Culp, Inc.

Good day and welcome to the Culp, Inc. Third Quarter Fiscal 2026 Earnings Conference Call. All participants will be in 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.

Good morning, and welcome to the Culp Conference Call to review the company's results for the third quarter of fiscal 2026. 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 facts. 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. An investor relations presentation 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, and good morning, and thank you, To everyone for joining us today, with me on the call is Ken Bolling, our Chief Financial Officer. I will begin the call with some detailed comments, and as mentioned in the introduction, we did post a slide presentation to our website that provides some information that is supplemental to what we will speak about today relating to our results and strategies. That slide presentation is simply entitled Third Quarter FY26 Supplemental Information. Ken will then review the financial results for the quarter. After that, I'll briefly review our business outlook for the remainder of fiscal 26, and we will take some questions. Our third quarter results are candidly frustrating, given all that we've done over the last year and a half to transform our company and position it to generate value for shareholders. The prolonged low demand environment across the home furnishings industry just continues to pressure our top line and inhibit our ability to leverage all the cost and efficiency enhancements we've made in recent periods. Compounding our frustration was untimely severe weather in the southeast that caused us to lose the last week of our quarter of shipping from Stokesdale. This was a significant one-time impact, especially to our batting revenue results, which I will touch on a bit more shortly. Regardless, I'm extremely proud of our team for staying focused and executing on integration and restructuring initiatives that touch pretty much every area of our company, and doing so both on time and according to plan. I'm confident that the benefits of this work will become more and more evident in our results. I'd like to thank all of our associates across the United States, China, Haiti and Dominican Republic, and Vietnam as well as our former associates in Canada and our global network of strategic supply partners for all of their heavy lifting to get us to where we are today with a fully optimized manufacturing engine ready to pounce on any improvements in demand. Importantly, our revamped platform is poised to scale and absorb capacity without adding any significant expense. We just need the unit volumes. As I mentioned in our release, we are confident that industry conditions will eventually stabilize and skew favorable in our core bedding and furniture markets. Both our own operating history and the market data are indicating a current historical deficit in overall industry units, but also conditions that are ripe, perhaps even overripe, according to some, for a product replacement cycle that should energize the top line. The pockets of positive demand activity that we've seen in recent periods on the betting side also support that proposition. However, we agree with the industry consensus that housing activity, particularly affordability and availability trends in housing, and consumer confidence and discretionary spending all need to level up to drive any meaningful market recovery. We've included some data in our supplemental presentations on pages 14 through 18, providing additional context for the impacts of housing activity, consumer confidence levels, and other related factors, as well as some historical industry unit trends. Our commercial team, led by Chief Commercial Officer Tommy Bruno, has done an outstanding job of being proactive in increasing our share of the available business, despite the top-line current environment where overall sales growth is so hard to come by if not unheard of on the supplier side. One thing we've always done really well at Colt is to take the time to listen to our customers, fully understand what their needs are, and meet those needs on their timetable with competitive and fashionable fabrics and sewn covers. We have continued to do this well and prioritize our customers above all else, which has resulted in a fairly steady stream of program wins with major customers on both the bedding and upholstery sides of our business, and what we believe is a larger market share within the key segments we target. In our betting business, we were on pace this quarter. The comp sales in the prior year period, which is no small feat in this market, but multiple snowstorms in the southeastern U.S. caused us to basically lose the entire last week of shipping for the quarter at our most important facility in that business. Up to that point in the quarter, we believe that our betting sales velocity was outpacing the industry. Despite this difficult backdrop, we have solid opportunities in mattress covers, which is a key growth area for us that carries higher sales dollars and margin. And we look for the momentum we saw in our overall betting business for most of that third quarter to resume in our fourth quarter. Sales velocity in our upholstery business was more elusive this quarter, with residential furniture purchases continuing to be affected by muted housing and consumer spending activity, along with heightened tariff sensitivity due to the primarily offshore supply chain for furniture and especially for furniture components. In addition, we've continued to see project