Good day, and welcome to the Culp’s Second Quarter 2019 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd 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 second quarter of fiscal 2019. 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 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 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 to today's call. I will now turn the call over to Frank Saxon, Vice Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you, Dru. 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 and Iv Culp, our Chief Operating Officer and President of our Mattress Fabrics Business. I'll begin the call with some brief comments and then Ken will then review the financial results for the quarter. I'll then update you on the strategic actions in each of our segments. After that, Ken will review our third quarter business outlook, and then we'll be glad to answer your questions. As expected, our results for the second quarter reflect the ongoing challenges facing the bedding industry related to the significant increase of low-priced imported mattresses from China. We believe the recent petition approved under U.S. trade laws to address this situation will ultimately be favorable for the domestic mattress industry. However, the high volume of imports continued to affect our major customers during the second quarter, which reduced demand for our mattress fabrics and mattress covers. Our upholstery fabrics business had a solid performance for the second quarter with a meaningful contribution from Read Window Products, which was acquired in April of 2018. While we're experiencing considerable headwinds with respect to the mattress industry, we are optimistic that we will begin to see improvement in our quarterly results during the fourth quarter of this fiscal year, as preliminary duties are expected to be announced and put in place. We will continue to execute on our product-driven strategy as we expand our reach into new markets. We are excited about the potential growth opportunities for Read Window in the hospitality space and for eLuxury, Culp's e-commerce business offering bedding accessories and home goods direct to consumers. Above all, we remain focused on offering creative designs and innovative products that meet the changing demands of our diverse customer base. Importantly, we have continued to generate strong free cash flow, especially during the second quarter and returned funds to shareholders through another quarterly dividend increase and share repurchases. These decisions reflect our confidence in Culp's future. We have the financial strength to support our business in this current environment. And we are well-positioned for continued growth as the market conditions evolve. I'll now turn the call over to Ken, who will review the financial results for the quarter.

Thank you, Frank. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website that cover key performance measures; we have also posted our capital allocation strategy. Here are the highlights for the second quarter. Net sales were $77 million, down 4.6% compared with the prior year. Pretax income in the second quarter was $4.3 million, compared with $6.2 million last year. Pretax income margin was 5.6%, compared with 7.6% a year ago. The financial results for the second quarter included a net benefit of approximately $443,000 in restructuring and related charges and credits and other non-recurring items due mostly to the closure of our Anderson, South Carolina production facility. Excluding this net credit, pretax income for the second quarter was $3.7 million. With respect to SG&A expenses, unallocated corporate expenses were down 25% compared to the prior year period, due mostly to lower incentive compensation expenses and lower professional fees. Net income attributable to Culp, Inc. shareholders for the quarter was $3 million or $0.23 per diluted share, compared with $4 million or $0.32 per diluted share last year. Trailing 12 months adjusted EBITDA was $30.1 million or 9.7% of LTM sales. Consolidated return on capital was 18.4%. Now, let’s take a look at our two businesses. For Mattress Fabrics segment, sales were $42 million, down 14% compared with last year’s second quarter. Operating income margin was -- operating income was $2.9 million, compared with $6.6 million a year ago with operating income margin of 7% compared with 13.5% a year ago. Our operations for the second quarter were affected by the significant decrease in demand caused by the growth in Chinese imported mattresses. Despite this pressure, we were still able to achieve a 7% operating margin, which reflects the significant investment in operational…

Thank you, Ken. I will start with our mattress fabrics segment. Our mattress fabrics sales for the second quarter of fiscal 2019 reflect the ongoing disruptions and uncertainty surrounding the mattress industry. We were pleased to see sequential sales growth over the first quarter. However, imported mattresses entering the United States from China have continued to significantly disrupt the domestic mattress business. In anticipation of both increased tariffs on mattresses and the anti-dumping petition that was approved by the United States International Trade Commission on November 1st, we believe a number of companies and retailers accelerated orders and promotions of low-cost imported mattresses. As a result, we experienced continued lower demand for fabric and sewn covers from our customers during the quarter. The second quarter marked the first full quarter to include the operations of eLuxury. We are very excited about this important new sales channel for Culp and the opportunity to participate in the growing e-commerce direct-to-consumer space. We are working hard to develop and create innovative bedding accessory items to be marketed through this exciting platform. New products have already been developed within Culp’s global manufacturing platform, and inventory is being prepared for product launches in the near term. We believe eLuxury enhances our strong value proposition, and we expect to see favorable growth trends from this business category as we move into the new calendar year. Looking ahead, we do see ongoing challenges in the mattress industry that will continue to affect short-term demand trends and our operating performance. While we were pleased to see the anti-dumping petition approved on November 1st, and we are beginning to see some positive developments, it is uncertain when demand trends will return to more normal levels. We believe the expected punitive measures against Chinese importers will be significant and will…

