Culp Inc (CULP) 2018 Q2 法說會逐字稿

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Good day, everyone, and welcome to the Culp, Inc. Fiscal 2018 Second Quarter Conference Call. Today's conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Dru Anderson. Please go ahead.

Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the second quarter of fiscal 2018.

As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition and prospects of the company. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact.

The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q. You are cautioned not to place undue reliance on forward-looking statements made this morning, and each such statement speaks only as of today.

We undertake no obligation to update or to revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is included as a schedule to the company's 8-K filed yesterday and posted on the company's website at culp.com.

A slide presentation with supporting summary financial information and additional performance charts are 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.

Good morning, and thank you for joining us today. I would like to welcome you to the Culp quarterly conference call with analyst and investors. With me on the call today is Ken Bowling, our Chief Financial Officer.

I'll begin the call with brief comments, and Ken will then update you on the financial results for the quarter. And then I'll comment on our strategic actions in each of our businesses. And after that, Ken will review our third quarter business outlook, and we'll be happy to answer your questions.

Overall, second quarter sales were higher than expected. And we are pleased with the solid top line performance for both upholstery fabrics and mattress fabrics. Our results reflect our focus on product innovation and creativity and our ability to leverage the strength of our efficient global manufacturing platform. We've just completed a major transition period in our mattress fabrics business, and we expect to realize greater operating efficiencies from these changes going forward.

Our strategic initiative -- initiatives focused on product and customer diversification are producing favorable results for our upholstery fabrics business. Current demand trends in both businesses are encouraging. And as such, we are more optimistic about our sales growth in the second half of this fiscal year. Importantly, we have the financial strength to continue to make the strategic investments to enhance our operations, including potential acquisitions that support our growth objectives.

As noted in our press release, we also announced an increase in our quarterly cash dividend from $0.08 to $0.09 or $0.36 per share on an annualized basis. This is an important milestone as $0.36 per share is 3x the amount paid when we reinstated the dividend in July 2012, just over 5 years ago. This action is also consistent with our capital allocation strategy and confirms our commitment to generate value for our shareholders.

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

Thanks, Frank. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website to cover key performance measures. We've also posted our capital allocation strategy. Here are the financial highlights for the second quarter.

Net sales were $80.7 million, up 7% compared with the prior year. Pretax income for the second quarter was $6.2 million. The $6.2 million included approximately $400,000 of nonrecurring professional and legal fees associated with the proposed acquisition of a China business that did not close. Pretax income margin was 7.6% compared with 9.5% a year ago. Net income was $4 million for the second quarter compared with $4.5 million a year ago. The consolidated GAAP income tax rate was 34.2% for the second quarter compared with 37.5% for the second quarter of last year. The rate decrease was primarily due to the mix of earnings between the company's parent and foreign subsidiaries.

The company's overall consolidated adjusted income tax rate, a non-GAAP measure, for the second quarter was 14.2% compared with 17.8% last year. As a reminder, the company had approximately $9 million loss carryforwards as of the end of last fiscal year. The company now expects these loss carryforwards to be fully utilized during this fiscal year. Given current U.S. federal corporate income tax guidelines, the company expects to pay a blended income tax rate in the range of 25% to 30% for fiscal 2019 and 30% to 35% thereafter. Of course, all of these assumptions change if tax reform is passed.

Annualized consolidated return on capital was 25% compared with 34% a year ago.

Now let's take a look at our 2 businesses. For mattress fabric, sales were $48.6 million, up 7% compared with last year second quarter. Operating income was $6.6 million compared with $7.5 million a year ago, with an operating income margin of 13.5% compared with 16.4% a year ago. While we still achieved a solid operating margin of 13.5%, the decrease was due primarily to production disruptions from the extensive changes that took place across our production facilities during the first half of this fiscal year. We also incurred higher-than-expected expenses associated with new product rollouts. Annualized return on capital for mattress fabrics came in at a strong 30%. For upholstery fabrics, sales for the second quarter were $32.1 million, up 7.7% over the prior year. Operating income was $2.4 million for the quarter, slightly down from last year's $2.5 million. Operating income margin was 7.4% compared with 8.4% last year. Operating performance during the quarter was impacted by cost pressure associated with supply chain disruptions in China. Frank will discuss this issue in more detail later.

Annualized return on capital for upholstery fabrics business continue to be impressive coming in at 59%.

