Good morning and welcome to the Culp, Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I’d now like to turn the conference over to Dru 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 and fiscal 2022 year. 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 today 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 in the tables to the press release included as an exhibit 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 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 Iv Culp, President and Chief Executive Officer of Culp. Please go ahead, sir.

Good morning and thank you for joining us today, I'd like to welcome you to the Culp quarterly conference call with analysts and investors and with me on the call today are Ken Bowling, our Chief Financial Officer and Boyd Chumbley, our President of our Upholstery Fabrics business. I will begin the call with some opening comments and Ken will then review the financial results for the quarter and the full year. I will then briefly update you on the strategic actions specific to each of our operating segments and after that Ken we review our first quarter fiscal 2023 business outlook and we'll then be pleased to take any questions. As previously announced, our results for the fourth quarter were significantly challenged by the unexpected shutdown of our China facilities due to COVID related restrictions affecting both of our businesses and by further weakening in domestic mattress industry sales. However, our operating loss for the quarter was somewhat better than expected as our mattress fabric segment experienced slightly higher sales than previously anticipated during the last two weeks of the quarter. We were also able to return a small number of employees to our Culp China locations at the end of April and facilitate product shipments in a limited capacity. Importantly, we have maintained our strong customer relationships despite this disruption, as we have balanced and diversified supply chains in both businesses. Much effort has gone into our delivery platforms and we fully understand the importance of customer service in our competitive industry. We also ended the quarter with a higher cash position than expected with $14.6 million in cash and investments and no outstanding borrowings. In addition, we are pleased to announce the closing of our new secured credit facility, which enhances the company's financial flexibility and is…

Thanks Iv. As mentioned earlier on the call, we have posted slide presentations through our Investor Relations website that cover key performance measures. We've also posted our capital allocation strategy. Here are the financial highlights for the fourth quarter. Net sales were $56.9 million down 28% compared with the prior year period. The company reported a loss from operations of $5.4 million compared with income from operations of $1.6 million for the prior year period. I'll comment in more detail on divisional sales and operating performance in a moment. Net loss for the fourth quarter was $6 million or $0.49 per diluted share compared with net income of $1.5 million or $0.12 per diluted share for the prior period. Our overall operating performance for the fourth quarter was significantly pressured by lower sales, operating inefficiencies at our US and Canadian locations due to the rapid and material decline in revenues, unfavorable foreign exchange rate fluctuations in China and additional employee training costs and operating inefficiencies at our new Haiti upholstery cut and sewn facility, as it continues scale capacity to its full planned output level. These pressures were partially offset by lower total SG&A expense for the quarter, due primarily to a lower incentive compensation expense. For the full fiscal year, net sales were $294.8 million down 1.6% as compared to the previous year. Income from operations for the full fiscal year was $678,000 compared with income from operations of $12.1 million for the prior year. Net loss for the full fiscal year was $3.2 million or $0.26 per diluted share compared with net income of $3.2 million or $0.26 per diluted share for the prior year. Operating performance for the current year was affected by the factors I noted earlier in the fourth quarter, as well as higher freight,…

Thanks, Ken. I'll just give a few more comments about each division beginning with the mattress fabric segment. Despite the headwinds in this business, Culp Home Fashions has maintained a continued focus on its product driven strategy with an emphasis on innovation, design creativity, quality and personalized customer service. In response to the ongoing headwinds, management is taking decisive action to further reduce expenses and improve operating efficiencies with the targeted annual cost savings of approximately $2 million. We're also planning to announce additional pricing action during the first quarter that will be effective for the second quarter of fiscal 2023. Looking ahead, we are optimistic about plan new programs and product development opportunities for fiscal 2023, but industry weakness is expected to continue for some period of time, which may reduce demand for mattress fabrics and cover products and delay the timing of new product rollouts. We have an excellent supply chain platform within CHF with manufacturing and sourcing operations across six countries. Customer service and reactivity remained at our core. And we will be prepared to respond to changing demand scenarios and meet our customers where they want to be serviced. Now I'll turn over to the upholstery fabrics segment. Despite the significant disruption in the residential business during the fourth quarter due to COVID-related shutdowns in China, we sustained our focus on innovation and creative design. We continued the ramp up in production at our new Haiti upholstery cut and sew facility during the quarter. And we also expanded our options for fabric development and sourcing, offering greater diversification and supply chain resiliency within our global platform. We are also pleased the shutdowns have significantly curtailed our China operations throughout April and May have now been lifted and we are currently operating at normal capacity. However, we note that lingering constraints from the shutdowns may continue during the first quarter of fiscal 2023. Looking ahead, we believe our upholstery fabrics business is well positioned for the long-term with its scalable global platform and its sustained focus on innovative product offerings, including our popular portfolio of LiveSmart performance products and a growing hospitality fabric business. However, we expect a slowdown in new retail business for the residential home furnishings industry may affect demand for the residential business for some period. Ken is now going to discuss the general outlook for the first quarter of fiscal 2023 and then we'll take any questions.

