This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good morning and welcome to Culp Incorporated third quarter 2022 earnings conference call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the call over to Ms. Drew Anderson. Please go ahead.
spk00: Thank you. Good morning and welcome to the CULP conference call to review the company's results for the third quarter of fiscal 2022. 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 measurement is included in 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. A slide presentation with supporting summary financial information 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. Please go ahead, sir.
spk02: Thank you so much, Drew, and good morning, and thank you 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, our Chief Financial Officer, and Boyd Chumley, the President of our Upholstery Fabrics business. I will begin to call some opening comments and objectives, and Ken will then review the financial results for the quarter. I will then briefly update you on strategic actions specific to each of our operating segments. And after that, Ken will review our fourth quarter and fiscal 2022 business outlook, and then we will be pleased to take your questions. As expected, the third quarter was significantly challenged by a convergence of factors that affected our performance. Sales were generally in line with expectations, despite being tempered somewhat in our mattress fabrics business. And they did reflect stable demand for our products as compared to the third quarter of last year. We also saw some impact from the pricing actions we've taken. As compared to the same pre-pandemic period two years ago, sales for the quarter were up nicely at approximately 17%. However, profitability for the quarter was pressured more than expected, particularly in our mattress fabrics business. Despite headwinds, the fundamentals of our business remain solid, and we have the financial strength to support our business in the current environment. In each of our segments, we continue to execute our product-driven strategy with an emphasis on design creativity, innovation, and servicing the evolving needs of our customers. Our diversified global platform and robust supply chain have enabled us to consistently meet our customer delivery commitments in the face of numerous challenges, and we are well positioned to capitalize on planned new programs and expanding market opportunities. Notably, we opened our third Haiti facility during the third quarter, which will allow us to expand our near-shore capacity for cut and sewn upholstery kits and to complement our already strong sewn mattress cover business and also to support future growth and build supply chain resiliency. We have also made considerable investments in our business during the past nine months, including this new cut and sew facility in Haiti, a new innovation campus in High Point, North Carolina, and a higher inventory balance to protect against supply chain disruption. That inventory balance and those expenditures also support our valued customers and to get ahead of rising raw material costs. As a result of these strategic investments, our cash position has declined during fiscal 2022, but we now expect our cash position to stabilize during the fourth quarter. Importantly, while it's always our intent and desire to grow our revenues and profits, we understand that we are facing an uncertain demand and cost environment. We will be laser focused on generating cash and keeping our expense structure in line with whatever revenue backdrop might arise. Looking ahead, we have a number of focused initiatives for the fourth quarter and continuing into fiscal 2023. Our first objective is to grow sales and specifically focusing on our mattress fabrics division in doing so. Our mattress fabrics business is seeing significant planned new placements that we have won with customers and we are waiting for them to roll out. The timing for new product rollouts by our customers would normally have been in our third quarter, or at the start of the calendar year. But we have seen some customer delays, and we now expect these launches will commence this summer. We have opportunities for sales growth in both mattress fabrics and sewn covers, but we especially look to rebound sales in our sewn cover business, where inventory of our customers has delayed the timing of new orders. We are also reorganizing our sales effort and our sales team within our mattress fabrics business to continue leveraging our reimagined 3D rendering service to develop a more tailored and much more personal sales relationship with our customers and offering enhanced speed to market. We are also effectively utilizing the talent of our brand experience managers and the expertise of our service personnel and our global platform to secure new opportunities. We also have an amazing location at our new design and innovation center at Congon Yards in High Point. The design teams from our various businesses are collaborating, and for the first