued to make the strategic investments for the future and expand our operations, in line with expected demand. Our operating performance in FY16 includes the benefits of capital investments with increased capacity, enhanced finishing capabilities and overall improved efficiency in throughput, and lower input costs.

Importantly, we have enhanced our ability to meet our growing customer demand with excellent service and delivery performance. With our outstanding performance in the year, we have established a strong competitive position and we are excited about the opportunities to build upon our success.

Looking ahead, we continue to move forward with our multi-year expansion plans. We have already commenced work on additional projects in our North Carolina facilities to add more production capacity, expand our design facilities and significantly enhance our distribution capabilities. Additionally, Phase 2 of our Canadian expansion is expected to begin early this fiscal year, including additional equipment, finishing capabilities and a new distribution platform that will allow us to improve deliveries and better serve our customers in Canada.

Our focus on design and innovation continues to distinguish our products in the mattress fabric marketplace. Our product mix of mattress fabrics and sewn covers across most price points and style trends has allowed us to execute our diversification strategy and enhance our strong value proposition.

We are also pleased with the recent growth in CLASS, our mattress cover business, as we call it. Importantly, CLASS has allowed us to reach new customers in additional market segments, especially the growing Internet bedding space, with solid growth prospects. We look forward to the opportunities ahead for another strong performance in both mattress fabrics and sewn covers during FY17.

Now let's move to upholstery fabrics. Our sales for the fourth quarter were somewhat lower than expected, reflecting our customer mix strategy and a softer retail demand environment for furniture. However, even with lower sales, we were pleased with our overall operating performance and improved profitability compared with the prior year's fourth quarter.

For the full year, Culp continued to deliver a solid operating performance and further enhanced our reputation as an industry leader with exceptional products and service for our customers. Our strategic focus on three critical areas: driving design and innovation, providing a diverse range of products, and expanding our customer base, both to new end-user markets as well as to a broader global marketplace, was the key driver of our performance for the year.

Our China platform has provided significant manufacturing flexibility and we have continued to leverage this to support our product-driven strategy. Sales of China-produced fabrics accounted for 91% of our upholstery fabric sales in the year and our improved operating performance reflects a more favorable mix of fabric styles and price points, as well as a more favorable currency exchange rate in China.

Looking ahead, in spite of current retail market conditions, we remain confident about our long-term opportunities for this business. Our recent showing at the April furniture market was very encouraging, with strong placements for Culp. Customer response to our latest product offerings was very favorable, especially with the introduction of our new performance line of highly durable stain-resistant fabrics.

We will continue our relentless drive to meet the changing demands of our customers and keep pace with current style trends. As such, we believe we are well-positioned for growth in upholstery fabrics, especially as a stronger economy and a more stable US housing market support higher consumer spending for home furnishings.

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

At this time, we expect overall sales to be comparable to slightly lower than the first quarter of FY16 due to a softer retail environment. We expect first quarter sales in our mattress fabrics business to be comparable to the first quarter of FY16, which was a record first-quarter performance in both sales and profitability. Operating income and margin in this segment are expected to be comparable to the same period a year ago.

In our upholstery fabrics business, we expect first quarter sales to be down slightly compared with the first quarter of last fiscal year. We believe the upholstery fabrics segment's operating income margin will be comparable with the same quarter of last year. Considering these factors, we expect to report pretax income for the first quarter of FY17 in the range of $7 million to $7.5 million. Pretax income for last year's first quarter was $7.4 million.

With respect to capital expenditures, based on our current budget, capital expenditures for FY17 are expected to approximate $11.5 million spent in FY16, primarily related to our mattress fabrics business. Depreciation, amortization and stock compensation expense is expected to be approximately $10 million. Additionally, the Company expects another good year of free cash flow even after another year of higher-than-normal capital expenditures and modest growth in working capital.

Frank?

We are pleased with our performance in the year and our ability to execute our strategies. Our success in the marketplace reflects our ability to leverage our outstanding design capabilities and deliver a wide range of innovative fabrics that keep pace with customer demand and style trends.