We continue to navigate a convergence of headwinds, including significant inflationary pressures that are affecting consumer spending, a challenging labor market, COVID-related disruption in China and other geopolitical events. Although the company remains well positioned over the long-term with this product-driven strategy and flexible global platform, the current conditions are likely to continue pressure results through at least the first half of fiscal 2023. Due to the continued volatility in the macro environment, we are providing only limited sequential financial guidance for the first quarter of fiscal 2023 at this time. We expect net sales for the first quarter of fiscal 2023 to be comparable to the fourth quarter of last fiscal year. While we still expect a material consolidated operating loss for the first quarter of fiscal 2023, we do expect a moderate improvement as compared to the loss incurred during the fourth quarter of last fiscal year. We also expect our cash position as of the end of the first quarter of fiscal 2023 to be comparable to our cash position as of the end of last fiscal year. In conclusion, as we continue to weather the current challenges, we will be laser focused on prudent financial management with the goal of always maintaining a strong balance sheet, especially with regard to ensuring a strategic balance in our working capital. With that, we'll take your questions.

[Operator Instructions] Our first question today comes from Budd Bugatch of Water Tower. Please go ahead.

I guess, the question I have is really to assess the health of your customers and their inventory, current inventory and their financial capacity. I'm talking about the manufacturing customers, both in upholstery and in mattresses. Maybe you could give us some color to the extent that you can without talking about individual customers?

Budd, nice hearing from you. For sure, we don't want to talk any details about specific customers. But generally, I would say one of our strengths in our cash position or management for the last period of time has been really solid receivables. So we've been pleased with that. What we're facing probably on a customer level is that I think a lot of our customers have -- are still working off high backlogs, have inventory in place that we have shipped them and are using that to fill orders they have, while they're also seeing some slowness in their market, which is maybe limiting what they're bringing in from us. So we have done a really nice job, as we've touched on in many previous calls, of delivering demand. So even through the surge, we kind of kept up. We never built a really large backlog and we just kept shipping our customer. And so now I think we are faced with some -- some of our customers on both sides of the business that have inventories of our products and other things and they're finishing out their backlogs and not pulling new things from us at least currently. So as excited as we get about new product wins and all the things we talk about that's growing, we're getting new product to offset stuff that's not moving. We're not able to gain on the total quite yet. Boyd, do you want to add anything to the customer?

I would just echo what you said there, Iv, which is, a lot of our residential furniture manufacturing customers still have backlogs that they are working down. And while those backlogs have been coming down, I think a number of them are still in a position where they're in pretty good shape of having backlogs to still work through. That does vary within our customer base and there are some that backlogs have been brought down further than others. But I think it's just a general assessment of the industry that remains the picture of where it is today.

So two questions come to mind on that. Is there any difference between upholstery and mattress? And at the current rate of sales and their work down, how long will it take before their inventories are better balanced or better in -- reached normalcy?

Budd, I think there's maybe a little bit of a difference between upholstery and mattress customers for us. Generally, the mattress business, as you know, has always been more of a just-in-time delivery cycle. So maybe you carve out on the mattress side, bed-in-a-box or mattress-in-a-box type of customers. There probably is a lot of inventory in the system on products like that, but traditional mattress business, probably not large backlogs, maybe just weaker conditions we're feeling. And then on the upholstery side, I think it's for sure, it's higher backlogs than most everyone has experienced. And Boyd, I don't know if you have an idea of a timeline? I'm sure it varies by customer.

I think we're still looking at several months out at minimum before we start to see more normalization there to pre-COVID type backlogs and lead times. So I think there's still some number of months of run out to go.

