Culp, Inc.

Good day, ladies and gentlemen, and welcome to the Culp's third quarter 2021 earnings conference call. Today's call is being recorded, and at this time, for opening remarks and introductions, I would like to turn the call over to Ms. Drew 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 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 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 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 colp.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. I will now turn the call over to Ev Culp, President and Chief Executive Officer. Please go ahead, sir.

Thank you, and good morning. Thank you very much 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 Tim Bolling, our Chief Financial Officer, and Boyd Sumley, our President of Appalachian Fabrics. 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. And after that, Ken will review our fourth quarter fiscal 2021 business outlook. And of course, we'll then be happy to take your questions. Okay, so we are energized by our financial performance for the third quarter of fiscal 2021. These results reflect strong growth in sales and operating performance compared to the prior year period as well as exceptional execution of our product-driven strategy in the continued resilience of our robust global platform. These results would not have been possible without the hard work and perseverance of our dedicated team of associates around the world. Their determination and diligence, including strict adherence to safety protocols to help minimize the spread of COVID-19, have enabled us to continue operating our business with minimal disruption while also meeting the rapidly changing needs of our customers. We are tremendously grateful for their tireless efforts and unwavering commitment to operational excellence during this unprecedented time. We are encouraged by the performance of both our mattress fabrics and upholstery fabric segments during the quarter. Our growth in both segments was driven by a combination of strong demand for our products and the benefits of market share gains from product innovation. As consumers have remained focused on the home environment, our diversified manufacturing and sourcing capabilities, along with our stable supply chain, have allowed us to effectively service the increased demand from both new and existing customers. Our design and innovation emphasis, along with our strengthening virtual and digital marketing services, are helping us gain greater market share in both businesses. As we are winning additional placement to brick and mortar retail, and in online e-commerce channels. In addition to our positive momentum in sales and operating performance, our cash flows and balance sheet also remain strong, and we ended the quarter with $51.8 million in total cash and investments with no outstanding debt. While we are pleased with this cash position going into the fourth quarter of fiscal 2021, it is important to note that our cash will be affected by our strategic investments in working capital and planned capital expenditures which will be more robust during the fourth quarter. In addition, our fourth quarter expenditures will include the recent acquisition of the remaining 50% ownership interest in our Haiti cut and sew operation. These strategic investments are important for us to bolster our supply chains and our efficiencies in preparation for what we expect will be a strong fiscal 2022. We are also pleased to announce our Board of Directors has reinstated our share repurchase program. which was previously suspended in April 2020 due to pandemic-related uncertainty. While our primary focus with our capital allocation strategy remains investment for organic growth and, of course, maintaining our regular quarterly dividend, we do believe it is important to have the ability to acquire shares at opportunistic price points. Looking ahead, we are very optimistic regarding the ongoing strength of industry demand trends and we believe our business will continue with solid performance during the fourth quarter of fiscal 2021 and extending into fiscal 2022. We are also pleased with the recent fourth quarter acquisition of the remaining 50 percent ownership interest in our Hayden's Firm mattress cover platform, which has proven to be an ideal near-shore location for this growing business. The benefit of this strategic investment comes from enhancing the capacity of this operation which has always been set up as a pure manufacturing center that supports our domestic sales growth and promotes our fabric to sewn cover model. We have a preferred supply chain for our mattress covers, utilizing cold fabrics in an onshore, nearshore, and offshore strategy. When evaluating expectations for the fourth quarter, it is critical to understand that the full impact of this year's shutdowns for the Chinese New Year holiday affects us entirely in the fourth quarter, as compared to other years when the timing of the holiday is split between Q3 and Q4. Sequentially, as compared to our third quarter performance, this is significant pressure for upholstery fabrics, as we effectively lose three to four weeks of production and sales. We do expect further near-term pressures relating to foreign currency fluctuations in China, as well as continued constraints in our customer supply chain for foam and other non-fabric components, which could delay their scheduled delivery of our fabric orders. We are learning of more potential farm shortages for our customers in both furniture and mattresses, and we understand this could temporarily mute some of our anticipated revenue growth in Q4. Also, while raw material and commodity costs have remained relatively stable for the first nine months of fiscal year, We do expect some increase in these costs as well as increased freight costs to affect our businesses in the near term. Notably, we are announcing price increases in both divisions during the fourth quarter to help mitigate the ongoing pressures just mentioned. Nevertheless, we are confident in our ability to withstand these headwinds, and we believe we will deliver solid results in the fourth quarter in preparation for a strong fiscal 2022 year. We are especially excited by our mattress fabric segment, which is expected to continue its strong rebound in Q4. We are well-precision for growth and look forward to opportunities ahead for both our business segments, with continuing opportunities to capture market share. I'll now turn the call over to Ken, who will review the financial results for the quarter.