We are well-positioned to support our continued growth with our flexible and scalable global manufacturing platform, backed by exceptional customer service. We've continued to make the right investments to enhance our design and production capabilities in order to strengthen our competitive advantage. At the same time, we have followed a disciplined capital allocation strategy, allowing us to reward our shareholders with significant dividend payments and share repurchases.

Above all, we are committed to outstanding performance for our customers as a financially stable and trusted source for innovative fabrics. As Rob and I look ahead to the years to come, we are even more excited and bullish than we have ever been. We are fortunate to be surrounded by an extraordinary group of seasoned associates around the globe who continue to outperform our expectations. They inspire us every day by their dedication, their talent and their can-do attitude in serving our customers.

With that, we will now take your questions.

(Operator Instructions)

Budd Bugatch, Raymond James.

Good morning, Frank. Good morning, Ken. Congratulations on the year.

Good morning, Budd.

I guess I would like you to hopefully help us and give us some quantification of the character and the growth in the mattress segments. You brought up CLASS, or the mattress cover business versus the yardage business that you have -- has been your legacy business. You've now been, I think, growing CLASS for the last four or five years. Can you give us a look inside of the segment to give us the character and the growth of the yardage and maybe in terms of units and CLASS in terms of covers or how that's been growing and what it is year over year?

Budd, that's not a -- we don't break that out as of today, but let me give you this. We are in the -- of our mattress fabric sales in the 10% range, and growing.

What is 10%? Is it covers --

Of our mattress fabrics covers. Yes, mattress fabrics covers are 10% of our annual sales so still a relatively small portion of that overall business.

So make sure I'm clear, 10% of total Culp or 10% of the segment?

Of the segment.

And the last year at this time, what would it have represented in last year?

Let's just say a nice increase.

Okay.

That will work in your calculator, won't it?

It still comes up with error but nice is not quantifiable. (laughter) Unless you want to give us a range of nice?

We are growing; we expect solid growth in that area.

Okay, and solid also has the same measure so I guess I'll -- you are talking about lapping the customer and product shift. Can you give us a feel of when you do a lap that shift of customers and I take it that this has been a conscious initiative of Culp?

Are you referring to upholstery fabric business?

In upholstery, in upholstery, sorry. In upholstery.

I would say third quarter of this coming year.

Okay and can you quantify for us what that, maybe what that drag was in the quarter?

I would say the decline in business over the quarter was a mixture of that trend and the softer environment.

How about parsing that in quantification; any way to do that?

More in the customer mix side.

Okay. So as you (multiple speakers) customer mix side, would you have had upsales?

I don't know; would not have.

Okay. All right. That's helpful. And lastly, the capacity for us in mattress fabrics, you talked about the Canadian side. Are you still going to be under pressure? And how much capacity are you adding?

We are not under any pressure from a capacity point of view. This is -- you may remember our mix is 80% internal. Our target mix is 80% internally produced, 20% external, so we've got ample capacity. But this just does give us more capacity in the knit area. As the business mix shifts between wovens to knits, we are positioned well for that. I don't see any capacity limitations.

Now, as I recall, you were pretty much out of room in knit machines in North Carolina; is that correct?

Out of room in North Carolina and we've expanded into Canada. That's correct, to allow us the area for expansion.

So how many knit machines are you adding in Canada?

Budd, that's not something we give up -- but, we give out, but we have ample capacity in Canada to handle our current and expected needs and we can add more in Canada. We have the space and the people to do that as necessary.

So you did have -- you had a great performance in FX, obviously between Canada and China, but as you add more capacity in Canada and the Canadian dollar, if it strengthens versus the US, does that present an operational or financial challenge that we should be aware of?

It does help us with the currency weakening in Canada versus the USD the past year, but remember all raw material costs are denominated in US dollars so the currency impact is only on the conversion cost in that facility.

So it is helped us this year and could hurt if the currency were to strengthen more. But I wouldn't -- it's not significant because the majority of cost of goods sold in mattress fabrics is in the raw material side.

So the conversion cost are probably just barely double-digits, right? Or is it a little more than that?

