Culp, Inc.

Good day, and welcome to the CULP, Inc. Second Quarter Fiscal 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should 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. To ask a question, you may press star, then one on a touch-tone phone. 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 second 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 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. 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. This time, I will turn the call over to Yves Culp, President and Chief Executive Officer of Culp. Please go ahead, Yves.

Thank you, Drew, and good morning, and thank you for joining us today. I would like to welcome everyone to the quarterly conference call with analysts and investors. Joining me on the call are Ken Bolling, our chief financial officer, Boyd Chumley, president of our upholstery fabrics business, and Tommy Bruno, president of our mattress fabrics business. I will 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 then I'll briefly review our business outlook for the third quarter of fiscal 24, and we will then take your questions. I'd like to open with a general update of some overriding themes and discuss the current state of our business within the overall furniture and bedding industries. I will further discuss some critical actions we are undertaking in both businesses and I will expand on these comments to illustrate where Culp is headed. First, we are pleased to report both sequential and year-over-year improvement in our consolidated sales and operating performance for the quarter, despite the challenging industry environment and ongoing demand softness within the two industries we service. These results are satisfying, as we believe we are outperforming general market conditions in both businesses. Secondly, we continue to be excited about the comprehensive transformation within our CHF mattress fabrics business, and we are pleased to be gaining market position in the face of unit slowness in the domestic mattress industry. Our 19.6% year-over-year sales growth and 90% improvement of year-over-year operating loss represent strong evidence of our progress and the effectiveness of our CHF leadership. Third, although market conditions are also pressuring the residential home furnishings industry, our upholstery fabrics business continues to enhance its profitability despite these pressures. And demand remains solid in our growing hospitality business. And finally, we're continuing our diligent focus on prudent financial management, including maintaining a strong balance sheet and ensuring an appropriate level of working capital while also making strategic capital investments, especially in the mattress fabric segment, to further support our recovery and efficiency. So providing more detail on Q2 results. Again, our performance for the second quarter was in line with our expectations, with consolidated sales and operating improvement both sequentially and year over year. This is a solid outcome as industry demand remains soft within residential furniture and bedding. The strong sequential and year-over-year sales growth in our mattress fabrics business, a 7.4% improvement sequentially and a 19.6% improvement year-over-year, was primarily driven by new fabric and cover placements during the period, as well as SKU rationalization and the repricing of some underperforming SKUs. As we have discussed in previous reports, we are pricing new placements we've received in line with current raw material and operational costs. And this, along with the re-merchandised use, has resulted in higher average selling prices overall. While our unit volume was slightly down as compared to the prior year, we believe we are performing considerably better as compared to the significant unit contraction experienced by the domestic mattress industry through the first nine months of the 2023 calendar year. This demonstrates that CHF's revenue has grown not only because of the higher average selling prices, but also because we have made gains with customers in a difficult market environment. We expect to continue this trend of growing CHF's market position. CHF also achieved a 90 percent improvement in its operating results as compared to the prior year period. and a 33% improvement as compared sequentially to the first quarter. While not yet back to profitability, we are pleased with CHF's trajectory. The material reductions of our losses for the quarter were driven by balanced inventory management, higher sales, better pricing and margin, and our ongoing focus on operational efficiencies and cost reduction initiatives across our locations. For the upholstery fabric segment, we report significantly improved operating income as opposed to the prior year period due to better inventory management, fixed cost savings, and other operational efficiencies, along with continued solid demand in our hospitality contract business. But as expected, sales within our residential fabrics business were lower as compared to the second quarter of last fiscal year due to ongoing softness in the home furnishings industry and shifting consumer spending trends. While we understand that the furniture embedding environment remains challenged, we are managing 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 those adjustments are paying off. We are also focused on managing our operational efficiencies across our fabric platforms, therefore lowering overall costs. Beyond Q2, we believe our continuing recovery will be punctuated by our mattress fabric segment, where our execution of a comprehensive transformation plan is laying the foundation for steady gains. I'm going to expand