Thanks, Viv. As mentioned earlier on the call, we have posted slide presentations to our investor relations website that cover key performance measures. We have also posted our capital allocation strategy. I also want to note that as a result of the sales eluxury during the fourth quarter of last year, the financial results for the home accessory 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 for the third quarter. Net sales were $79.3 million, up 15.8% compared with the prior year period. Both divisions had a strong sales performance for the quarter. It will go into more detail on the visual operation performance in a moment. On a pre-tax basis, the company reported income from continuing operations of $3.1 million, which included $1 million in other expense relating mostly to foreign exchange rate fluctuations associated with our operations located in China. compared with pre-tax income from continuing operations of $2.7 million for the prior year period, which included $282,000 and other expense. Notably, the foreign exchange charges included in the other expense line item for both the third quarter and the first nine months of this fiscal year are mostly non-cash and are mostly offset by income tax deductible foreign exchange losses associated with our China operations. The current quarter was affected by the unfavorable foreign exchange rate fluctuations I just mentioned, as well as higher SG&A expenses due primarily to increased incentive compensation costs, offset somewhat by lower T&E and marketing expenses, mostly associated with the Pulse Fabric segments. On a percent of sales basis, total SG&A came at 12.4% compared to 12.9% for the same period a year ago. Net income from continuing operations was $2.1 million or $0.17 per diluted share for the third quarter, compared with net income from continuing operations of $1 million or $0.08 per diluted share for the prior year period. The effective income tax rate for the third quarter of this fiscal year was 28.8%, compared with 60% for the same period a year ago. The decrease in the company's effective income tax rate for the third quarter of this fiscal year is mostly due to income tax deductible foreign exchange losses associated with operations in China. Additionally, the 60% effective tax rate for the third quarter of the prior fiscal year was adversely affected by the global intangible low tax income or GILTI tax assessed on foreign earnings for that quarter, which no longer applies due to an exemption under the U.S. Treasury regulations enacted during our first quarter of this fiscal year. As a reminder, the company's effective income tax rate is impacted over the fiscal year by the mix and timing of actual earnings from our U.S. operations and our foreign subsidiaries 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 fourth quarter will be in the 30 to 35 percent range based on the facts we know today. Selling 12 months adjusted EBITDA as of the end of the third quarter of this fiscal year was 11.8 million or 4.4% of sales. Now let's take a look at our business segments. For the mattress fabric segment, sales were 38.6 million, up 15.1% compared to last year's third quarter. Operating income for the quarter was 3.3 million compared with 1.8 million a year ago, with operating income margin of 8.5% compared with 5.3% a year ago, an increase of 320 basis points. Our improved operating performance for the third quarter primarily reflects higher sales offset somewhat by unfavorable China point exchange rate fluctuations for mattress covers and our customer supply chain constraints resulting from non-fabric components. For the upholstery fabric segment, sales for the third quarter were $40.7 million, up 16.4% over the prior year. Operating income for the quarter was $3.9 million, compared with $3 million a year ago, with an operating income margin of 9.5% compared with 8.7% a year ago. Our improved operating performance for the third quarter primarily reflects the significant increase in sales for our residential business and lower SG&A costs due to cost containment in the marketing and P&E areas offset somewhat by unfavorable foreign exchange rate fluctuations and sales mix. Here are the balance sheet highlights. We reported $51.8 million in total cash and investment and no outstanding bonds as of the end of the third quarter, up from $38.7 million net cash position as of the end of last fiscal year. For the first five months of this fiscal year, we incurred $4.3 million in capital expenditures and spent $3.9 million on regular quarterly dividends. We also generated cash flow from operations of $21.7 million and free cash flow of $17.1 million for the first nine months of this fiscal year, compared with negative cash flow from operations of $519,000 and negative free cash flow of $4.7 million for the prior year period. This year-over-year improvement reflects higher earnings and a focused attention on working capital management during the first nine months of this fiscal year. While we are very pleased with our 45 balance sheet going into the fourth quarter, It is important to note that our cash position will be affected by our strategic investments in working capital, planned capital expenditures, and the acquisition of the remaining 50% ownership interest in our Haiti cut and sew operation during this period. On March 2, 2021, the Board of Directors reinstated the company's share repurchase plan, which was previously suspended last April due to the economic uncertainty related to the COVID-19 pandemic. The company did not repurchase any shares during the third quarter of this fiscal year, leaving the full $5 million available under the share repurchase program approved by the board in March 2020. With that, I'll turn the call back over to Ed.