Well, we would say two-thirds, one-third in rough numbers, raw material and overhead cost

Overhead, as you come up with the overhead side of the -- overhead and labor is the conversion cost, right?

Correct. Correct.

Okay, all right, Frank. Thank you very much. Good luck on the current periods and the year.

Super. Thank you, Budd.

(Operator Instructions)

Dillard Watt, Stifel.

Thanks. Good morning, everybody. I believe you discussed maybe in the past, somewhere around a 11% or 12% EBIT margin goal, I guess you could call it, for the mattress business. Obviously, we are sitting here in the end of FY16 at a much better number than that.

How should we expect margins to progress moving forward? Will you maybe be a little bit more aggressive on the sales front or maybe does that margin target simply move or maybe there's some other aspects like the FX or raw material issues that we've been discussing?

It's a good question, Dillard. I think I would say that we would move up our margins targets long-term up some but we have benefited from the lower input costs throughout the year. And we are prepared, if they would move up some raw material cost, we are not seeing that today and we have visibility throughout our second quarter and slightly into our third quarter. So -- but we are certainly enjoying historically low raw material inputs at the present time, which should mean we are above long-term target margins.

Got it. Any change on your comment for the mattress business, for the first quarter, basically I think you're guiding to flat sales? Is that more of a factor of we get a 1 percentage point more difficult year-over-year comparison between the fourth quarter and then the first quarter? Or did you see maybe a little bit of slowdown in the marketplace?

Well, I would answer that two ways. First, we are comparing against a record quarter in the first quarter of last year's sales and profits in that segment. And at the retail level, currently, it is just okay. Don't know if I'd call it weak in the bedding sector but it's certainly not strong; just okay.

Okay. That's helpful and then I know we talked about strong free cash flow for 2017. Do you still have an elevated CapEx situation this year? What are the primary sources of cash next year? Is that going to be some earnings growth or maybe there's some working capital improvements there? And then second part of that would be would we expect to see 2018 then at a more normalized level and what would that number be?

Okay, first part of your question. The free cash flow for the year ahead, we would expect that to come predominantly from earnings. Second part of your question, FY18 CapEx, while somewhat above historical levels, it will be lower than the last two years, current year and prior year. So high-single $7 million to $9 million range would be a rough estimate for 2018.

Perfect and that's something I can put in the calculator there so thank you guys so much and congrats.

Thank you.

(Operator Instructions)

Marco Rodriguez, Stonegate Capital Markets.

Good morning, guys. Thank you for taking my questions.

Good morning, Marco.

I had a couple of quick follow-ups here. Most of my questions have been asked but in terms of the upholstery side, you had mentioned last quarter that you had some issues on the revenue side due to weather and some customer push-outs. Did those push-outs close in Q4 as you had expected?

That was mostly on the mattress side.

That was more on the mattress fabric side. (multiple speakers)

I see, okay.

The (multiple speakers) production, the mattress fabric production. There was one plant in the US --

That was related to our Stokesdale plant earlier this year; that was on the mattress side.

Okay, got you. My fault. Then keeping on the upholstery side, you mentioned that the retail environment there, I guess is -- you've insinuated it 's weak for the upholstery side and for furniture. I'm just trying to better understand here, what are some of these dynamics that are out there that either you guys are seeing or your customers are saying they are seeing?

I guess we're hearing just a -- I don't know that anything specific comes to mind; just a weaker retail environment, we're hearing from our customers. Marco, I will share something I read a couple of days ago when they came out with the retail sales that showed that furniture was way down but other categories, like restaurants, were up.

So the -- I guess the point was people are spending more on eating out and maybe postponing buying furniture. I don't know but that was an interesting tidbit that I saw.

Got you. And so those discussions perhaps or any kind of information you're getting from your customers on the somewhat soft retail environment on the upholstery side, the mattress guys aren't seeing that?

Not as much.

Okay, got you. Then in terms of the gross margins in the upholstery side, you mentioned a couple items here that are really helping you out. One in particular was new product introductions. Can you maybe rank, in addition to lower raw material cost, et cetera, where is all this acceleration in the margin, gross margin coming from when you still have your revenues for FY16 for upholstery were down year over year?