We expect overall sales to be down approximately 7% compared with the third quarter of last year. We expect sales, operating income and margins in our mattress fabrics segment to show sequential improvement but to be significantly lower than the third quarter of last fiscal year, due primarily to the continued significant growth in Chinese imported mattresses. Assuming the mattress industry relief materializes under U.S. trade laws, we expect to see more normalized trends during the fourth quarter of this fiscal year that are more in line with the prior year. In our upholstery fabrics segment, we expect sales to be slightly up compared with a strong third quarter of last year due to the timing of the Chinese New Year. Operating income and margins are also expected to be slightly up compared with the same period a year ago. However, our projections are contingent upon any potential additional tariffs that could be imposed effective January 1, 2019, and could therefore affect our operating costs. Considering these factors, we expect to report pre-tax income for the third fiscal quarter in the range of $4.6 million to $5.4 million, excluding any restructuring and related charges and credits and other non-recurring charges. Pre-tax income for last year’s third quarter was $7.5 million. Our performance for the fourth quarter of this fiscal year is currently expected to be more in line with the results achieved during the fourth quarter of last fiscal year. Based on our current budget, capital expenditures for this fiscal year are now expected to be in the $6 million to $6.5 million range, as we have moved to a more maintenance level of capital expenditures. Additionally, given the strong free cash flow achieved in the second quarter and the current outlook, free cash flow for this fiscal year is expected to be improved over last year’s results, even with the significant headwinds we are facing in our mattress fabrics segment. With that, we’ll now take your questions.

Thank you. [Operator Instructions] And our first question comes from John Baugh with Stifel. Please go ahead.

Thank you. Good morning. I wondered if we could walk down the path of the 25% tariff. And give us some sense if that’s what we’re looking at for the next 12 months plus, how that impacts your business I guess on the furniture side? Thank you.

Good morning, John. The 25% tariff you’re referring to, we’ve got 10% already which was implemented in September. And the current, I guess position from the administration is an additional 15% as of January 1st. If that were to be put in place on the furniture side, we will do exactly what we did with the first 10%, and that is we will increase prices. And we are benefiting from a weaker currency. So the price increase to be equal, we didn’t have to give a price increase for the full 10%, because we did benefit from some currency. But we would plan to do the same thing we did with the 10%, we will raise prices.

And Frank, what position -- where are you competitively -- one of your competitors done so far with the 10%, where are they sourcing their fabric from? Are they in the same boat and doing the same thing or is there some other countries sourcing where you've got an issue?

That's really -- let me -- that’s really a couple of questions there, John. The first one is our competitors that are sourcing fabrics from China, which is really 90% of the upholstery fabrics comes from China, there is no other meaningful country in the world where upholstery fabrics come from. So, they all have increased prices as well. The domestic producers, of which, there is a few, also have raised prices recently we hear and due to some raw material increases or other reasons. So, we are not out there raising prices by ourselves. And I would expect that the other folks importing from China would continue to have to increase prices, they'd have to. The second part of the question is, there is really -- and we've looked at this -- we've looked at it a long time and we’ve continued to especially look more detailed over the last six months, is there any other place where we could source upholstery fabrics or our customers might go to source upholstery fabrics in the world. And whether it's Indonesia, whether it's Turkey, whether it's South Korea, Taiwan, India, none of which are competitive with China even with the 25% duty. So, that gives us -- and we're in touch with a lot of players in those areas. And so, I don't think it's a risk that the business moves from China on the 25%.

And then, Frank, before I touch on bedding, can you give me a sense of the amount of fabric? You said 90% I think the imports are coming from China. What percentage of all upholstery we're consuming in this country, upholstery fabric is coming from domestic producers as a percentage?

I would say 10. I mean, our back of the envelope, there is no public data available. We think of it as 90-10. And there is a minuscule amount coming from other countries. Some come from Turkey, some from Indonesia, but they're really not significant.