Here are the balance sheet highlights. As of the end of second quarter, we reported $49.1 million in total cash and investments with no outstanding debt. We paid off the debt during the second quarter. During the first half of this fiscal year, we spent $7.5 million on capital expenditures, which includes vendor financed payments and $4.6 million on dividend payments. Cash flow from operations for the first 6 months of this fiscal year was $10.2 million compared with $17 million for the same period a year ago. The decrease was primarily due to lower net income and a greater use of cash associated with working capital as compared to last year.

Looking ahead, we expect cash flow to be significantly stronger in the second half of this fiscal year, bringing the full year total to a level more comparable to last year's total.

With that, I'll turn the call back over to Frank.

Thanks, Ken. I'll start with mattress fabrics. We had solid growth in mattress fabric sales for the second quarter, as we again outperformed reported mattress industry growth trends in an uncertain marketplace. Our strategic focus on design, creativity and innovation and our ability to provide a diverse product offering across all price points, including mattress fabrics and sewn covers, have been a key drivers for our sales performance.

Sales for the second quarter of fiscal 2018 also reflected some aggressive marketing of some new product rollouts. We have made excellent progress enhancing our platform and production capability. As we as recently completed a period of major transformation across our North American manufacturing operations. As expected, we experienced some disruptions to our production throughout the second quarter as well as higher expenses associated with the product rollouts, as Ken noted earlier. However, we expect to realize greater operating efficiencies in the second half on a going-forward basis.

All of our knitting and other fabric forming equipment has now been placed into service in our expanded Stokesdale, North Carolina facility. And our U.S. mattress cover operation, called CLASS, is fully operational in its new location, also in North Carolina. We have also finished the installation of new equipment in our Canadian operation, and are now focused on further refinement of our overall inspection and quality processes there to support our continuous improvement initiatives. We are excited about the increasing sales contribution from our CLASS segment, our mattress cover business, as we have expanded our business with traditional customers and made impressive strides in reaching new customer markets, especially the fast-growing bed in a box base.

Additionally, our newest joint venture mattress cover production facility in Haiti will further strengthen our ability to grow our CLASS business. We have commenced production activities in Haiti and will continue to gradually add capacity, in line with expected demand. We also have the ability to utilize our China fabric and cut-and-sew platform there to expand our business to new markets. With the transformation of our North American operations and our global production capabilities for both fabric and sewn covers, we are very well positioned to meet demand in all segments of the market.

At the same time, we continue to look for supportive opportunities to add to our platform through acquisitions or other strategies that will support our growth. Looking ahead, Culp has a solid competitive position across all product categories, supported by a sustainable and efficient global platform with sufficient capacity and distribution capability.

Overall, we expect to see solid improvement in our quarterly operating results as we move into the second half of this year.

Now I'll turn to upholstery fabrics. We are pleased with the solid growth in our upholstery fabric sales for the second quarter. As we are benefiting from the success of our various growth initiatives. However, our operating performance was slightly affected by higher-than-anticipated freight cost associated with our China operation. During the second quarter, a forced Chinese government shutdown in certain textile dye mills for environmental control disrupted the supply-chain and we incurred additional freight cost in order to ensure and meet customer deliveries. We also experienced some impact from an unfavorable China foreign exchange rate.

Our results for the second quarter reflect the success of our product-driven strategy, highlighted by expanded sales of LiveSmart, our popular performance line of highly durable stain-resistant fabrics. We've also seen solid growth in sales of fabrics designed for the hospitality market, and we are excited about the opportunities to reach a more diverse customer base. We're exploring potential acquisitions in the hospitality market that will complement our upholstery fabrics business, which is principally in the residential market. We had an excellent showing at the recent October furniture market in High Point, North Carolina, and we are especially pleased with the favorable customer response to our performance line of fabrics, as many manufacturers were featuring this fabric in their showrooms. We have recently launched a new website specifically for this product line, along with more -- a more aggressive marketing campaign, and we remain optimistic about the sales opportunities for Culp in the second half of this year and beyond.

Looking ahead, we are encouraged by a more favorable market outlook as consumer spending for home furnishings is starting to pick up. We believe Culp is well positioned to benefit from any further improvement in demand trends, and we look forward to continued growth in the second half of this fiscal year.

Ken will now review the outlook for the third quarter, and then we'll take your questions.

