Culp, Inc.

Good day, and welcome to the CULP, Inc. Third 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 third 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 action 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 8-K 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. Please go ahead.

YVES CULP, 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. Joining me on the call today are Ken Bolling, our chief financial officer, Tommy Bruno, president of our mattress fabrics business, and Boyd Chumley, president of our upholstery fabrics business. I'll begin the call today with some detailed comments, and Ken will then review the financial results for the quarter. After that, I will briefly review our business outlook for the fourth quarter of this fiscal year, and we will then take your questions. We are pleased to report continued year over year and sequential improvement in our consolidated sales and operating performance for the third quarter. Both of our core business segments reported increased revenue year over year, which is impressive considering the challenging demand environment in the bedding and furniture industries. Additionally, our consolidated operating performance for the quarter was better than our revised outlook announced on January 17, 2024, due to stronger improvement in our upholstery fabric segment. In short, Q3 was in line with our sequential improvement story that we have been executing throughout the first nine months of this fiscal year. Culp upholstery fabrics achieved a year-over-year increase in residential sales for the first quarterly period since the end of last fiscal year. driven by both the timing of the Chinese New Year holiday and some improvement during the quarter in customer demand for residential fabric products. While this increase in residential sales was offset somewhat by lower sales in our hospitality contract business, due partly to weather-related events in January and short-term supply chain issues that affected Reed Window, overall demand remained solid for our hospitality contract business. Also, our upholstery fabric segment once again saw a significant improvement in operating performance, driven primarily by higher sales, a more profitable mix of sales, and fixed cost savings. We are encouraged by several factors within upholstery fabrics, especially the recent hiring and steady transition underway with Mary Beth Hunsberger. Boyd Chumley and Mary Beth are working well together, and we are grateful to have time for an orderly and successful transition of leadership. We are also excited by the cadence of new residential fabric placements that we saw at the previous Las Vegas Furniture Market and that are planned for the upcoming High Point Market. Our upholstery product designs are being received well, as we are continuing to see a desire for new fabrics from manufacturers. and our portfolio of LiveSmart performance products remains quite popular. The acceptance and the innovation of our product instills confidence for our future. Additionally, we remain pleased with the solid demand and back order in our hospitality contract business, and outside of some pressure we incurred in Q3 due to weather and other events that affected Reed Window, we do expect go-forward improvement from our hospitality contract segment. Lastly, we are furthering our pivot within our production and sourcing capabilities to establish more varied global options in our supply chain for improved costs and to optimize supply to best service our customers. In our mattress fabric segment, we continued our significant year-over-year improvement in sales and operating performance, driven largely by a focus on new fabric and cover placements that are priced with proper margins and are in line with current raw material costs. However, the sequential results for this segment as compared to the second quarter reflects some ongoing market weakness in the bedding industry, as well as internal efficiency issues, primarily related to the startup and production of certain new products and the cost for these program launches that occurred during the quarter. As we have been noting this year, we are driving hard to win profitable new business on both fabrics and sewn covers and we are having success with this initiative. Our competitive market position is improving in a difficult macro market and we are flexing our strengths across our global platform. But in some cases, as we expedite production schedules and push to meet accelerated deadlines, there are some inherent costs and internal quality pressure that impact results. These are not long-term impacts, rather they affect current profitability and the ramp-up. In addition, CHF also has some lingering legacy products that are still operating at lower than desired margins due to hangover from improper pricing at previous elevated cost levels. Our mattress fabrics team is working daily to replace or re-merchandise these SKUs while supporting customers and maintaining attention on new products, as I just mentioned, but we do still have some more work to do. We are encouraged by the management team in Mattress Fabrics and some new faces we have on board to strategically target new sales opportunities. We were pleased with our customer placement to the Las Vegas market, and we have our largest trade show for the mattress business, which is called ISPA, occurring next week. And that will give us a chance to present our newest innovative offerings to the vast majority of our customers. We maintained our solid balance sheet during the quarter with a continued focus on prudent financial management while allowing for critical capital expenditures and ensuring a strategic level of working capital to support the needs of our business. We ended the quarter with $12.6 million in cash, no outstanding borrowings, and $26.2 million in borrowing availability under our domestic credit facility. So now as we enter the fourth quarter, we continue to implement improvement initiatives within our mattress fabric segment to support future profitable sales growth and enhance operating efficiencies. As I discussed a moment ago, we are diligently focused on winning new placements to drive revenue and increase margins, and we are optimistic about mid- to long-term growth potential for this business. However, while we knew the timing of Chinese New Year would be an impact to quarterly revenue, the industry demand backdrop in both of our businesses has weakened much further than expected during the first few weeks of the fourth quarter, especially in our upholstery fabric segment. We are currently trying to ascertain what that means for the remainder of our Q4 in March and April. It is important to note that we do not expect to remain for the low level of February demands. and we are not altering our view of our trajectory of growth for the midterm, but the near term is certainly unpredictable. We remain confident in our market position in both of our businesses, but to keep our sequential progress, we need some macro industry and end consumer support. Also, the internal efficiencies relating to the startup and production of new products and mattress fabrics that impact us in the third quarter will also affect operating performance during the fourth quarter. As a result of these challenges, we now expect that our return to consolidated operating profitability will be delayed from the end of our current Q4 into fiscal 2025. In the face of these various ongoing macroeconomic headwinds, our attention is on managing the aspects of our business we can't control. With the uncertainty of consumer demand in the near term, We are also evaluating strategic actions to adjust and right-size our global platform to align with the current demand levels, while of course still supporting our valued customers. Two points are very clear to us. First, we understand that near-term demand is uncertain, and we must adjust our capacity levels and costs to match demand, and we cannot tolerate continued operating losses. We have been making our intended progress through the first nine months of this fiscal year, but we expect a step back in volume and profitability in Q4. We have the potential to see up to 10 percent or more consolidated revenue reduction, both year-over-year and sequentially, with more pressure on upholstery fabrics, which is currently our solidly profitable business. This revenue reduction is mainly driven by macro and consumer demand in our space. and to some degree the timing of Chinese New Year. Second, specifically in mattress fabrics, we are finding some growth opportunities in fabric accessory products and cut and sewn covers that will likely not need the same level of North American capacity. Therefore, we are reviewing all possible actions and synergies across both of our segments to adjust our business, our capacity, and our cost to focus on restoring profitability in fiscal year 25. Importantly, we remain well positioned with our solidly performing upholstery fabrics business and recovering mattress fabrics business. And I will repeat that we are not wavering on our growth trajectory for the mid to long term. And again, we are committed to taking steps to position our business for renewed profitability in fiscal 25. and we are confident in our ability to leverage our competitive advantages, including our innovative product offerings, creative designs, global manufacturing and sourcing platform, and solid financial management to support our future growth, and especially when market conditions improve. 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.