Okay.

Unfortunately, China wiped out the domestic industry last decade.

Yes. And then, on bedding, there is so much noise with the volumes impacting your business there. I'm curious, because we hear the high-end bedding is fairly strong, and I know you're not as well positioned there. But, if we were to somehow get a picture of the rest of your bedding business exclusive of this low-end impact on the volume, what does it look like? How is Culp doing in terms of product mix and price per yard? Whatever color you could give will be great.

Yes. John, this is Iv. Thank you. I'll take that one. And I want to recircle back a little bit to your question on tariffs. And just one thing that we should add from a bedding standpoint is, while the tariffs are somewhat damaging and are tough on our upholstery side and renegotiating prices and some of those challenges have a cost, some of that plays really well to us on the mattress fabrics side and the mattress covers side, because we are able to expand our mattress cover business into some of that China location, because mattress covers aren’t today in the Section 301 tariffs. Now, who knows what the future holds in any of that, but today it’s enabling us to really expand our cut-and-sew business quite a bit into China and that is a third leg of our cut-and-sew business. But to answer your question more directly, we really do, -- it might be a misconception, we are pretty well-positioned from low to high. Our design, our innovation in our business will be targeted towards all levels of bedding. We don’t really just target lower end but that’s what’s been so disruptive this year, because of some of the inventory that’s been built up, and just a lot of disruption at retail as well. So, I think we’ll be well-positioned for both. For us, high-end bedding helps companies make mattresses because the mattresses sell very high. And when we make high end fabrics, it’s better for us, price point wise, but it’s not the same lift as a mattress company is going to get by selling a bed in multi-thousand dollars. Our fabrics are still going to be in $7, $8, $9, $10 range; we’re not going to be able to -- it’s not such a dramatic shift for us in fabric to generate it. But, we need both to be strong, both medium to low, and medium to high.

Okay. That’s extremely helpful. And I guess, as I think about bedding and moving forward, is your expectation, Iv, that we’ll start to, what, see different behavior even before a number is announced, maybe mid, late-February, because of fear that a number will be announced and that could be retroactive or would the expectation be that you really wouldn’t see orders and/or shipments flowing through until after that? I’m trying to get a sense for how much the fourth quarter might benefit from dumping rate announcement?

Yes. The expectation -- again, this is Iv. Thank you, John. The expectation we have is that the percentage is going to be significant. And everyone that we talk to and we consult with it feels like, it’s fairly certain. I know that’s not -- we can’t guarantee it but it does feel fairly certain and most of that seems to be lining up with the calendar year. So, we have for sure seen many companies reestablishing supply chains to domestic production. And we’re working on really an inordinate amount of projects for that end. And for us, we have a really strong platform with our fabric production combined with cut-and-sew now in U.S., Haiti and in China, all three really gearing up very strong. So, we can’t guarantee we’re going to win in all of these places but we sure are working on a lot of them. And it feels pretty certain that end of our fiscal year should be back to some of the business we’ve been used to.

And then, finally on SSB, I know they’ve got deep pocketed parent company funds, but we also know, they’re not doing terribly well, although they did make an acquisition. So, presumably, they have access to capital. Simple question is, do we need to worry at all about that receivable, what are you seeing out of that particular important customer?

I mean, we have not been worried about that. We -- that is a critical customer for us and one that we really like to do business with. We haven't been worried about it, John. We -- I like a lot of things about how they approach the business and I think their acquisition looks smart. We really believe that the best way forward of the combination of B2B with B2C which we are fully embracing here at Culp too. So, we would expect both of those channels to be something that we truthfully target heavy going forward. That's a strategic customer for us.

John, this is Ken. I mean, we monitor that account very closely and we certainly share -- we watched the news and in contact with them. So, it's an account we are very in touch with and on top of.

And, Ken, there has been no change in their payment pattern behavior, I assume.

No, no.

Great, thank you. I appreciate it. Good luck, guys.

Thank you, John.

Thank you. We'll next go to Bobby Griffin with Raymond James.

