Good day, and welcome to the Culp, Inc. Third Quarter Fiscal 2025 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 third 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 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.

Thank you, Dru, and good morning, and thank you 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. I'll 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 on the progress of our current restructuring plan, primarily focused on our Mattress Fabrics segment, which I'm very pleased to say is now substantially complete. Ken will then review the financial results for the quarter. And after that, I'll briefly discuss our business outlook for the fourth quarter of fiscal '25, and we will answer some questions. Despite continued macro industry sales pressure, we achieved further sequential improvement in our operating results for the quarter, driven largely by the positive effects of our mattress fabrics restructuring activity. We also continue to see increasing potential to grow our market share, particularly with new business opportunities for mattress fabrics and sewn mattress covers. We remain very confident in the future of our 2 business segments, especially considering the competitive advantages generated from our now more streamlined cost structure, along with our agile manufacturing and sourcing platform and market-leading design and innovation capabilities, ultimately all supported by an eventual market recovery. Looking at our Mattress Fabrics segment specifically, we continue to improve our operating performance with a 58.3% sequential reduction in operating loss despite lower sales for the quarter. This builds on the 70.7% sequential reduction in operating loss we reported in the second quarter. We also achieved near breakeven consolidated adjusted…

Thanks, Iv. Here are the financial highlights for the third quarter. We continue to face a challenged demand environment. Net sales were $52.3 million, down 13.5% compared with the prior year period. The company reported a loss from operations of $3.9 million, which included $2.3 million in restructuring expense and related charges, of which $2 million was cash. This compares to a loss from operations of $1.7 million for the prior year period, which included $111,000 in restructuring and related credits. Adjusted loss from operations was $1.6 million compared with an adjusted loss from operations of $1.9 million for the prior year period. Notably, the $1.6 million adjusted operating loss was sequentially improved as compared to Q2's $2.6 million adjusted operating loss, even on $3.4 million less in sequential sales. I'll comment in more detail on divisional sales and operating performance in a moment. Net loss for the third quarter was $4.1 million or $0.33 per diluted share, compared with a net loss of $3.2 million or $0.26 per diluted share for the prior year period. Our overall adjusted operating performance for the third quarter was supported by improved operating efficiencies resulting from the mattress fabrics segment's restructuring initiatives, lower fixed cost and lower SG&A. Adjusted EBITDA for the last 12-month period ending Q3 was a negative $6.3 million as compared to a negative $3.3 million for the same prior year period. However, adjusted EBITDA for the third quarter was close to breakeven at a negative $123,000, which was a sequential improvement compared to adjusted EBITDA of a negative $1.3 million for the second quarter, again, despite $3.4 million in lower sales. The effective income tax rate for the third quarter of this fiscal year was a negative 12.1%, compared with a negative 47.5% for the same period a year…

Thank you, Ken. Due to the ongoing macroeconomic and increasing tariff uncertainty, we expect continued industry sales pressure are only providing limited financial guidance at this time. We expect our consolidated net sales for the fourth quarter to show some growth year-over-year and to remain relatively flat sequentially. The year-over-year growth is driven by an expected increase in the mattress fabrics segment, offset by ongoing pressure on residential upholstery fabric sales due to weak industry demand and impact from the timing of the Chinese New Year holiday, which this year falls entirely in our fourth quarter. We currently expect continued sequential improvement in adjusted EBITDA, which excludes restructuring and related charges, with further improvement in mattress fabrics profitability in the fourth quarter, providing a foundation for a return to consolidated operating income in fiscal 2026. These expectations reflect certain assumptions regarding our business and trends, the projected impact of the restructuring actions and ongoing market headwinds. Importantly, our expectations also assume no further meaningful impacts from tariffs and trade negotiations. So with all that, we'll now take your questions.

[Operator Instructions] First question comes from Brian Gordon with Water Tower Research.