more on the mattress fabrics transformation plan momentarily, but our sequential and year-over-year operating improvement reflects some of the initiatives we've undertaken internally to manage our business. Now, while this challenging industry environment is expected to continue, our market position is strong and growing, and we are expecting a considerably better second half of fiscal 24, including a return to positive adjusted EBITDA in the third quarter and a return to consolidated operating profitability by the end of this fiscal year. Regardless of the current demand backdrop, we expect sequential and year-over-year operating improvement to continue, and we are not factoring in industry tailwinds to accomplish this. Essentially, it's evident we are making strong progress, and our pace could be accelerated when we do eventually see macro industry growth. We are well prepared with our innovative product offerings, creative designs, resilient global manufacturing and sourcing platform, strong leadership teams, and focused financial management. These hallmarks of our business will support us into the future. I'll now expand a little more on the ongoing business transformation within Colpone Fashions, our mattress fabric segment, under the leadership of Division President Tommy Bruno. As we've detailed before, 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 mentioned earlier, we are working to replace or re-merchandise underperforming SKUs and optimize our sales strategies to focus on partner selection, proper segmentation, and execution of our product assortment. We believe CHF improvement is our best short-term opportunity to grow revenue and to strengthen our year-over-year as well as our sequential performance. Tommy and the CHF management team remain dedicated to operational excellence. 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 United States, Canada, Turkey, Haiti, China, and Vietnam. We are providing 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. even as the domestic mattress industry continues to experience significant unit slowness. While this mattress industry contraction may remain for some period, we also know it's not permanent, and we are improving our performance through new placements, SKU rationalization and repriced incumbent SKUs, and more efficient operations. Our recovery in CHF is not fully dependent on the industry environment, and we expect to see significant progress with steady, sustainable improvement in CHF this year and beyond. Turning for a minute to Culp Upholstery Fabrics, we are pleased with continued and better profitability of this business. Consistently, Division President Boyd Chumley and his strong leadership team have managed effectively in the midst of abnormal, tumultuous times. CUF is growing its profitability with the focus on operational efficiencies and proactively taking strategic actions to reduce our cost structure. while also supporting customers with our flexible global platform. I believe CUF has been best in class in servicing customers through challenging supply chain conditions, and our design and product excellence, combined with our effective global platform, has led the way. This quarter, CUF's operating performance improved both sequentially and significantly year over year as a result of better inventory management, lower fixed costs resulting from CUF's prior restructuring of its cut-and-sew platforms, lower freight costs, and a more favorable foreign exchange rate associated with operations in China. CUF also had another solid hospitality contract business quarter, and sales accounted for 33% of segment sales for the second quarter. While this percentage remains higher than normal due to pressured residential sales, It does reflect the ongoing strength of our hospitality contract business, as well as its importance to our overall strategy of product diversification for this segment. Also, we remain committed to adjusting CUF's global platform for the fabrics portion of our upholstery 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 Colt, and a diversified platform is a critical strategy providing improved risk management and a more stable supply base. While we know this tough environment is likely to continue, Corporal Pulsary Fabrics remains well-positioned with our strong global platform and our innovative product offerings, including our popular portfolio of LiveSmart performance products and other new product technologies. We also believe we have seen the bottom in residential furniture demand, as manufacturer and retail inventories are largely back to normal, and we are seeing increases in newly written fabric orders, which will support the second half of fiscal 24. We also expect the upholstery fabric segment will continue to benefit Colt through the remainder of fiscal 24, with better inventory management, a solid hospitality contract fabric business, including our reed window business, and a rationalized cut-and-sell platform. So lastly, I'd like to highlight our constant focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital. I am very pleased with the management team for its continued effort in effectively managing our cash and total liquidity positions. We ended the quarter with $15.2 million in cash and no outstanding borrowings, and we have total liquidity of $41.4 million in cash 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, especially within our mattress fabric segment, to support future profitable sales growth and further improve operating efficiencies. I'll now turn the call over to Ken, who will review the financial results for the quarter, and then I'll review the outlook for the third quarter of this fiscal year.