Good morning, everyone, and welcome to the Culp, Inc. First Quarter Fiscal 2025 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today’s event is being recorded. At this time, I’d like to turn the floor over to Dru Anderson. Ma’am, please go ahead.

Thank you. Good morning, and welcome to the Culp conference call to review the company’s results for the first quarter of fiscal 2025. 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 website at culp.com. A slide presentation on the company’s restructuring plan is also available on the 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.

Thank you, Dru, and good morning and thanks to everyone 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 are Ken Bowling, our Chief Financial Officer; Mary Beth Hunsberger, President of our Upholstery Fabrics business; and Tommy Bruno, the President of our Mattress Fabrics business. Today, I will begin the call with some detailed comments. And as mentioned in the introduction, we have posted an updated slide presentation to our Investor Relations website that covers information related to our restructuring plan, which I will refer to you today. Ken will then review the financial results for the quarter. And after that, I’ll briefly discuss our business outlook for the second quarter of fiscal 2025, and we will then take some questions. Before starting, I would first like to express our sympathies to the family of Budd Bugatch on his recent passing. Budd was a friend to many of us personally and certainly to Culp. We appreciated Budd’s coverage for close to 40 years, and we learned much from him about the larger furniture industry. Budd’s talents, expertise, and heart were unique, and we will miss him. We look forward to a continuing relationship with Water Tower Research, and we appreciate their handling of a tough situation. So turning to our first quarter, our sales results reflected strong sequential improvement as compared to last quarter, with mattress fabric sales at 9% and upholstery fabric sales at 19.7%. While we continue to experience challenged macro industry conditions, our sequential sales growth was better than expected, and year-over-year consolidated sales were flat despite the overall industry weakness. These impressive sales results are largely driven by our improving market position in both businesses. Our innovative styling, our dedicated…

Thanks, Iv. Here are the financial highlights for the first quarter. Net sales were $56.5 million, down 0.2% compared with the prior year period. The company reported loss from operations of $6.9 million, which included $2.7 million in restructuring expense and related charges as compared with the loss from operations of $3.1 million for the prior year period, which included $517,000 in restructuring related charges. Adjusted loss from operations was $4.1 million compared with an adjusted loss from operations of $2.6 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 first quarter was $7.3 million or $0.58 per diluted share, compared with the net loss of $3.3 million or $0.27 per diluted share for the prior year period. Our overall operating performance for the first quarter as compared to the prior year period was pressured by inefficiencies primarily related to the significant restructuring activity underway in the mattress fabric segment offset somewhat by increased gross profit in our upholstery fabrics business and lower SG&A expenses, mainly related to lower incentive compensation expense and lower professional fees. Adjusted EBITDA for the 12-month period ending for the Q1 was a negative $5.7 million as compared to adjusted EBITDA for negative $16.7 million with a comparable prior year period of 66% improvement. The effective income tax rate for the first quarter of this fiscal year was a negative 3.4% compared with a negative 26.5% for the same period a year ago. Our effective income tax rate for the quarter continues to be impacted by the company’s mix of earnings between our U.S. and foreign subsidiaries with an operating loss in the U.S. and taxable income mostly from China, which has a higher income tax rate compared to the…

Thank you, Ken. So due to the significant activity underway in connection with our restructuring initiatives, we are only providing limited financial guidance at this time. Although we are encouraged by the updated and improved guidance we are giving, especially as we look into the second half of the fiscal year. While macro demand is expected to remain challenged, we expect our consolidated net sales for the second quarter to be comparable to the first quarter of fiscal 2025. We currently expect to return to near breakeven adjusted EBITDA, excluding restructuring and related charges in the second quarter of this fiscal year, and to return to positive consolidated adjusted operating income, excluding restructuring and related charges in the third quarter of this fiscal year. So with that, we will take some questions.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] Our first question today comes from Brian Gordon from Water Tower Research. Please go ahead with your question.

Good morning, Iv, Ken, Mary Beth, and Tommy. First, I definitely want to congratulate you guys on what is, I think, a very solid quarter, given the substantial growth in both segments and what is a challenging environment for sure, better margins in upholstery, and the progress that you guys have demonstrated with the restructuring initiative. I guess my first question would be about the cadence of business over the quarter in the last few weeks, given the very strong sequential growth that you guys had. How did that play out across both upholstery and mattress?

Thank you, Brian. This is Iv, and I’m going to pivot those questions, and let Tommy and Mary Beth give you the feedback from the ground level on the businesses, but again, just want to thank you for your support on Water Tower. If you want to know, it’s a tough cycle with Budd. We’re just grateful to have your participation with us, and thanks for following us. We appreciate it. Mary Beth, why don’t you go first, if you want, on what you’re seeing in upholstery trends.

Sure. Thanks, Brian. Thanks, Iv. So we definitely saw in Q1 a nice rebound from Q4. We started out very strong May, June, July. We have seen – we did see some weakness in July, more so than in the prior months. Again, I think the industry trends are really hard to predict at the moment, but in general, the business is still strong and we’re feeling good about our market share specifically in the industry.

Hey, Brian, it’s Tommy. I think, for us, we saw some of the same similar things that Mary Beth saw. I think we’ve seen consistency through July into August as well. So, I think the visibility we have to new placements and market share opportunities remain strong through Q2 and into Q3. So, I think we feel like we are on a good path for sequential growth throughout the year based on what we see today. Obviously, that’s tied to the programs launching in the periods in which they’re expected to launch.

Great. Great. Thank you for that. I definitely want to dig in a bit on the restructuring. First, and maybe to the question for Ken, could you talk a little bit about where the savings from that original $8 million estimate for the restructuring are coming from?

