Culp, Inc.

Good day and welcome to the Culp, Inc. First Quarter Fiscal 2027 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 Teresa Moore with Finn Partners. Please go ahead.

Good morning, and welcome to the CULP conference call to review the company's results for the first quarter of its fiscal 2027 year. 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 material 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 filing on Form 10-K. 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 to not 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 8-K filed yesterday and posted on the company's website at www.culp.com. An investor relations presentation is also available on the company's website as a part of the webcast of today's call. I'll now turn the call over to Ev Culp, President and Chief Executive Officer of Culp. Please go ahead, sir.

Thank you, Teresa. and good morning and thank you to everyone for joining us today and for your interest in our company. With me on the call are Ken Bowling, our Chief Financial Officer, and Mary Beth Hunsberger, our Chief Operating Officer. I will begin the call with some detailed comments and as mentioned in the introduction, we have posted a slide presentation to our website that provides supplemental information for today's discussion. That slide presentation is entitled First Quarter FY27 supplemental information. Ken will then review the financial results for the quarter. After that, I'll briefly review our business outlook and we will take some questions. We view our first quarter performance as indicative of what Culp can achieve on both the top and bottom lines, even in challenging operating environments such as those that continue across the home furnishings industry and the markets we serve. As we stated in our release, our ability to increase overall sales and profitability year over year during a quarter with one less selling week and in persistently difficult industry conditions provides validation to us that our optimized platform and strategies are succeeding. We have developed valuable resiliency and we have positioned Culp for Success across a broad range of demand scenarios. I'm extremely proud of all of our associates and our leadership team for guiding us through a major restructuring and now a re-energizing of the business. We have successfully executed on many difficult decisions over the last two years in the midst of a trough market and we are now seeing some solid recovery. Our innovative products are on point, our supply chain is balanced, and our dedicated employees are second to none. While we are excited to forge ahead, we are particularly bullish on our prospects as and when business conditions return to greater normalcy. During the quarter, we increased gross profit by nearly 17% and generated positive adjusted EBITDA even excluding the benefit of approximately $7 million in IEPA tariff recoveries recognized during the quarter. This successful improvement is displayed graphically on pages eight and nine of the supplemental presentation. Again, these results reflect the cumulative impact of the transformation initiatives we undertook approximately two years ago when we began a comprehensive restructuring of our betting business and then integrated our formerly separate bedding and upholstery operations into a unified platform. Along the way, we closed and consolidated facilities, exited certain markets, expanded into others, implemented numerous cost reduction initiatives, and we fundamentally reexamined how we operate and go to market. Those efforts required tremendous execution. all while maintaining the high service levels our customers expect. While we recognize there's still work to do and our results are not yet what we ultimately expect to achieve in a more favorable operating environment, we are encouraged by the progress reflected in our performance and truly grateful for the commitment of our global team in making this transformation successful. A summary of all these restructuring actions is covered on pages five through seven of the supplemental deck. I'd like to spend a moment discussing the tariff recoveries recognized during this quarter. We were pleased to realize these recoveries, particularly given the significant impact those tariffs had on prior year's results. As Ken will discuss in more detail, we elected to deploy the full amount of these recoveries to further strengthen our balance sheet. Combined with our ongoing success in lowering and managing our inventory levels, this contributed to a significant improvement in our financial position. We ended the quarter approximately $3 million in net debt, roughly a 70% reduction from our position at the end of fiscal 26. Looking ahead, we remain focused on disciplined working capital management and continued debt reduction. with the goal of returning to a net cash position this fiscal year. Our ability to achieve this level of progress on the balance sheet while simultaneously delivering year-over-year growth in revenue and profitability in challenging market conditions is further testament to the effectiveness of our strategic initiatives and the strong execution of our team. Additional information regarding our balance sheet and capital structure can be found on page 10 of a supplemental presentation. Our bedding business was a major contributor to the success this quarter, growing sales by more than 13% despite continued weakness in overall industry demand and the impact of one fewer shipping week compared to the prior year period. Based on the market data available to us, we believe our growth materially outpaced the broader industry trend from both a unit and dollar volume perspective. When compared with industry