time in years, we are presenting all of our products in the same show space. Customers across our divisions have been raving about the atmosphere and the opportunities for development, and we believe we will continue to see success from this location. We also have the ISPA trade show next week. This is the first real mattress trade show in four years, and we will be featuring an express line of fabrics, offering a curated, quick-ship option to further champion our global service capability and flexibility. We will also debut new collections focusing on sustainability and luxury in both aesthetics and technical performance, encompassing development and fabric-forming processes. New innovation with excellent service is paramount for the future, and we are executing on both. In our upholstery fabrics business, we will continue marketing the strength of our LiveSmart portfolio of products, offering performance, ease of cleaning, durability, and sustainability. We remain very excited about our LiveSmart brands and their acceptance in the marketplace. We will also continue pushing, and we are optimistic about the recovery of our hospitality business as consumers return to the office and hotels begin to renovate again for travelers. In tandem with a plan for increasing sales, we will also work to maximize our efficiency and optimize our global platforms. Proper customer service is equally as important as building sales, and we have re-established through these uncertain times that the supply chain flexibility and redundancy are critical. Our multi-country platform, offering production and sourcing capabilities in six countries, USA, Canada, China, Haiti, Vietnam, and Turkey is vital to our success and allows us to meet our customers where they are and how they want to do business with us. In both businesses, we have competitive advantages with our global presence to service our customers, and we have proven it throughout the last year with an excellent service record. As we look ahead, the heavy lifting in establishing these platforms is complete, and we are going to be more strategic to balance output from all facilities as we meet demands. A balanced product mix across our global platform is critically important to overall profitability. As I already commented, our most recent enhancement is our new Haiti operation for cut-and-sew upholstery kits, and that is now operational, and we are growing the capabilities of this facility every week. This is our third building in Haiti, again with two existing facilities for cut-and-sew mattress covers already in operation. Another objective and a top priority is our emphasis on managing and stabilizing our solid cash position. And as mentioned, we will work to achieve this regardless of the industry environment. Notably, we continue to maintain a strong balance sheet with solid liquidity. We will continue following our formalized capital allocation strategy, which is available on our website. We will utilize and strategically reduce our investment in inventory, to generate sales, and to protect us from macro disruptions and or cost pressure. We will continue to control our corporate overheads and SD&A costs just as we have done this fiscal year. We have already made significant capital expenditures in recent years, and we do not anticipate major needs in the near term. We will aggressively manage costs overall in response to the industry environment. Overall, we remain diligently focused on maintaining balance sheet strength and continuing to reward our shareholders with our regular quarterly dividends. Although we do expect the current pressures to continue near term, we are certainly working to mitigate these challenges with the initiatives I just mentioned, as well as other actions, including additional price increases taking effect in both of our businesses during the fourth quarter to help further offset rising costs. We are seeing some improvement in labor conditions, and we are intentionally focused on retaining existing and newly trained employees. We also expect to see a more normalized product mix in our mattress fabrics business during the fourth quarter. I remain very optimistic about Culp's future as we continue to demonstrate the competitive strength of our innovative product offerings in diversified global platforms. We look forward to the opportunities ahead to deliver long-term profitable growth and value for our shareholders. And lastly, I just want to thank our dedicated employees around the world for their resiliency and their commitment to the long-term success of Culp. Their spirit is inspiring to me, and I'm proud to be part of their team. I also want to celebrate the completion of our first global giving initiative, aptly named Share the Love. In February, all of Culp's worldwide facilities participated to support their local communities and those in need. A special thank you to our employees for contributing in such a meaningful way. With that, I'll now turn the call over to Ken, who will review the financial results for the quarter.