We expect overall sales to be slightly higher as compared with the third quarter of last year. Mattress fabric sales are expected to be slightly higher than the same period a year ago. Operating income and margin in this segment are expected to be somewhat higher as compared to a year ago. In our upholstery fabric segment, we expect sales to be slightly higher than the same period a year ago. Operating income and margin in this segment are expected to be slightly lower as compared to last year as we expect higher shipment cost out of China and an unfavorable China exchange rate.

Considering these factors, the company expects to report pretax income for the third fiscal quarter in the range of $6.8 million to $7.4 million. Pretax income for last year's third quarter was $7 million. With respect to the full fiscal year, capital expenditures, including vendor finance payments, are currently expected to be comparable to the previous year and both related to additional improvement projects for mattress fabrics. D&A, or depreciation and amortization, added to stock-based compensation is expected to be slightly higher than last year. Additionally, the company expects another good year of cash flow even with the expected level of capital expenditures and modest growth in working capital.

With that, we'll now take your questions.

(Operator Instructions) It appears our first question comes from John Baugh with Stifel.

The first question I had for you is, you've had a fair bit going on the capital spend side, Haiti, Canada, things you're doing in China. Is there a way for us to think about what the current capacity that you've brought online recently or will bring up shortly, what that could produce in terms of incremental revenue? And how we think about capital spending needs going forward, all on the context of accelerating revenue growth here?

Okay. I'll take the latter part of your question first. In terms of ongoing CapEx, we are ending this fiscal year of 3-year record of some significant capital expenditures, which have expanded and transformed our mattress fabric platform, as we have talked about. The range of capital spending in the last 3 years has been $10 million to $12 million each year, significantly higher than prior years, as you may recall. As we go forward, we do see significantly less capital spending. And at this point, I would say, for next year, $6 million to $8 million range, with maintenance CapEx being in the, probably, $4 million range, we'll be able to firm that up on our next call, but we see a significant decline in CapEx for the next year or 2 as we have continued to absorb all the capacity in things we've done. So to the first part of your question, as to -- thinking about capacity in terms of revenue opportunity, and I'll take them separately. In Haiti, we have plenty of capacity with what we're building there and can grow -- I mean, we can easily double what we're doing today with Haiti operation. And to refresh your memory there too, Haiti, we are thinking of that in terms of the larger simpler programs, and our North Carolina operation would be more items with smaller volumes and quicker delivery. In terms of our North American operations, U.S. and Canada, we see no capacity constraints at all with the woven fabric area. In the knitted fabric area, that does appear to be more where the demand is, part of our capital expenditure program next year will likely be more knit machine. But with the expansion that we've done in our Stokesdale, North Carolina operation and Canada, we have ample room to add knit machines. And that would be part of our capital spending on an ongoing basis, I believe, to support the knit growth. Knitted fabrics are used mostly for the bed in a box products, so we're positioned well to grow that.

Okay. So Frank, if -- not to put words in your mouth or hold you to something, but if we thought about CapEx of $6 million to $10 million per year for the next couple of years, that wouldn't be a bad number, even if revenues stay up in this high single-digit range. And I know you're not necessarily expecting that, but that would or would not cause a need for a ramp in CapEx above, let's say, $6 million to $10 million for the next 2 years?

And John, that's exactly what I'd say. I'd even say $6 million to $8 million. We've done so much the last few years in each of our facilities.

Okay. Could you quantify FX China in Q2, and then, I guess, help us with where they are right now? It sounds like it will be a drag in Q3 as well, and I don't know what the Q4 comparison looks like. But if you know that, off the top of your head, assuming FX stays where it is.

Okay. The China exchange rate during the second quarter of last year was in the range of RMB 6.8 to RMB 6.9 to the U.S. dollar. This year, it's been in the range of RMB 6.55 to RMB 6.6. It has been strengthening over the last 6 months, as you may know, after 2 years of weakening from about RMB 6.0 to RMB 6.9. So the effect in the second quarter on the upholstery fabric side was about $100,000, $150,000. Not a lot, but different from what we had been experiencing.

Okay, and similar kind of magnitude maybe for Q3?

Yes, yes. Of course, we have been expecting once the 19th Party Congress was over in October in China, that there would be some weakening of the currency. A lot of the experts felt like the currency was held steady and even strengthened ahead of that conference. And that we would see some weakening in the currency. And we have not seen it. It has been right around RMB 6.6 over the last few weeks.

