Culp, Inc.

Good morning and welcome to the Culp, Inc. Second Quarter Fiscal 2023 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal Conference Specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would like to turn the conference over to Drew Anderson. Please go ahead.

Good morning and welcome to the Culp Conference call to review the company's results for the second quarter of fiscal 2023. As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition, and prospects of the company. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. the actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q. You are cautioned not to place undue reliance on forward-looking statements made today, and each such statement speaks only as of today. We undertake no obligation to update or revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial 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 colp.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. I will now turn the call over to Yves Culp, President and Chief Executive Officer of Culp. Please go ahead, sir.

Good morning, and thanks to everyone for joining us today. I would like to welcome you to the Culp Quarterly Conference Call with Analysts and Investors. With me on the call today are Ken Bolling, our Chief Financial Officer, and Boyd Chumley, President of our Upholstery Fabrics business. I will begin today's call with some opening comments, and Ken will then review the financial results for the quarter. Following that, I will provide further updates on some strategic initiatives and opportunities specific to each of our operating segments. And Ken will then review the business outlook for the third and fourth quarter of this fiscal year. We will then be pleased to take your questions. Our sales and operating results for the second quarter reflected ongoing pressure from the continued slowdown in consumer demand in the domestic mattress industry and to a lesser degree in the residential home furnishings industry. As previously announced, our operating performance was significantly affected by inventory impairments and inventory closeout sales for our mattress fabric division, as well as higher than normal inventory markdowns and restructuring and related charges associated with our upholstery fabric segment. The timing of this inventory impact was mostly driven by our customers' focus on new product offerings to introduce at the retail level, as well as inflationary pressures, changes in consumer spending, and ongoing macro conditions. We expect to ultimately benefit from a focus on new products as we continue to win new replacements in both divisions, but it is difficult to predict the timing of new product rollouts due to the ongoing excess of retail and manufacturer inventory. I am pleased with our continued focus on cash generation and working capital management, including inventory reductions throughout the quarter. Maintaining a solid financial position has been our major priority through these challenging times, and I am grateful to both of our segments for their excellent work in this regard. We ended the period with a higher cash position than the first quarter of fiscal 2023, with $19.1 million in cash and investments and no outstanding borrowings. We also generated cash flow from operations of $6.2 million and free cash flow of $4.8 million for the first six months of the fiscal year. Additionally, based on market dynamics for cut and sewn products and the strength of our Asian supply chain, we took action during the quarter to rationalize and adjust our model for this platform with the closure of our Shanghai cut and sew facility resulting in certain restructuring and related expenses. We also began to implement a rationalization of our U.S.-based mattress fabrics cut and sew platform during the quarter, moving our R&D and prototyping capabilities from our High Point, North Carolina location to our Stokesdale, North Carolina facility, and initiating the closure of two U.S. facilities associated with this business, which is expected to be completed during the third quarter. We believe both of these moves will generate meaningful cost savings, estimated at approximately $3 million annually, without sacrificing our ability to support our customers, grow our cut and sew business, and maintain our competitive advantages through our lower-cost manufacturing and sourcing operations in Haiti and Asia. Importantly, we continue with a very robust platform for cut and sewn products, driven both for market pricing and reactivity to customer demand for rapid prototyping as well as ramp-ups. I remain encouraged by the market positions of both of our businesses, and the actions our management teams are taking to improve performance in the face of extraordinarily difficult conditions. Later in these remarks, I will provide more color around specific strategies in each business with detail around cold pump fashions. I'm encouraged by our leadership transition within the cold pump fashions business to generate improvement for the future. Across both segments, we are optimistic about new customer programs that are expected to launch in calendar 2023, as these programs will have the benefit of being priced in line with current market conditions as compared to the price-cost lag we've experienced for the last several quarters. Looking ahead, we will continue to diligently manage the aspects of our business that we can control, including execution of our product-driven strategy, ongoing cost reduction measures, and consideration of further adjustments to right size and restructure operations to align with current demand levels. We are pleased to have entered into a term sheet for a new credit facility that will give us more flexibility as we navigate this difficult environment. And we remain focused on taking the necessary steps to weather the current headwinds and meet the needs of our customers both now and as conditions normalize. I'll now turn the call over to Ken who will review the financial results for the quarter, and then I'll talk more about some initiatives we have planned for both businesses as we move into the second half of the fiscal year.