Good morning, everybody. I appreciate you taking my questions. Frank, I first want to follow back up on the upholstery side of things. And you mentioned you guys have started to pass through some of the price increases for the 10% tariffs. What have you heard from your customers, those price increases are having -- or what have you heard -- how those price increases are having an impact on demand? Is there any type of color you can give us maybe on your unit volume or yardage? Help us to think about…

Yes. That's what we all -- Bobby, exactly what we're concerned about and have been, but we're not seeing it yet. Backlogs, orders, you see -- I mean, they still are pretty good. We're not -- people are worried about that, but we're not seeing it yet. Business is decent.

So, the upholstery growth we're seeing, obviously some of it’s benefiting from the acquisitions, but when you look at just kind of pure yardage numbers, your yardages are still showing growth. Is that correct?

Yes. And remember, it's a little cloudy because we've got our Anderson, South Carolina plant sales related to that that are down and are phasing out. But, if you would exclude those, then we are growing in our China produced fabrics. And we feel pretty good now. I mean, with the innovation, the creativity, the performance line; I mean all feels pretty good to us right now, even with the tariffs.

Okay. That's helpful. I really appreciate that. And then maybe I was hoping to maybe get a little bit more color on how the integration is going with Read Window Products. Have you made -- have you been able to push some of the Culp China fabrics in through that platform as we've talked about before in the past? If not, maybe kind of what's the timing on that?

Yes. The Read Window acquisition we're very pleased. They’re performing a little better than expected from the beginning on margins; sales are pretty much as expected. They integration has gone well; we've got a fabulous team there. Customers have been really excited about Culp expanded product offerings. And we've been calling on all the major flags and key other customers and it's gone very well. You also -- second part of your question is one of the key synergies over the long-term, which is to use Culp fabric in the window treatments. Read Window, when we bought, it was using no Culp fabrics; it was buying from other suppliers. That's going to take a few years to get in place, but we started already with some products which are getting great -- our first introductions are getting great reception. So, that will evolve quarter-by-quarter and I feel very good about achieving results on that particular synergy. And of course, that will bode well, Bobby, when and if we get another acquisition. We'll already have those products in the pipeline for the hospitality market.

And, Bobby, this is Iv. I would add one thing to what Frank was saying there too. He may have said and I didn't hear him, but you had asked about what those China fabrics specifically and maybe in some cases yes, but we also can do those products from our North American locations as well. So, it's sort of the trend throughout the Company with both Read and eLuxury and several -- where dots are just being connected in a lots of really good ways, taking our fabrics from just the all traditional way of selling manufacturers to find a new ways to get our products further downstream. Lot of good things are happening across the Company in that regard.

I mean, we are going to see more synergy among our businesses. We're clearly seeing that. And Iv's really initiative in his role is to maximize that synergy. We've got so many capabilities and strengths among our -- now our various platforms. And it seems like lots of opportunities everywhere we look. I think, we're going to see more of that exactly like this opportunity where in this case the great goods are made at our Canadian facility, which is part of the CHF. We do digital printing on them and sell them through the Read Window Product channel. And the second example, we're doing - -we're developing a several key products for Culp produced for eLuxury. All this is going to take a little time, but we're seeing increasing synergies among our businesses.

Okay. And then, I guess, lastly for me on mattresses. One, can you maybe refresh us a little bit on how the concentration of that business is among the big four players, maybe as a percentage of sales or something to help us think about that breakout of business? And then also, assuming we do get some help here from anti-dumping, and the volume does return, production capabilities under the kind of coverings business, how do you guys look to kind of capture some of that return on volume here to the U.S.?

Bobby, yes, I think you kind of have to look a little bit back and little bit forward to your question. For sure, for a long time, we have been well entrenched with the big four, and that has for a long time been a big part of the mattress industry. I know we see numbers where those big four are 60, maybe even 70% of the business, have been in the past, but that's changing so much and so rapidly because there are so many new entrants. And I think even some of us as close in the industry as we are haven’t grasped how many beds that are coming in and being sold against the market that we were really targeting. The customers that we were not restricted to sell, but that was just sort of the market we were in. I think, we're kind of -- our eyes are being opened to how many opportunities are ahead of us, seeing how much diversification of product we have, the platform we have of cut-and-sew and how we can target so many new customers. So, our customer list is much longer, much bigger than it was previously. And that's exciting for us as we think about where we can take products going forward.

Are those big four today still -- I mean, the last time I looked into filings there, plus 45%, plus around 50% of bedding sales, is that exposure still at the same level today?