spk05: 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. Here are the financial highlights of the third quarter. Net sales were $80.3 million, up 1.2% compared with the prior year period. The company reported income from operations of $1.1 million compared with income from operations of $4 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 third quarter was $289,000, or $0.02 per diluted share, compared with net income of $2.1 million, or $0.17 per diluted share for the prior year period. Notably, the net loss and earnings per diluted share for the third quarter of this fiscal year were significantly impacted by an abnormally high tax rate for the quarter, which I'll discuss in a few minutes. Our overall operating performance was affected by several headwinds, namely operating inefficiencies within our mattress fabrics global platform due to an unfavorable product mix impacting our U.S. and Canadian locations, as well as the continued rapid rise in freight, raw material, and labor costs, and operating inefficiencies due to labor shortages in the US and Canada among other factors. These pressures were partially offset by lower total SG&A expense for the quarter due primarily to lower accrued incentive compensation expense. On a percent of sales basis, total SG&A came in at 10% compared to 12.4% for the same period a year ago. Trailing 12 months adjusted EBITDA was 15.3 million or 4.8% of net sales compared to 8.8 million or 3.3% of net sales for the same period last year, reflecting a year-over-year improvement of 73%. Consolidated return on capital for the 12-month period was 8%. The effective income tax rate for the third quarter of this fiscal year was 129%, compared with 28.8% for the same period a year ago. The significant increase in the company's effective income tax rate for the third quarter of this fiscal year is due to the company's mix of income between the U.S. and its foreign jurisdictions. During the third quarter of this fiscal year, we incurred higher pre-tax losses from our U.S. operations as compared with the third quarter of last fiscal year. As a result, since all of our taxable income is earned by our foreign jurisdictions located in China and Canada, the income tax expense we incur and stem from taxable income from our foreign jurisdictions that was much higher than our consolidated taxable income during the third quarter of this fiscal year as compared to prior year period. We are currently projecting cash income tax payments of approximately 3.5 million for this fiscal year. Importantly, our estimated cash income tax payments for this fiscal year are managed as current projections only and can be affected over the year by actual earnings from our foreign subsidiaries located in China and Canada versus annual projections changes in the foreign exchange rates associated with our China operations in relation to the US dollar, as well as the timing of when significant capital projects will be placed in the service. Now let's take a look at our business segments. For the mattress fabric segment, sales were 38.4 million, down 0.4% compared to last year's third quarter. Sales for the quarter, which included pricing and surcharge actions that were in effect during the period, were relatively stable as compared to the third quarter of last fiscal year. However, top-line performance was tempered by significant weakness in mattress cover sales, as well as customer delays in launching new products. Sales were also affected by traditional seasonal slowdowns, the widespread resurgent of COVID, and the impact of inflationary pressures on consumer spending, as well as weather disruptions at some of our facilities. Operating income for the quarter was $0.4 million compared with $3.3 million a year ago, with an operating income margin of 0.9% compared with 8.5% a year ago. Our operating performance for the third quarter of this fiscal year was significantly pressured by operating inefficiencies within our global platform due to an unfavorable product mix impacting our U.S. and Canadian locations. An unfavorable product mix mainly infers not maximizing production across all of our onshore, nearshore, and offshore locations. In the third quarter, as we service committed demand, we were unbalanced with higher amounts of offshore production, which impacted efficiency and our ability to cover fixed costs in our North American locations. Operating performance for the quarter was also affected by higher freight, raw material labor costs, ongoing labor challenges, including inefficiencies due to hiring and training new employees in the US and Canada, and record levels of COVID absenteeism in January, and also inefficiencies due to normal holiday shutdowns at certain of our locations. We did take selective pricing action during the third quarter to help offset these rising costs, and we are implementing additional targeted price increases during the fourth quarter to further mitigate inflationary pressures. For the upholstery fabric segment, sales for the third quarter were $41.9 million, up 2.7% over the prior year. This growth in sales was driven by solid demand for our products, even when compared to an especially strong sales performance during the prior year period. Demand remained well above pre-pandemic levels, and we continued to benefit from our robust platform in Asia, our stable long-term supplier relationships, and the success of our product innovation strategy, including the continued popularity of our LiveSmart portfolio of performance products. Our sales results were also supplemented by the pricing and surcharge actions that were effective during the quarter. Additionally, top-line performance in our hospitality business continued to recover from pandemic-related impacts during the third quarter, with higher sales in both our hospitality contract business and our re-window products business. Operating income for the quarter was $2.4 million compared with $3.9 million a year ago, with an operating income margin of 5.8%, compared with 9.5% a year ago. Our operating performance was affected by higher freight and raw material costs, startup costs for our new Haiti facility, unfavorable foreign currency fluctuations in China, and a lower contribution from our re-windowed products business. We took additional pricing action during the third quarter to help cover a portion of the