Good day, and welcome to the Culp Incorporated Fourth Quarter Results Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Drew Anderson. Please go ahead.

Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the fourth quarter of fiscal 2012. As we start, let me express that some statements made in this call will be forward-looking statements. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise, are not statements of historical fact. Actual performance of the company may differ from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission, 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 is also available on the company's website as part of the webcast of today's call. I will now turn the call over to Frank Saxon, President and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone and thanks for joining us. We have a lot of great news to share with you today. With me on the call is Ken Bowling, our Chief Financial Officer. I'll begin the call with some brief comments about Culp, and then Ken will review the financial results for the quarter. I'll then update you on the strategic actions in each of our businesses. And after that, Ken will review the first quarter outlook, and we'll be happy then to answer questions. Now looking at the fourth quarter. We are very pleased with the fourth quarter performance highlighted by continued strong sales momentum with the highest overall quarterly sales in 8 years and the highest quarterly pretax income since 1998. These results reflect improved industry demand and the benefits of our outstanding design capabilities and lean global manufacturing platform. The biggest factor driving our sales gain in Q4 was the amount of new innovative products in both businesses. Culp now has a strong competitive position in both mattress fabrics and upholstery fabrics as we have continued to offer a wide range of innovative products that meet the changing style demands of our customers. Notably, our financial position is the strongest in the company's history. Our growing net cash position represents an important competitive advantage in today's economic climate and provides us with excellent flexibility to pursue our growth initiatives, as well as an opportunity to enhance shareholder value through our expanded share repurchase program and new dividend announced yesterday. As noted on our press release, we are very excited to be initiating a dividend. Our last dividend was paid over 11 years ago. Our Board of Directors has approved a payment of a quarterly cash dividend of $0.03 per share on or about July 16 to shareholders of…

Thanks, Frank. Total sales for this quarter were $75.7 million, up 25% from the fourth quarter of last year. Operating income for the quarter was $5.7 million, up 20% over a year ago. On a pretax basis, we reported income of $5.5 million, up 18% over the same period last year. Beginning this quarter, the company worked toward adjusted net income and adjusted earnings per share. Adjusted net income is calculated using estimated income tax expense for Culp's foreign subsidiaries. Adjusted net income, which is a non-GAAP measure, was $4.5 million or $0.35 per diluted share compared to $3.9 million or $0.30 per diluted share for the prior period -- prior-year period. The company's overall adjusted effective income tax rate for fiscal 2012 was 18.5% compared with 16.1% for the same period last year. This adjusted effective rate, or ongoing estimated cash tax rate, represents income tax expense for Culp's foreign subsidiaries, divided by consolidated income before taxes. This information is very important because the company currently does not pay cash taxes in the U.S., nor does it expect to in the foreseeable future due to its $60 million in U.S. federal and state loss carry forwards. Overall return on capital was 22% for the fourth quarter this fiscal year compared with 25% last year. Capital employed at the end of this quarter was $68 million compared with $63 million for the same time last year. Here are the results by operating segment: For mattress fabrics, we reported $43.4 million in sales for the fourth quarter, up 23% from a year ago. Operating income from this segment was $5.7 million, up 8% compared with a year ago. Operating income margin was 13.1% of sales compared with 14.9% of sales for the prior-year period. SG&A in mattress fabrics was up 24%…

Thanks, Ken. I'll now provide you an update on our operating segments. First, mattress fabrics. Our mattress fabrics business had a very strong fourth quarter performance ending the year with the highest annual sales in our history. We have solid gains across all major product categories, highlighted by our recent resurgence in sales of our woven damask product line. The overall sales trend reflects a growing consumer demand for better bedding and a higher quality mattress fabric as some segments of the industry are demanding more decorative products. Culp is well positioned to meet this demand as a leading provider of an innovative and diverse line of products in every major category, supported by exceptional customer service. Additionally, we've maintained our focus on high velocity segments of the market, which are below $1,000 in retail price point for a queen set. We also have the ability to leverage our flexible manufacturing platform and outstanding design capabilities for developing new products that can meet the demands of the leading customers in the industry. While we are pleased with the increased sales, our operating margins for the quarter and year were slightly affected by higher raw material costs and continued pricing pressures compared with market conditions a year ago. We are encouraged however, that raw material prices have come down from their peak levels and appeared to have stabilized in the fourth quarter. We expect subsequent quarters will show gradual improvement in our raw material imports. We continue to look for opportunities to expand our current custom value-added business platform and keep pace with changing industry demand trends. As such, we have entered into a joint marketing agreement with A. Lava & Son, a leading provider of mattress covers based in Chicago, that will design, produce and market mattress covers. A. Lava…

We expect the overall sales to be 6% to 11% higher than the first quarter of last year. We are seeing the rate of growth lower than the previous few quarters. We expect sales on our mattress fabric segment to be 8% to 13% higher than the same period a year ago. Operating income and margins in this segment are expected to be significantly higher than the same period a year ago. In our upholstery fabrics segment, we expect sales to be 2% to 7% higher as compared with the previous year's first quarter results, although recent trends and incoming orders reflect a softening of demand momentum. We believe the upholstery fabrics segment's operating income and margin will be significantly higher than the same quarter of last year. Considering these factors, the company expects reported pretax income for the first quarter of fiscal 2013 in the range of $3.6 million to $4.4 million. Pretax income for last year's first quarter was $3 million. This is management's best estimate at present, recognizing that future financial results are difficult to predict because of overall economic uncertainties. Frank?