shipment data published by the International Sleep Products Association, which is included on page 20 and 21 of our presentation, our bedding top line is particularly compelling. As we look ahead, there continues to be considerable discussion across the industry about the timing and magnitude of a recovery in bedding demand following the last several years of depressed conditions. ISPA's latest forecast continues to point to modest shipment growth beginning in calendar year 2027. And we generally share the view that the industry is at or near the point where a more normalized replacement cycle could begin to emerge. Mattress replacement activity in the U.S. has remained below historical levels for an extended period, and that's shown on page 22 of our supplemental deck. And we believe that that dynamic suggest there may be some pent-up demand that drives market improvement over time. However, I will note that a meaningful acceleration in unit demand will likely require stronger consumer confidence and a corresponding increase in discretionary spending to draft traffic into mattress retail stores. Against this challenging backdrop, we are particularly encouraged by the performance of our bedding business and its double-digit sales growth over the last two quarters We believe this reflects our strategic investments over the past several years to strengthen our U.S. manufacturing platform, while also expanding the flexibility and scale of our near-shore and offshore production capabilities. This diversified global manufacturing strategy, balanced over five geographies, continues to resonate with customers as they navigate an evolving trade and tariff landscape and look for dependable sourcing solutions. We believe our broad range of manufacturing options, combined with the certainty they provide, has differentiated us in the market and positioned us for more growth as demand ultimately improves and that replacement cycle gains momentum. From a product perspective, our sewn mattress cover category remains an important growth driver during the quarter and serves as a strong example of how our product development efforts and diversified manufacturing are working together to create value. As we have expanded beyond traditional knitted fabrics, we have simultaneously invested in the infrastructure and expertise necessary to efficiently produce other products such as quilted sewn covers through our nearshore and offshore platforms. This combination has helped shield us from some of the macro unit erosion and created an attractive solution for our sewn cover customers seeking both innovation and supply chain flexibility. and it has also enabled us to deepen a number of strategic customer relationships and gain share with key accounts. Innovation also remains a core component of our long-term growth strategy. Performance fabrics have been a significant driver of growth within our bedding business for many years and we continue to invest in developing differentiated products that address evolving consumer preferences. During the quarter, we completed testing on several promising new cooling technologies that we expect to incorporate into our product line in the near term. We look forward to introducing these new developments later this year and anticipate strong customer interest as the market continues to emphasize products that combine comfort, performance, and temperature management benefits. For additional context, we have included a timeline highlighting our key product innovation milestones over many years on page 17 of the supplemental presentation. Overall, we remain encouraged by the trajectory of our betting business and the progress we have made since implementing our restructuring initiatives. We believe the business is well positioned to benefit from an eventual improvement in macroeconomic conditions and a normalization of industry demand trends. Importantly, our current manufacturing footprint provides meaningful capacity for growth. and we believe we can support higher unit volumes with relatively modest incremental costs. As a result, we expect future revenue growth to translate into enhanced operating leverage and improved profitability. Turning to our upholstery business, we were encouraged by our performance during the quarter. Sales were largely comparable to the prior year period despite a shorter selling period and continued softness within residential furniture, which remains the largest end market for our upholstery business. Equally important, we were able to maintain relatively stable gross profit margins despite the challenging demand environment. We believe this reflects the benefits of the actions we took last year to streamline our cost structure and integrate our operations, which have enhanced the consistency of our upholstery business in a manner similar to bedding. In the residential channel, we are pleased with our placement rates, but we believe a sustained recovery there will depend on broader improvement in macroeconomic conditions. Trends in housing activity and mortgage rates remain particularly important variables, given their influence on consumer confidence and discretionary spending on home-related purchases like furniture. We have included some macro trend data that we believe impacts our upholstery business in the posted presentations on pages 23 through 27. From a diversification perspective, we continue to invest in expanding our customer relationships in Asia and other international markets. While these regions currently represent a relatively modest portion of our upholstery business, we believe they offer attractive long-term opportunities. Our established manufacturing platform in China, combined with our operational capabilities in