continued rise in operating costs, and this action began to favorably impact our results in the latter part of the quarter. Although the temporary cost price lag affected operating performance for the third quarter, we will benefit during the fourth quarter from the full impact of this additional pricing action. Notably, we have done a better job in our policy of fabrics business in keeping up with the cost price pressures, although it has been with a temporary lag. For the fourth quarter, we do expect to be more normalized cost pressure for this segment, assuming there are not more changes or inflation for our raw materials. Now turn to the balance sheet. We reported $22.2 million in total cash and investments and no outstanding debt under our $30 million unsecured revolving credit facility as of the end of the third quarter. This compares with $46.9 million in total cash and investments and no outstanding debt as of the end of last fiscal year. Cash flow from operations and free cash flow were negative $12.4 million and negative $18.5 million respectively for the first nine months of this fiscal year. As we continue to invest in our business, our cash flow from operations and pre-cash flow during the first nine months of this fiscal year were affected by the following uses of cash. An investment of $17.1 million in higher inventory levels to protect against supply chain disruption and to support our valued customers to get ahead of rising raw material costs and to strategically improve our in-stock position ahead of the Chinese New Year holiday. Importantly, approximately 25% of this increase was the result of higher raw material costs through the revaluation of our inventory. Another point, 5.3 million investment in capital expenditures, including expenditures for machinery, equipment, and IT investments, as well as expenditures related to our new innovation campus. 1.9 million in payments for our new building lease and startup expenses associated with our Haiti upholstery cut and sew operation, and increased accounts payable payments related to our return to normal credit terms as opposed to extended terms previously granted in response to the COVID-19 pandemic. Additionally, during the first nine months of this fiscal year, we paid $4.1 million in regular quarterly dividends and spent $1.8 million on share repurchases. The company did not repurchase any shares during the third quarter of this fiscal year, leaving approximately $3.2 million available under our current share repurchase program. Finally, as we have discussed, we remain focused on maintaining a strong financial position and disciplined execution of our capital allocation strategy during these uncertain times. Over the course of this fiscal year, we have strategically committed significant funds for organic investment in our business to positively position the company for future growth as external conditions normalize. Based on our current and expected uses of cash and our business outlook for the remainder of this fiscal year, We expect total cash and investments to stabilize during the fourth quarter. With that, I'll turn the call over to Ip.
spk02: Thank you, Ken. I'll just give a few more comments about each division, beginning with the mattress fabric segment. Despite the headwinds in this business, Culp Home Fashions has remained focused on product innovation, creative designs, and personalized customer attention. We had a very favorable showing at the recent Las Vegas market, and we are excited about the positive response from customers. Also, the strength and flexibility of our global manufacturing and sourcing operations has enabled us to support the evolving needs of our customers throughout the quarter. This platform continues to provide us with a competitive advantage for opportunities to expand our market reach across new and existing customers with preferred model offering onshore, nearshore, and offshore capabilities. Looking ahead, we are enthusiastic about our strong new placements and product development opportunities for next fiscal year. However, there is some weakening in the domestic mattress industry, and it may impact demand and lead to additional temporary delays of new product rollouts. Rising costs also continue to pressure our profitability, but we are implementing additional targeted price increases during the fourth quarter to further mitigate these higher costs. We also expect a more normalized product mix during the fourth quarter, And we remain committed to controlling costs, managing and reducing our inventory, retaining talent, and improving our operating efficiencies. Now a few comments on the upholstery fabric segment. We were pleased by the better than expected growth in sales for the third quarter. And notably, the $41.9 million in third quarter sales is the highest quarterly level since our 2006 fiscal year. We were also excited to open our new Haiti facility during the quarter. We finally started shipping products from the facility in January, and we look forward to increasing production and reducing startup costs over the upcoming months. Looking ahead, we expect some of the current near-term headwinds may continue to pressure our results during the fourth quarter. We also expect to slow down a new business for the residential home furnishings industry as compared to the peak experienced during the post-COVID stay-at-home surge which may temper the level of growth in sales for our residential fabric products. Additionally, our sales and operating performance for the fourth quarter, as compared sequentially to the third quarter, will be affected by the timing of Chinese New Year holiday, which falls substantially within the fourth quarter. But despite these external conditions, we remain encouraged by the generally favorable demand trends. We are confident in our ability to navigate these pressures as we leverage our product-driven strategy and innovative products, along with our flexible Asian platform, stable supply chain partners, and expanded capacity in Haiti to sustain our competitive advantage and expand our market reach. We are well positioned for the long term, and we look forward to the opportunities ahead as we continue to support our valued customers. So now Ken's going to discuss the general outlook for the fourth quarter of this fiscal year, and then we'll take some questions.
