Good day and welcome to the Culp, Inc.’s Fiscal 2018 First Quarter Conference Call. Today’s call is being recorded. At this time for opening remarks and introduction, I would like to turn the call 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 first quarter of fiscal 2018. As we start, let me say that this morning’s call will contain forward-looking statements about the business, financial conditions 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 facts. 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 statement speaks only as of today. We undertake no obligation to update or revise forward-looking statements. In addition, during this call, the Company will be discussing non-GAAP financial measurements. A reconciliation of the 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 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 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 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 then review the financial results for the quarter. I will then update everyone on the strategic actions in each of our businesses. Our sales were in line with expectations for the first quarter compared with a very strong first quarter sales a year ago. During the quarter, our performance was affected by an uncertain and retail environment for home furnishing and other market disruptions specifically related to the mattress industry. Our profitability was primarily affected by these issues and by cost pressures associated with the significant transitions in our mattress fabric production facility. We do believe these transition issues will be behind us by the start of our third quarter. Regardless of market dynamics, we have remained focused on creative designs, innovation, and exceptional customer service with a diverse product offering that meets changing customer style trends. To support this strategy, we have made significant investments in our mattress fabric business with improved production and distribution capabilities that will enhance our ability to meet customer demand with outstanding service. We are also encouraged by the success of our diversification strategy in our upholstery fabrics business. Importantly, we have the financial strength to make the strategic investments to support our growth strategy, including acquisition and continue to return funds to our shareholders. We are excited about our announcement yesterday of a non-binding letter of intent to acquire mattress fabric operation in China. This acquisition is expected to extend our market reach in China and other parts of the world. I will talk more about this later in my update on mattress fabric segment. With Culp’s strong financial position, a key growth strategy for us is to make strategic acquisitions in areas synergistic with our core markets and our core capability. I’ll 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 presentation to our Investor Relations website that cover key performance measures. We’ve also posted our capital allocation strategy. Here are the financial results for the first quarter. Net sales were 79.5 million, down 1.4% compared with prior year. Pre-tax income for the first quarter was 6.7 million, down 21% compared with the prior year period. Pre-tax income margin was 8.5% compared with 10.6% a year ago. Results for the quarter were affected by approximately $600,000 of one-time charges and by the cost pressures coming from the significant manufacturing inefficiencies associated with our plant consolidation project in the mattress fabrics business. We will comment in more detail about this project later. Partially offsetting this pressure was lower unallocated corporate SG&A expenses due primarily to lower incentive compensation costs. Net income was 5 million for the first quarter compared with 5.3 million a year ago. The consolidated effective GAAP income tax rate was 24.3% for the first quarter compared with 37.8% for the first quarter of last year. The rate decrease was primarily due to the income tax benefits realized on certain stock based compensation awards and differences in the mix of earnings between the Company’s U.S. parent and foreign subsidiaries. The Company’s overall consolidated adjusted effective income tax rate and non-GAAP measure for the first quarter was 15.5% compared with 17.8% last year. As a reminder, the Company had approximately 9 million loss carry forwards as of the end of last fiscal year. As a result, the Company currently does not pay material amount of cash taxes in the U.S., nor do we expect to for approximately one more year. Trailing 12 months adjusted EBITDA was 38.1 million, compared with 39.2 million for the same period a year ago.…

Thank you, Ken. And I will start with mattress fabrics. Our sales for the first quarter reflect the ongoing uncertainties in the mattress industry compared with market conditions a year ago. As Ken noted, we are also comparing to a record quarterly sales performance from a year ago. However, we continued to outperform overall mattress industry sales trend. In addition to lower sales, our operations were affected by several factors as Ken mentioned. As previously announced, we have been working through a period of major transition across our manufacturing operations. We completed the move of the majority of our knitting equipment and relocated our mattress cover operation to new locations in North Carolina during the last month and first quarter. Both of these significant moves created more disruption to our production than we had anticipated, and especially during a weaker sales environment. We remain on schedule with our previously announced joint venture of mattress cover production facility in Haiti. Following initial sample, production, and training, we expect to commence customer production activity in October. The new Haiti operation will complement our U.S. operations with additional capacity via a mirrored platform, enhancing our ability to meet customer demand and remain cost competitive. The sales results for the quarter include a growing contribution from CLASS, our mattress cover operation, and we are excited about the additional sales opportunities ahead. We continue to expand this business with both our traditional customers and new market segments, especially the fast growing Internet bedding space. Looking ahead, we see continued uncertainty in the mattress industry that could affect short-term demand trends in our operating performance. We also expect some continued impact on our operating efficiencies in the second quarter related to the equipment relocations and changes in production that occurred towards the end of the first…

