Good day and welcome to the Culp Inc. Third Quarter Fiscal 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [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 call conference call to review the company's results for the third 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 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. I will now turn the call over to Iv Culp, President and Chief Executive Officer. Please go ahead.

Thank you, Dru. And 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. Joining me on the call today, are Ken Bowling, our Chief Financial Officer; Tommy Bruno, President of our Mattress Fabrics business, and Boyd Chumbley, President of our Upholstery Fabrics business. I'll begin the call today with some detailed comments. And Ken will then review the financial results for the quarter. After that, I will briefly review our business outlook for the fourth quarter of this fiscal year. And we will then take your questions. We are pleased to report continued year-over-year and sequential improvement in our consolidated sales and operating performance for the third quarter. Both of our core business segments reported increased revenue year-over-year which is impressive, considering the challenging demand environment in the bedding and furniture industries. Additionally, our consolidated operating performance for the quarter was better than our revised outlook announced on January 17, 2024, due to stronger improvement in our Upholstery Fabrics segment. In short, Q3 was in line with our sequential improvement story that we have been executing throughout the first nine months of this fiscal year. Culp Upholstery Fabrics achieved a year-over-year increase in residential sales for the first quarterly period since the end of last fiscal year, driven by both the timing of the Chinese New Year holiday, and some improvement during the quarter and customer demand for residential fabric products. While this increase in residential sales was offset somewhat by lower sales in our hospitality contract business due partly to weather related events in January and short term supply chain issues that affected read window, overall demand remained solid for our hospitality contract business. Also, our Upholstery Fabrics segment once again saw…

Thanks, Iv. Here are the financial highlights for the third quarter. Starting with consolidated results, net sales were $60.4 million, up 15% compared with the prior year period. Gross margin for the third quarter of this fiscal year was 12.7% compared with 4% for the same period last fiscal year, and 870 basis points improvement. The company reported a loss of operations of $1.7 million for the quarter, which included $111,000 in restructuring related credit. This compares with a loss from operations of $7.8 million for the prior period, which included $711,000 related to certain restructuring expenses. Importantly, the $1.7 million loss of operations for the quarter compares favorably with a $2.2 million loss from operations for the previous quarter. Net loss for the third quarter was $3.2 million or $0.26 per diluted share, compared with a net loss of $9 million or $0.73 per diluted share for the prior period. The key drivers for this improvement include of higher sales and more profitable mix of sales for both the Mattress Fabrics and Upholstery Fabrics segment, a more favorable foreign exchange rate associated with our Upholstery Fabrics operation in China, and fixed cost savings in our Upholstery Fabrics segment. These factors were partially offset by higher SG&A expense during the period, as well as production inefficiencies related to the startup of certain new product launches in the Mattress Fabrics segment. SG&A expense during the quarter was up compared to the prior period due mostly the wage inflation and higher personnel costs. An increase in the provision for bad debts, higher travel and tradeshow costs and an increase in sampling expense driven by new product rollouts partially offset by lower incentive compensation expense. Importantly, with regard to SG&A expense, as business conditions improve and demand for our products rise, we believe…

Thank you, Ken. Due to the uncertainty in the macro environment, we are only providing financial guidance for the fourth quarter of this fiscal year. We expect consolidated net sales for the fourth quarter to be lower as compared to the fourth quarter of fiscal 2023. This is due partly to the timing of Chinese New Year holiday, which this year falls primarily in the fourth quarter, as compared to the third quarter last year, but more due to weakness in the industry demand environment that is expected to pressure sales and both that accompanies business segments, especially in the Residential Upholstery Fabrics business. We expect consolidated operating loss for the fourth quarter of this fiscal year that is comparable to the $4 million operating loss in the fourth quarter of last fiscal year. While macro industry conditions are certainly pressuring near term demand, we believe these demand conditions represent bottom levels, and will improve over the mid to long term, as consumer spending trends return to more normal levels. We are well positioned with our strong market positions in both businesses when this occurs. However, in the face of these headwinds, we are evaluating and we are committed to strategic actions in both of our businesses to align our capacity and cost with demand and to restore profitability in fiscal year 2025. So with that, we'll take some questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Budd Bugatch with Water Tower Research. Please go ahead.

