Good morning, and welcome to the Culp, Incorporated, Fourth Quarter Fiscal 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Good morning, and welcome to the Culp conference call to review the Company's results for the fourth quarter and fiscal 2024 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. 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. A slide presentation on the Company's restructuring plan 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.

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. With me on the call are Ken Bowling, 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. And as mentioned in the introduction, we have posted a slide presentation to our Investor Relations website that covers information related to our restructuring plan, which I will speak about in detail today. Ken will then review the financial results for the quarter and the full year. And after that, I'll briefly review our business outlook as we turn the page to fiscal 2025, and we will take some questions. Our sales and operating results for the fourth quarter were in line with our expectations announced on May 1, 2024, when we also announced our comprehensive restructuring actions. Our results for Q4 reflected weakness in industry demand in both of our businesses, driven primarily by ongoing macroeconomic headwinds. Our sales performance for fourth quarter was also affected to some degree by the timing of orders as many of our larger customers experienced extremely slow conditions beginning in January. Looking back, we posted solid year-over-year sales gains in both of our business segments during our fiscal third quarter, and we were making progress towards our stated improvement goals. However, we faced a significant decline in order levels during our fourth quarter related to demand pressures our customers faced early in the calendar year. The impact on fourth quarter revenue, along with the ongoing macro pressure led us to take aggressive action to bring our manufacturing costs and capacity in line with current and expected demand. We announced a wide-ranging…

Thanks, Iv. Here are the financial highlights for the fourth quarter. Net sales were $49.5 million, down 19.4% compared with the prior year period. The Company reported a loss from operations of $4.2 million, which included $204,000 in restructuring expense as compared with a loss from operations of $4 million for the prior year period, which included $70,000 in restructuring expense. I'll comment in more detail on divisional sales and operating performance in a moment. Net loss for the fourth quarter was $4.9 million or $0.39 per diluted share compared with a net loss of $4.7 million or $0.38 per diluted share for the prior year period. Our overall operating performance for the fourth quarter as compared to the prior year period was primarily pressured by lower sales in both divisions as well as operating inefficiencies in the Mattress Fabrics segment during the quarter and a onetime customer payment received during the fourth quarter of last fiscal year that did not reoccur this fiscal year. Offsetting some of the operating pressure was lower SG&A expenses due primarily to lower incentive compensation. For the full fiscal year, net sales were $225.3 million, down 4.1% compared to previous year. Loss from operations for the full fiscal year was $11.3 million, which included $676,000 in restructuring related expense during the period compared with a loss from operations of $28.5 million for the prior year, which included approximately $9.9 million relating to certain inventory impairment and other charges and restructuring-related expenses during the period. Net loss for the full fiscal year was $13.8 million or $1.11 per diluted share compared with a net loss of $31.5 million or $2.57 per diluted share for the prior year. Operating performance for the year as compared to the prior year period, which was pressured by inventory impairment…

Thank you, Ken. Due to the uncertainty in the macro environment, as well as the significant activity underway in connection with our restructuring initiatives, we are only providing limited financial guidance at this time. While macro demand is expected to remain challenged in the first quarter of fiscal '25 pressuring year-over-year sales results, we do expect our consolidated net sales for the first quarter to be moderately higher as compared sequentially to the fourth quarter of fiscal '24. The sequential growth is driven by an improving market position for Culp as well as some lift in sales conditions from the Memorial Day holiday. We are not providing specific first quarter operating income guidance as there are many possible outcomes related to the timing of the restructuring and the charges and benefits that will occur. A significant portion of this activity will affect operating results in Q1. We will update progress on our restructuring initiatives every quarter. And post restructuring, we expect to return to a positive operating income on a monthly basis sometime in the second half of fiscal 2025. With that, we will now take questions.

[Operator Instructions] Our first question is from Brian Gordon with Water Tower Research. Please go ahead.