spk05: Although we are well positioned over the long term with our product-driven strategy and flexible global platform, we continue to navigate near-term uncertainty in the macroeconomic environment, including significant inflationary pressures, a challenging labor market, fluctuation of foreign currency exchange rates, and customer supply chain disruption. We expect net sales for the fourth quarter of this fiscal year to be slightly lower as compared to the fourth quarter of last fiscal year, and we expect consolidated operating income for the fourth quarter of this fiscal year to be comparable to the fourth quarter of last fiscal year. Notably, our expectations for the fourth quarter of this fiscal year are based on information available at the time of this call and reflects certain assumptions by management regarding the company's business and trends and the projected impact of the ongoing headwinds. Additionally, Based on current expectations, capital expenditures for this fiscal year are now expected to be in the range of 6.8 million to 7 million. Depreciation and amortization expect to be approximately 7.4 million to 7.6 million for this fiscal year. Finally, as already mentioned, as a top priority, we will be aggressively focused on generating free cash flow in our fiscal 2023. With that, we'll now take your questions.
spk07: Now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. First question comes from Bud Bugach, Water Tower Research. Please go ahead.
spk08: Good morning, Ken and Yves and Boyd. if maybe you can give us a little bit of a high level, uh, you said there's a lot of opportunities in, in mattress fabrics and you've had great placements. Um, maybe you could add a little color. Are you seeing new customers into it? And, and what are the trends that you are seeing that, um, that give you some, some, uh, um, optimism on the, those, the near, the longer term future of that?
spk02: Yeah. Thank you, bud. And, um, Yeah, look, we recognize and understand that, you know, we've been talking about some of this business that we see on the horizon. You know, we thought it would be materializing in Q3. We had some expectation now that it might materialize in Q4. And there may be some things in the back of the quarter, but now it just looks like some of that's coming in the summertime. To give you a little color on it, we just have built a really solid business service platform. We have the ability to meet our customers in any location where they want to be serviced. We also have just an outstanding opportunity the way we're marketing our products today, both fabrics and sewn covers, with some really highly skilled 3D rendering services and then just some excellent personnel talent. to develop new items. And we, you know, we're just seeing whether it be new customers or existing customers, if it's traditional retail or bed in the box, we just, we see placements that we've won. And so we just, you know, without giving specific names of people or customers or retailers that it might be, we just, um, we know it's there. So the optimism for us is really strong for the business to, you know, we've done the heavy lifting to get the, um, the platform in place, and now we're just kind of waiting for these to materialize. So, you know, existing business is okay, but, you know, resetting new business at current cost is a big help to us as we get those things in the marketplace.
spk08: And has it just been the supply chain disruptions that have caused them to delay their programs? And do you see that dissipating? You said you're seeing some better labor, so... It looks like maybe we're coming to the backside of those problems.
spk02: Yeah, I hope so, Bud. I speculate to some degree on this. I can't speak that this issue is across every customer. There could be different situations. But there was such a surge of just general business post-COVID. And at the same time, there were some significant material shortages, not of our product, but of other items that our customers needed to make mattresses. And so as that was going on, as the industry started to catch up now, I just think that, you know, customers and retailers have been – have slowed down changing out lines on the normal cadence because they just kind of want to get caught up. So, you know, I'm not sure there's any one thing, but it does feel a lot more – I think just the industry is taking a breath now and people are catching up and it's starting to get back to some normalized conditions that we think will be very favorable for cult.
spk08: That's good. And you've had to take pricing. We've seen that throughout the economy. Are you getting much resistance on it? Nobody ever likes price increases, but as long as it's endemic, that's not a good word. But are we seeing any much resistance to it, or is it just their understanding that those are things that just are coming up?
spk02: Yeah, I would say, and I'm happy to let Boyd comment too, because he's been more front line with it on the upholstery side. No one likes it. You said that very well. No one likes to do price. We've done a couple combinations of some price increases that are more permanent and some surcharges to deal with freight and other things. And up until now, we've had fairly good success and customers have understood the need there. And I don't think To date, we have depressed consumer spending with what's been passed through. But I would tell you, if we have to continue going up, then, yeah, I feel like there will be pressure to receive those. We need to now get some normalized conditions, settle our product mix, pull these lag of price increase that we now have coming to fruition for our fourth quarter, and operate efficiently for our customers and try to deliver with the value they expect. So... Boyd, do you want to comment at all to whether that's been a challenge?
