Good day. And welcome to the Culp, Inc. Second Quarter Fiscal 2024 Earnings Conference Call [Operator Instructions]. Please note, this event is being recorded. I would 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 second quarter of fiscal 2024. 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. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial results. 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 measurements 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 Web site at culp.com. At this time, I will now turn the call over to Iv Culp, President and Chief Executive Officer of Culp. Please go ahead, Iv.

Thank you, Dru. And good morning, and thank you for joining us today. I would like to welcome everyone to the Culp quarterly conference call with analysts and investors. Joining me on the call are Ken Bowling, our Chief Financial Officer; Boyd Chumbley, President of our Upholstery Fabrics Business; and Tommy Bruno, President of our Mattress Fabrics Business. I will begin the call with some detailed comments, including the discussion of key points and topics for the quarter and for both businesses as well as priorities as we look ahead. After that, Ken will review the financial results for the quarter, and then I'll briefly review our business outlook for the third quarter of fiscal ‘24, and we will then take your questions. I'd like to open with a general update of some overriding themes and discuss the current state of our business within the overall furniture and bedding industries. I'll further discuss some critical actions we are undertaking in both businesses, and I'll expand on these comments to illustrate where Culp is headed. First, we are pleased to report both sequential and year-over-year improvement in our consolidated sales and operating performance for the quarter, despite the challenging industry environment and ongoing demand softness with the two industries we service. These results are satisfying as we believe we are outperforming general market conditions in both businesses. Secondly, we continue to be excited about the comprehensive transformation within our CHF mattress fabrics business. And we are pleased to be gaining market position in the face of unit slowness in the domestic mattress industry. Our 19.6% year-over-year sales growth and 90% improvement of year-over-year operating loss represents strong evidence of our progress in the effectiveness of our CHF leadership. Third, although market conditions are also pressuring the residential home furnishings industry, our…

Thanks, Iv. Here are the financial highlights of the second quarter, starting with consolidated results. Net sales were $58.7 million, up 0.6% compared with the prior year period. The company reported a loss from operations of $2.2 million for the second quarter compared with a loss of operations of $11.9 million for the prior year period, which included $6.7 million related to certain inventory impairment and other charges and restructuring related expenses during the period. The $2.2 million loss from operations for the quarter also compares favorably with the $3.1 million loss from operations for the previous quarter. Net loss for the second quarter was $2.4 million or $0.19 per diluted share compared with a net loss of $12.2 million or $0.99 per diluted share for the prior year period. Our overall operating performance for the second quarter as compared to the prior year period was positively affected by a number of factors, including the better inventory management, higher sales and better pricing and margins for the mattress fabric segment, fixed cost savings in the Upholstery Fabric segment, improved operating efficiencies in both segments and a more favorable foreign exchange rate associated with operations in China. This year-over-year improvement in operating performance was partially offset by lower residential upholstery fabric sales and higher SG&A expense due primarily to increased compensation expense, higher professional and consulting fees and increased sampling expense, driven by new product rollouts among other factors. Importantly, with regard to SG&A expense, as business conditions improve and demand for our products rise, we believe that we'll get significant leverage from the increased sales. Adjusted EBITDA for the period was close to breakeven at negative $247,000 as compared to adjusted EBITDA of negative $8.2 million for the prior year period. The effective income tax rate for the second quarter…

Thank you, Ken. Due to the uncertainty in the macro environment, we are only providing financial guidance for the third quarter of fiscal ‘24. We expect consolidated net sales for the third quarter to be sequentially comparable to the second quarter of fiscal ‘24 and moderately higher as compared to the third quarter of fiscal ‘23, even in the face of ongoing demand headwinds. We expect consolidated operating loss for the third quarter of fiscal ‘24 in the range of $1.2 million to $1.6 million, sequentially improved from the second quarter results and a significant improvement compared to the $7.8 million operating loss for the prior year period. Again, I'll comment that we believe we are poised for a considerably better second half performance with a return to consolidated operating profitability by the end of the fiscal year. Finally, we will continue to be laser focused on balanced financial management with the goal of always maintaining a strong balance sheet, especially with regard to ensuring a strategic balance in our working capital. We are optimistic about Culp’s future and we know that financial stability is paramount to our success. With that, operator, we can take some questions.

[Operator Instructions] The first question today comes from Budd Bugatch with Water Tower Research.

Iv, I wonder -- and congratulations on the improvement in the quarter, it's very heartening to see that. Iv, you mentioned that you think you're starting to see bottoming in some parts of the residential industry, obviously, upholstery and mattresses are slightly different. Can you give us a little bit more color of what you're hearing from your customers in terms of what they're seeing going forward and their confidence that we may be at bottom in these areas?

Sure, Budd, and I'll let Boyd comment more specifically and Tommy too if he wants. But the comment I made in the script is, we do believe we've seen the bottom in residential home furnishings upholstery fabric sales, and we really say that's primarily due to inventories of both manufacturers and retailers seem to have corrected and back to a normal level. So while we aren't saying that the industry is getting stronger and we recognize we still have tailwinds, we just think for us with inventories flushed out, it's more normal ordering course and we're able to see our sales grow and incoming orders pick up. Boyd, would you add any more to that?

Budd, I think that's exactly right. We did, during the quarter, see some pickup in our incoming orders at the beginning of the quarter and really throughout much of the quarter. And again, as you say, Iv, I think that is partly a result of the inventory now being depleted in terms of furniture inventory in the pipeline at both manufacturers and retailers. And so we are now seeing the benefit of retail orders coming through to us in fabric orders. So I think with that -- certainly, I think from a market perspective, it's likely that the retail sales will continue to be soft for a period of time. But I think from our standpoint, we have seen and probably will continue to see some better business due to those factors.