We expect overall sales to be comparable with the second quarter of last year. We expect sales in our mattress fabrics segment to be comparable to the second quarter of last fiscal year. Operating income and margins are expected to moderate a lower compared to same period a year ago, as we continue to face uncertain business conditions and work to return to normal operating efficiencies and production schedules. In our upholstery fabrics segment, we expect sales to be slightly higher as compared to the same time last year. Operating income and margins are expected to be slightly higher compared with the same period a year ago. Concerning these factors, the Company expects to report pre-tax income for the second fiscal quarter in the range of 5.4 million to 6.1 million. Pre-tax income for last year’s second quarter was 7.2 million. Looking ahead to the rest of the year, our performance for the second half of this fiscal year is currently expected to be more in line with the result achieved during the second half of last fiscal year excluding any impact from acquisitions. Capital expenditures for this fiscal year including vendor finance payment are currently expected to be comparable to the previous year mostly related to additional improvement projects for mattress fabrics. Additionally, the Company expects another good year of free cash flow even with the expected same level capital expenditures and modest growth in working capital. With that, we’ll take your questions.

[Operator Instructions] We’ll take our first question from John Baugh with Stifel. Please go ahead.

Thank you for taking my questions, and good morning Frank and Ken and the team. I guess I wanted to focus on hospitality. Could you talk about the success you’re having there? Is that one or two account wins? Have you already designed a different product line to address that market? Is that -- how are the margins in that business currently? Are you chasing business or is it a better margin residential? Just kind of getting some feel for the longevity of that, I doubt you’ll breakout the sales mix, but I’m trying to think forward here how much of an impact growing hospitality without on acquisition could have on your upholstery fabric business?

Good morning, John. Thanks for the question. First of all, the customer base, there are no large customers. We have a very broad group of customers in this business so far, and that is a characteristic of the market that we like. There are no 800-pound gorillas, so to speak. It is a collection of very diverse, small-to medium-sized customers across the market. So that’s a favorable characteristic. Second, you asked about product designs, most hospitality in hotels now are moving towards a residential look and that’s favorable because the products we’re selling are mostly products we’ve done in the residential area as well. They do require some extra steps to meet the more stringent quality requirements, but for the most part, the product designs and the products we’re selling come from our existing design portfolio, which again we’re very pleased with and we see the trend in the marketplace definitely move into more homey, more residential looks in across all the brands that we sell. As for margins, as I’ve mentioned in earlier conference calls, the margins are significantly above our consolidated margins and that’s we’re very pleased with that. And Culp, a real strength of us in this marketplace is we are vertical. All of the competitors are converters. So with Culp’s presence in China, for example on upholstery fabric, we are vertical. So the margins are all -- I think I’ve even quoted earlier as much as 50% above our current margins. And so -- go ahead.

Yes, and finally any sense of how important is this to the segment in terms of either percentage of sale or the growth trajectory because you did have growth in upholstery, and typically if we are to look at the flat to negative numbers for a while?

Yes, that is -- it is certainly a growing percentage of our business there. It’s still small relative to the upholstery fabric segment in total, but it is becoming more meaningful every year. Of course, our strategy is to expand the product offerings that we do to this market. Currently, we are offering upholstery fabrics to the marketplace for furniture, et cetera. We also are offering the bed skirts and the bed wraps that we’re able to do from a China platform. What we like to find of course is an acquisition in the window treatment area. And that is what we’re seeking actively to find an acquisition to expand our product offering into that area, and I am reasonably, as I’ve said on the last call, cautiously optimistic that we will be able to make one of those acquisitions within our current fiscal year.

And then on bedding, I guess, I’m curious of your view of the bedding industry, and let’s talk units of mattresses. And as we look at sort of last year now, whatever year-to-date intel you have, you seem to be negative at least by ISPA count. And I guess, I’m wondering, is that really true or are there beds coming from other places that are not being accounted and there is actual flat performance or growth, and then more specific to Culp and you mentioned the pending acquisition. But are you -- if this is morphing to other channels of distribution or other things outside of this discounting, your ability to participate in that shift?

Okay, John, as you stated, we believe some of this ISPA reporting certainly could be understated, and it is difficult to capture the imports from China. And we have been studying that market in China for some time and that is why we ended up wanting to make an acquisition in China, so we can participate in that growing segment of the distribution channel. This certainly follows three or four years ago, as you know, we got into the mattress cover business and that has helped us significantly in participating in the growing Internet bedding market. So I would say, yes, we’re seeing more imports. And your guess is as good as mine where that trend will go, but we want to be able to participate in that. And with the China, this acquisition, we will be very well positioned to participate and sell into those manufacturers in China.