spk04: Sure, I'd say, but generally there certainly is a common understanding in the industry about the rising cost that has taken place. So I think there's acceptance that there's a degree of this that's just necessary and is having to be passed along. I do feel that we have approached this in a in a fair and appropriate way, generally with new orders placed. So again, nobody ever likes increases, but I think that there's an understanding in the market that they're necessary and we've approached it in a proper way.
spk02: And I think, Bud, just to make, you probably know this, you're savvy in the business for a long time, but it will help as we get to new product introductions. at least it gives us the chance and our customers the chance to reset all these new items at where costs really are versus having to catch up something that was placed years ago. So that will be a positive when new products start to come through.
spk08: Okay. Just a couple more from me. Hospitality, you continue to like what you're seeing in there. What can you talk about the new programs or what gives you that feeling of good optimism in hospitality?
spk02: Yeah, I'll let Boyd speak to this in more detail, but I think hospitality for us has been, through COVID, a difficult product line because, you know, people weren't going to their offices, they weren't traveling and staying in hotels, and so some of the remodeling or development work was put on hold. But we're now starting to see that come back pretty strong. especially in the fabric side. And I'll let Boyd talk to you about how he's managing cost and price in that business and then what he might see for that plus Reed Windows.
spk04: Yeah, and just again, as you say, from a general perspective, we are certainly seeing accelerated demand in the hospitality segment as it appears the consumer is beginning to devote more spending to travel And so, yes, we started seeing a nice lift in that segment of our business in Q3 and continuing. So I do think we're seeing a more full rebound occurring in the hospitality market. And as Yves says, we have, again, in that area also implemented some pricing actions that were necessitated through cost increases. which will, including within our reed window products business, which will benefit us as we go forward into the next quarter as we get those pricing actions more realized. But yes, very favorable on the hospitality business, seeing a nice shift in the trends of that business as the demand starts to accelerate considerably now above where it was had gone during the throes of the pandemic.
spk08: Okay. And finally, for me, talk a little bit about if there's anything new coming in. LiveSmart, you've made some great innovations there. What's next on the horizon there?
spk04: Yeah, thank you, Bud, and definitely the LiveSmart category of performance products continues to be a key driver of our business. We're very pleased with the acceptance of really all of the products under that umbrella. We are continuing to see a particular growth with the Evolve, which is the product that is in the sustainability area. So that seems to be just gathering more and more momentum and acceptance in the marketplace. We have a new fluorine-free product that's just been launched as well. And so we just continue to innovate in that area and add on to the portfolio of products that we have there and have additional new introductions in the wings as well.
spk08: Okay. Well, my last comment is just, you know, I've followed Culp for an awfully long time, and I've seen these kinds of challenging times before, and I don't remember a time in Culp's history when it's been, I don't know, it hasn't been fun for you all. But in past times, I would have been more worried about the company. I'm not this time, because your financial condition has remained solid during these challenging times. So congratulations to you. to all of you for leading the company through these times. And certainly good luck going, hopefully we all get to easier times. I'm not sure that's all going to be possible, but I hope so.
spk02: Thank you, Bud. Yeah, we appreciate your comments there. And it is something that our board is certainly very keenly aware of. And, you know, we have lived through highs and lows in this business. And we certainly understand the importance of being strong financially to whether our whatever may come at us. So thanks for recognizing that.
spk08: Good luck. Thank you.
spk02: Yes, sir. Thank you. Thank you.
spk06: Thank you. Our next question comes from Anthony Ladinsky, Sedodian Company. Please go ahead.
spk01: Yes, good morning, and thank you for taking the questions. So first, just curious, so when you look at your products in both segments, can you just talk about what portion of your business would you say ultimately is sold to the lower-end consumers versus kind of higher income and other consumers? Just wanted to, you know, one of the major mattress retailers talked about weakness on their low-end consumer line. So just wondering if you kind of could parse out the, what you're seeing as far as products sold and ultimately to the end users?
