Q2 2021 Culp Inc Earnings Call
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Please and bikes were about to begin.
Good day and welcome to the call second quarter 2021 earnings Conference call. Today's call is being recorded at this time for opening remarks, and introduction I'd like to turn the call what would you Mr. Anderson. Please go ahead ma'am.
Thank you good morning, and welcome to the <unk> Conference call to review the company's results for the second quarter of fiscal 2021.
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.
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 and indicated by the forward looking statements because of various risks and uncertainties. These.
These risks and uncertainties are described in our regular FCC filings, including the Companys. Most recent filings on form 10-K and form 10-Q.
You are cautioned not to tell a undue reliance on forward looking statements made today and each such statement speaks only as of today, we undertake no obligation to update or 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 either 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.
Culp dot com or in the slide presentation with supporting summary financial information that is also available on the company's website and part of the webcast of today's call.
With that I will now turn the call over to his call President and Chief Executive Officer of calls. Please go ahead Sir.
Thank you drew good morning, and thank.
Thank you everyone for joining us today.
I would like to walk and each of the Cold quarterly conference call with analysts and investors.
With me on the call day, or condolence, Chief Financial Officer, and voice trembling growth more upholstery fabrics business.
And I will begin the call with some opening comments and Kinda then review the financial results for the quarter finals.
I'm going to update you on the strategic actions and each of our operating segments.
And after that Kendall and do our third and fourth quarter fiscal 2021 business outlook. We will then be happy to take your questions.
We are pleased with our strong performance from second quarter fiscal 2021.
Which reflects the times efforts and our associates around the world and the strength and resilience and our global platform.
And if it contingent and navigate our way through these uncertain times and.
Got clarity from into the health and safety line employees customers and suppliers and the communities we serve.
We are incredibly proud of our team's continued drive to deliver innovative products and satisfy the evolving needs and our customers well.
And also integrating enhanced safety practices and new ways of working virtually throughout our business.
Overall, we are very pleased with the top line performance for both our mattress fabrics, and you and upholstery fabrics and.
This faster than expected recovery indicates an increased concern with focus on the home environment.
As well as our ability to service this increased and demand you all strong global platform and stable supply chain.
We are also benefiting from market share gains as our innovative products resonating well with both new and existing customers.
Additionally, we delivered significant sequential improvement in operating income as compared to the first quarter consistent with our expectations.
We further strengthened our balance sheet with increased liquidity and total cash and investments each $56.5 million.
Based on the strong financial performance and.
Net cash flow for the percentage for the year, we are pleased to announce and our board of directors approved a 5% increase and our quarterly dividend, marking the eighth consecutive year and critics.
This is consistent with our capital allocation strategy and our commitment to sunrise going and for our shareholders.
We also expect to continue investing and working capital and plan and capital expenditures during the second half of the year.
Additionally, we have decided to maintain the suspension of our share repurchase plan at this time.
These strategic decisions are based on our disciplined approach to capital allocation and as described in our capital allocation strategy, which was posted on our website.
The ongoing uncertainty relating to the code and 19 pandemic, including at least in certain cases and governmental considerations from new shutdown Masters is certainly a factor were taken into consideration with respect to capital utilization.
Well, we are also working to remain strategically position during the current environment.
And our current approach to capital allocation is conservative in terms of marriage and short term called and 19 uncertainty.
But we also believe it is appropriately aggressive and allows us to be opportunistic and and girls opportunities that may present themselves, both organically and otherwise.
As always and the strategy the desires and continually there's no current facts and circumstances.
Looking ahead, our customers ability to meet their demand is being challenged price the package spot trading constraints related primarily to non standard were components as well as some labor shortages, which could temporarily delay their scheduled delivery of fabric orders from our decisions.
Additionally, the ongoing impact in duration of the cold and my two things and that remains unknown.
We are prepared for a range of macroeconomic scenarios and we are confident and our ability to weather these near term headwinds.