So, my first question would be sort of about the change in guidance. And so my understanding from what you said this morning and from the press release would be that at current demand levels, you're now kind of expecting early first quarter, maybe first half at the latest for a return to profitability. Just want to clarify this.

Yes, sir. That's right, Brian. That's how we're talking about it. And we just are -- maybe as I touched in the script, we're committed to returning to profitability at whatever demand levels we see. And that just means we have to do more to get there. And the levels have gotten somewhat worse. Hopefully, it's temporary with all this uncertainty that's going on right now, but we're going to make the adjustments to set a foundation for next year to be a profitable, sustainable, profitable year. That's the plan.

Great. So it sounds like -- and switching gears a little bit here. So it sounds like you guys are definitely gaining market share with mattress and with the hospitality and contract side of the business. Could you talk a little bit about that and maybe then also what you're seeing from a market share perspective with upholstery in general?

Yes. Brian, thank you. It's a good question. And Mary Beth and Tommy are both here with me. So I'll let them speak to some of that directly. But I do think it's important, the way you phrased that question. The restructuring project we have going on in mattress fabrics certainly is reducing some capacity in the places we want to reduce it. But none of what we did there was ever intended not to grow the business. So I think you're picking up the way we're phrasing it right, we do believe we're gaining share in our Mattress, in both businesses. But certainly, specifically in Mattress, the restructuring we're doing is making us better, making us more streamlined, making us more efficient. So that is a very positive thing. And it's -- at the end of it here, we're pretty bullish on what that's going to deliver for us. But let me pivot to Tommy, and he can tell you what he sees high level in his industry, and then Mary Beth can do same for upholstery, both residential and contract.

Brian, it's Tommy. From my perspective, we -- from my perspective, what we're seeing is continued market share growth in both our fabric business and growth in our cover business. So despite the challenging environment, unit environment in the mattress industry, we're seeing continued growth with existing customers, and we're actually working on projects with new customers, which are new share for us. So I think the puts and takes of programs that are going end of life and then new programs that come from the January Las Vegas furniture market are kind of in our numbers in Q4 a little bit, but we're seeing that those new programs are strong, and we had a great Vegas market showing. So we feel very good about the new programs that are launching. The only impact for us is how do those mattresses sell once they're launched with our customers.

So just to follow up there. So it's not just with existing customers. It sounds like there are potentially some new wins in there as well.

Yes, sir. That's correct. Iv had mentioned we had some new capabilities that we talked about with our quilting in Haiti and we've won some new share there, some of which is launching now and then some new share that's launching in Q4 going into Q1. And then additionally, just some new opportunities based on some of the tariff uncertainty where folks like our preferred platform and are leaning in, and we're quickly getting to market with some of those opportunities as well.

Brian, it's Mary Beth. I'll talk to you a little bit about upholstery. Let's start with residential. There's so many things going on in that space. If we think prior to the election, we had some bankruptcies and financial disruptions with major players like Big Lots and Conn's and Badcock that were really focused at the low end. And then earlier in this year, of course, we started to see tariffs and thinking about the impact that, that's going to have. At the same time, interest rates haven't moved a lot, certainly not enough to trigger any big move in housing turnover, which is the biggest predictor of furniture sales. So what that leaves us with is a really soft industry where we feel like going forward, the high cost of living is going to really pressure the low end and the popularity of remodeling is going to fall more in the slightly more affluent customer base. So in light of all of this, we've really segmented our approach to the upholstery industry, where we do have a very targeted strategy to that value customer where we're looking at very price-sensitive, very specific constructions and how do we meet the needs of those customers, along with some realignment of our sales force to put some good experience with those customers. And then on the more affluent side, we have so much to offer. That's where we can really showcase our broad variety of products that we're able to produce. That's where we rely on our U.S.-based design staff, which has over 100 years of collective experience. And we just really can innovate and provide on-trend, really interesting products for our customers that are design focused. There, we also benefit from our innovation center at Congdon Yards here in High Point and our new branding assets that we unveiled in 2024. So in those ways, we can really target those affordable luxury type customers that we have. We've also seen a lot of success with introductions to customers we have not historically sold. So really excited about new opportunities there. And then I'll pivot to contract hospitality. So that's usually the flip side of residential. And we do continue to see that the focus on travel for the consumer is continuing much as it did post-COVID. We don't really foresee that changing, although certainly the tariffs have had an impact on some projects. We are seeing some customers take a pause as they sort through what the tariffs mean to them. But we are really pleased with some new partnerships we have. So with -- if you think about the major hotel conglomerates, Hilton, IHG and Choice, we have -- we are brand standards for a number of properties within each of those 3 conglomerates, and many of those relationships are new in the last 6 months. So a lot of opportunity, but certainly, we're not immune to what's happening to our industry with tariffs.