Vietnam and our global sourcing network, provides us with the flexibility to serve customers across multiple geographies. Over time, we believe these capabilities can help diversify our upholstery revenue and create additional growth opportunities. We were also pleased to see improving conditions in our hospitality and commercial upholstery fabric markets during the quarter, with both verticals delivering year over year growth. We believe these areas present attractive opportunities as we move through the year, especially as travel activity Hospitality spending and commercial project development continue to normalize. An important aspect of these markets is that many customers operate under established brand and performance standards that suppliers must meet to qualify. Those qualification requirements can create meaningful competitive advantages for Culp and support longer-term customer relationships. As a result, we remain focused on supplying both fabric and window treatment products to these end markets. Product innovation is also a key long-term growth factor for our upholstery strategy. Performance fabrics continue to be an essential component of any comprehensive upholstery line, and we are committed to staying ahead of emerging trends in technology in this category. In connection with Project Blaze, and the integration of our formerly separate divisions into a unified cult branded platform, one of our objectives has been to more efficiently and effectively leverage the brand equity we have built through decades of product innovation, quality and customer service. Our LiveSmart technology used in upholstery fabric is a good example of how we have successfully created brand recognition with customers through differentiated performance benefits. Building on that success, we are currently developing a broader family of branded performance products designed to strengthen customer and consumer awareness and loyalty across our upholstery and bedding businesses. While we are not yet ready to share all the details, we believe these initiatives represent a meaningful opportunity to further differentiate and streamline our product portfolio, enhance the value of the Colt brand, and drive long-term growth. We look forward to providing additional updates as these programs progress. As a final comment on our overall business, we are optimistic about our momentum entering the second quarter and believe our lower cost structure and global footprint position us for continued success in this low demand environment while supporting acceleration and profitability as conditions improve. In addition, we believe our pricing is currently aligned with the tariff environment and we are confident in our commercial growth strategies under the leadership of our Consolidated Chief Commercial Officer, Tommy Bruno. However, the trade landscape remains dynamic and can change quickly. As a result, we expect tariff-related trade policy to remain an important market consideration and a potential source of disruption going forward. Before I turn the call over to Ken, I want to update you on our succession plans for his chief financial officer role. As we announced back in January, Ken has been planning to retire from the CFO role, but kindly offered to stay with us during 2026 to facilitate an effective transition of his responsibilities to a successor we may identify. I want to again extend our gratitude to Ken for all he has achieved throughout his almost 30 years of Culp and for both his leadership and loyalty throughout his tenure. Ken leaves some big shoes to fill, and we're grateful he has agreed to stay with Culp through December to help with a smooth transition to his successor, who I'm excited to announce is Mary Beth Hunsberger, who is with us on the call today. Many of you will recall that when we were digesting Ken's decision to retire earlier this year, we began to focus on our chief financial officer role in the context of our Project Blaze integration initiative and its emphasis on change across our company intended to drive efficiencies where practical. Through that lens, we established a plan for Mary Beth to begin working closely with Ken with the goal of immediately taking a more active role in some of the operational and FP&A functions of the CFO role. Based on the success of that collaboration, as well as Mary Beth's acumen and invaluable knowledge of our business, We're excited to take the next step of appointing Mary Beth to succeed Ken as our chief financial officer effective September 14th, 2026. Mary Beth will also retain the operational oversight responsibilities of her current role with us. Mary Beth joined us at Culp several years ago as president of what was then our Culp Upholstery Division. and subsequently moved into the Chief Operating Officer role in May 25. Before Culp, she spent substantial time in financial leadership roles, including several years with Tempur-Sealy, a key customer of ours now known as Somni Group, and a variety of accounting and executive roles, including CFO, COO, and president of multinational furniture companies. We are very excited to have Mary Beth take on this financial leadership role and also continue to drive operational excellence across our global platform. We believe it is a natural fit for her skill set and experience, and she will help drive even greater connectivity amongst our executive team. And again, we're extremely grateful to Ken for agreeing to serve in the CFO role through this official transition and to stay on in the consulting capacity through the end of the calendar year. Lastly, as a final note to our celebration of all these moves, I would like to wish Ken a happy birthday. And with that, I'll turn the call over to Ken.