Good morning, everyone. Thank you for taking my questions. It's obviously been a tough quarter, but we know that the entire team has been really laser-focused on restructuring and managing costs, and it definitely shows in the results even with sales down significantly. I do have several questions, though I want to cover about the restructuring. And Iv in your comments, I know you touched on this a bit already. But when the restructuring was first announced, you noted that the bulk of the $8 million should be booked in the first quarter of '25 -- do you have any update on the timing -- the expected timing of the cash and non-cash components of these charges?

Yes, Brian, thank you for the questions. And we try to layout a general timeline in that new restructuring deck, so we can -- we'll speak to it maybe generally there. We do expect the bulk of the charges both non-cash and cash to be impacted in the first half. Ken, you may want to add something more towards how it lays out Q1 or first half or maybe it's -- we just got it to first half at this point.

Yes. It's just based on expectations of how the restructuring effort will continue, but it's mostly related to the first half.

I mean we're going to push it quick, Brian. We're trying to go as rapid speed as we can, balancing, servicing our customers very well, transition equipment at the right time and the right pace. I mean it's a significant portion in Q1, but there will be some drift into Q2 for sure.

Okay, thank you. On a similar note, do you have any update on the expected magnitude and timing of the cost savings over second half? When we're thinking about how to model the savings, should we be expecting something like a $2 million to $3 million improvements by Q4? And maybe how much should we expect in Q3?

Yes, Brian, this is Ken. I think the way we've laid it out, we've talked about annualized savings in the second half of the year will definitely be improved with operating results. It just depends on the timing of all the different aspects of the project, but the benefits will start coming into play in the second half.

Okay. Thank you. Kind of following on and maybe looking out a little bit longer term. You've said for Mattress Fabric that your long-term goal is an operating income target of something like 9% to 10% in two or three years. When we think about the restructuring, how much of that longer-term target do you reach to this current restructuring activities? And how much do you think is going to depend on anticipated revenue growth?

Good question, Brian, and you're picking up on the points very well. We do in our investor communications point to a normalized margin -- operating income margin of 9% to 10%. That's historically where we had wanted to be at a minimum. And what we're doing in the restructuring process is recognizing the current depressed volume in the macro industry. So the restructuring actions are generally getting us back to breakeven to small profitability without any change in demand. And the growth past that is based on revenue. So we feel really good about our product placements. We feel encouraged about our sales team. We're encouraged by our product and design innovation process. So we're -- we know we're going to grow the business. I think we can grow the business without industry getting better. But we also know at some point, it will. So we're really trying to guide to returning to profitability with these actions and then banking on our product placement and macro tailwind to drive us back to normalization.

Okay. Thank you. Understood. Obviously, a big part of the restructuring is moving to a more agile sourcing model for Mattress Fabrics. And part of that is consolidating production in the Stokesdale facility and creating a center of excellence there. But when we think about what you're doing in terms of closing Quebec and moving the -- some of that equipment to North Carolina. How should we think about -- like what percentage of the equipment in North Carolina is going -- equipment Quebec is going to be new to North Carolina versus how much is going to be sold. And where are you guys in that process?

I can pivot some of this to Tommy because he's managing this process for us daily, if not hourly, -- he's working on it really hard. We have an advantage in the process, Brian, as we've had -- we've kind of had two what I would consider super plants that can do most of our production. We had North Carolina and Canada. We have generally very good equipment in both. But this process allows us to optimize the best equipment into one location, and generally just having economies of scale across one location, one set of overhead and just being very diligently focused, a strong North American business with very strategic, flexible sourcing options. So Tom, as to where you are in the process, you might be able to give some guidance, and it's going to be a sprint over the quarter -- but maybe got into where we are so far.