So Ken, to get to a comparable cash position at the end of Q1, if you're going to have a sizable operating loss, I guess that means that, a, you're not going to spend a whole lot of capital in advance of depreciation. But b, you're going to be working down some working capital as well. Where is the source of cash coming from? Is it primarily receivables or will there be a significant inventory reduction at the end of Q1? And if so, could you quantify what your thoughts are?

Well, I think our obvious focus will be on inventory. I mean, we made significant -- well, good progress in Q4. Our inventory was down almost 9% from Q3. We want to continue that effort in Q1. Of course, we have to balance with the opportunities that get presented before us. But yeah, I think we're looking for a material contribution from inventory as well as you said, we're going to very carefully monitor CapEx and just limit spending there unless you absolutely need it, we're not going to spend it. So it's -- and of course, continuing to focus on prudent accounts payable management as well as keep laser focused on our accounts receivable receipts or accounts receivable performance. So it's all kind of play in there, but inventory is going to be a major focus for sure.

And again, do you think it's a 9% reduction or what's the kind of number that you get to at the end of Q1?

Budd, I can't -- I mean, I don't want to quantify that. It's just it will be material. We're going to have to really focus on that. And of course, as you said, to cover the losses, we're going to have to make a material contribution for sure.

Budd, I'll just make a quick comment on the inventory, maybe specifically to the CHF side, and we have touched on this in previous calls. We still [Technical Difficulty] significant part of our inventory on that part is raw material. So that is a product that we're not worried about moving. It's the timeline of moving and then we've got to generate volume to move it. So we see opportunities to reduce the inventory. And it is hard to pin down on a number we'll get to, but there will be significant focus on both moving fabrics that are in stock to the customers that have taken it and to opportunities for new customers as well as just getting the run schedules a little better so we can work down yarns that have already been purchased. So there's some tailwinds in there.

And did I hear you right, you have a $2 million cost savings program? And is that an annual number? And where do you see that, in which divisions and what kind of actions are you taking?

Most of those actions or generally all those actions have been taken on the mattress fabrics side of the business and it's coming from several areas. I mean, it's labor cost reductions, both salaried and hourly. It's some right-sized product shifting for certain aspects of the business. We have -- some of our segments may not be performing as others, so we're going to scale back production of those items. We're going to flex our global platform to make the products in the most advantageous cost spot. There's a lot of material improvements such as order quantities, just managing the efficiency of the business better, dropping some yarn SKUs, just being more efficient in the business in these current terms. It's mostly on the mattress side. And if we complement that with some announced pricing actions we're going to need to do and then maybe get a little volume relief on new products, that's where we see improvement being potentially there.

And the pricing actions, have they been announced? And can you quantify them?

No, we haven't announced those yet. We'll be announcing those in our quarter in Q1 to be effective for Q2.

Good luck on the balance of what's going to be a difficult period for all of us, I'm afraid.

[Operator Instructions] Our next question comes from Anthony Lebiedzinski from Sidoti & Company. Please go ahead.

So first, I guess, just looking at the cost savings, just to follow-up on the previous question from Budd, as far as that $2 million savings program. As far as the timing of that, I mean, should we expect that kind of evenly throughout the year or like, Ken, maybe you can help me out as far as thinking about the timing of those expense savings?

Good question, Anthony. I think the way we would look at that is maybe the back end of Q1, but primarily, Q2, Q3 and Q4 is where that would spread.

And then as far as -- I know some of the new product rollouts could be delayed because of just all the uncertainty that is out there. But that being said, I know that's a high focus for you guys as far as keeping an eye on innovating products. So can you share with us some of the examples that you hope to be able to rollout in fiscal '23? What are some of the exciting new things that you hope to bring to market in your segments?

Well, I think about it, if we look about two different parts of the business, let's start with maybe the upholstery side. And Boyd, I'll let you comment if I'm missing something here and I'll let you fill in details. I'm thinking there's excitement there for our LiveSmart products. I think we continue to see strong potential in new placements with our sustainability products, LiveSmart Evolve. And I think we're pretty optimistic about the recovery of the hospitality business, specifically on the fabric side where those fabric applications can fit. I think there's opportunity in both those parts. Boyd, why don't you touch on it and I'll do mattress fabrics after you?