delays in the commercial and hospitality upholstery markets we serve that have in turn delayed sales of fabric and window treatments into those channels. We see the project delays in our commercial channel as temporary, and we continue to build relationships with major hotel brands and prioritize our preferred supplier certifications under their design and construction standards. We have built a strong competitive position in both the residential as well as the commercial and hospitality markets, and this advantage creates some natural hedge for our revenue and supply chains. In recent prior periods, hospitality and commercial performed well relative to residential, but Q3 was an anomaly with weaker sales in both areas that is expected to be non-recurring as we look forward. One bright spot for us in upholstery during the quarter was in the upholstery kit product category. This is a high growth area for us where we typically generate higher per unit revenue. and we were able to achieve double digit growth there that we look to continue in the fourth quarter. Also at Upholstery, Tommy and his team continue to focus on expanding our customer base to include more brands and retailers playing in the higher price point areas. Our current customer base primarily targets consumers buying at the mid and lower tier furniture price points. And one of our strategic priorities is to maintain our market leading position in these segments while also diversifying more into the higher-end customer segment that caters to consumers less affected by economic cycles. One of the other things we've always done well at Culp across both businesses is invest in the resources necessary to maintain market-leading position in product design and development, whether that's creating or adopting new fabric technology and performance capabilities, or staying ahead of design trends and other innovation efforts. Our noted growth in furniture upholstery kits and in sewn mattress covers, despite the tough market conditions, provide good examples of our consistency in development and will continue to leverage our advantages and expertise going forward. This current season we're in also offers several great opportunities to meet with customers and show new products. This week, our key sales leaders for bedding are attending the International Sleep Products Association's bi-annual trade show and displaying in tandem with our long-term partner in Turkey. This ISPA show puts us in front of many of the industry leaders and major customers we target. We'll follow that up with a bedding design showcase here at our Innovation Center at Congdon Yards in High Point, where we'll host our bedding customers by appointment during the week of March 23rd to review all of our new products, our cut and sew prototypes, and our open line. Both of these customer windows allow us great opportunity to continue placing new products and to grow our market position in bedding. Likewise in upholstery, we have recently opened a new dedicated showroom in Vietnam to host customers anytime they need to review new fabrics. Our showroom is placed conveniently in the Ho Chi Minh City area, and the opening corresponds with a traditional Vietnam furniture show called the Vifa Expo for furniture and accessories. We are pleased with customer engagement so far, and the showroom allows us to meet with visiting U.S. customers, as well as Asia-based visitors and customers from all over the world. We are excited to have this global reach to display our latest introductions. The VIFA Expo also serves as a nice lead-in to our main fabric show, Interwoven, that will be in High Point at Congon Yards in May. At a summarized and big picture level, we feel very good about our position as a key supplier to the major players in both our core betting and upholstery markets, and believe that our market share gains will ultimately be reflected in our top line growth, certainly once demand normalizes. On the betting side particularly, we believe that our strategic focus aligns nicely with the ongoing consolidation trends among the major betting brands and retailers that we believe are likely to continue. What we've learned over our many years as a supplier is that customers value optionality and compliance in their supply chains and the redundancy and reliability we offer for production planning purposes. Our restructured global platform with flexible options across the full range of supply strategies is designed with that need foremost in mind, and it has continued to garner even more perceived value to larger customers that have complexity and diversity in their product lines. A basic map of our global platform and production options is displayed on page 12 of that supplemental deck. Turning now to the global trade and tariff landscape, particularly all of the change and unpredictability we are seeing there, we believe the recent volatility of trade policy can actually be a net positive for us, given that it serves to highlight the strategic value of our global platform to our customers. This was certainly the case before the recent IEPA tariff developments, but even more so now, given the fluidity and status with those tariffs and other new tariffs either announced or under consideration. We are watching tariff developments very closely, from the Supreme Court decision to strike down IEPA tariffs to the administration's immediate enactment of new Section 122 tariffs and recent activity under Section 301. A summary of the tariff impacts and our mitigation strategies are displayed on page 11 of our supplemental deck. Our