Yes, absolutely. So we'll be selling 100% of our damask weaving assets from Quebec as a part of this process, and we'll be moving roughly half of our knitting and net finishing assets to Stokesdale. As where we are in that process, we have to retain that equipment as we service our customers as a part of the restructuring until such time that we cease operations. But we would expect that all the equipment would move to Stokesdale over the end of the third, into the fourth quarter -- calendar quarter. And we'll start selling equipment. We're already in the process of selling some. We expect the rest to be sold by the end of the calendar year based on how the market is.

Okay, thanks for that. That's all very helpful. I certainly want to be respectful to other callers who might have questions. Do I have time though to ask maybe a few questions about demand in the current environment?

Certainly, Brian. And I was just going to maybe add one more thing on Tommy. I stretched this a couple of times in the plate. I think it's important for investors to hear. He has a really good plan and his team has a really good plan to optimize the equipment in the right places. But when we talk about selling some equipment and downsizing, none of that prevents us from growing the business. We have really solid partners, we have a really good plan to service our customers, and we expect to be able to grow the business on a lower asset base, which will be fantastic when that starts to occur. So I just -- I want to be sure it's always very clear that we aren't -- we maybe scaling our internal capacity in our North American facility, but we aren't, in any way, losing our ability to grow the business. Important point.

Definitely. When you talk about the guidance in terms of like some modest sequential improvement, is that low single digits? Is that how we should be thinking about that?

Yes, that's right, Ryan. We've got the year-over-year parts pressured, but we do see some sequential growth there from fourth quarter to first quarter.

Right. Okay. Thank you. One of the things that you both noted in your comments and in the release was that hospitality contract was up at 38% of sales for upholstery. How much of that is winning new business versus maybe weakness in the residential furniture side?

I'll let -- I'll pivot that to Boyd. He's managing that business for us really well. So Boyd, why don't you take that question?

Sure, I'd be happy to. Yes, Brian, we are really encouraged by this segment of our business as it's really remain solid throughout FY '24 and backlogs are currently increasing. As you noted, and we've noted in our comments, the segment did grow to 38% of total CUS sales in fourth quarter. Now granted that is somewhat due to residential weakness. But we have been seeing a solid business here throughout our fiscal year. And with the increasing demand, we have recently initiated a capacity expansion for the roller shade category of our window treatment business, and we are establishing that output in our North Carolina, one of our North Carolina operations, and that's expected to come on stream in Q2 of this year. So we remain very excited about the prospects of this part of our business as the consumer is continuing to prioritize spending on travel and experiences and do see a good outlook for that business.

Great. Thank you. Anecdotally, there was some evidence that Memorial Day weekend was a positive for mattress sales, even though May as a whole, may have been flat. What have you been hearing from your customers on the demand side?

I think, Brian, good to call out. We are saying that we have -- we're hearing more and more from our customers that it's -- sales are getting very promotional holiday driven. So, it's not atypical for us to see a boost of business around holidays and promotions and that -- a lot of those are in the summer. So, we've been seeing some of that as well. I think for us, we're trying to distinguish the excitement we have from a promo period, but also balancing that with our intensive focus on placing and winning new business. And that's happening at a very good rate in both businesses. And we -- listen, we understand the fruits in the pudding. And those seeds are being planted and there will be days as a better market condition, we'll see improvements in both. So I think we have a lift from the holiday, and I think we have a lift from the efforts we're doing on both sides to place more products at retail.

Thank you. Obviously, new product introductions have been really important from a margin perspective, especially given the compression, that inflation and higher costs have had in the recent quarters. As investors are kind of thinking about the business, first of all, where are you in terms of like pricing of the new products versus your targets? And when we're thinking about like fiscal year '25 revenues and beyond, what percentage of sales are going to come from these kind of new placements and new embedded products?

It's a good question, and let's break that down by business. We did a better job through cost pressure when we had raw material and freight and other pressures, we did a better job passing those prices on in Upholstery Fabrics. And this was before Tommy's joining Culp. He had a transformation process underway in the mattress side to move our underperforming products to better margins, either through SKU rationalization or just price adjustment. And he's in the middle of that now. He can -- I'll let him tell you how far he is in that. We still need to exit or change margin on older SKUs, making great progress and the strategy is underway in a big way. So Tommy, I don't know how you feel where you are in it. I know it's moving every day. Maybe some advice for Brian there.

