Culp, Inc.

Please invite. We're about to begin. Good day and welcome to the CULP second quarter 2021 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Drew Anderson. Please go ahead, ma'am.

Thank you. Good morning and welcome to the CULP conference call to review the company's results for the second quarter of fiscal 2021. 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. 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 measurements is included in either the tables to the press release included as an exhibit to the company's 8K filed yesterday and posted on the company's website at CULP.com or in the slide presentation with supporting summary financial information that is also available on the company's website as part of the webcast of today's call. With that, I will now turn the call over to Yves CULP President and Chief Executive Officer of CULP. Please go ahead, sir.

Thank you, Drew. 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 today are Ken Bolling, Chief Financial Officer, and Boyd Shumley, President of our Upholstery Fabrics business. I will begin the call with some opening comments, and Ken will then review the financial results for the quarter. I will then update you on the strategic actions in each of our operating segments. After that, Ken will review our third and fourth quarter fiscal 2021 business outlook. He will then be happy to take some questions. We are pleased with our strong performance in the second quarter of fiscal 2021, which reflects the tireless efforts of our associates around the world and the strength and resilience of our global platform. As we continue to navigate our way through these uncertain times, Our top priority remains the health and safety of our employees, customers, suppliers, and the communities we serve. We are incredibly proud of our team's continued drive to deliver innovative products and satisfy the evolving needs of our customers, while also integrating enhanced safety practices and new ways of working virtually throughout our business. Overall, we are very pleased with the top-line performance for both our mattress fabrics and upholstery fabric segments. This faster than expected recovery indicates an increased consumer focus on the home environment as well as our ability to service this increase in demand through our strong global platform and stable supply chain. We are also benefiting from market share gains as our innovative products are resonating well with both new and existing customers. Additionally, we delivered significant sequential improvement in operating income as compared to the first quarter consistent with our expectations. We further strengthen our balance sheet with increased liquidity as total cash and investments reach $56.5 million. Based on the strong financial performance and excellent cash flow for the first half of the year, we are pleased to announce that our Board of Directors approved a 5% increase in our quarterly dividend, marking the eighth consecutive year of increase. This is consistent with our capital allocation strategy and our commitment to generate value for our shareholders. We also expect to continue investing in working capital and planned capital expenditures during the second half of the year. Additionally, we have decided to maintain the suspension of our share repurchase plan at this time. These strategic decisions are based on our disciplined approach to capital allocation. as described in our capital allocation strategy, which is posted on our website. The ongoing uncertainty relating to the COVID-19 pandemic, including the recent surge in cases and governmental considerations for new shutdown measures, is certainly a factor we're taking into consideration with respect to capital utilization. But we are also working to remain strategically positioned during the current environment. Our current approach to capital allocation is conservative in terms of managing short-term COVID-19 uncertainty, but we also believe it is appropriately aggressive and allows us to be opportunistic on growth opportunities that may present themselves both organically and otherwise. As always, this is a strategy we evaluate continually based on current facts and circumstances. Looking ahead, our customers' ability to meet their demand is being challenged by supply chain constraints related primarily to non-fabric components, as well as some labor shortages which could temporarily delay their scheduled delivery of fabric orders from both our divisions. Additionally, the ongoing impact and duration of the COVID-19 pandemic remains unknown. We are prepared for a range of macroeconomic scenarios, and we are confident in our ability to weather these near-term headwinds. By any additional shutdowns, we are optimistic, based on our current industry demand trends and market share opportunities, that we will deliver strong results for the second half of fiscal 2021. We believe that Culp has become a stronger company, both financially and competitively, than we were pre-COVID-19, and we are well-positioned for continued growth. I'll now turn the call over to Ken, who will review the financial results for the quarter. Thanks, Yves. As mentioned earlier on the call, we have posted slide presentations to our investor relations website that cover key performance measures. We've also posted our capital allocation strategy. I also want to note that as a result of the sale of eLuxury during the fourth quarter of last year, the financial results for the home accessories segment are excluded from the reported financial performance of our continuing operations and presented as a discontinued operation in our consolidated financial statements. Here are the financial highlights of the second quarter. Net sales was 76.9 million, up 10.5% compared with the prior year period. Both divisions had a strong sales performance for the