decision to consolidate our North American operations within our own Stokesdale facility in the U.S. provides our bedding customers with a robust domestic production and distribution option that has proven to be prescient in this current environment. Similarly, our platform in Haiti on the border with the Dominican Republic gives customers a near-shore and low-tariff option, while our Vietnam and Turkey supply chains provide nice supplemental offshore options to complement our China production. Encouragingly, we're seeing customers lean more and more into the various sourcing alternatives we offer, as they are continually forced to factor the cost of new and changing tariffs into their models and build more flexibility into their strategies. Our global platform presents customers with what we believe is the best opportunity out there to source in multiple geographies and tariff regimes, but with the operational and administrative ease of dealing with a single turnkey supplier partner. Looking at that tariff issue from a pure cost perspective and how they directly affect our financials, we believe that the current go-forward tariff rates applicable to our business are manageable. and in some cases improved versus what we've had to absorb in prior periods. Additionally, our pricing adjustments and surcharges implemented in recent periods are appropriately calibrated and are expected to offset tariff costs on a cost-neutral basis over the near to medium term, absent, of course, any unanticipated governmental changes or sudden increases. I have stated for multiple quarters that we believe our strategic platform is an advantage for CULT in an uncertain tariff environment. The problem we had for most of this year was keeping pace with the sweeping changes in tariff rates. The quick cadence of the changes often created a natural lag between tariff effective dates and price adjustments that resulted in pressured profitability. I again want to reiterate that we are now covered with known tariffs present today, and overall we feel positive about where we are on the tariff issue going forward. both from the perspective of our competitive positioning in the market and from a product cost perspective. Before I move on from tariffs, I want to mention that we are, of course, taking the steps necessary to be in position to obtain any available refunds on the IEPA tariffs we've paid that were subject to the recent court decisions on that issue. We have filed all the necessary protests related to reliquidated entries and have also filed a lawsuit with the Court of International Trade. Over the last 14 months, we've paid over $15 million in total baseline duties and tariffs, with an estimated $6 to $7 million in IEPA tariffs over that same period. It is those IEPA tariffs where we are entitled to refund. Depending, of course, on how the refund issue ultimately plays out, our receipt of the amount of IEPA tariffs we've paid would be significant and would offset some previous period losses. Again, that pace of tariff implementation has been punitive to our profitability, so any refunds would help to remedy the lag impacts we experience adjusted to those policy changes. Lastly, on tariffs, in addition to those IEPA tariffs, we're also anticipating some refunds on the baseline duties on Haiti-produced sewn covers we paid in recent periods, before the reinstatement of the Haiti Hope Help Trade Program, which gives Haiti imports duty-free treatment. I'd now like to take some time to update all of the work we've completed on our lower cost structure and add efficiencies across both our bedding and upholstery businesses. Our third quarter was a capstone to the efforts we began at the beginning of last fiscal year to comprehensively restructure our operating platform as well as integrate our business and the way we go to market. We've now completed the last of several major initiatives associated with the integration of our two former standalone divisions, Mattress and Upholstery, or what we called CHF and CUF, into a unified, cult-branded business which we called Project Blaze internally. The fiscal year 26 substantive actions of this comprehensive reorganization are detailed on pages 9 and 10 of the supplemental presentation. And Q4 will be the first quarter with all projects completed and savings and efficiencies fully enacted. As a reminder, our project blaze initially involved the transition of our division presidents into company-wide chief commercial officer and chief operating officer roles. And we followed that with the blending of other division operations and resources. During the third quarter, we completed two key related initiatives. And thanks to the hard work of our team, we now have all of our U.S. distribution operations consolidated under one roof with our own facility in Stokeston, North Carolina, with a single management team overseeing both our bedding and upholstery businesses' distribution activities in our largest market. We also completed a similar transition in our reed window business, operated within our upholstery segment during the quarter. Our fixed costs in that business are now significantly reduced through the relocation of our former operations in a leased facility in Tennessee to a shared management model within our Stokesdale facility and the increased usage of strategic outsourcing partners. And finally, we completed our plans to streamline our China operations, which are our second largest after the U.S. during the quarter, which included both facility and headcount reductions. All told, beginning with the restructuring