Absolutely. So Brian, one other element of the business restructuring that we've announced is that in moving our business to a sourcing model, it's allowing us to rationalize our SKUs and move to a better degree of profitability as a result of lowering our fixed expense. So the business restructuring is pushing a portion of our portfolio to be fully rationalized by the end of calendar Q3 and then I think we're about halfway to our objective on the other portion of the business that will be manufactured in North America on a continuing basis.

Okay. Thank you. One final question, if I may. There's also been reports about both freight surcharges and potentially anticipated delays with shipping, especially coming out of Asia. Any comments on how this potentially is going to affect you guys in fiscal '25?

Yes, Brian, this is Boyd. And thanks for the question. We certainly have been experienced some of this with the global route changes that took place to avoid the Suez Canal. I'd say that generally has increased transit times by probably two weeks. And we have been seeing some delays both of our own and certainly with some of our customers that we ship direct to, some delays in getting equipment and vessel space. But I'll say it really hasn't had any significant impact to us at this point. We've been successfully managing through this by adjusting our supply chain and logistics planning and it really had no real significant disruption to deliveries anywhere. As you noted, certainly, costs have been escalating since earlier this calendar year because of all these factors, but they're still below the peaks that we saw in '21 and '22. So at this point, we're just continuing to monitor and we'll, of course, take any appropriate steps as required depending on how that plays out from here.

Thank you. And thank you, everyone, for the very generous time that you've allocated to my question. I'll let anyone else ask questions at this point. Thank you.

The next question is from John Deysher with Pinnacle. Please go ahead.

Hi, good morning. Thanks for taking my question. Most of my questions have been answered. I guess one remaining is the $10 million to $12 million from proceeds of real estate and equipment, how does that break down in terms of mix, what percentage would be real estate? And what percentage would be equipment roughly?

Yes, John, this is Ken. It's $10 million to $12 million related to the real estate, and we said $2.5 million from the equipment.

Oh, I missed that. Okay. So $10 million to $12 million for real estate, plus $2.5 million for equipment.

Correct. Correct.

Okay. And the $10 million to $12 million for the real estate, how did you get to that number? I mean, appraisals? How did you get to the number? And at what point do you actually sell the real estate? Obviously, you market it in advance. But at what point can you actually sell it, once the equipment is out?

Yes, John, this is Ken again. We've looked at several different ranges as far as the sales opportunity up there. We worked with our broker on that. We worked with our tax partners on determining our tax liability. There's different aspects of unwinding the business up there. So that $10 million to $12 million is an estimate or a range of potential scenarios, and that's kind of where it failed. We again, we've already engaged a broker, and we started that process. Obviously, there are some things to get to plant and obviously get our restructuring completed, get the plant in shape, not much to do there, but there's some things we need to do to get everything ready. So all that's in motion right now. And as we said in the prepared remarks, we hope to get it sold before the end of the year.

Okay. So the broker is actually marketing it now?

He is in the process of getting materials ready and reaching out to contacts.

John, it's a little tricky for us. This is Iv. It's a little -- timing is a little tricky only because we're still winding down the facility and servicing our customers for products that we have place there, just getting things structured. So that takes a little time. Every indication we have is there's a lot of interest in the building. So we just need to get -- we do phase down, wind down, exit and then just get it marketed. And then Ken's range is just an all after-tax kind of net. So it feels like a good range. We hopefully move as quick as we can and all indications seem positive.

Okay. Just to be clear, I mean, you've had appraisals done on the property?

Yes.

Yes, sir.

Okay. All right, great. I appreciate it and good luck.

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, operator. And again, thank you for your participation and your interest in Culp. We look forward to updating everyone 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.