Thank you, Ken. Let me start with the mattress fabrics business. We are very pleased by the strong growth in sales and operating performance for the mattress fabric segment during the third quarter, which is historically our most challenging quarter due to seasonality within the mattress industry and and holiday shutdowns in certain of our locations. Our significant increase in sales, 15% year over year, compared to the prior year period, was driven by an ongoing consumer focus on the at-home experience. And we also benefited from market share gains across a diversified group of new and existing 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. In addition, we believe the domestic mattress industry, and in turn our business, began to realize some benefits during the quarter from the preliminary anti-dumping duties imposed in October 2020 by the U.S. Department of Commerce on mattress imports from seven countries. We are cautiously optimistic that this tailwind will continue during the fourth quarter of fiscal 2021 and beyond. We remain especially pleased with the growth in our stone mattress cover business and the ongoing consumer acceptance of the box bedding trend in both e-commerce and traditional retail outlets. We continue to work collaboratively with new and existing customers to develop fresh, innovative products utilizing our fabric-to-cover expertise. We are also excited about our recent strategic investment to acquire the remaining 50% ownership interest in our sewn mattress cover joint venture in Haiti, which was completed at the beginning of the fiscal 2021 fourth quarter. By gaining full ownership of the Haiti platform, we have increased our flexibility and enhanced our capacity to meet growing customer demand, while also maintaining certain commitments to our previous joint venture partner through a supply agreement. As we look to the fourth quarter and beyond, we are excited about our enhanced digital project management platform, which allows us to work with customers from concept ideation and 3D mapping to product lifecycle management and final merchandising. These digital and IT competencies support our front-end design capabilities, exceptional service, and speed to market. We also remain focused on developments in product innovation, including expanding our specialty finish options. Finally, our increased fabric capacity in North America, resulting from our investment in additional equipment, will also be available during the fourth quarter, further enhancing our ability to meet the rapidly changing needs of our customers. Buying additional shutdowns or greater than expected disruption in our customer supply chain for raw materials other than fabric, we believe we are well positioned to increase market share during the fourth quarter of fiscal 2021. We have a compelling business model supported by innovative products, creative designs, dedicated service, and an efficient global platform. Now I'll turn to the upholstery fabric segment. We were especially encouraged by the better than expected growth in our upholstery fabric sales for the third quarter, 16% year over year. This growth reflects a significant increase in our residential business compared to the prior year period, partially offset by lower sales for our hospitality business, which remained under some pressure due to pandemic-led disruptions that continue to affect the travel and leisure industries. The increased demand in our residential upholstery fabrics business was fueled by strong consumer focus on the home. We also benefited from the success of our product innovation strategy, including the continued popularity of our LiveSmart product portfolio, which has remained aligned with consumer preferences by focusing on cleanability, ease of maintenance, sustainability, and antimicrobial technology. In addition to our LiveSmart flagship brand, we now have LiveSmart Evolve, LiveSmart Outdoor, and LiveSmart Ultra fabric lines. And we recently launched LiveSmart Barrier Plus, which features enhanced moisture protection and cleanability as another offering in our LiveSmart brand evolution. These LiveSmart performance fabrics are important drivers of our growth in the residential business. Our residential business also continued to benefit from our robust platform in Asia, including our expanded cut and sew capabilities in Vietnam and our stable long-term supplier relationship. The strength and flexibility of this platform allowed us to respond quickly to meet increased demand from our customers and grow our market share. The backlog in our residential upholstery business remains historic and strong, reflecting the favorable demand trends for this business. Looking ahead, as mentioned, the full impact of shutdown for the Chinese New Year holiday within the month of February does cause some expected pressure. We do expect the solid performance in our residential poultry business to continue. Of course, absent additional pandemic-related shutdowns or material disruption in our customer supply chain, we are confident in our ability to meet the demands. We are also cautiously optimistic that as vaccine rollouts continue, pent-up demand for travel and leisure activities will ultimately benefit our hospitality business, although the timing of this return still remains somewhat uncertain. Ken will now discuss the general outlook for the fourth quarter of this fiscal year, and we will then take some questions.