quarter. We will go into more detail on divisional operations performance in a moment. On a pre-tax basis, the company reported income from continuing operations of 3.9 million which included $680,000 of other expense related mostly to foreign exchange rate fluctuations associated with our operations in China. This compared with pre-tax income from continuing operations of $4.5 million for the second quarter of last year, which included only $99,000 in other expense. The current quarter was affected by the unfavorable foreign exchange rate fluctuations I just mentioned, as well as higher S&A expense due primarily to higher accrued incentive compensation expense offset somewhat by lower T&E and marketing expenses. On a percent of sales basis, total SG&A came in at 12.7% compared to 13.1% for the same period a year ago. Net income from continuing operations was 2.4 million or 19 cents per diluted share for the second quarter compared with net income from continuing operations of 2.2 million or 18 cents per diluted share for the prior year period. The effective income tax rate for the second quarter of this fiscal year was 41.4% compared with 50.1% the same period a year ago. The effective income tax rate is affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and forms from city areas located in China and Canada, which have higher income tax rates as compared to the U.S. federal rate. Looking ahead to the rest of this fiscal year, we estimate that our consolidated effective income tax rate for the third and fourth quarters of this fiscal year will be in the range of 40% to 50% based on the facts we know today. Showing 12 months adjusted EBITDA as of the end of the second quarter of this fiscal year was 11.5 million, or 4.5% of sales. Now let's take a look at our two business segments. For the mattress fabric segment, sales were $40 million, up 12.2% compared with last year's second quarter. Operating income for the quarter was $4.4 million compared with $3.3 million a year ago, with an operating income margin of 10.9% compared with 9.2% a year ago. Our improved operating performance for the second quarter primarily reflects the benefit from fixed cost absorption from higher sales, and improve operating efficiencies, resulting from fully maximizing our production capacity. For the Tulsi Fabric segment, sales for the second quarter were 36.8 million, up 8.7% over the prior year. Operating income for the quarter was 3.3 million, compared with 3.5 million a year ago, with an operating income margin of 8.9% compared with 10.2% a year ago. Operating performance was materially affected by unfavorable China foreign exchange rate fluctuations, as well as some impact from sales mix, offset somewhat by lower spending on P&E and marketing expenses. Here are the balance sheet highlights. We reported $56.5 million in total cash and investments and no outstanding borrowings as of the end of the quarter, up from our $38.7 million net cash position as of the end of last fiscal year. For the first six months of this fiscal year, we incurred $2 million in capital expenditures and spent $2.6 million on regular quarterly dividends. Cash flow from operations and free cash flow were $22.7 million and $20.5 million respectively for the first six months of the year, compared with cash flow from operations and free cash flow of $8.2 million and $5.6 million respectively for the prior year period. This year-over-year improvement reflects a focused attention on working capital management during the first half of the year. While we're extremely pleased with our strong cash position and fortified balance sheet going into the second half of the year, it is important to note that our cash position will be affected by our strategic investments in working capital and planned capital expenditures during this period. The company did not repurchase any shares in the second quarter, leaving the full $5 million available under the share repurchase program approved by the Board in March 2020. As previously discussed, the company temporarily suspended its share repurchase program during the fourth quarter of last fiscal year, given the economic uncertainty related to COVID-19. With that, I'll turn the call back over to Ed. Thanks, Kim. Let me start with the mattress fabrics business. We were especially encouraged by the strong growth in sales and operating income for the mattress fabric segment during the second quarter. We built on the momentum generated during the last eight weeks of the first quarter by utilizing our product-driven strategy for both mattress fabrics and sewn covers, as well as our global supply chain and dedicated attention to our customers. The strength and flexibility of our global manufacturing and sourcing operations in the United States, Canada, Haiti, Asia, and Turkey enabled us to support current demand and serve the needs of our mattress fabric and cover customers. We are also pleased with the continued growth of our Sun mattress cover business, with the man trend for mattress covers now exceeding pre-COVID levels. This trend is driven by the ongoing growth in the box bedding space, and we continue to work collaboratively with new and existing customers to develop fresh and innovative products. Our sewn cover production capabilities in the U.S., Haiti, and Asia, along with our vertical ability to provide innovative product offerings from fabric to sewn cover, provide us with a strategic integrated advantage in supporting the rapidly changing demands of our customers. Additionally, our building expansion in Haiti was completed during the second quarter, providing additional capacity and enhancing our ability to produce sewn covers. We are also excited about ongoing developments in product innovation, including expanding our specialty finish options to include features for sustainability, antimicrobial protection, and