Yeah, I’ll begin there, Brian, and I’ll let Tommy jump in. I mean, obviously, with the closure of the Canadian plant, we’re going to have much lower fixed costs. And then with just consolidating the operation, getting the efficiencies of having operations in one plant, and then the savings of outsourcing our damask line, all of those kind of add up to the projected savings that we’re looking at. And, Tommy, if you want to jump in here as well, I mean...

Yeah. No, for us, it’s really the fixed cost savings associated with combining plants. There’s other operational improvements that we’ll benefit from by being in one facility in Stokesdale with consolidated leadership. And as we move our damask business offshore, separately, we’re expecting margins to improve some as a part of that transition and that all gets phased in as we sell through that inventory. That’s why we’re cautious about Q2. But we expect that benefit to start to impact results in back half of the year.

Thanks.

[We expect to finish your question, Brian] [ph], or are you asking more about the reduction in the cost for the restriction? We want to make sure we hit your question the way you want it there.

Well, I mean I was going to ask about the anticipated savings too, but I was specifically asking about the difference from the $8 million to the $5.1 million for the restructuring cost.

Okay, Brian. I’ll take that. Yeah, we had in late April estimated the restriction expense to be about $8 million. Of course at that time, we were just getting into things and looking at the different pieces, and so we’ve obviously had many months since then to get a much clearer picture of our expected expense. The difference is really broken down into about in roughly three areas. Number one is we looked at certain operating expenses related to our Canadian operation that we originally felt would be classified as restructuring and related, but those ended up being classified as normal expenses, so that’s a reduction. Secondly, our original estimate for equipment and inventory write-downs and impairments is coming in less than we expected due to the simple fact that we are using those assets, so after looking at things and looking out the structure where we’re going, we were able to use more assets than we anticipated. And then finally, with respect to certain cash costs, such as employee termination costs, we just expect to come in lower than we originally forecasted. So that’s kind of the breakdown between the $8 million and the $5 million expectation. And, obviously, the current $5.1 million is a fluid number, so just we’ll provide updates in the future.

Right. Thank you very much for that. That’s helpful as the original comments on how those cost savings are going to play out. I kind of wanted to step back maybe a little bit and ask kind of a bigger picture on how the restructuring is really going to change the business model for CHF in terms of like what percentage of the product is going to be produced in-house versus what percentage of the product is going to be in that strategic sourcing model that you guys have talked about, which is more similar to upholstery? And then as investors look at that, how should they think about how that change is going to impact margins and the economics of the business?

Brian, thank you. This is Iv. I’ll take that one first and anyone can certainly add to it. It’s a good question. And just we really overemphasize this in the release. There’s no doubt. The point of this restructuring decision is to reduce our cost level on the CHF business primarily. So we’re really proud of CUF and the asset-light model they have, which is especially important today due to variable business conditions and political economic risks that are just happening all over the world. So we love that asset-light model. And CUF is a, upholstery fabrics is a shining star in our current scenario. So we’re proud of that. In CHF mattress fabrics, that restructuring is a significantly reduced cost and effectively lower our breakeven. So remember the point we’ve been making all along here is that we’re going to get the business back to breakeven or to profitability in this current environment. And then we know other tailwinds will eventually really improve that business that the macro industry improves. So we’re going to go asset-light on our damask business, which is a portion of our business, and we’ll leverage a long-term very dedicated partner to source that business. That’s a smart move. And remember, our cut-and-sew business is going to utilize low labor cost strategies in Asia and also in Haiti, combined with right on the border there, the DR, and really just a great labor force that we have in offering us nearshore capabilities and just having low labor costs throughout our cut-and-sew platform. But the businesses, CHF and CUF, are some different, and we do need to maintain some significant manufacturing service customers in this competitive quick-ship world. So we’re going to have a very super plant, robust manufacturing in North Carolina for circular knits, and then our cut-and-sew covers will be low labor cost driven, and our damask business will be asset-light. So we’re making really good progress reducing that cost level and becoming much more agile to service our customers, but we do think we need in this business, some higher asset level mix to be successful in the mattress fabric side. So hopefully that answers kind of where our heads are.

Yeah. No, that’s incredibly helpful. Thank you, Iv. I have one more question, and I guess this would be for Mary Beth. Hospitality looks like it’s continuing to grow quite nicely. I was hoping you might be able to give us a little bit more color on what’s driving the growth of that business and where you see this going from here.

Sure. Great question. So the hospitality industry in general is booming coming out of COVID. The focus on travel and experiences is outweighing purchases of things with most people, so we’re seeing the boom of hotel rooms, especially in the mid-price range, the extended stay where people are utilizing hotels more in their life than they were before. So the industry is certainly helping us. For Culp, in particular, we have a beautiful new line, a new portfolio of products specially designed for this type of hotel that is really helping us gain market share, number one; and then the second piece helping drive this business is our window treatment business. We have expanded roller shade capacity in our Burlington facility, as Iv mentioned, and really just capturing the market with a number of hotel properties that we are now approved brand partners with. So very exciting, a lot of potential in this segment and we really hope to see this segment become a very significant portion of our business.

Thank you for that. I think you brought up a point which I hadn’t fully realized before that that gives you guys effectively a little bit more exposure to the experience economy and less dependence on what’s happening with the residential furniture per se. So I think that’s an exciting point to highlight. So thank you.

Sure. It is definitely nice to have a portfolio within CUF that strikes both industries. So when one is up, you kind of have cover with the other. So it’s a nice mix.

Thank you. And I’ll turn it over the call to anyone else who might have a question. So thank you.

Thank you, Brian. Have a great day.

And ladies and gentlemen, at this point, we’ll be concluding the question-and-answer session. I’d like to turn the floor back over to management for any closing remarks.

Thank you, 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. Have a great afternoon.

And ladies and gentlemen, with that, we’ll conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.