Culp, Inc.

Good morning and welcome to the Culp, Inc. First Quarter Fiscal 2024 Earnings Conference Call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star, then one. To withdraw your question, please press star, then two. Please note this event is being recorded. 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 first quarter of fiscal 2024. 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 they're 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. 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 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. I will now turn the call over to Yves Culp, President and Chief Executive Officer of Culp. Please go ahead, Yves.

Thank you, Drew, and good morning, everyone, and thank you for joining us today. I would like to welcome you to the quarterly conference call with analysts and investors. With me on the call are Ken Bolling, Chief Financial Officer, Boyd Chumley, President of our Upholstery Fabrics business, and Tommy Bruno, President of our Mattress Fabrics business. So today, I'll begin the call with some detailed comments, including a discussion of key points and topics for the quarter and for both businesses, as well as priorities as we look ahead. After that, Ken will review the financial results for the quarter, and I will then briefly review our business outlook for the second quarter of fiscal 24, and we will then take your questions. Regarding the current state of our business and the overall furniture and bedding industries, I want to review some overriding themes we discussed last quarter and detail some critical actions we are continuing to execute within both businesses. I will also expand on our comments with a few important points that illustrate where Culp is today. Number one, we are encouraged by our better than expected operating improvement for the quarter, both sequentially and year over year, despite the ongoing industry malaise and demand softness within the two industries we service. Number two, we remain excited about the progress of our comprehensive transformation within our CHF mattress fabrics business. and we are pleased to be gaining market position in the face of some contraction in the domestic mattress industry. Number three, although market conditions are also pressuring the residential home furnishings industry, our upholstery fabrics business has remained profitable despite these pressures, and demand remains quite solid in our growing hospitality business. And number four, we are continuing our diligent focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital. So going to theme number one, our results for the first quarter reflected better than expected operating performance, both sequentially and year over year, even as industry demand remained soft, especially in residential home furnishings. However, our operating performance improved despite pressure on sales due to internal improvements within both businesses. The strong sequential and year-over-year improvement in our mattress fabrics business, a 45% improvement sequentially and a 52% improvement year-over-year, was supported by the rollout of new fabric and cover placements during the period. As we have commented for some time now, these new programs are priced in line with current raw material and operational costs and we expect these new programs to grow Culp Home Fashion's market position in fiscal 24. The operating improvement in the CHF business was also driven by our ongoing focus on operational efficiencies and cost reduction initiatives across our locations, and I will expand more on this shortly. I do want to emphasize that mattress fabric sales for the quarter were flat compared to the prior year period, which is a solid performance in the face of difficult industry conditions and certainly reflects our growing position in the market. For the upholstery fabric segment, we saw operational improvements and fixed cost savings, along with solid demand in our hospitality contract fabric business and improvement for reed window. But as expected, sales within our residential fabrics business were lower as compared to the first quarter of last fiscal year, which notably was a strong quarter due to a lift in sales following pandemic-related shutdowns in China and the quick recovery that the upholstery furniture industry was experiencing at that time. Our sales for residential fabrics this quarter were certainly affected by the ongoing softness in the home furnishings industry and shifting consumer spending trends following the pandemic stay-at-home surge. While we do understand that the furniture embedding environment remains challenged, we will continue to manage the aspects of our business we can control, taking necessary steps to withstand current market conditions and position our business for renewed growth. As detailed in earlier quarters, we have made platform changes to our cut and sew profile on both mattress fabrics and upholstery, and the cost benefits from these adjustments are coming to bear. We are also focused on managing our operational efficiencies across our fabric platforms, and therefore lowering overall costs. Beyond Q1, we believe our continuing recovery will be led by our mattress fabric segment, where our execution of a comprehensive transformation plan is laying the foundation for study improvement. I'll expand much more on the mattress fabric transformation plan momentarily, but our sequential and year-over-year operating improvement reflects some of these initiatives we have undertaken internally to manage our business. While the challenging industry environment is expected to continue for some time, our market position is strong and improving, and we believe we are poised for a considerably better second half of fiscal 24, and that's November to April by the calendar. with a return to operating profitability in this fiscal year. Regardless of the current demand backdrop, we expect continued progress in improving our operating results. But we understand the speed of our recovery may be affected by overall industry trends. We would like to see some macro tailwinds to allow recovery to happen quicker. We are well prepared for the long term, and our strong leadership teams Innovative product offerings, creative designs, and a resilient global manufacturing and sourcing platform will support us into the future, especially when the environment improves. The second important thing to expand on is the business transformation update within Colpone Fashions, our mattress fabric segment. Under the leadership of Division President Tommy Bruno, along with his restructured management team, Our transformation plan focuses on long-term improvement in every facet of