Okay. On bedding, I guess, my question is, from your seat, do you see online and bed in the box, and maybe I'd throw even imported mattresses in that bucket, do you see that growth -- clearly, it's exceeding the overall growth of the, let's call it, traditional bedding market. Has that pace lessened, strengthened, similar? Is the first question. And then the second would be, how does Culp, in terms of mix, benefit or get hurt from that shift? I know there are fairly high-end price points, generally speaking, but just curious whether it's mix neutral or helpful or hurtful?

Okay, [eliminating] to the first part of the question. We are seeing and certainly, believe that the trend is going to be more sales of bed in a box product, some people are calling it box bedding these days. That can be from the internet folks, it can be from traditional people as well. But there definitely seems to be an increasing trend that we think has several years to run. And there's going to be more mattresses delivered in a box. And when you do that, most of the time, it needs a mattress cover for that. So we believe our global cut-and-sew platform now, China, Haiti, U.S., is perfectly suited for this trend. And we are getting requests from a variety of sources, not just, as I said, the bed in a box people, the internet folks. So also, these products are mostly Memory Foam products. As you may know, hybrids are starting to gain traction as well. But all of them usually require a knitted fabric, which is where we've expanded the most in our Canadian and U.S. operations. So as we see the trends, we seem to be perfectly positioned to be able to handle whatever comes our way in that development. So the question is, how fast does this bed in a box grow? And I do not know if we are able to answer that. It's definitely growing but the rate at which it will growth is anybody's guess. Does that helps, John?

And margin impacts -- margin impact from all of those is helpful, neutral?

No, margin impact is positive for us, but remember when we do the cut and sew of the mattress covers, we obviously like to use our fabric. That isn't always the case. Sometimes we will do a mattress cover for a customer and he uses someone else's fabric. That's not as good a margin, obviously, because we're only capturing the cut-and-sew margin, which is less than the fabric margin. So we are constantly -- our marketing efforts are constantly pushing for -- to have our fabrics in our cut-and-sew programs, and most of them are. But we will probably never get 100% Culp fabric in mattress covers. I think that margins are at minimum neutral. The cover gives us an added margin to the fabric margin. And you can look historically at Culp before we've had the mattress cover expansion 4 years ago, we were in the 18% to 22% gross profit range on fabric. So cut-and-sew margins are not as high -- just the cut-and-sew margin. It's a lower-margin business.

Our next question comes from Budd Bugatch with Raymond James.

Let me, just trend, get into some areas of growth. Your growth is -- this quarter was a reversal of some of the things that we've seen over the last several quarters. You pointed to, in upholstery fabrics, the LiveSmart product line, is that where the growth came from, is all the growth coming in the LiveSmart?

The growth is coming from 3 areas, Budd. Number one, LiveSmart/iClean; performance fabrics coming from our hospitality area; and third, which we haven't mentioned a lot of, is the stationary fabric -- stationary customer market in residential. So -- and I would say, the LiveSmart is the largest impact, hospitality, second, stationary third. But all meaningful growth opportunities for us.

And by stationary, is that mean new customers in stationary? Because you've been in stationary for a long time.

Yes, correct. That's correct. A good question. It means new customers as well as expanded penetration with existing customers. Take a Flexsteel, take a Bassett, take a La-Z-Boy new line, they're stationary products. All the folks in Hickory, North Carolina.

Okay. And in order of magnitude, can you say, LiveSmart the most of 40% of the growth, and the other 2 with 30 each?

Yes, LiveSmart -- and when I -- when we say performance, when we say LiveSmart, I would throw iClean in there too, which is the performance brand that we've licensed to La-Z-Boy. So yes, that -- those are increasingly popular with us and other fabric competitors as well.

Okay. And placements on that are -- placements rising on that product? I mean...

Placements are absolutely rising, absolutely. (inaudible) approach.

Yes, so I was asking to quantify the growth of relationship between the 3 areas. You said, LiveSmart was the most -- is it the majority of it at 40% of the growth?

Let's say -- I mean, 40% is a good guess of that. Good estimate.

Okay. All right. And in mattress fabrics, the growth there, is that all coming from CLASS, is all the growth out of CLASS?