other wellness-related properties. We also remain pleased with the continued opportunities for innovation through our reimagined home fashions, our 3D rendering services, which have allowed us to continue showcasing our products and support our customers through virtual design collaboration, in the face of travel limitation. Our virtual design emphasis began before the pandemic, and since that time, these capabilities have strengthened our position with customers. We expect that our increased fabric capacity in North America, resulting from our investment in additional equipment, will be available during the fourth quarter of fiscal 2021. We also believe that the domestic mattress industry, and in turn our business, will benefit from the recent preliminary empty dumping duties imposed by the U.S. Department of Commerce on mattress imports from seven countries. Additionally, despite these ongoing uncertainties relating to the pandemic, we have continued to focus on our commitment to environmental sustainability. We have now achieved landfill-free status at both of our U.S. manufacturing facilities, which reflects our ongoing effort to promote sustainable production across our operations. Barring additional shutdowns or significant disruption in our customer supply chain for raw materials other than fabric, we believe we are well positioned in mattress fabrics to execute our strategy and increase market share during the second half of fiscal 2021. Now let me turn some attention to the upholstery fabric segment. We are also very pleased with the solid growth in our upholstery fabrics business for the second quarter. Our residential upholstery business saw a significant increase in sales compared to the prior year period, given primarily by the increased consumer focus on the at-home experience and overall comfort. Through our strong platform in Asia, including our expanded cut-and-sew capabilities in Vietnam and our stable, long-term supplier relationships, we were able to respond quickly to the upsurge in demand from our customers and increase our market share. We have also generated historically strong backlog in our residential upholstery business, reflecting the ongoing favorable demand trends for this segment. Our line of highly durable, stain-resistant LIVSMART performance fabrics, as well as our line of LIVSMART Evolve performance plus sustainability fabrics, continue to experience favorable demand trends. We also recently launched LIVSMART Ultra, the next step in our LIVSMART performance brand evolution. This new product line features an antimicrobial finish and silver ion technology to protect the fabric from mold, mildew, and odor-causing bacteria. It has been well received in our recent showings. We are focused on promoting these product lines and building our strong brand of performance products under our LiveSmart umbrella. These LiveSmart performance fabrics are important drivers of our residential growth. Our hospitality business remained under pressure by the ongoing COVID-19 disruption to continue to affect the travel and leisure industries. These lingering pressures also affected LEED window products, our window treatment and installation business during the quarter. While sales for our hospitality business remained relatively stable as compared to the first quarter, we expect that the disruption in hospitality and leisure will continue to affect this business in the near term. Additionally, while we saw solid sequential improvement in our operating income as compared to the first quarter of fiscal 2021, our second quarter results compared to the prior year period were materially affected by unstable China exchange rate fluctuations, as well as some impact from sales mix. We expect these factors will continue to affect our operating income during the third quarter. Despite these pressures, we were encouraged by our solid operating margin in the second quarter. We are encouraged by the historically strong backlog in our residential upholstery business and are confident in our ability to meet this demand. We expect the strong performance in our residential upholstery business to continue, absent any additional pandemic-related shutdowns or material disruption to our customer supply chain. Ken will now discuss the general outlook for the third and fourth quarters of this fiscal year, and we will then take some questions. At this time, due to the continued economic impact of the COVID-19 pandemic and the lack of visibility as to its duration or ultimate impact, we are providing only limited financial guidance for fiscal 2021. Although subject to unforeseen changes that may arise in connection with the pandemic, we are encouraged by the ongoing execution of our product-driven strategy and continued strength in demand for home-punishing products, as well as our opportunities for market share growth. Considering these factors, we expect sales and operating income for the third quarter of this fiscal year to be comparable to the prior year period, with the mattress fabric segment continuing its strong year-over-year rebound and the upholstery fabric segment facing ongoing headwinds relating to foreign exchange rate fluctuations associated with its operations located in China, customer supply chain constraints, and sales mix. We also expect sales and operating income for the fourth quarter of this fiscal year to be dramatically improved for both segments as compared to the fourth quarter of last fiscal year. Based on current expectations, including the $4 million investment in additional knit machines for our mattress fabric segment that we mentioned last quarter, capital expenditures for this fiscal year are now expected to be in the $8.5 to $9 million range. Depreciation and amortization is expected to be approximately $7.5 million for this fiscal year. With that, we will now take the questions.