Good morning, Iv. Good morning, Ken. First, congratulations on the keeping the balance sheet in good positioning during this troubling time and difficult times. So I think you all deserve credit for that. I would like to just make sure we understand that third quarter mattress sales were up significantly, is that pretty much all price? Is that the way to think about that?

Yeah, Budd, I think -- this is Iv. I’ll surely let Tommy comment to it as well. We're making a really big deal in our comments about how we are driving very hard to win new business at proper pricing, and factoring in actual cost. So yes, we're improving our margins. And so a lion's share in a weak environment is price for our increase. And we're proud of that will pay more dividends when volumes are better. But it is primarily just execution of price and margin. Tommy, you think, you would say different?

Yeah, no, Budd. I think that's spot on. We're seeing about an 18% increase in our ASP. So it's primarily price and a little bit of mix.

And, Tommy, I think there's still some legacy programs out there at less than favorable pricing. You kind of maybe give us a quantification of what you may have left in the sales book for mattresses that are not at prices you would like or at the margins you would prefer.

Yeah, I think as a part of our initiative to improve our margins. We probably have about a third of our book that we need to optimize in order to get in line with our expectations.

And how long do you think that will take?

We're going to make that were going to make that a major priority to address it very quickly. I don't know exactly how long it will take those are individual conversations by customer by skew. But ultimately that is something that we’re going to make go faster than it has so far.

But investors should think about that as a one quarter, two quarter, one year, two year kind of situation, or how many? How would you?

Yeah. I would quantify it in quarters, no more than a year. But I think a lot of it will get addressed within the first two quarters, I would assume.

Okay.

I think, Budd, maybe I would just comment on the legacy sales. We've been dealing with this for some time. And we are a very well respected and very, we love to business. So we're trying to do the right thing by our customer base. But as we're starting to think about some strategic actions, we need to take in the face of the pressure demand, that's obvious something we just going to have to do faster. We want to be responsible to our customer and do things the right way, but likely have to accelerate that.

Yeah, I totally concur with the view that you just, you espouse in terms of the way Culp is respected. So that's, I would expect no, nothing different on that. You talked about the inefficiencies for the startup of new products. How close are we to being it through that particular -- those particular challenges?

Hey, Budd, it's Tommy. I would expect that we will be primarily through that by the end of Q4 at the very beginning of Q1. You would not expect it to continue beyond just the very beginning of Q1 of 2025.

Okay. And if we've seen the mattress business go through some travails before. And obviously, we've gone through an anti-dumping refresh as well. Shouldn't that help Culp’s volume in the intermediate term?

Yes, Budd. I would agree with you. I think there's a lot -- it's an interesting thing to talk about in the face of weak current demand. But I do believe and tried to state it in the remarks that we are confident in the mid to long-term volume potential for us. We think we're positioned very well. We think we're winning more than our fair share. And we think that the industry dynamics are playing to our favor, whether that be anti-dumping or consolidation. We just think there are advantages that we can flex to grow our business. But we just been so surprised by the current demand level, which we know won't last. But obviously, we're just trying to get our arms around the timeline for that improvement.

And as you step back and think about that, and the surprise, is there any change in the structure of the industry? I know the industry has got some structural changes that are going on anyway. But in terms of where you think that the demand issue is, in terms of are there different types of mattresses that are winning share or something going on there, like we had for viscose back at the turn of the century or Bed In A Box starts to develop?

Yeah, I don't know. I don't know that there's anything dramatically, fundamentally different Budd. But we are, in our remarks, we did note that we are seeing unique growth opportunities in products and aren't necessarily traditional fabric by the yard sale. So whether that be a fabric accessory product, or a cutting sewn cover that becomes a roll packed bed. And some of those unique opportunities don't necessarily flex all of our North American assets. Now we have really strong manufacturing and sourcing capabilities worldwide. And that doesn't in any way deter our positive nature. But it may be a little different, we may supply it a little different. And so maybe that's fundamentally changed, but it's not changing to impact our ability to attack the market. There's traditional players and e-commerce players and omni-channel players but we have a way through our fabric and cover manufacturing and sourcing platform to reach all of those. So confident with some normalized demand that we're in really good position.

Okay. And last two things for me. One, you talked about right sizing the business. Any idea as to how long that will take when you make those decisions. What's the timeframe looking in that?