Most of the growth is coming from CLASS. But you have to remember that a lot of the CLASS growth in product has Culp fabric in it. So is it really fabric? Is it really CLASS?

So that was my -- my next question, is it the value added portion of CLASS? Or is it just CLASS as a subsegment? And you're not going to tell us the...

It's both. It's both, Budd. I mean, definitely both. CLASS is up significantly with what's going on in the industry in our various platforms. And certainly, looks good to us now, and will continue to be.

So with those 2 growth areas in continuing, and LiveSmart getting new placements, and you're excited about hospitality, and stationary is showing some life, and then CLASS growing, and I take it that you didn't have all the new capacity in place during second quarter. Is that right? All the new CLASS capacity?

That is correct. Haiti is coming online as we speak. First production was October. We'll have a little more in third quarter as we ramp up, train people. Little more in fourth quarter. But probably not until next fiscal year to really benefit a lot more capacity out of Haiti.

So with each of those subsegments up around 7%, how do we square that with the guidance, it says, just modestly, better revenue. Why is that? Was there something going on in the third quarter last year where the revenue comparison is that much harder?

Budd, that's a good question again. As you know, we've typically been on the conservative side. And I will tell you that it feels pretty good right now. Our current trends are good and I think there's a reasonable chance to do better. But we'd like to be conservative in those outlook.

Okay. All right. I think John pretty much explored the margin side of the question. So I think I will let somebody else have the floor, if they want.

You're not going to ask a capital expenditure question?

Frank, you've already said, you're going to have lower capital expenditures. So I suspect that, that excludes the opportunity if you find an acquisition, right?

That is correct. That's correct, yes. Yes.

So your -- I guess, I will ask this question on margin that I usually ask is, and growth is -- the U.S. and upholstery. Anderson versus China, how is that doing? And what do we look like on the U.S. side versus the Chinese side?

Anderson is still our -- it's only about 10% of our upholstery fabric revenues and we are still struggling in Anderson. The 3 areas of growth are China based, and we still want to hold on to the Anderson platform as a hedge or as -- we're trying new products down there with all the emphasis on U.S. manufacturers from the current administration. We want Anderson to work. We really do. But still -- it's still struggling. And our gains are out of the China operation in the China products. But I'm still hopeful.

Got you. Your -- so your tolerance with being as small as it is, your tolerance, is that -- are you less tolerant today than you were this time last year?

Maybe some, but it would be -- but what holds us, it would be great, it would really be terrific, if we could get some products going down there. And we're trying some different things product-wise in -- out of Anderson that we have some hope will gain traction. It would really be nice to have a U.S. supply chain part of one in upholstery fabrics. It's a whole lot easier, I promise you. So we are not near any decisions, but we are watching it more carefully these days. But the gains are -- and the results are from our China produced platform.

Frank, I think that's the key point. We're actively looking for opportunities for Anderson, too.

Yes, actively looking. I want it to work. I really do.

(Operator Instructions) Our next question comes from Marco Rodriguez with Stonegate Capital Markets.

Wondering -- I was wondering if we can maybe circle back around here on the fabric side, the upholstery fabric side. You guys -- I don't know if I missed this or not, but you guys called out the freight -- the increasing freight charges that you had to incur in China due to the stoppage there for work, force shutdown. Can you quantify that?

Yes, I would say for the second quarter, approximately $300,000 of extra freight, airfreight. And of course, Marco, you know from Culp, we are absolutely committed to on-time delivery of our fabrics to customers and to keeping up the strong delivery reputation that we have. So with the supply challenges we had in China in the second quarter, and it is some carrying into the third, we were airfreighting a lot more product than we normally would have ocean freighted to the tune of about $300,000.

Marco, another point in the upholstery fabrics margin is the fact we've been and frankly, which I made, and we've been more aggressive at growing the business. And so, we were able to maybe offer more promotions to get higher business from certain customers.

Yes, some targeted pricing, we've done to key customers of volume programs.

Okay. And that was also an impact there on your gross margin in Q2 in upholstery fabrics?

Yes. But the bigger issue is with the freight issue, and -- which we hope we'll work through over the next quarter, and we can get back to more ocean freight rather than airfreight. And you may have heard or read of late FedEx and UPS and all of the airfreight from China, demand has really increased and rates are going up as well. So -- but I hope that's a -- and I think it's going to be a temporary measure as we work through it. And the second thing is the currency.