And yes, the strength in the LiveSmart umbrella of products that we offer, that certainly remains a core strength for us. And I'd say, especially the Evolve, the sustainability product that we have introduced to the marketplace. And the reality of it is, while that has been available for a couple of markets, these are a couple of market seasons where there was not a lot of new introduction being done. So as we came out of the most recent April furniture market and certainly our most recent fabric showing season here in May, we have really seen renewed interest and additional receptance to these products. And again, especially the Evolve, LiveSmart Evolve is really gaining a lot of traction. We are hearing from a lot of people that there is going to be a need and is a need in the retail environment and in the market for new products. We're expecting much more significant introductions in that late in October. So we remain very optimistic for that entire category of our product offering.

And Anthony, I can add a touch point on the mattress side, if you want, with just what gets me excited about that is -- and we talked about it in Q3 release and Q4. We have made significant sales presentation changes. Meaning a lot of digital technology, a lot of brand experience management, a lot of just very sophisticated development and customer service process, and we are seeing projects being placed. It's both fabrics and covers for national brands and rollouts that are scheduled really for this current fiscal year. What's going on, and Boyd touched on it so much, is retailers, in our view, just have not put a lot of new product on the floor as they've come out of the COVID surge. And so now as business starts to get a little more challenging and gets a bit weaker, we see optimism for new products and retailers wanting to push things on the floor to drive customer excitement. And that's where our optimism lies because we know we've won better placement position on things that are scheduled to be launched. We just are not able to control yet when they will actually physically launch. So that gives hopefully some color as to what we're seeing and why we're having a hard time estimating the timeline, but why we're also pretty optimistic about the future.

So it sounds like that because of these initiatives as far as new product innovation that should help you to come out faster in that recovery once we're past this tough period here. And just a follow-up also on the sustainable product focus for LiveSmart Evolve. Generally, is that a higher margin type of product for you guys versus others?

Anthony, typically, the performance category does have somewhat higher margins. So yes, as that category continues to grow for us, that should have some impact there.

Remember, Boyd is able to do that two ways. When he talks to performance, we think about that, Anthony, it's a sustainability product along with having a lot of performance features and cleanability. So it really is an excellent product that is demanded. Now we can offer it multiple ways. It doesn't have to have both, but a performance and sustainability product is pretty special offering we have.

And then as far as the hospitality business, can you give us a sense as to like how big that -- just in terms of the overall impact on the business, I know you talked about top-line recovery within that business. Can you just -- I know you guys don't quantify specifically how much that is, but sort of any kind of color where that is now versus a year ago versus two years ago?

Anthony, this is Boyd, and I'll be glad to address that. As we've talked about before, during the 2021 year, hospitality typically lags what's happening in residential. And with the stay-at-home focus during that COVID time period, we certainly saw more increase on the order demand from the residential side than we did initially from the hospitality side. We have seen that now certainly flip to where the hospitality growth is coming back again as more and more traveling has started to take place. We did -- and again, you're right, we don't normally disclose those percentages of our business, but I will put it in this perspective. Our FY '21 saw our hospitality business as a percent of our overall business declined quite significantly. In FY '22, that came back, not quite to the normal levels or the levels that we had grown to pre-COVID, but not that far off. And certainly, as we're moving into this fiscal year, we're seeing continued strength in that segment of our business. So I think we will see a return to being a percent of our overall business similar to what it was prior to COVID.

That's very helpful color. And then I know you guys are very focused on managing your CapEx. I may have missed this, but Ken, did you give a number for CapEx for the year that you expect or I just wanted to follow-up with that?

No, Anthony, we did not. We're just -- like I said, right now, we're looking at every single expenditure and just managing that very closely. And so it will be limited, for sure, as we go through this time, but we did not give a total at this point.

Best of luck, and have a great holiday weekend.

Our next question comes from Budd Bugatch of Water Tower. Please go ahead.

Sorry for the follow-up. But there is -- there was a notable -- there is a notable bankruptcy in the mattress side of the business. I just wanted to make sure or ask if the receivables have been appropriately reserved for that or will that be an issue that we have to address going forward?

Budd, good question, and that's something we just learned about on Saturday morning. So we're still kind of gathering our data around it. That customer has been a good customer for us and we certainly are going to support the restructure. I'm pleased to tell you there's really no impact to us for Q4, and we're just now managing the impact to our business and the opportunity we see. But for now, with more to learn, we feel pretty good and feel like that's not going to be a major impact to Culp.

This concludes our question-and-answer session. I would now like to turn the conference back over to Iv Culp for any closing remarks.

Thank you so much, operator. And again, thank you all for your participation and your interest in Culp. Have a happy 4th of July holiday, and we look forward to updating you on our progress next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.