Culp, Inc.

Good morning, and welcome to the CULP, Inc. Third Quarter Fiscal Year 2023 Earnings Conference Call. All participants will be in a listen-only mode today. And should you need any assistance during the call, 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. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star and two. Please note that this event is being recorded today. I would now like to turn the conference over to 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 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. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial results. Your caution not to place undue reliance on forward-looking statements made today, and each such statement speaks only as of today. We undertake no obligation to update or revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is included in the tables to the press release, included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at 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 Kolb, President and Chief Executive Officer of Kolb. Please go ahead, sir.

Yves Kolb Good morning, and thank you for joining us today. I would like to welcome you to the Kolb quarterly conference call with analysts and investors. With me on the call today are Ken Bolling, Chief Financial Officer, and Boyd Chumley, President of our Upholstery Fabrics business. A few housekeeping items. First, I want to let you all know that Tommy Bruno, president of our Mattress Fabrics business, is unable to join us on the call today, as he is traveling and working on the business. But we do plan to have him join us next quarter. I also want to point out that we have not posted our usual investor presentation or capital allocation strategy deck on our website, as we are preparing a new refreshed investor presentation and improvement roadmap, which we expect to share within the next few weeks. Lastly, I want to quickly thank our 1,400 employees around the world for their dedication and hard work over these challenging times. Our culture at Culp is special, and we are really proud of our associates. We are also grateful to have been awarded the Hearts Award from the Dallas Market Center and Accessories Resource Team with nomination from the International Textile Alliance. We are honored to be recognized for our heart-based leadership. I'll now begin the call with some opening comments, including a discussion of key themes for the quarter and priorities as we look ahead. After that, Ken will review the financial results for the quarter, and I'll then review our business outlook for the fourth quarter, and we'll then take some questions. So when we think about the third quarter, there are really three major themes. Number one, current weak demand within the two industries we serviced. Number two, is our focus on maintaining a strong balance sheet and managing our cash position. And number three, the transformation within our CHF mattress fabrics business. Regarding theme one, on the demand side, our sales and operating results for the quarter reflect a continued weakness in the domestic mattress and residential home furnishings industries, especially related to unit volume. With sales at these levels, it is a very tough environment for Culp to thrive, despite our market gains. We are a unit-driven company, and in the absence of solid furniture embedding units being sold within the industry, it is challenging for us to run our facilities and manage our supply chain efficiently. Now, there's certainly much to complain about regarding macro conditions and inflationary pressures affecting consumer spending. Those are things that are out of our control. and that are definitely pressuring demand. But it goes deeper than that for Culp, and the impacts are different by business segment. Our upholstery fabric segment has experienced a continued lag in residential business due to high inventory levels that are still being worked through and managed at manufacturers and retailers. We expect that could take a few more months to normalize. On our mattress fabric segment, This business seems to be caught in a temporary industry malaise, with some reports of mattress unit sales currently down as much as 25%. Within this tough demand backdrop, we are controlling what we can control in managing our business, including making strategic adjustments and working to expand our market position. We believe the slack will come out of the supply chain at some point, and macro conditions will stabilize. When that incurs, we are extremely well positioned and expect much better results. Now let me turn to theme two, which is continuing to manage a strong balance sheet and manage our cash position. This is one of the main things we can control, and I'm very pleased with our management teams and both of our businesses for their diligence in maintaining our solid financial positions. We have done an excellent job with inventory reductions with a favorable cash impact of $18.2 million since the end of the third quarter of last fiscal year. We have also managed accounts receivable effectively by improving our terms with key customers and navigating three major bankruptcies without any material impact. Additionally, we have generated positive cash flow for the first nine months of the fiscal year a significant improvement compared to last year, and we now expect to end this fiscal year with a cash level comparable to the end of last fiscal year. This is outstanding cash management and preservation in the face of very challenging times. Importantly, we also have no outstanding debt, and we have entered into a new asset-based revolving credit facility that enhances our liquidity position if we ever need it. We fully recognize that management of Culp's strong balance sheet is paramount to our future success. The third key theme for us, both for the quarter and as we look ahead, is the business transformation underway in Culp Home Fashions, our mattress fabric segment. This certainly falls within the scope of areas we can control, and we recognize that CHS Mattress Fabrics is the business that needs our most immediate attention. This is where we believe the majority of our value exists and what we think is our best opportunity for growth from current levels. Our CHF Mattress Fabrics business is executing a transformation plan in every facet of the business, from processes to people. This business possesses a rich history with an excellent reputation and a strong global platform. While our market position remains solid, we have struggled through extremely volatile demand periods over the last two years, and we have needed better cost control and pricing, as well as better overall discipline. We are in the process of transforming those areas, among others, under the leadership of New Division President Tommy Bruno, and we believe that engaging in this holistic business improvement strategy will position us to emerge even stronger when conditions normalize. I am overwhelmingly pleased with the new leadership under Tommy as he brings an ideal mix of energy, strategic thinking, and experience in the mattress industry. In Tommy's short time with CHF and as reflected in our numerous recent announcements to trade publications and on our social media channels, we have already made excellent progress with getting the right people in the right places, including new managers in sales, customer service, operations, and manufacturing. We are focusing on production efficiency, quality management, and balancing our product mix to proper volume SKUs and steady run schedules. We have an intensive focus on improving our operational excellence. We are also noting now some raw material price improvement, although as we previously disclosed, we are still lagging somewhat in our price cost structure for existing products. Some good news is we are winning new business and gaining market position, and our new opportunities are priced in line with current market costs. It was also very encouraging to see the activity level at the January Las Vegas market. The industry has previously been in a cycle of deferring new product introductions, which affects our unit volume. So we were pleased to see many new products and innovations presented at this market, featuring cult mattress fabrics and sewn covers, that are launching throughout calendar 2023. Looking ahead, we expect all of these elements will be the building blocks for steady, sequential improvement in the CHF business, though notably the pace of our improvement will be dictated by overall macro industry demand. We are working diligently to regain profitability in fiscal 2024, and we do expect that CHF mattress fabrics will lead that recovery. Regarding our upholstery fabrics business, despite the elevated inventory levels affecting demand for our residential fabric products, we remain well positioned for the long term with our scalable global platform and innovative product offerings, including the popular portfolio of LiveSmart performance products. Our upholstery fabrics business has generally been more stable over the last two years in market volatility, supported in part by our hospitality contract business over the last year, following its recovery from COVID impacts. Hospitality contract accounted for approximately 30% of the segment sales for the third quarter. And while this percentage is higher than normal due to lower residential sales, it does reflect the ongoing solid performance of our hospitality contract business, as well as the importance to our overall strategy of product diversification for this segment. We also took some action during the quarter to align our upholstery cut and sew platform in Haiti with current demand trends. While this did result in some restructuring charges, we were able to accomplish this adjustment without sacrificing our ability to support customers and grow our cut and sew business. Ken's going to go into more detail on this in his review of divisional performance, but I'm pleased that we will have a go-forward annualized savings from this action and we will recoup a majority of our prepaid rent costs over time. I also want to be very clear that we still view Haiti as a critical near-shore location for coal. We have a strong mattress cover platform running in Haiti, and we expect Haiti to be an important part of the company's future for cut and sewn mattress kits and covers. I'll now turn the call over to Ken, who will review the financial results for the quarter. and then I'll come back and review the outlook for the fourth quarter of this fiscal year. Ken?