Yes. No, thank you for that update. It's particularly exciting to see the growth on the hospitality side. It's something like 40% of the business now you noted in the press release. Kind of looking forward, do you see that level continuing as growth returns to the industry kind of more generally?

I do. I mean we obviously are planning and working towards a regrowth of the residential side, but our focus is largely on the contract hospitality space, and we do expect that to continue to be a growing portion of our business.

Brian, I think, I just maybe cap off their comments a little bit. I would add what's neat about it, they're really executing in a very difficult market. And they are winning Tommy and Mary Beth both and their businesses are winning opportunity in a tough pressured environment. And if you combine that with the innovation they have by innovating their supply chain to be tariff preferenced and innovating with style and function, there is a lot of opportunity. It's sometimes hard to see it in the face of the pressure. But where I sit, I can clearly see it, and there's so much opportunity. I'm just proud of the way their businesses are executing. It's -- it will be a day it really shows through, and we're excited about that.

Yes. No, definitely. It's -- I mean, clearly, with the macro headwinds, it's challenging. But what is exciting, I think, is the share gains that you guys have been able to generate across both of the segments and hospitality and residential on the upholstery side, too.

Yes, sir.

So I want to pivot though a little bit to some of the restructuring. So if we look back at the first wave of the restructuring that you guys announced, that's mostly completed. But you've mentioned 2 things on the call this morning and on the press release that I kind of want to dig into a little bit. First is that incremental $1 million that you guys announced. I was hoping that you could talk a little bit more about what that involves and when those impacts might start hitting the results?

Brian, thank you. Good question, and we tried to lay that out. I know we -- there's some speak to more that's coming, and we can talk about that, too. But the initial restructuring that saves $10 million to $11 million is primarily focused on mattress fabrics. That's complete. The only thing left to do there is to sell the facility. And as we noted in the release, we're under contract on that, pushing hard to get that done. It's in the upcoming months, we expect to have that finished. And that will be the cherry on the Sunday of the restructuring project. But the operational portion of that is done. The $1 million that we're calling out in the press release is an additional savings on personnel. It's some personnel we have and it's professional fees that we utilize. So that savings starts annualized in Q4 and will carry through into next year. And then we noted here that we're looking at some other streamlined opportunities that will be on top of both of those. So I hope that's answering your question, at least at the high level.

Okay. So the $1 million, we'll start seeing that kicking in, in the fourth quarter?

Yes, sir.

And so I know you're saying it's a little bit early, but could you talk about what this additional restructuring might entail both in terms of like what are you guys looking at across the business and timing and magnitude, if any of that's available at this point?

Yes, Brian, I know -- thanks for the question. It's a little bit of a -- we're formalizing the plans on that. What I can tell you about it and what makes me excited about this is Tommy and Mary Beth as they're running their businesses are really doing well, and they're really synergized together. And so what we're finding within Culp is there are places where we can synergize between the divisions and share some resources, and we find ways to take cost out that way. So I wouldn't call the next steps we're going to take as restructuring projects. They are synergistic efficiency projects. And they're finding them. They're finding them as they're working together in their businesses. And Brian, I think these -- we're talking up to $2 million of additional savings that we'll start to implement annualized basis in fiscal '26.