[Operator Instructions] We’ll take our next question from Budd Bugatch with Raymond James. Please go ahead.

I guess, we have seen -- you’ve seen some really good strategic growth in adding value to your fabric with both cut and sew in your China operation and now with the CLASS joint venture. Could you breakout a little bit of what -- how important it is to the revenues now of each of the segments and give us a little bit of feel of the growth of that and growth of basically the fabric side of each of those segments?

Budd, I’ll do the best we can. As you know, we breakout those individual parts of our businesses. In the mattress side, of course, the mattress cover operation has grown significantly and continues to grow double-digit amount quarter-over-quarter. And we believe that will based on the opportunities that we see and what’s happen in the marketplace that we believe, we will continue to see that kind of growth rate in our operation.

When you say that, are you talking total units so it’ll be fabric and labor year-over-year or just labor?

No, it would be -- Budd, we look at it in its entirety, fabric and labor and overhead, yes. Of course a big part of mattress cover product is the fiber that’s the majority of the cost. And of course a lot of -- most of the cut and sew products that we sell are our own fabric, not always all but most.

And you say that’s growing double-digits. What’s the degree of penetration of that last even year or this year, that $48 million of mattress fabric revenue reported in the segment this year versus $50 million last. Is it 10% now or is it 15%, 20% coming out of?

I would just say Budd that’s not something we’ve been breaking out and not something we want to break out, but it is growing nicely and that’s about the best I can do. We are participating with the new channels, the e-commerce particularly. Across meaning of those new customers, we are a key supplier. And as I’ve mentioned before, we have the full court marketing and sales pressed on gaining penetration in that market.

So, the growth in double-digits is that only because of e-commerce or is your legacy customer usage also growing at that kind of rate?

I would say Budd it’s both, and we are expanding into Haiti because a lot of our larger customers want to have a lower cost option for mattress covers. Some customers, the speed is more important than the lower cost, so they want to have the mattress cover produced in our North Carolina facility. But there are a few of the larger people, they do want a low cost platform and we are able to provide that not only in Haiti, but we’re able -- now we’ll be able to provide it with our mattress fabric operation in China, we’ll be able to provide that in China. None of our competitors have the global cut and sew platform that we have. North Carolina, Haiti, China, and whatever our customer wants we are able to meet that. We believe, Budd, where we've headed though I think we certainly believe there are going to be more mattresses sold, foam and hybrid that require a mattress cover. So, we need to be participating in positioning our capabilities to serve that growing part of the market.

Now that market is much more -- is much simpler to operate as opposed to the upholstery fabric cover business, right? Then an upholstery cover sheet has many more parts and complexity than does a mattress kit because of the profiles are vastly different and differ. Is that correct? Is that something I should…

You are exactly right. Many mattress covers are four to five parts. A recliner could be 60 to 80 parts.

So how do we think about the barriers to entry here, if that’s simple or that’s less complex, nothing simple?

No, even though I would tell you based on our experience so far in the last three years to four years now in mattress cover cut and sew, even though, it is simpler on a parts wise basis, it is still difficult. You can screw it up really quickly. So, it has its own other challenges to do it correctly. So, the quality -- consistent quality is a barrier to entry, with no doubt in my mind from what we've seen.

Okay. And then lastly for me on this issue bond bidding resource to a fairly well. Is if this side of the business is growing a double digit that means that the other side of the business is shrinking at maybe double digits, is that the way to think about it? And or is it more in line with the overall industry which I think was now high single digit?

Budd, I think you know what we -- we want our fabric to go into the mattress cover of course. So, when we look at total sales and we talked about double digit growth that does include our fabric. So, what you can do earlier, the real incremental revenue to us is the labor and overhead of the cut and sew cover. So, I think it’s still -- we still going to do fine on the fabric side because the cut and sew component basically is likely did on the furniture side, it is a value add. So, the customer can come to us for one stop shopping all the way from design to delivery of the cover.

Okay. And I would think the labor when you price that in that's got to be at a less than a fleet average kind of margins, is that not correct?

Yes, the margin is -- the cut and sew is in okay margin, but your margin is more in the fabric than in the cotton sole, which is the same on the furniture side.

Okay, all right. Thank you very, very much.

Good questions, Budd, and that's a key area for us as we see what’s happening in the marketplace.

Well, it would be greatly helpful if we had a little more visibility into the penetration of that. I know it’s a -- so I wish to do that for obvious reasons, but we’ll continue to probe that area for a while.

I understand, and Budd, if that can be done without hurting us competitively, that something we'll take a look at.

[Operator Instructions] And if there are no more further questions, I would like to turn the conference back to our speakers for any additional remarks.

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

And once again that concludes today’s presentation. We thank you all for your participation. And you may now disconnect.