spk02: Yeah, it's a good question, Anthony, and it'll be hard to do it by actual percentages. I will tell you that Culp for, historically speaking, if we look at our upholstery fabric business, we have generally been on a middle to up range, but primarily trying to hit the sweet spot of the middle of the market. On the mattress side, we have normally been more broad from high to low, but so many of the units that make a difference to cover fixed costs and a facility. With our domestic North American platforms and mattress fabrics, it certainly helps us to have more units running through the facility. And it is a fair commentary just to say that, you know, the lower end of the market is under more pressure today for sure because of, you know, tax returns being delayed or stimulus being curtailed or whatever it may be or just general weakness. There is some – there's more business at the higher – middle to high than at the low. That doesn't mean we can't be very successful, because with our mattress cover expansion, we have a way from fabric to cover to get at almost any price point. And our sales have been relatively stable, and I think they continue to will be. We just need to get our product mix more tailored to running our assets more effectively. It would be important for us. I don't know if that answers your question, but I hope it helps you.
spk01: Yeah, definitely. Thank you for the color. It was definitely very helpful. So in terms of the price increases taken and the ones that you plan for 4Q, can you just kind of go over that as far as like, I know it's not across the board, it's more strategic, but can you just give us sort of some additional color as to what you guys are thinking as far as the impact of that?
spk05: Hey, Anthony, this is Ken. You mean like the financial impact? How much was part of the quarter?
spk01: Yeah, I think... For the quarter, and I guess what's implied in your guidance for 4Q?
spk05: Yeah, I think if you look at the upholstery, I mean, the gain there is pretty much was all price. So that difference was pretty much all price for 4Q. For CHF, for the mattress fabrics business, you had about, you know, you had about 6% of the total sales amount for the quarter being priced. So you had a little bit of fallback there without the price, but you had a nice impact from price in that business as well.
spk01: Got it. Okay. Thanks for that. And looking to fourth quarter, is that, what we should expect as well as far as the impact of pricing?
spk05: Yeah, I think for, again, for CUF, I would say probably, you know, you've got, you know, more, you've got the effect of the full effect of the price increase from previous, so you've got a little bit more impact there. Probably, you know, you're about 5% of that amount would be price impact on the sales And then for CHF, it's probably about 6.5 to 7.
spk01: Okay, great. Thanks for that, Ken. And then, as you mentioned, obviously, you guys continue to have a strong balance sheet. As we look at your capital allocation, I mean, is it safe to say that you guys are still committed to raising the dividend longer term? And any thoughts about that? share repurchases after you guys build up some cash?
spk02: Yeah, you know, Anthony, really good question. And, you know, as we always talk about, we are very disciplined with our capital allocation strategy. And, you know, of course, we publish it everywhere. It's easily available on the website. And, you know, just as of late, we've chosen priorities to invest in the business with CapEx, some of the things we spoke of, and then certainly invest organically in the inventory position to be prepared for you know, what we might see or protect against any further cost pressure. And we're also just a conservative company, and we like to have a solid cash balance without debt. And it is a priority for us to continue with the regular quarterly dividends and increasing those dividends. And I think we have now a nine-year record of increasing the annual dividend, and we carried that through the COVID period. So, For sure, that's a strategy we'll take. And in terms of buying stock, it's one of the tools we can utilize. Just in this current quarter, we felt like we had taken, used a lot of cash for some really positive reasons, inclusive of the dividend, and we wanted to stay to our roots and be conservative and make sure we have a strong cash balance with no debt. So we just kind of weigh all those things against each other.
spk01: Got it. Well, thank you very much, and best of luck going forward.
spk02: Yes, sir.
spk01: Thank you, Anthony.
spk07: Again, if you have a question, please press star then one. Our next question comes from Marco Rodriguez, Stonegate Capital Markets. Please go ahead.
spk03: Good morning, everyone. Thank you for taking my questions.
spk02: Morning, Marco. Hey, Marco.
spk03: I was wondering if maybe you can talk a little bit about your prepared remarks. You talked about reorganizing the sales force. Can you maybe discuss how long that might take? Are there any sort of meaningful costs associated with that? And then if you can also maybe talk about what were the drivers behind this change?
