Culp, Inc.

Good morning, everyone, and welcome to the CULP, Inc. second quarter fiscal 2025 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 and one using a touch-tone telephone. To withdraw your questions, you may press star and two using Please also note today's event is being recorded. At this time, I'd like to turn the floor 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 2025. 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. A slide presentation on the company's restructuring plan 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.

Thank you, Drew. Good morning, and thank you 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, Mary Beth Hunsberger, President of our Upholstery Fabrics business, and Tommy Bruno, President of our Mattress Fabrics business. Today I will begin the call with some detailed comments, and as mentioned in the introduction, we have posted an updated slide presentation to our investor relations website. It covers information on the progress of our restructuring plan and the timing to completion, which we will refer to today. Ken will then review the financial results for the quarter, and after that I'll briefly discuss our business outlook for the second half of fiscal 25, and we will take some questions. For the second quarter, we made continued progress on our plan to return to consolidated profitability post-restructuring, even within the currently challenged demand environment. We are making changes to our platforms and improving our market position in both segments of our business. While we certainly expected demand pressure in a quarter, the worsening conditions in the upholstery fabric segment were an added headwind to our pace of recovery. Specifically, we saw accelerated softness in our residential upholstery fabrics business, leading to lower than expected sales performance. Nevertheless, we remain encouraged with our strategic approach, our comprehensive restructuring process, and the growth we expect from market share penetration, along with an eventual normalized environment. In spite of the 5% decline in consolidated year-over-year revenue for the second quarter, We believe we are outperforming the industry average. We were especially pleased with the sequential improvement in sales and operating performance from our mattress fabric segment during the quarter. Sales for this segment increased 7.1% compared to the first quarter of fiscal 25, driven by higher order levels, which we believe are indicative of our growing market position. We are steadily securing new opportunities in both fabrics and sewn covers, thanks to robust product development and a strategic supply chain. We are providing our customers with innovative and functional solutions and serving them with speed to market and long-term supply security. The mattress fabric segment also sequentially reduced its operating loss by 70.7% for the quarter, reflecting the solid progress we are making with our restructuring activity. and we expect this segment to return to a profitable run rate in the second half of this fiscal year. The vast majority of our restructuring will be complete in the third quarter, and as the end of November, we have fully ceased production in Canada. With the completion of this initiative, we will have a preferred manufacturing and sourcing supply chain model, featuring an improved and efficient USA location in North Carolina for fabrics, and a right-sized cut and sew platform in Haiti, which is located on the Northeast Dominican Republic border. Our near-shore Haiti platform also includes recently installed quilting capability with new equipment, which opens an additional product opportunity for CHF and an additional service offering to our customers. Our North American capacity has been expanded by strong supply chain operations in Asia, including a growing platform for fabrics and cut and sewn covers in Vietnam, as well as a long-term turkey relationship for high-volume fabric supply. We are executing continual operational improvements, and with the benefit of the restructuring activities, we expect increased margins on knits, wovens, and sewn covers in the back half of the fiscal year. Despite all of this, positive information as expected due to the scope of this restructuring initiative, inefficiencies associated with the process did affect mattress fabric's operating performance during Q2. Turning to our upholstery fabric segment, sales for residential fabrics were affected by more dramatic weakness in residential home furnishing sales. While we did expect pressure during the period, we experienced larger impacts from customers adjusting their inventory levels to align with demand after a strong ordering period during the first quarter. This included a significant and temporary reduction in orders from a large customer during the second quarter, which is also expected to affect sales during our third quarter. It is important to note that in the face of this pressure, we remain optimistic about our residential fabrics potential, as we have noted strong customer reaction at both the recent High Point Furniture Market and the Enterwoven Fabric Show. Our product line is diverse, consumer-focused, and stylish, and we are diligent in presenting our customers with varied supply chain strategies. With uncertainty around tariffs and trade regulations, it is important to offer supply chain options, and we are doing that by developing products via our extensive Asia operations with increased focus in Vietnam while also reviewing other parts of the world to enable a preferred response. We also recently unveiled a new branding strategy at the Interwoven Fabric Show to accentuate our LiveSmart brand of performance fabrics. More to come on this as we look ahead, but we are strengthening our offering of performance, sustainability, and well-being-focused products, as fabrics with increased functionality are becoming an expectation for many of our manufacturing customers. Additionally, Sales for our hospitality contract fabric business remain solid during the quarter, representing 35% of CUF's total sales. And we are realizing increased potential with commercial fabrics and window treatments. This hospitality contract part of the business generally affords higher margins, and we are building a strong model to supply a diverse product range. Of particular note is the improvement we are making with window treatments under our We Read Window platform. We are currently producing window treatments in Knoxville, Tennessee, and we are expanding our blackout roller shade production in Burlington, North Carolina, week by week. The window treatment portion of our business is an important profit improvement target for the second half of fiscal 25. Overall, we remain pleased with the upholstery fabric segment's continuing profitability, supported by an asset-light platform. While the foreign exchange rate associated with our operations in China was a pressure to operating results in Q2, we are currently seeing a favorable currency impact in Q3 that is expected to be a profit tailwind for us during the quarter. The actions we have taken over the last year to rationalize our finishing operation and improve our supply chain are lowering our manufacturing costs for upholstery fabrics, which gives us confidence to navigate our