Our results for last year demonstrates Culp's ability to succeed in spite of a challenging period of economic uncertainty. Throughout the year, we continue to build upon our strong competitive position in both businesses. Our commitment to product innovation and creativity, along with our scalable and global manufacturing platforms, are key advantages for us, and they are allowing us to meet the changing demands of our customers. At the same time, we are well positioned for further profitable growth as the housing market and economy gradually recover. As we begin fiscal '13, we have the financial strength to pursue our strategic initiatives and continue to generate added value for our shareholders through dividends and share repurchases. Above all, we are 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 to enhance our leadership position in the year ahead. With that, we'll now take your questions.

[Operator Instructions] We'll go first to Chad Bolen with Raymond James.

Frank, in your commentary, you talked about seeing some gradual, or expecting some gradual improvement in raw material costs. I guess, how far have things come down? And should we read that as maybe continuing to be a year-over-year headwind but less so in the next couple of quarters? Or would we expect that to turn into a year-over-year benefit any time soon?

Chad, we will see a year-over-year benefit beginning in Q1. In Q4, maybe modestly year-over-year, not quite there. But Q1, and as it looks now, Q2, year-over-year benefit.

And when you look at the revenue growth, obviously, terrific in both segments, can you parse for us a little bit about how much of that is driven by sort of units as opposed to pricing and mix? And was it significantly different in mattresses versus upholstery?

Yes. Most different. In upholstery, 90% units, 10% average selling price, but definitely, price points are moving up some in there. In mattress fabrics, however, much different. Unit growth is in the. [Audio Gap] USP is in the 70%. As we said in my comments, the move to better bedding by most of the major people wanting better, higher -- better quality and better design mattress fabrics.

And looking at the segment margins, both segments had margins above what we had modeled, upholstery even more so, and the year-over-year improvement in upholstery was obviously pretty significant. Can you parse for us at all how much of the improvement in upholstery operating income came from the actions you took in the U.S. operations versus the improvement? I would assume you saw some improvement in the non-U.S. operations as well. How should we think about that?

The way you should think about it in both businesses, but I'll start with upholstery, #1 factor in operating margins is new product introductions. And then, that have decent gross margins. Secondly, would be the sales volume covering our fixed costs, and third would be the Anderson operation. Anderson could be tied to as second place. Anderson, South Carolina U.S. operation also had a much improved quarter over the year earlier period. I want to note, however, it is not where we need it to be, but it is certainly far better than where it was. In mattress fabrics, again, we are seeing the gross margin in terms of better, more decorative product, and we're able to get a little more margin on that. And of course, at mattress fabrics, the fixed cost utilization contributed nicely to the quarter.

And last question for me. Obviously, we were very pleased to see you initiate the dividend at the $0.12 annual rate that you've indicated. You have a pretty conservative payout ratio. Can you give us any insight into the Board's longer-term thinking about that? Is there a specific kind of payout ratio target in mind? Or do you think there's an opportunity to increase that over time?

Well, as you see from Culp's history, we approach things from a conservative and disciplined manner. We would like to see the payout ratio increase as our performance continues in the years ahead. We've left ourselves, as you can see, plenty of runway to do that.

[Operator Instructions] We'll go next to Dillard Watt with Stifel, Nicolaus.

I wanted to dig just a little bit into the guidance in terms of weaker sales, softening demand in the upholstery segment. I'm wondering maybe what you could give us in terms of either color, a little further commentary in terms of what you're seeing, what might be driving that, in terms of maybe that -- is that one larger customer? What's going on there?

We're definitely seeing year-over-year gains, lower than they have been in the last few quarters, and especially the fourth quarter where we had 25% gain year-over-year. Our customers and retail especially in furniture, have softened considerably in the last month, and our forward visibility isn't much further than a month or so out. So while we still see gains in sales in the first quarter, the business climate is not particularly good at retail in upholstery. In bedding, it's also weaker than it was on a year-over-year basis in the fourth quarter. Although mattresses and bedding is not as seasonally cyclical as furniture. So it's still decent, but still seems slower than year-over-year basis than our fourth quarter. And various explanations for the period of January through April, better weather across the country contributed to the strong industry demand throughout that period, and some people are saying that with that, some business was pulled forward, and that's causing some of the weakness that we're seeing now.

And there are no further questions at this time.

Thanks, operator, and everyone, thank you for your participation today. We appreciate your interest in Culp, and we look forward to updating you next quarter. Have a good day.

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