Yes. I think they’re still obviously in today’s environment -- and they should also, I’d assume, they’ll get a lift too with some protective measures that get placed on import. And they also -- those companies are getting very smart in the kind of products they’re designing, developing and how they’re looking at their new sales strategies. So, I think that’s probably still fair, Bobby. I mean, they’re certainly critically important to us, those big four; no doubt, we have to keep a very strong focus on.

Okay. I appreciate all the detail. Best of luck moving forward, and the continued strength of integrating the businesses together.

[Operator Instructions] We’ll next go to Marco Rodriguez with Stonegate Capital Markets.

Just a couple of quick follow-ups. I’m not sure, if I caught this or not. But, did you provide a revenue contribution in the quarter for eLuxury and then also for Read?

No, we just -- Marco, we just gave the annual run rate on sales and operating income contribution.

Okay. I apologize. I guess I missed that. What were those numbers?

It was 20 -- approximately $20 million for eLuxury and $11 million to $12 million for Read Windows. That was sales down; on the operating income, we said the margins for Read Windows was going to be slightly higher than the overall upholstery fabrics margin, and then the operating income contribution for eLuxury was going to be minimal this -- for the annual run rate.

Got you. And maybe if you could talk a little bit about eLuxury, just kind of what the performance you kind of saw over here on Black Friday, Cyber Monday? Was it kind of in expectations or just how you kind of saw that?

Yes. I think it’s been fun for us, new for us to experience consumer sales around Black Friday, Cyber Monday, and was very busy. We have a lot of excitement about these holidays and hopefully it’ll carry through the holiday season. More excited looking out, because we’re in the process right now, a lot of -- building the pipeline is underway today with a lot of our new products and things that we’re designing, both with fabrics and other products and finished products. So, I would feel even more excited about next year at this time in these holiday seasons when all of our items are up on the site and for sale. I think, it’s fun to see those peak sale periods and this was good, I would expect next ones to be even better.

Marco, another synergy in that line is that -- I didn’t mention earlier as it relates to eLuxury is that we’re taking the mattress pads that eLuxury makes, which is about half of those sales. And we’ve got a big initiative to sell them into our -- into the hospitality market, on a B2B basis. And that’s in the works now as another type of cross synergy between our businesses.

Yes, I think we -- Frank is right. We really have a lot of dots to connect throughout the Company. And it’s just taken us a little bit of time in figuring out where to put those pieces together. But that is -- that’s a great one.

And in regard to the comments on these new products that you been developing and the inventory that you’re building up here for these launches on eLuxury. I’m assuming that there's no issue from a capacity standpoint. And then also, maybe you can talk a little bit about timing as far as when these products might be launched, and what you might be kind of looking at?

Yes. Well, we have already put a few select items on the site. We have some finished products we developed; we’re selling some upholstery fabrics by the yard in concert with TLC show that airs. A lot of these products we are making to our China platform, and these are items not impacted today by any Section 301 duty. So it's a little bit of a timeline of development, production and then, you're dealing with the China lead time of shipping. So again, it's somewhat really starts to gear up for us to be hitting the websites towards our fourth quarter to probably more substantial and real selling and profits in the next fiscal year.

Got you. And last quick question is kind of a housekeeping item. Now, with eLuxury full quarter in, obviously Read for a couple quarters now, SG&A running around $10 million excluding onetime items. Is that a good run rate to look at for you guys going forward or are there additional things you might be looking to add or take out?

Well, I think -- Marco, it's Ken. I think when you look at the addition of both new businesses and the impact on SG&A. I mean, you look at the second quarter and projecting forward, I think that is pretty representative of where we're going to be, maybe just a little bit higher going forward. But, I think that with the mix of all that -- it's probably safe to say second quarter is a good parameter of where to look to in the future, I guess.

Got it. Thanks a lot guys. I appreciate your time.

Thank you. And it does appear we have no further questions in the queue at this time. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Okay. Thank you. One last one comment I want to make, for everybody, is that I want to be sure that everybody hears how confident and optimistic we are about our future. We raised the dividend for the seventh consecutive year, we're repurchasing shares, and we have strong balance sheet to weather the current short-term situation, but we are very confident and optimistic as we look ahead at all the opportunities ahead of us. So, with that, I just want to say thank you again for participating the Culp call. And we’ll look forward to updating you next quarter.

Thank you. And again, ladies and gentlemen, that does conclude today's call. We thank everyone for their participation. You may now disconnect.