business through a variety of environments. I'd now like to circle back to give more detail on the progress of our mattress fabrics restructuring actions. As we have discussed previously, we announced a wide-ranging restructuring plan in early May with the primary focus on our mattress fabric segment. The announced adjustments, once fully implemented, will enable us to operate more efficiently and profitably with a lower level of fixed costs and without limiting our ability to grow the business. This restructuring initiative is critical to us returning to consolidated profitability in this current pressured environment. As already discussed, Mattress Fabrics operating results were pressured by these restructuring actions in the second quarter, but we believe we were on target to achieve positive consolidated adjusted EBITDA for the second half of fiscal 25 and a return to positive consolidated adjusted operating income sometime in the fourth quarter. Mattress fabrics improvement is the critical catalyst to our consolidated recovery. As we rationalize our capacity, reduce fixed costs, and increase efficiency, we expect to make significant improvements to our financial results, even without typical sales growth from a macro market recovery. This point is illustrated mathematically in a hypothetical example on page six of the updated restructuring deck. Again, to reiterate, our mattress fabrics restructuring is a comprehensive undertaking that impacts people, plant consolidations, equipment relocation, and process improvements. But with it, we are successfully lowering our cost structure, despite weak demand, and we look forward to meeting our objectives. I do want to emphasize that we are grateful for the support we have received from our valued employees, customers, and suppliers during this process, and we are confident that the strength of these relationships are helping to drive our recovery. It is our focus to consolidate our operating facilities efficiently without any disruption to programs or customers. The scale and scope of this mattress fabrics restructuring cannot be overstated. It's a dynamic process, but one that will be accretive. We are enhancing our business platform in the current environment and with our growing market position driven by innovation and styling, along with improving operational activities, and best-in-class manufacturing and sourcing capabilities, we believe we are very well positioned for the future. I'd also like to again remind you that we have updated our restructuring slide deck, and it's posted on our investor relations page. The slide deck purpose is to help illustrate the details of the restructuring plan, including the actions we are taking, the timeline for those actions, and the expected financial impact. Updating the progress of our restructuring initiative, the consolidation of our North American mattress fabrics operation is largely complete, with the phased wind down and pending closure of our manufacturing facility in Canada. We discontinued knitting production at our Canadian facility in Q2, and we just discontinued damask weaving production at this facility last week. With that step, we now have fully transitioned our damask weaving business to a sourcing model, primarily with one of our long-term dedicated manufacturing partners, which will improve margins for this business. We are also nearing completion of the relocation of certain knitting and finishing equipment to our Stokesdale, North Carolina facility, and we expect the last steps of this optimization will be finalized by the end of the third quarter. We also completed the consolidation of our Haiti sewn mattress cover operation during the first quarter, reducing our cost and establishing steady run schedules in this location. And we recently added quilting capabilities for important new product development. This nearshore platform serves an important piece of our mattress fabric supply chain for cut and sewn cover capacity. Additionally, we have listed for sale and are actively marketing our Canadian property. And we hope to exit and sell that facility in the fourth quarter of our fiscal year. But, of course, the timing of that will be dependent on the market and interest for the building. More details in the general timeline, again, are found on page four of the updated restructuring deck. Beyond this restructuring process, our expectation is to return to positive consolidated adjusted operating income, excluding restriction and related charges in the currently depressed demand level sometime in the fourth quarter of fiscal 25. Our plan continues to project a solid $10 to $11 million in annualized cost and productivity savings from the restructuring, mostly via the mattress fabrics division. But we do expect to generate over $1 million in annualized savings from reductions with unallocated corporate and shared services. Based on the restructuring activities that have been completed, along with our updated estimates on those that remain underway, we now expect to incur total restructuring related charges of $7.3 million. Cash charges are now expected to be $4.4 million, increased somewhat as a result of a strategic decision to retain and relocate some additional equipment to optimize efficiency and due to some increased severance charges in Canada. We expect the vast majority of these charges will have been incurred by the end of the third quarter of fiscal 25. We also anticipate funding close to $2 million of the cash costs with proceeds from the sale of excess manufacturing equipment and a building lease termination in Haiti. And we currently expect approximately $6 to $8 million of net proceeds from the sale of our Canadian facility. Our expected proceeds from the building and property sale has decreased somewhat due to a hardening real estate market along with Canadian ministry zoning changes. limiting some industrial activities in St. Jerome, Quebec. It is important to emphasize that these expected cash proceeds are after all property, real estate, and taxes associated with winding down our operations in Canada. A cash and liquidity update is shown on slide five of the restructuring slide deck. The expected benefit of our restructuring actions on both profitability and liquidity is evident. And again, this is all assuming no lift in market demands. Closing my comments and looking ahead, we are optimistic about the progress we are making with our restructuring initiatives, as well as our solid market position in both businesses. We are optimizing our operations and cost structure, providing excellent customer service, and winning new placements with our innovative product portfolio. Although the restructuring activity involves a significant undertaking and short-term inefficiencies, we are demonstrating quarter-by-quarter operating improvement and a challenged macro demand environment. Importantly, while we anticipate that the industry conditions will remain somewhat pressured through fiscal 25, we expect the strategic actions we are taking will position us for a return to profitability post restructuring, again, at the currently depressed demand levels, as well as growth opportunities as 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 review the outlook we are providing as we look ahead to the second half of fiscal 2025. Ben?