Okay. That is exciting and definitely looking forward to hearing more as you kind of announce that. My apologies. So is this kind of more like something that you're expecting to see in the first half?

Well, I mean, we'll start those projects in the first half for sure. And these are not -- again, these aren't restructuring projects that have a lot of cost of cash to do. These are things that we just think are very synergistic for the businesses. And so the faster we can get them executed and moving, the faster we can generate some of the savings. So I mean, we certainly see them fully implemented, Mary Beth, probably by the back half of the year and some -- maybe some early year help, Brian, but it's up to $2 million annualized kind of number.

Okay. Excellent. I want to ask a little bit, though, additionally about the tariffs and what the potential opportunities are there for you? Because I think it's -- well, so first, kind of what percentage of production right now would be affected by tariffs. And obviously, there is a lot of volatility there on the policy side. But then how does this position Culp in particular, to maybe potentially gain share?

Yes. Good question, and tariffs is top of mind for everyone these days. And as I said in the script, there really is no foolproof strategy. So I don't want to pretend that I have a silver bullet that can solve all this. But what I do believe, and it's part of ingrained in our culture, is we focus on supply optionality. We want to supply our customers with continuity. We want to be available to them where they want to be sold. So because of that innate culture for us, we have multi ways to shift our production. So we talked about in upholstery fabrics with Mary Beth's business, really only about 30% of our business now is tariff impacted coming from China. Now we're doing all we can to relocate that, and we're very focused in Southeast Asia and working on opportunities. But we're designing around that. It takes a little time because there are things that are placed and that have to be structured, but we're dealing with that. And what we can't move, we'll pass the price, Brian. So we're not anticipating an impact to Culp from tariffs. On the mattress side of the business -- go ahead, I'm sorry.

So I was going to follow up on that. Is that going to be more of like a surcharge? Or how are you actually thinking about handling any of these tariffs?

Brian, we'll do that on the upholstery side through price. So it will be a price increase.

And then, Brian, on the mattress side of the business, and Tommy and I have talked a lot about this, we can move that faster. We just have -- a lot of it's cut and sew. It's just we have cut and sew operations in other parts of the world. In our Haiti location, it's a tariff-free strategy. So it's just a matter of positioning materials to be able to sell them to meet the customer demand. And so maybe there's some short-term pressure if your things in transit get tariffed, and that's kind of the herky-jerky nature of this that's catching us. But within a month or 6 weeks lead time, we can have something moved and source it somewhere else. That could impact when it arrives and when you bill it and when we generate the revenue, but we can help our customers around these tariff impacts. At least what we know today, what's being tariff today, we can work around them and be preferred and offer customers better opportunities with our cost structure. So it's really positive -- tariffs are not positive, but our ability to react to them is positive.

Got it. One final question, I think, for this morning. When you're looking at consolidation, especially on the mattress side, do you see it more in terms of like risk to the business or more in terms of opportunities for the business?

Yes. So Brian, just to make sure I understand your question. The consolidation we see going on, which there's a lot. There's been some big moves, several in the last 6 months or so. Is that -- how do we see that as a challenge or an advantage for Culp? Is that the question?

Exactly, exactly. That's the question.

Okay. Brian, it's Tommy. Yes, the consolidation for us, we believe is a net positive. As Iv mentioned in the script, we are a large provider of fabrics and mattress covers in the industry. And our design and innovation capabilities and our flexible platform fare well with the larger suppliers in the mattress industry. So for us, we think it's a net positive. We obviously have to work through those dynamics in order to reap that benefit but that is a focal point for us.

Great. And that's all that I have for this morning. So good luck with the quarter.

Thank you, Brian. We appreciate it. Thanks for all your support.

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, sir. 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 in the next quarter. Have a great day.

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