Although subject to uncertainties related to COVID-19 pandemic and potential disruption in our customer supply chains, We are encouraged by the execution of our product-driven strategy and continued strength in demand for home furnishing products, as well as opportunities for market share growth. We expect sales and operating income for the fourth quarter of this fiscal year to be dramatically improved compared to the prior year period. The fourth quarter of last year was materially affected by global shutdowns related to the COVID-19 pandemic. We expect our net sales for the fourth quarter to be approximately 40% higher compared to the prior year period, with increase in master fabric sales expected to be moderately higher than this percentage, and the increase in upholstery fabric sales expected to be moderately lower than this percentage. Notably, as Ed mentioned earlier, operating performance for the upholstery fabric segment is being affected by the timing of holiday shutdowns for the Chinese New Year holiday, which fall entirely in the company's fourth quarter. Recognizing this impact, Consolidated operating income is expected to be in the range of $1.2 million to $1.7 million for the fourth quarter. This compares to an $18 million operating loss in continuing operations for the fourth quarter last fiscal year, which included $13.7 million in asset impairment charges. Excluding these charges, adjusted operating loss in continuing operations for the fourth quarter last fiscal year was $4.3 million. Based on current expectations, including the $4 million investment in additional knit machines for our mattress fabric business that we've mentioned on previous calls, capital expenditures for this fiscal year, together with the recently completed fourth quarter investment in our Haiti operation, are now expected to be in the $9 million to $10 million range. Depreciation and amortization is expected to be approximately $7.5 million for this fiscal year. With that, we'll now take your questions.

Thank you. And ladies and gentlemen, to ask a question, that is star 1 on your telephone keypad. Please note that if you're on a speakerphone, to pick up your handset or depress your mute function so that we can hear your question. Again, that is star 1 on your telephone keypad. And we'll go first to Bud Begach of Water Tower Research.

Good morning, Ken. Good morning, Yves. Congratulations on the portal and your navigation. Can you hear me OK?

Yes, sir. Good morning, bud.

Good morning. Congratulations to you and your team for navigating during this unusual pandemic time. You've done a terrific job. And of course, obviously my first thought, and I'm sure yours, sort of the families and your team members to stay well and ultimately get vaccinated. And you've addressed a lot of this during the script, and I just want you to go maybe For me, I'm getting questions on the seasonality difference this year versus last year and maybe the year before, which is maybe the more telling comparison between the third quarter and the fourth quarter. Can you kind of put it in framing as to what's most important? Is the Chinese New Year the most important thing and upholstery the most impacted? Because you've also got the issue with weather affecting the foamers. in uh in the middle part of the country you've got anti-dumping that seems to actually have lowered the amount of uh of imports so far so there are a whole lot of dots that are going on and then maybe you can connect them and put them in relative rank order for us yeah thank you bud that's um good very good questions and i would first start and thank you for recognizing uh

our people, our associates, for just extraordinary efforts. And I mean, everyone's said it so many times, just unprecedented times. We can't be more grateful for the efforts, resilience, tenacity, however you want to say it, that our people have demonstrated during this period. We're very proud, very proud to be where we are and would not have been possible without everyone's effort. So thanks for recognizing that. That means a lot. Looking at the comparison to Q3 and Q4, First of all, you know, both quarters are significantly better than last year. So whatever that's worth, we're very happy with that. And then you're picking up on a lot of the really good points. It's not a fair or even an appropriate comparison to look at Q4 sequentially to Q3. And to your question of ranking those, you know, as we mentioned in the script, the full effect of the Chinese New Year shutdowns impacted corporate policy fabrics fully in the fourth quarter, really mainly in February. or will impact in the fourth quarter, mainly in February. In a case like this, we can lose three to four weeks of production and sales in one quarter. So we've seen this in previous years. It's not really abnormal. It's better for us when the Chinese New Year timing spreads over Q3 and Q4, as opposed to hitting all in one quarter. Also, generally speaking, this is really an all-copal poultry fabric impact. The pulp home fashion is expected to be consistent sequentially. There are also awesome factors. I would say today that that's the number one factor, the Chinese New Year timing, but there also are some other things, pressure in Q4. Of course, we're watching the currency close, and we'll deal with that with our price adjustments. And now raw material allocation, primarily sunum, as you mentioned, can mute our sales somewhat in Q4. We think we've built some of that in, but we have to be aware if that's more significant than we might think. All that being said, our belief and expectation is for a really solid Q4 and a strong start to fiscal year 22. So we're excited about the business and excited about the market share growth.