Budd, we just don't have time for that decision to be long. So if we said we just can't tolerate further operating losses, our business is too good and too strong to be performing in this demand environment. So in the current demand environment, we have to make those changes quick. We want to do this ASAP, and we're reviewing all possible actions, whether it be synergized operations, or a capacity reductions or cost management. But everything's on the table, and we're looking at it in the immediate near term.

Got you. Okay, and is there a risk that you might cut too far?

That's something we always will think about. And I would love to have the problem of needing more capacity, we'll find it. So I don't anticipate cutting too far. And I do think that, as I was touching on are really strong manufacturing and sourcing capabilities that we have ways to react to any demand that might be in front of us. So I'm not worried about that. But we'll be careful.

And Ken, your inventory metrics look like they're back to somewhat normal at pre-COVID levels in terms of days outstanding? Is that the right way to look at it? We don't really have an over-inventory problem, at least not inside the company right now. Maybe some of our customers do, but the company doesn't.

Yeah, I think that's fair. I think both divisions have done, over the last year and a half a fantastic job of getting inventory in line with demand. And, again, we look at inventory, they look at inventory every day, we look at it every day. And we are committed to keeping that in line with demand. So right now, I think, Tommy, boy, I think we feel that we're in line with what we expect to for the coming weeks and months.

Okay, I'll let others have a crack. Thank you very much for answering my questions. Good luck.

Thanks. Have a good day.

Next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good morning, gentlemen. And thank you for taking the questions. And certainly, nice to see the balance sheet remaining strong. And certainly, great to see the sequential and year-over-year improvement in sales and operating metrics as well. So I guess, first and just the follow up as far as the question as far as the right sizing of the business and taking actions. So does your guidance for the fourth quarter, does that include any restructuring action? Or anything else? Or just wanted to get a better understanding of that?

No. And this is Ken, it does not. It does not. We’re as if said, we are in the middle of planning for that. But it does not include any of those actions, potential actions.

Understood. Thanks for clarifying that. So there could be potential upside, I guess, I suppose. Okay. And then, you've done a nice job, certainly pricing products in line with costs. At this point, and kind of going forward, just curious to get your take as to what you're saying, from a cost perspective, if you could just go over the various puts and takes in regards to your cost structure. And whether or not you think the pricing pieces that you've put in place, whether those are sustainable going forward?

Yeah, Anthony this is Ken. I think from a raw material standpoint, I think things are stable. And obviously, we're monitoring that very carefully. I think, labor, that part of it, as far as demand that seems to be steady as well. So as far as being able to, first of all getting our costs, right, I think we feel good about that. We've got to deal with the variances, which we are, but as far as pricing. I mean, we're working with our customers every day to make sure we have the right price for the right product.

That's great to hear. Okay. So you're not getting significant pushback, I guess. In terms of, being able to pass that along. It sounds like you're able to do that.

It's not really I wouldn't call it a -- we're not passing on prices on current items, generally. The new things that we're developing our new products being developed with the right prices. We're not overcharging, we're just pricing things properly. Some of the things that we're having to re merchandise Yeah, we either have to offer alternatives or adjust pricing, but that's not a push back being Anthony. We're not trying to drive our competitive price. We just are running a better business on new product.

Okay. That sounds great. Okay. And then you also mentioned that your CapEx, you're focusing on projects that increase efficiencies, improve quality, especially at CHF. So can you share any details in regards to that? And as far as when do you expect those projects to pay off for Culp?

Hi, Anthony, it's Tommy. Most of those projects are being implemented now and will come online in the middle to the end of Q4. And then we would expect to start seeing efficiencies from those as early as Q1 of 2025. And really start to see the majority of that benefit, probably starting in Q2 of 2025.

Got you. And is it possible for you to like, share, give us some examples as to what you're doing now? And how to think about the potential, say cost savings as you get more efficient?

Yeah, I would say most of the projects that we're doing are helping to eliminate waste of our chemical raw materials, as well as to measure and monitor our fabric formation. So we can price our goods accordingly. I would expect about a 2% improvement, and starting in the middle of 2025 in terms of our gross profit against those initiatives.

Profit. That's very helpful. Well, thank you very much. Best of luck, and I'll pass it on to others.

Anthony, thank you.

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

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

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