the business, including quality, sales, marketing, and operational processes, supply chain optimization, employee engagement, and organizational management structure. As we've said, we believe CHF improvement is our best short-term opportunity for recovery and growth from our current levels. Tommy and the CHF management team remain focused on operational excellence. as well as balancing our product mix to proper volumes and steady run schedules. Even after our previous cost saving adjustment to our domestic North Carolina cut and sew capabilities, we continue with a robust global platform featuring manufacturing and sourcing capabilities in six countries. The US, Canada, Turkey, Haiti, China, and Vietnam. Our combination of onshore, nearshore, and offshore options provide our mattress, fabric, and sewn cover customers with the agility and value they need for their business. Combining this platform with our expertise in design and product innovation, we are making excellent progress for sustainable improvement in fiscal 24. Overall, as we've mentioned, the domestic mattress industry is experiencing significant contraction with industry reports showing aggregate reductions of 10% in dollars and 20% in units through the first six months of calendar 23. But notably again, CHF revenue over the same general period has remained flat, indicating that CHF has made gains with customers in a difficult market environment. While the mattress industry slowness may remain for some period, we still expect to improve our performance through new programs and improved operations. Our recovery in CHF is not fully dependent on the industry environment. And assuming our sales volumes in fiscal 24 do not materially fall below the prior year, we expect to see significant progress with steady, sustainable improvement in CHF this year and beyond. The third important theme is the continued profitability of cold upholstery fabrics. I've detailed just now a lot of excitement about CHF, but it is equally as important to note the steady performance of CUF. Division President Boyd Chumley and his strong leadership team have managed effectively in the midst of abnormal, tumultuous times. CUF has maintained profitability with a focus on improving operational efficiencies and proactively taking strategic action to reduce our cost structure to align with demand levels while also always supporting our customers with our flexible global platform. I believe CUF has best in class in servicing our customers and our design and product excellence combined with an effective global platform has led the way. Our improved operating costs within CUF began with the restructuring of our cut and sew upholstery kit platform in China during the second quarter of last fiscal year. and then continued with the rationalization of our upholstery cut and sew platform in Haiti near the end of last fiscal year. We took further action in Haiti this quarter to discontinue production of cut and sewn upholstery kits at this location based on demand softness. This step further reduces CUS cost structure and avoids losses that would have otherwise been incurred while allowing this business to continue to support customers through its strong Asian supply chain. Notably through these actions and other improvements in operational efficiencies, CUF has been effective in lowering its overall cost levels to remain profitable in the face of reduced demand. Just one quick aside, I do want to again reiterate that while we have discontinued production of upholstery cut and sew kits in Haiti, our Haiti cut and sew platform for mattress covers remains an integral part of our strategic plan. Now turning back to CUF, We are also adjusting our global platform for the fabrics portion of our upholstery fabrics business, as we look to provide options within our supply chain in China, Vietnam, and multiple other new countries. Customer service is a hallmark for Cole, and a diversified platform provides improved risk management and a more stable supply base. Of note, our hospitality contract business accounted for 33% of segment sales for the first quarter. 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 its importance to our overall strategy of product diversification for this segment. While the tough demand environment may continue for some time, Culp Upholstery Fabrics remains well positioned for the long term. with a scalable global platform and innovative product offerings, including our popular portfolio of LiveSmart performance products and our new product technologies. We are also beginning to see increases in newly written fabric orders, and we believe we will see the benefit from this in the second half of fiscal 24. Similar to the first quarter, we also expect the upholstery fabric segment will continue to benefit Culp through the remainder of fiscal 24 with improved inventory management, a solid hospitality contract fabric business, improvement in our read window business, and a rationalized cut and sew platform. And lastly, I'll shift to the fourth theme, which is constant focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital. I'm very pleased with the management team for its continued effort in maintaining our cash and total liquidity position. We ended the quarter with $16.8 million in cash and no outstanding borrowings. And we had total liquidity of $42.3 million consisting of cash and borrowing availability under our domestic credit facility. We are continuing to carefully manage inventory against current demand levels and we are strategically investing in our business. I have repeatedly, through my remarks, mentioned the softness within our industries, and that has been most evident to us by several recent closures within the furniture industry. And remember, this is on the heels of several bankruptcies we witnessed in the last year as well. We are seeing some suppliers, competitors, and customers endure financial difficulty and it gives us more appreciation for our financial stability and its importance to our future. We are managing accounts receivable effectively, and we do not have any material exposure with respect to the recent closures. I am grateful to our credit teams and divisional management for how we conduct Culp's business with a lens towards the future and careful partner selection. We fully recognize that the management of CulpStrong Balance Sheet is a critical initiative, and we believe we are well-positioned to focus on investing and optimizing our global manufacturing platform and growing profitable sales. I'll now turn the call over to Ken, who will review the financial results for the quarter, and then I'll briefly review the outlook for the second quarter of this fiscal year. Ken?