Thank you for that. Yeah, and this is just last. It's pretty much a February event for Chinese New Year. That's pretty much over, and we don't see any effect of this for next year right now, except when we get to the third and fourth quarter again. We have to figure out where Chinese New Year is. Is that the way to look at it?

Yeah, that's right. Yeah, that's right, Fred. I mean, we are starting to see the mills. We don't take nearly as long as a Chinese New Year shutdown, as some of our supplier and partner mills do. So they're all starting to come back on stream this week. So, yeah, that's pretty much a February event for us.

Your balance sheet is impressive. At the end of the quarter was over $50 million of liquidity and notes. no debt. Can you talk about the fact that you've got, I think, you know, it looks like about $5 to $6 million worth of CapEx that you're going to spend in the fourth quarter. Is that right? Is that what you expected? Yeah, CapEx and the investment in Haiti, yes. Okay. And then you've got the investment in Haiti. That lets you open a separate line, right? That shows an acquisition line. Pardon? Pardon? the Haiti acquisition will show up on a separate line on the cash flow side? Yeah, yeah, yeah. Yeah, we're working all that out. But, yes, that will be handled. But I just wanted to make sure that everybody knew, in addition to our CapEx, we have that investment as well. So can you peg where you think cash winds up at the end of the fourth quarter? Where do you think it will be at the end of the fiscal year? Yeah, but that's a great question. We, you know, we don't guide that, but I will say, you know, obviously based on our investments in the fourth quarter, you know, we're going to use some of that cash that we ended the third quarter with, and that's what we've always strived for, to build a cash position strong enough to be able to react to investments, either investments like this or opportunities or anything down the road of acquisitions or whatever. So I think we will use some cash in the fourth quarter, but we'll still be in a strong position as we go into FY22. It's just, you know, we've got these investments to get behind us, but, you know, we will be – we feel very good about our prospects and where our cash position will be at year end. And for next year, do we need a similar amount of cash capital expenditures? What's your best guess today? I know you can change that and opportunities will happen, but is there any – number that we can model in for CapEx for next year? Yeah, what we do, if it's considered kind of a normal, what we call maintenance CapEx year, which we feel is in the $5 million to $7 million range, that's what we would say in a year where there's no either additional opportunities for more equipment or investment or whatever. I would say that in a normal maintenance mode, we would say $5 to $7 million for CapEx. We're getting 15 NIT machines. That's the big bump this year, right? Do we have more room for more NIT machines next year if we need them?

Yes, sir. Bud, this is Ed. We do have space allocated. It's easy for us to expand the capacity in several locations, whether it's We decide to do it. You know, we'll be determined. But I do think for all the things I watch Ken worry about, cash balance has not been one he's been worried about. I know we're feeling a good position there. And from where I sit, we feel great. We have the ability to do more strategic things if we decide to do them. Right. So we like our position. We think we've done a lot. We think we're in a great position. But if opportunities present themselves, we'll be able to take advantage of them.

And am I right, Ken, that we've seen a little bit of stretch out in terms of engaged sales of receivables? Yeah, we have. You know, our DSOs, our day sales outstanding, they are lower than they were, obviously, at the end of last year, but they have moved up a little bit from Q2 and And that's mainly just due to our customers paying on net terms. I will say that we have been very pleased with our customers paying. You know, we've done very well with our customers paying as they agreed to pay. And, of course, that's been reflected in our cash position. And, you know, our credit team does a great job working with our customers, and we've done very well there.

That's been a real strength to our cash position is, timely receipts for sure. That's correct.