of our betting business last year and continuing through the completion of these most recent initiatives, we've generated over $20 million in annualized cost savings and enhancement, many of which have already began to positively impact our results and the remainder of which should begin to benefit our results in our fourth quarter and in fiscal 2027 in the form of lower costs and better operating margins. Of course, assuming no further significant drop-off in sales. We believe we now have the pricing and cost structure optimized throughout our U.S. nearshore and offshore operations, and we are ready to quickly and profitably increase capacity without additional cost when demand picks up. We look at our rebuilt platform as a high-performance engine that is ready to run. We just need more unit volume for it to fully reflect on our operating results and generate the value for our shareholders that we believe it will. We estimate that with our revamped lower cross-platform, any increase in our revenue numbers flows to the bottom line at an approximately 25% rate. However, I want to be very clear that our ultimate near-term goal remains getting Colt profitable in these pressured market conditions, and we are fully committed to maintaining a disciplined approach to cash management and cost containment until we get there. One byproduct of our recent restructuring and integration activities that I want to briefly discuss is the excess inventory that we have accumulated in connection with the facility consolidations that were part of those efforts. When we made the decision to close our operations in Canada last year, we chose to build some safety stock in certain fabrics to ensure availability to customers as we transitioned to a single North American facility and stood up our outsourced supply model for damage products in Turkey. We also accumulated some excess inventory as a result of the reduction of our distribution footprint to a single facility with defined capacity, as well as other drivers. We took some markdowns on this inventory during the quarter that affected our profitability, and we have measurable plans to work through it and turn this inventory into a tailwind and generate cash over the next two quarters. In addition, our team is intensely focused on tightening up our overall inventory management efficiency and minimizing any markdown impacts to profitability going forward. Before I turn the call over to Ken, I want to acknowledge his planned retirement that was announced in January and update you on our success and plans for his Chief Financial Officer role. First of all, I want to thank Ken for his almost 30 years with Cole and for all he's done to help grow our company and lead us both through a variety of challenges and to many successes over the years. Ken will leave very big shoes to fill to say the least. We're thankful he has agreed to stay with Culp throughout 2026 and help us make a smooth transition to his successor. As we are digesting Ken's decision to retire, we are looking at the Chief Financial Officer role in light of our Project Blaze initiative to integrate our operations and drive efficiencies where it makes sense. I'm pleased to report that we've established a plan for Mary Beth Hunsberger, our current Chief Operating Officer, to begin working closely with Ken over the course of calendar 2026, with the goal of immediately taking on some of the operational functions of the CFO role, specifically the financial planning and analysis, or FP&A, process for our FY27 operating plan. Mary Beth joined us at CULP several years ago as president of what was then our CUF Upholstery Division, and subsequently moved into the COO role in May 2025 as part of Project Blaze. Before Colt, Mary Beth spent a significant portion of her career in financial leadership roles, including several with Tempur-Sealy, a key customer of ours now known as Somni Group, in a variety of accounting and executive roles, including CFO, COO, and president of multinational furniture companies. We are very excited to leverage Mary Beth's skill set in an interim dual role responsible for integrating financial leadership and operational execution across our global platform. We believe it is a natural fit for Mary Beth to combine her operational leadership by financial oversight to accelerate our consolidated improvement and create more efficiencies. Mary Beth should also be instrumental in bolstering our FP&A capabilities through system enhancements and upgrades, which is an area she has valuable proven leadership experience. We are extremely grateful to Ken for agreeing to continue serving in the CFO role and as our principal financial and accounting officer until we believe the time is right to make any official leadership transition. Ken has always been willing to share his wealth of knowledge regarding Culp and his financial and accounting functions, and we are all glad to have this time for our teams across the company to work together. I'm also excited to report that we've hired an individual to replace our recently departed corporate controller, which we also announced in January. This individual will also have the opportunity to work with Ken this year. As part of his planned transition, we believe he will be a key player for us going forward. Needless to say, we are thrilled to have a comprehensive transition plan in place for our financial leadership team at Culp. Congratulations, Ken and Mary Beth, and welcome to Culp O'Darrow. With that, 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 into the fourth quarter of fiscal 26.