Yes, both of those, we've guided in the third quarter to have an impact. So...

So we did really -- given those 2 factors, pretty good for the second quarter. I wasn't -- it was down slightly, our absolute level of gross profit dollars, margins were down, of course, but that was really the 2 factors -- 2 main factors.

Got you. And you are expecting some additional headwind from the freight cost in Q3? Is that correct?

Yes, we are.

Yes.

We are.

Okay, okay. And then, so coming back here to the volume discounts that you provided here on the upholstery fabrics. Is that what you were referring to as far as the aggressive marketing or is that something different?

I think the aggressive marketing was -- in upholstery side was more targeted to our performance line of fabrics. During the quarter, we've introduced social media, we've introduced ad campaigns, websites.

Sites, yes.

Variety of marketing initiatives, which, historically, we haven't done. But it's -- we have done a lot more in Q2 to market our performance line of fabrics.

Got you. And is that expected to drop here sequentially, or do you anticipate maintaining that sort of level of marketing expense through fiscal '18?

The really -- the only level of expense going forward will be in the ads. Not a lot of expense in the social media area or website, but we've also dedicated a person to this to really do more -- make that more prevalent. I don't think we're going to see that forward much.

Got you. Then shifting here just a little bit to the mattress fabrics. Obviously, you called out that you had some -- obviously, some disruptions in the quarter. Just given all of the shifts that you've made here and you've completed, can you quantify what sort of impact that had on the quarterly results for mattress fabrics?

Well, what we've said, when you look at the quarter, gross -- let's take operating margin, 16.4% last year, 13.5% this year, 290 basis point decrease. The majority of that is related to the production disruptions. Also, I think you have to factor in second quarter of last year at 16.4%, was a fabulous quarter. Little higher than we normally do. So most is production related disruptions. And I think the other point, Marco, is we were off in the margin from last year, but what's encouraging to us is the off margin is 13.5%. Still a pretty darn good level of margin.

Also, too, Marco, we call out some marketing cost or some aggressive product -- aggressive costs associated with new product rollouts. I mean, that is where we had some higher shipping cost to get new products to our customers on time. And so that had some pressure, too.

Sure. Okay. And any expectation, if I'm understanding you guys correctly that, seeing that now that you have all the expansion complete, obviously, Haiti is still kind of ramping up, but we shouldn't see that sort of a negative impact from efficiency aspects in the next quarter, and we should start to see margin expansion there?

That is correct. Yes, we're already seeing in our November results. And the week-to-week stuff we look at, we've come a long way in every facility. As you're right to point out, Haiti is still coming up. But North Carolina and Canada, we are very pleased with what we're seeing there in efficiencies. And I do want to point out though, one thing that nobody has asked about that we should point out, we are beginning to see some increase in polyester prices. We've had a long run, probably a 2-year run of very favorable low prices. Now we're hedged out pretty well for 4 to 6 months, but it's starting to feel like we're going to -- we might see some uptick in raw material prices. I don't see that affecting us the next 2 quarters, but it's something we're going to watch.

Got you. And last quick question, just I was wondering if you might be able to talk a little bit more just kind of high level, you'd mentioned some very positive trends that you guys are looking at. And that sort of changed your optimism level here for the second half of '18, vis-a-vis your guidance. Can you maybe talk about -- are there any specific economic metrics you're looking at? Is it conversations with your end-clients that is kind of giving you this increase optimism?

As I think from a macro basis, we've had 2 quarters of 3% GDP growth. We've always heard, now whether it holds true now, that the best correlation to mattress sales has been GDP growth. That's been the highest correlating macro metric. So seems like that's pretty good. Unemployment is low. Consumer discretionary income, up a little bit. Housing starts, better.

Consumer confidence up.

Consumer confidence, these are all traditional favorable indicators for our business. Now we are seeing certainly, that's on a macro basis, on a micro basis, it certainly seem like we're getting some more broad-based demand on both sides of our business, of late, too. So that's why we are more optimistic, but maybe constantly optimistic, because we know how fast it could turn but it certainly seems and feels better as we head into the second half of our year. And our growth initiatives are finally take in place, we're seeing -- they're bearing fruit, which is good to see.

And it appears we have no other questions in the queue at this time.

Okay. Everyone, thank you for joining us today. And we look forward to updating you on the Q3 call in a few months. Have a great day.

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