You, you, you renovated really well over the last couple of years. Live smart, uh, uh, was a, a really good innovation. I think you've extended that with a number of other programs and now the cut and show is, uh, really become a more important part of mattress. Um, is there anything else on tap that we can, that you can tell us now? I realized some of that may be competitive, but, uh, What's on tap now, and what are you most excited about?

Yeah, good question. You hit on a couple of really good ones. You're right. For us, innovation and design are critical pieces, and I believe we're flourishing in both businesses. You said in upholstery, we're thrilled with the success of LiveSmart. Now that's cleanable, sustainable. We have antimicrobial protection for the fabric. and we have waterproof options. So that LiveSmart portfolio is really on trend with consumers' demand for performance fabrics. On the mattress side, we do also have some specialty finishes in development, and we're really excited about the sewn cover platform. That helps us innovate from fabric to cover so we're not just stuck to the fabric side anymore and we get a greater content share of a finished mattress. I guess new things we're excited about. There's definitely going to be a more technical story push for antimicrobial fabrics, and we believe a much stronger push in sustainability. We just know that's going to be a major focus post-pandemic. Also, I think both businesses, another way of thinking of innovation, we're really pleased with our digital and virtual presentation capabilities, and I think this is going to pay big dividends helping to streamline and then win some new business. And then I think it's worth saying, I'm probably getting a little outside of your question here, but we're really excited about this diversity of our customer base. We have a more solid, more diverse customer base than we've had in a while in both businesses, from high-end to low-end, from traditional e-commerce, from import to domestic, and, of course, from fabric to sewn cover or sewn upholstery kit. And then, you know, just One more thing, we're optimistic about lead window in our hospitality business. As the world gets better, we know that that business has some room to recover. So, you know, all that stuff, I'm excited about a lot of things, but certainly very excited about our future.

Wow. Okay. I don't remember that much on your plate. You've got a lot on your plate right now. Last for me, the easy questions, tax and currency. You've given us a tax question. In fact, you're not paying any cash taxes, Ken, or are you? What's the cash impact of what you're paying, and how long does this currency thing, what do you think it's going to be in the fourth quarter? If rates stay where they are, what do you see for the fourth quarter? Well, let me talk about cash taxes first. I mean, right now, obviously, we're paying cash taxes in Canada and China. We pay very little cash tax in the U.S. There's Just a very small amount, and that's really for the foreseeable future, the way we're structured. As far as foreign exchange, we have seen a little bit of weakening in the RMB this past month. Not a lot, but it certainly has slowed down. So if that stays calm, or stable throughout the quarter, then the effects really around the world will be far less than they were in the first nine months. So we're hoping that's the case. So far, so good. We're one month into the quarter almost, and it's been pretty calm. But it all depends on where that rate moves for the next few months. And is all the currency RMB, or is there the Canadian dollar and any Vietnamese currency impact, or? No Vietnamese right now, but yes, Canadian. We do have Canadian exposure, but not nearly to the extent that we have the RMB exposure. Okay. All right. Well, that does it for me. Thank you, and good luck for the quarter and for the beginning of next year. Thank you. Thanks, bud.

Our next question will come from Marco Rodriguez of Stonecap Capital Markets.

Good morning, everybody. Thank you for taking my questions.

Good morning, Marco.

I was wondering if maybe you guys could spend just a little bit more time and put some more color around some of the, I guess, supply chain constraints that your customers are kind of seeing. I know that you've mentioned the foam delays, raw material inflations. Can you just maybe sort of rank out where you're seeing the biggest constraints and anything else you might be seeing, and if at all possible, what you're kind of hearing in terms of when those constraints might be worked through, if you will?