spk02: Yeah, thank you, Marco. Good question. Thanks for picking that up. And it's not going to take much time. We're doing some pretty pretty strong moves here just ahead of our ISPA trade show that's next week, which we talked about. And these aren't necessarily, you know, fundamentally, you know, whole new sweeping changes, but we are just reallocating accounts, moving talented salespeople and brand managers to where they need for the way the customers want to be sold. We have really gotten advantaged with a 3D rendering service, and we just have some some talented folks that really embrace that and some customers that really embrace it and some that want to work their traditional way. So we just want to meet customers how they want to be served. We also always, with our sales focus in the mattress side, want to reward our sales people for growing the business with commission and then, of course, the margins there. So just kind of reallocating personnel and reallocating performance based on based on margin and growth. I think it's going to be very positive because we're going to be taking advantage of strong technical capabilities and provide a much more personal level of service and a faster, more efficient way of selling customers. We're excited about it.
spk03: Got it. Okay, I understand. And then kind of dovetailing into one of the second areas of your focus here and your prepared remarks about maximizing efficiencies, Can you maybe talk a little bit about your capacity utilization levels right now, how that's sort of working out or how you're envisioning that just kind of given the recent capacity additions you've done over the last year or so? And then if you can also kind of dovetail into that, the labor situation. I know you sort of addressed it on one of the prior questions, but just kind of how that is also meaningfully or putting into the equation for maximizing efficiency as you guys go forward.
spk02: Right. Yeah, and you're picking up on those comments we were talking about where we need to maximize efficiency in all our plants to maximize profitability. And so kind of what we're trying to get at there is we feel like we've done an extraordinarily good job of maintaining a stable sales level. And we do have customers now in this age of anti-dumping and all the things that have gone on, making products all over the world. And our global platform is very well situated to service these customers from almost any location. And so we're proud of ourselves for finding these opportunities. We think it's a really good thing. But for us to really maximize our profitability in mattress fabrics, we have to have a stable mix across the whole platform. And so I guess what's kind of been lagging in Q3 was the North American platform is just not running as full as we want it to run. So we're delivering customer and delivering the need. I don't want you to misunderstand my comments. We're happy with the offshore sales. And again, it only demonstrates our ability to meet customers where they want to be serviced. But to optimize, we need the sales to to complement a strong demand for North America. So those plants just aren't running at full capacity right now because of the demand we see in the North American business. They will, and if some of these things come to fruition that we see out there, we'll be in a much better position. But, you know, we have some high fixed costs that we need to cover by running those plants.
spk03: Understood. And the labor aspects?
spk02: Oh, I'm sorry. Labor challenges have definitely improved some now. I think that's what you were asking. You know, in Q3, we had significant hiring, retraining, sign-on bonus, all kinds of challenges we had with retaining our labor force. That is much, much better now. We certainly have higher wages than we had pre-pandemic, but labor cost is not a major factor in our cost per yard. So we can absorb that with our pricing actions, and the labor situation is more stable. We're able to get personnel to run equipment now, which is a good thing.
spk03: Got it. And then just kind of dovetailing on another question about pricing, you know, we've heard from the other Magis retailers, whether it's the traditional guys or the bed-in-the-box that You know, they've obviously been raising prices over the last year or so just due to the raw material inflation, but it seems to kind of be approaching, materially approaching an area where it might be depressing some consumer demand. So I'm wondering if you can maybe talk about what you might be hearing or seeing from your customers as it relates to these sort of dynamics or what your thoughts are there.
spk02: Yeah, I think it's a good question, Marco, and I don't have the absolute answer to that. I think we've thought about that a lot as we look at what's happened to cost in the business, is there a point where consumers will defer their spend to something else if it does become too expensive? And we're certainly aware of that. I think the way I'd look at it, not to dodge the question because I don't know, I think the way I'd look at that is new products will solve a lot of that. If we can get new exciting products rolled out to the market that have absorbed the current cost situation, we'll have a better chance. Trying to just raise prices on things that are already placed is challenging. But to move to some new items will re-energize the consumer in the marketplace. And that's why we keep pointing to some of the new products we see that are lined up to come through.
spk03: Got it. Very helpful. Thank you guys for your time. I really appreciate it.
spk07: Thank you, Marco. This concludes our call. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Colt for closing remarks. Please go ahead.
spk02: Thank you very much, Operator. And again, thank you all for your participation and your interest in Colt. We look forward to updating you on our progress next quarter. Have a great day.
spk07: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer