Good day, and welcome to the Culp, Inc. First 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, ma'am.

Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the first quarter of fiscal 2013. 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 measurement is included as a schedule to the company’s 8-K filed yesterday. This information is also available on the Investor Relations section of the company’s website at www.culp.com. A slide presentation with supporting summary financial information is also available on the website as part of the webcast of today's conference call. I will now turn the call over to Frank Saxon, President and Chief Executive Officer of Culp. Please go ahead, sir.

Thank you, Drew. Good morning, everyone, and thanks for joining us today. I'd like to welcome you to our quarterly conference call with analysts and investors. With me on the call today is Ken Bowling, our Chief Financial Officer. I'll begin the call with some brief comments about Culp today 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 our second quarter outlook, and then we'll be happy to take your questions. Now looking at the first quarter. We are very pleased with our first quarter performance, marking an excellent start to this fiscal year. These results reflect better-than-expected sales momentum through the summer months in both of our businesses. We have continued to experience a favorable customer response to our outstanding design capabilities and a wide range of innovative products. Our flexible and global manufacturing platform has enhanced our ability to develop new and exciting products and meet the changing style demands of our customers. We are also pleased that our focus on building a sound financial position and achieving favorable and consistent operating profitability over the past several years has enabled us to return cash to our shareholders in the form of cash dividends and significant share repurchases. I'll now turn the call over to Ken who will review the results for the quarter.

Thank you, Frank. Total sales for this quarter were $69.2 million, up 15% from the first quarter of last year. This is the company's highest total sales for the first quarter period in 8 years. This also marks the sixth consecutive quarter where we had year-over-year growth. On a pre-tax basis, we reported income of $5.4 million, compared with $3 million for the same period last year, an increase of 81%. Pre-tax margin was 7.8% compared to 4.9% a year ago. This is the highest first quarter pre-tax income level in the company's history. We now report adjusted net income and adjusted earnings per share. As a reminder, we calculate adjusted net income using estimated cash income tax expense. Adjusted net income, which is a non-GAAP measure, was $4.3 million or $0.34 per share compared with $2.4 million or $0.18 per share for the prior year period. The company's overall adjusted effective income tax rate for the first quarter was 19.2% compared with 18.2% 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-U.S. entities divided by consolidated income before taxes. This information is 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 loss carryforwards. Overall return on capital was 31% for the first quarter this fiscal year, compared with 19% last year. Capital employed at the end of this first quarter was $75 million, compared with $70 million for the same time last year. Here are the results for our 2 businesses. For mattress fabrics, we reported $38 million in sales for the first quarter, up 18% compared with $32.2 million for the same period…

Thanks, Ken. I'll now provide you an update on both of our operating segments, and let's start with mattress fabrics. Our mattress fabrics business had a strong first quarter performance with sales gains across all major product categories. This sales growth reflects growing consumer demand for better bedding and a higher quality mattress fabric. We are meeting this product shift with a great lineup of innovative products. As the mattress industry continues to evolve into a more decorative business, Culp's many years of planned capital investments are paying off. These expenditures have positioned us to meet this demand with an extensive manufacturing platform and flexible capacity to produce an innovative and diverse line of products. We have a strong competitive position, supported by exceptional customer service, reliable delivery performance and the consistent quality and value that are synonymous with the Culp brand. We are also pleased to note that, along with the higher volumes and favorable product mix in the first quarter, the efficiencies of our reactive capacity and the recent stabilization of raw material costs contributed to the significant improvement in our profitability for the first quarter. Compared with the peak levels for the same period a year ago, our production costs were considerably lower. We've also continued to merchandise new products with alternative sources of yarns and raw materials without compromising quality and value for our customers. Looking ahead to the second quarter, we expect continued stabilization of raw material costs countered by some customer pricing pressure. We also anticipate a normal seasonal slowdown in the second fiscal quarter, which affects operating cost inefficiencies during the quarter. Despite this, we expect sales and operating profitability for our second quarter to be higher than the same period a year ago. We are also very pleased with the progress we're…

We expect overall sales to be up 2% to 6% as compared with the second quarter of last year. We expect sales in our mattress fabrics business to be up 3% to 8% higher than the same period a year ago. Operating income and margins are expect to be moderately higher than the same period a year ago. In our upholstery fabrics business, we expect sales to approximate the previous year's second quarter results. We believe operating income and margin will be higher than the same quarter of last year. Considering these factors, we expect to report pre-tax income for the second fiscal quarter of 2013 in the range of $3 million to $3.7 million. Pre-tax income for last year's second quarter was $2.9 million. Frank?

We are pleased with the excellent start to this fiscal year. We have many reasons to be optimistic about the year ahead, with our outstanding design and diverse product offerings, along with our ability to leverage our scalable and global manufacturing platforms. Importantly, we also have the financial strength to pursue our growth initiatives and continue to generate added value for our shareholders through dividends and share repurchases. While challenges remain in an uncertain global economy, we believe Culp is favorably positioned to continue growing our business and performing well. Above all, we are committed to outstanding performance for our customers as a financially stable and trusted source of innovative fabrics. 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 sort of the seasonal slowing in order patterns for upholstery fabric and I guess, maybe, if you could, as best as you can tell, do you think that's being driven by, say, a change in end-consumer behavior or buying at retail? Or is there some kind of a component with your manufacturer customers where they're adjusting for inventory or maybe a little bit of both? Just give us a little bit of color on what you're seeing there.

Okay. Chad, I think it is twofold. I think, first, the business at retail is okay with the stronger customers doing better than the weaker ones, as you'd probably expect. Secondly, we have seen some inventory correction. The -- our fourth quarter had excellent sales growth, also our first quarter, and then we saw orders for most of the first quarter below last year's levels, but recently have seen them pick up, indicating to us that there was an inventory correction going on. So we would -- I would say both factors are influencing the seasonal demand.

Okay. And with regard to gross margin, up very significantly year-over-year and quite a bit better than what we are looking for. I think you called out higher volume, you called out favorable mix and moderating raw material costs. Can you may be either quantify for us or rank the key puts and takes that you saw on gross margin in the quarter and then give us a little bit of thought or color on what you expect from those to -- and how they shape up for the balance of the year?

Okay. As I've been mentioning on every call for a couple of years now, with the completion of our -- all of our restructuring and downsizing efforts in the U.S. and the development of our China platform and the many capital projects we put in our mattress fabric business, we've been able to turn our attention to really improving our product, design and innovative abilities. We are seeing the success of that in our last couple of quarter's sales. When we look at them, the bulk of the sales gains are new product introductions, and we're seeing the new products at better price points, as I mentioned in my comments today. And generally speaking, the more innovative we are, the better margin we're able to achieve on those products also, and we're we able to differentiate what we're doing from our competitors. We're also able to help our customers drive their sales at retail. So we put significant effort in both businesses and we continue to do so. It is our #1 priority to drive more innovation, and we are succeeding. Coupled with that, we are also having good success with our -- some sales and marketing initiatives. So yes, raw materials are helping us, without a doubt, a year -- compared to a year ago, higher volumes help, but I think the #1 factor in gross margin improvement is the -- our improvement in design and innovation. And we also believe, in that area, that has a much better chance to sustain itself in our margin improvement as we look ahead. Raw materials can come and go based on global commodity prices, not a lot we can do about that. But what we can do something about, is be as creative as possible, be leading in design and give our customers products that retail. So I hope that gives you some color on margin improvement and what we're doing.

Sure, no, that's very helpful. Appreciate that. Now countering the gross margin a bit. SG&A did come in a bit higher than we were looking for. Can you talk a little bit about what drove the increase in SG&A?

Yes, really, 1 factor and that is the incentive compensation with -- versus this first quarter versus first quarter of last year. And we obviously had a better quarter and what looks like a great start, obviously, to a good year and so incentive compensation would accordingly be up, and we have had to accrue more in the first quarter than we did in the first quarter of last year. But cost, overall SG&A cost, remain under very good control and don't expect anything out of the ordinary. Now I do not see this level of incentive compensation being accrued every quarter, so I would make that point, nor the timing of how it is accrued throughout the year.

Okay. And you talked about, with regard to Culp Europe, some macro-driven challenges there. I would imagine, that's to be expected. I think in your 10-K, you guys disclosed that sales outside North America and Asia were about $5 million in the last fiscal year. Could you maybe take a stab at what we could expect from that geography in fiscal '13? Is it flattish? Is it down because of the macro issues in Europe? Or do you think you can grow a bit despite the macro?

Sure. Last year, we disclosed that our sales in Europe were approximately 3% of our total upholstery. So that puts you in the $3 million range. I think we're going to be challenged to reach that level this year given the weakness, increasing weakness, in the European economy. Having said that, though, we have reduced our cost there and we remain very optimistic about Europe for the long haul. Going into a new area, it just takes time to learn product, to learn customers, but every week, we're seeing, I think people call them green shoes, from customers, whether it be Germany or Estonia or other countries where our products are getting exposed. So we still remain very optimistic about Europe for the long haul, and we believe we need to be there. So -- but I think in the short term, while I hope we grow, and we're trying to grow this year, given the economic macro view over there, it's probably not likely.

[Operator Instructions] We'll move next to Barry Vogel from Barry Vogel & Associates.

First question is, I noticed you had done a very good job in buying back shares, well, let's say a.k.a. returning money to your shareholders, so you definitely to be commended on that. So the question I have on that issue is, why only a paltry $2 million increase in authorization? You have really a lot of flexibility, whether you want to buy additional shares or not generally. So why not have a higher authorization?