Yeah, thank you, Marco. This is Viv. I'll give you my feedback on this, and we certainly are not experts on you know, supply chains outside of fabric. I mean, we understand our fabric supply chains well, but there are some external things that impact our customers that are going on, and we're trying to learn every day and getting different opinions about that. Really throughout, if we go back a little bit, throughout COVID-19, there has been a lift in the business for several quarters. And, I mean, we haven't been perfect for sure, But generally, our supply platforms have been really stable, and we have met most of the demand put in front of us. So we haven't seen really any shortage of material for our production. Yes, there are now some raw material price increases we're hearing about coming on yarns. We're hedged on that so far. We're hearing on that coming on freight. And so that's why we're going to have to implement some price increases in both businesses in Q4. But what we're thinking about and what maybe you're hearing about more is there have been over-the-quarter shortages for our customers of different components they use to build furniture and mattresses. And I guess the most topical one now today is after the – there was already a pressure on the supply chain because of the expanded need and demand, and then with the, you know, the The freeze of the power grid in Texas that has shut down a vast majority of chemical production that would feed into foam, that's just causing some concern for supply over what I think is a relatively short term. But whether it's two to three weeks or four to six weeks or six to eight weeks, I think it's still to be determined. So we're hearing customers with different level of allocation amounts. And obviously, we're ready to ship them fabric. But if they can't get the other components to make the furniture or the mattress, then it slows us down. We think we have it built into our Q4. We've already estimated that to some degree. But we just have to watch that and see if it impacts us more. But we do think it's short-term. I don't think it's anything that extends, certainly not beyond Q4 in our opinion. But again, I'm not an expert on it. It's a short-term impact we've got to watch.

Got it. And you mentioned that you have or you're going to put through price increases. I'm assuming that's through obviously both segments. Can you just kind of confirm, has that price increase already gone through?

Those are being announced now or in process or have been announced. So in our upholstery business, the price increases will be on written orders, new written orders, not on orders that have already been received. And on the mattress fabric side, it will be on or in shippable orders at a future date. Businesses are just different that way, but they're both being announced and will take effect in the fourth quarter. Got it.

Understood. And then kind of shifting gears, you prepared with Marcia and you mentioned market share gains and you listed out a few different reasons that are kind of helping you guys attain those gains. Maybe you can rank them in regard to kind of where you're seeing the most success right now.

Okay. Yeah, thank you, Marco. It's a good question, and we'll try to put some color around while we see it. So, you know, I think first, and this probably isn't the most important today, but it has been over the last six months. We're winning market share because of having strong, stable supply chains. We are outperforming. in delivering products, and we have a great global model in both businesses. I'd say the higher-ranking now today is our innovation and design are flourishing. And this isn't just nice patterns and, you know, pretty colors, but it's performance, as I talked about with the LiveSmart portfolio, and further development with sewn covers in both businesses. That's probably top of the list today. And then right under that is we just have a very broad range of customers now in both businesses. It's definitely more robust than years past. It's more actual customers, and it's more channels that our product has gone into. So we're seeing our products place, whether it be new national line rollouts for 2021 or if it's people rolling our products into areas where supply has been voided. And we just have great belief that our market share trend is going to continue in Q4 and also in 2022.

Understood. And then you guys in the past have mentioned, and you did as well on this call, that the end consumer is really kind of focused on comforting the home, and that's sort of helping drive some of the level of demand that you guys have seen here recently.

With the vaccine starting to kind of get rolled out here, and then, you know, a possible return to normalcy sometime by maybe, fall or winter or later this year, how are you guys kind of thinking about how consumer demand might evolve? Yeah, that's also a good question, Marco. I mean, certainly you are totally right, and everyone in our space has talked about the lift we've had from just a strong emphasis on home being a safe place and wanting to update your home. If you're going to entertain more in your home, then we have definitely seen a trend of consumers wanting to update that. I think we look at it, you know, our business is always kind of thinking about options for what's coming at us. And there's a really good positivity for us as we think ahead. We have a strong backlog in our upholstery business, which is great. We know we're a winning market share. We see ourselves placing on new rollouts. If travel and leisure gets more popular, we're poised to capitalize on that with a read window and hospitality. We have expectations that, I mean, we assume more stimulus will be coming into the market, so that's going to provide, I think, more opportunities for us to sell products and then, you know, just, again, our more diverse customer base and having more customers to sell to is a very positive trend. So I think it's important for For you to know, Mark, we've definitely been buoyed by the strong demand for home, but there's so much more under the surface of that that's going to drive our business next year. It's much more fundamental. The fundamentals of the business are strong. So really, whatever, who knows what's coming, right? Who would have expected what we face, and who knows what we'll face in the future? But we're excited about the prospects we have.

I understand. Well, thank you, guys. I really appreciate your time.

Thanks, Marco.

Thanks. And again, just as a reminder, that is star one. If you'd like to ask a question, we'll now go to Anthony Lobineski of Sudoti & Company.