Well, Marco, when you look at the past year, it's undeniable that the currency impact has been very strong. You've seen the weakness in the currency and as Frank talked about earlier, I mean, we -- on the China side, we pay all the expenses in the local currency so that has truly, truly helped. But that said, I don't want to take away from the innovation and creativity that's come through new products. So I think currency is very, very important. Raw material cost are important but innovation is all -- it has to be ranked up there as well.

Got you. Can you -- or do you know, how much of your revenue on the upholstery side are from new product introductions as far as a percentage is concerned?

Yes, we do, and that's not something that we disclose but I would say over the last several years, as we've really ramped up our efforts in the innovative fabrics area, it is a growing percentage.

Got you, okay.

(multiple speakers) It's something we are clearly focused on.

Got you. Okay. Then switching gears here, the strategy in China, which you guys alluded to a little bit earlier, removing the cash there to avoid some of the FX risk. Perhaps I'm not remembering correctly, but I thought that there was going to be some debt raised to make that transaction transpire. Was that done or not done or was there a change there?

No, no, Marco, that's a great question. We -- the strategy still in place. We just had higher cash flow during the fourth quarter and we were able to absorb that. Now looking ahead, as I said in the prepared remarks, we've transferred additional money this past month.

So looking ahead, we will have debt on the balance sheet at the end of first quarter, so that strategy will come into play for the fourth quarter. We just had stronger cash flow. Now, of course, if that pans out in the first quarter, we will pay the debt off as quick as we can.

Got you. That's helpful. Last question, and I will jump back in the queue. On your free cash flow guidance, obviously expecting solid numbers there. Just wondering, are you expecting growth year over year? And then also, how should we think about the progression of the CapEx spend through FY16? Or excuse me, FY17?

I think on the free cash flow. I mean, we've guided that's going to be another good year, so you look at the past two years. We've been at $15 million with the high level of CapEx. So I would say that's good guidance; that's going to be -- it's going to approximate the same type, the same level. With respect to CapEx, again, we are saying that we're going to be in the same range for FY17.

Right, but is it going to be top-heavy first half, second half, or is it going to be even throughout the year, the spend?

Pretty even. I don't see any gigantic quarters that would pressure us. I think there might be quarter blip here and there but nothing dramatic, I don't think.

Got you. Thanks a lot guys. I appreciate it

Dusty Henderson, Eagle Asset Management.

Hi, guys. Thanks for taking my call. Just one quick one. Your last 10-K indicates major customers for the mattress fabrics business include: Serta Simmons, Tempur Sealy, and Corsicana. It seems like your division is growing faster than the customers so are you selling to the online mattress guys, Tuft and Needle, Casper, Ghost Bed, like those people?

Yes, we are. In our -- in my remarks, I mentioned that our cut-and-sew operation, which we call CLASS, which we started three years ago, is now aggressively in that segment. And yes, we are selling most of those people.

Okay. Super and does that --

It represents an excellent opportunity for us.

Do they buy the mattress covers that we were talking about earlier?

Yes, they do.

They buy mattress covers --

Because most of that segment buys memory foam mattresses. Some limited hybrids but it's mostly memory foam. The memory foam mattresses take the mattress covers is what they buy. So we are ideally suited in the US to service those customers.

And as you may know already, they are very aggressive on the front end of their business. So having a reliable, fully-integrated source like us that has fabric as well as the sewn covers in North Carolina and Canada, it is a real competitive advantage for us and highly desirable for them for that new segment.

I agree; it sounds like you can be an arms dealer to the whole war, so --

We're excited about that category. There's differing opinions on the growth prospects there, but whatever it is, we are ideally suited to serve that area.

Interesting, thanks for filling me in. That's all that I have.

It appears we have no further telephone questions at this time.

Okay. Thank you, operator. And thanks, everyone, for joining us and we will forward to updating you on our first-quarter results in August. Have a good day.

This does conclude our conference. Thank you for your participation and you may now disconnect.