Barry, the answer to that is, we, first and foremost, we want to maintain sufficient, ample cash cushion. We are very pleased, as you've indicated, with the shares we've been able to repurchase at what we would consider opportunistic prices. But we do not want to, in any way, jeopardize the strong cash cushion that we have. We will continue buying shares as we feel comfortable that we're above our cash cushions.

What is your cash cushion?

We can -- let me answer this 1. We can review this decision frequently, as you know, with our Board of Directors. So as a year progresses, as our cash flow and cash position strengthen, we have the ability to do more. But we -- we've always been a very conservative company, and we'll continue to be. Yes, we could buy more shares and be more aggressive. But I would also tell you, I believe buying 8.5% of the company back at an average price of $9 and change over the last 14 months is a pretty darn good start to a buyback initiative.

I agree.

So we want to meet -- we never ever want to go back anywhere close to where we were a number of years ago. It wasn't too many years ago, 5 -- 4, 5 years ago, and Rob and I want to maintain a very sound financial position.

Okay. Now as far as Europe is concerned, can you -- you just elaborated that you did about $3 million in European sales in fiscal '12. Can you tell us if it was profitable or not? And if it was unprofitable, how unprofitable was it?

Okay. On our last -- at the last call, we did indicate that we are operating at a loss, small operating loss in Europe and it's something we can withstand given the potential over the long haul. We have not a lot of overhead in Europe. We have 6 employees in a small warehouse in Poland, in Central Poland. So it's not a big commitment of dollars on a monthly basis. But we believe we're also seeing over there some of our competition, much like what happened in the U.S., wasn't and hasn't been financially strong. Certain distributors and maybe operate on a shoestring and are having difficulties. So us and our financial strength to be there for customers during this recessionary period could gain us some nice market share over the next year or however long the European weakness last. Plus, our customers, as I mentioned, are, to Chad, there are -- Europe doesn't change product as much as the U.S. And the U.S. on the purchase side, there's a high point market twice a year. So the retailers and customers always introducing lots to new products. It's not that much in Europe. So it's going to take us a while to get our product in place. But we are seeing -- and what encourages us, and why we're optimistic, even though short term we're not very happy with the results, we see a lot of interest in our products. And so it tells us, stay the course, much like what we did with our Anderson, South Carolina facility. We didn't do too well there for a number of years, and we could have easily closed that operation and it was discussed many times. But Rob and I and the board felt, strategically, it was important to have a U.S. presence. And we stayed the course and now we're reaping the benefits of that. So we, at least our thinking today and for the foreseeable future, it's a similar scenario in Europe. We learned a lot from being in Europe from a product loss standpoint. If you want to be the global leader in design and fashion, you need to know what's going on in Europe, and it's given us great intelligence on those efforts as well by being there.

Now, is U.S -- is the U.S. operation profitable?

U.S. operation is profitable. That's a nice contributor to our first quarter. As we said, really impressive turnaround from first quarter of last year.

Was it profitable last year?

No, no, it hadn't been profitable. It had been -- we've been challenged there. But you may remember, we took some significant actions in the second quarter of last year to streamline cost, increase selling prices and all that paid off and then demand increased in our third quarter, on top of those 2 actions. So that really paid off for the fourth quarter and our first quarter. And now what gives us a lot of encouragement in our U.S. facility, now that we've stabilized things, customers are running the product, we're focusing a lot of attention on innovative product there like we've done out of China.

My last question has to do with this joint venture with Lava. I -- what is the size of the mattress covers market in your opinion?

Barry, the specialty, what we're talking about is these covers go on all specialty beds, which are the memory foam mattresses. People, that's probably dollar wise now, 25%, 30% of the market, and specialty has been growing at a rapid pace over the last 5 years, and of course, hence, why we need to be in the mattress cover business. But it's been growing in the 20% range per year, and it's probably 25% to 35% of sales in the mattress industry today and maybe a higher percentage of retail floor space.

You're saying that I don't have a memory mattress. I have a very good mattress and we have mattress covers, so you're saying your joint venture would not make a mattress cover --

Okay, okay, a mattress cover, let me clarify this, is not -- what we're making is not a mattress pad. A mattress cover uses our fabric. And if the memory foam is inserted into the cover, almost think of the cover as a sock, which encapsulates the memory foam, not the mattress pad which goes on mattresses. That's more of a commodity item. Our product is more -- is a increasingly decorative product. Hope that explains that.

Okay. I think seeing is believing, and 1 of these days, I've got to get out there to your plant and see what you're doing in Stokesdale.

I know you've talked about it. You just give us a date, we'd love to have you come visit us.

[Operator Instructions] And it appears we have no further questions at this time. I'd like to turn the conference back to our speakers for any additional or closing remarks.

All right, thank you, operator. And again, thanks to all of you for your participation today and your interest in Culp. We look forward to updating you on our progress next quarter. Have a good day.

That concludes today's presentation. Thank you for your participation.