Good morning, and thank you for taking the question. So first, I just wanted to follow up as far as the backlog is concerned. Is there a way that you can talk about the strength of that backlog, maybe perhaps quantify what you're seeing there with the backlog?

Yes, sir, Anthony. I'm going to pivot this to Boyd, but I'll first tell you that our businesses are different in that way. On our upholstery segment that Boyd will touch on, we do get written orders that generates a strong backlog. On our mattress side, we deal more in a forecast model, and so we are building to a forecast that seems very strong. I'm going to let Boyd talk specifically on the backlog and the written order side of the upholstery segment.

Yes, Anthony. The backlog position still remains today at significantly higher levels than at this point last year. We've really seen that remain somewhat consistent over these last couple of quarters with backlogs well above prior year levels. Incoming orders continue to outpace the same period last year as well. We still see strength from both the standpoint of very good backlogs and the pace of orders coming in. That seems to have stayed very steady. I think it supports us well for the coming quarters. That seems to be a very good position. Got it. Thank you for that. As far as the price increases that you're looking to put in place to offset higher costs, fully offset the higher costs, or will there be some lag by the time you're able to capture the higher prices?

Yes, sir, Anthony, I think mostly so. Yes, we're doing that with an expectation of what we think is going to cover it generally in full.

Yeah, Anthony, this is Ken. We've looked at all the different components, and each division is different. It's not a global type thing. So each division has looked at their facts and circumstances and adjusted their prices accordingly. Got it. Thank you very much. And then you talked about being excited about the diversity of your customer base. Just wondering, when you look at the recent results here, can you talk about the sales increases that you've captured? I just wanted to see if you can bifurcate this as far as growth from new customers versus existing customers. Can you give us some more color about that?

Yeah, you know, I think a lot of that stemmed, Anthony, from our growth in our sun mattress cover business. And so, you know, for a long time, we've had a really good success of being a reliable, innovative fabric supplier. And we always sold to furniture manufacturers. We've done that for a long time. Maybe specifically in the bedding business first, you know, as there's been more e-commerce brands that have started up, We just, our platform, the U.S., Haiti, Asia platform, combined with our ability to design fabric to cover and innovate, is gaining enough traction with a lot of the new upstart brands. So the fastest growing part of our business is mattress covers. But the reason that's hard to kind of bifurcate is because it also pulls through fabric. So it really is a terrific model for our mattress business to be pulling through So certainly mattress covers are growing and becoming a significant part of the business, but it also is using the fabric. So I may not be answering the question, and you can tackle that if you want more detail there, but on the upholstery side, we know how to service big customers because we just have a good supply chain and we can service high demand, but we're now pushing into more broad categories from promotional to high-end, game and share, also with e-commerce, furniture brands. So it feels like we have more channels in both businesses to push our fabric to and our covers to, which is popular for both sides.

And the hospitality business is a whole different thing.

Oh, and of course the hospitality business is a whole other wing to our upholstery business. We're You know, we feel good about where that business can be sometime in fiscal year 22. We think travel and leisure will come back, and it will come back strong.

Got it. Okay. Thanks for that. And then, you know, last question for me. So I know you're stepping up your investments as far as your CapEx and the Haiti joint venture, but, you know, long-term looking into fiscal 22 beyond, how do you prioritize your cash flow priorities? Yeah, Anthony, this is Ken. I think as we've done in the past, you know, we actually post our capital allocation strategy right on the website to give investors a view of exactly what we're thinking. You know, our primary purpose, we're going to invest in our business to grow organically, you know, through working capital, through CapEx, and we also view the obviously staying debt-free as long as we can. And then, of course, keeping the regular dividend in place and growing at a consistent pace. So those are our highest priorities as a capital allocation. And that's really any year that we will look at. So I would say that as we go into the new year, that would be our focus. Just like it was this year, it would be focused next year. Got it. Okay. Well, thank you very much. Best of luck. Thank you, Anthony. Thank you.

And with that, we had no other questions. I'd like to turn the call back to our presenters for any additional or closing comments.

Thank you, Operator. And again, thanks to everyone for your participation and your interest in CULT. We certainly look forward to updating you on our progress next quarter. Have a great day.

And with that, ladies and gentlemen, that does conclude today's call. We'd like to thank you again for your participation. You may now disconnect.