So it's really not -- it's not the fundamental demand, but as much as it is the fact that what was really hampering sales was the manufacturers over-inventory position and really, I guess, extending down into their customers over-inventory that prevented them from adding new products and new placements -- that's the fair way to think about it?

I think that is fair, Budd. I do think that we are with our broad product offering and innovative products that we do have the opportunity for gains with our customer base and our ability to reliably supply. So I think those things also will benefit us in the coming quarters. So I think it's a couple of those factors are coming into play.

Budd, the theme you're going to keep hearing from us as we look ahead here in the short term is we aren't -- and I said it’s kind of clear, we aren't factoring industry improvement for our improvement. We're going to improve our business, because we're getting better operationally and we're making gains with customers, and that's going to happen in both businesses. So we're not going to rely on market -- macro tailwinds, that will come some point. But for now, we're going to make our steady sequential improvement just because we're going to do a better job, not only operationally but also in growing our share.

And do you have many more things to do in upholstery fabrics and CUF to get that, you've made some changes in sourcing and obviously, you had to take your inventory medicine a couple -- in the quarter and previous quarters. So are there any initiatives that give you confidence that you can actually improve the margins there?

I think Budd, you've called out a couple of the things that we have already done that are -- did certainly assist with our performance in Q2 and will on an ongoing basis, where we did restructure our global cut and sew platform and aligned that with the current demand, and did some consolidation there to have all of that now in our Asia platform. And so I think that's one of the key things that we have done. I think, we will also -- one of the other key tasks that we have is continuing to expand our global platform as we keep looking at supply in locations other than China. And we've made great progress on that in expanding within Vietnam. We've got a couple of other countries that we're very heavily invested and involved in right now to develop platforms in some other locations. So that's one of the key things I think is we're seeing is our objective over this second half of our year.

And mattress fabrics has been also a main topic, because your desire to get back to a double digit operating margin basis on a profitable basis. Tommy, how are you seeing that? What's the timeframe to getting back to a double digit operating margin?

Budd, we continue to focus, like Iv mentioned in his prepared comments, on taking market share at the correct margins on an ongoing basis. We continue to look at our assortment for SKU rationalization and improved profitability. And an extremely large initiative that we're undergoing is looking at our efficiency and operational improvements across all facets of our operation. As those things start to continue to layer in sequentially, I think, we believe we'll be back in double digit profitability later this year, early in fiscal year 2025.

You're talking gross margin…

Gross margin, yes, that’s right. But I think for us to get back to -- we always have for the CHF business, a double digit operating income target. And what we're saying is we're going to keep making our steady sequential improvements in the current depressed market environment. And we say we're going to return to consolidated operating profitability in the fourth quarter, that's not normal profitability, that's not that. So we'll look and we'll springboard, we'll get -- stop our losses and springboard into FY25 with every goal of moving back to normal historical margins at the operating line, but it just takes time. And we will need some tailwinds to go all the way back. And we know those will come, we just have a hard time knowing exactly when. So I hope that helps understand that.

The next question comes from Anthony Lebiedzinski with Sidoti.

So first, just continued great job maintaining a strong balance sheet in this difficult operating environment. So first, I gues, my first question here is as far as ASP increases that you talked about at CHF, and you sort of -- can you guys maybe put a number on that as far as how much ASPs drove the overall sales increase? And what is your confidence level in terms of being able to maintain these higher ASPs?

Anthony, it's a combination of two things driving ASP, one is the types of programs that we're getting that are higher end programs in the market and then in general, we're mix -- our product mix is driving our ASP based on the mix of covers and higher end fabrics.

I mean, Anthony, we say the units are down, industry units are reported down almost everywhere and our units are slightly down. We think we are performing on units but a lot of our sales gain, majority of it is better prices, better margins, new products priced properly, all the things we didn't do for a period of time that Tommy and his team are really correcting. So we're seeing that offset. That's why we're really encouraged. We're growing our sales without units where we expect they will eventually be. That's why it even drives more optimism if you look at it that way.

And then, I guess, as far as this whole transformation process that's been taking place at the CHF. I guess, if we were in a kind of a baseball game, what inning are we in as far as the process and what are some of the initiatives left to do?

So I would say we're still in the middle innings. We're still continuing to work on changing some things within our product assortment to drive productivity through all of our SKUs. We're still continuing to work on operational efficiencies after we made some restructuring changes within our leadership team. So in general, I would say we're still in the middle innings. I think it's generally a two year transformation process and I just feel comfortable that we're going to show steady improvement through that process on our way back to historical results over time.

And then as far as the SG&A, I know you guys talked about that being up because of some higher business investments. Can you share with us a little bit more details on how should we think about SG&A going forward?

I think as we've said, SG&A is up but it's due to factors that are really supporting the business. We're putting in the right people in the right seats, we're getting back on the road again to traveling to customers and shows. We've had some restructuring things relating to our sampling. With the business levels being up, we are sampling a lot more with new programs. So all of those factor in. I think, when you look at where we are currently with our SG&A, we feel very good about where we are. We feel that going forward as sales start to rise, we will get that positive leverage. So we think we're well positioned. We've just got to get the lift going forward and get that positive leverage. But overall, we see that SG&A is an investment and we feel like we're in good shape at this point on both sides of the fence.

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

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

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