Barring additional shutdowns, we are optimistic based on our current industry demand trends and market share opportunities and we will deliver strong results for the second half fiscal 2021.
We believe the Culp has become a stronger company, both financially and competitively and we were pretty cover my team and we are well positioned for continued growth.
I'll now turn the call over to Kim who will review the financial results for the quarter. Thanks here as mentioned earlier on the call. We have posted a slide presentations to our Investor Relations website that cover key performance measures. We've also posted our capital allocation strategy.
I also want to note that as a result would still be luxury during the fourth quarter of last year. The financial result for the home accessories segment are excluded from the reported financial performance of our continuing operations and presented as a discontinued operation and our consolidated financial statements.
Here are the financial highlights from the second quarter net sales was 76.9 million up 10.5% compared with the prior year period.
Both divisions had a strong sales performance for the quarter. The it will go into more detail and divisional operation performance in a moment on.
On a pre tax basis. The company reported income from continuing operations of 3.9 million, which included 680000 of other expense related mostly to foreign exchange rate fluctuations associated with our operations and China.
This compare with pretax net income from continuing operations of 4.5 may and for the second quarter of last year, which included only nine 9000 and other expense.
The current quarter was affected by the unfavorable foreign exchange rate fluctuations I, just mentioned as well as higher assay day expense due primarily to higher accrued incentive compensation expense.
Offset somewhat by lower TNT and marketing expenses.
On a percentage of sales basis total assay they came in at 12.7% compared to 13.1% for the same period a year ago net.
Net income from continuing operations was 2.4 million or 19 cents per diluted share for the second quarter compared with net income from continuing operations of 2.2 million or 18 cents per diluted share for the prior year period.
The effective income tax rate for the second quarter. This fiscal year was 41.4% compared with 50.1% for the same period a year ago.
Effective income tax rate is affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, and Canada, which have higher income tax rate as compared to the us federal rate.
Looking ahead to the rest of this fiscal year, we estimate that our consolidated effective income tax rate and from income tax rate for the third and fourth quarters of this fiscal year will be to will be in the range of 40% to 50% based on the facts and we know today.
So and 12 months adjusted EBITDA as of the end of the second quarter of this fiscal year was $11.5 million or 4.5% of sales.
Yeah, I'll take a look at our two business segments for the mattress fabric segment sales were 40 million up 12.2% compared to last years second quarter.
Operating income for the quarter were for the quarter was 4.4 million compared with $3.3 million a year ago with an operating income margin of 10.9% compared with 9.2% a year ago our.
Our improved operating performance for the second quarter, primarily reflects the benefit from fixed cost absorption from higher sales and improve operating efficiencies, resulting from fully maximizing our production capacity.
The default and fabric segment sales for the second quarter was $36.8 million up 8.7% over the prior year.
Operating income for the quarter was $3.3 million compared with 3.5 million a year ago with an operating income margin of 8.9% compared with 10.2% a year ago operating performance was materially affected by unfavorable China foreign exchange rate fluctuations as well from impact from sales mix offsets from.
More by lower spending on PMT and marketing expenses.
Here the balance sheet highlights.
We reported 56.5 main and total cash and investments and no outstanding borrowings as of the and the quarter up from about 38.7 million net cash position.
As of the end of last fiscal year.
For the first six months of this fiscal year, we occurred to me and a capital expenditures and spent 2.6 may and our regular quarterly dividends cash.
Cash flow from operations and free cash flow were 22.7 million and 20.5 million respectively.
For the first six months of the year compared with cash flow from operations and free cash flow of 8.2 million and 5.6 million respectively for the prior year period. This.
This year over year improvement reflects that focus attention on working capital management during the first half of the year.
While we are extremely pleased with our strong cash position and fortified balance sheet going into the second half of the year. It is important to note that our cash position will be affected by our strategic investments and working capital and planned capital expenditures during this period.
The company did not repurchase any share from the second quarter, leaving the full 5 million available under the share repurchase program approved by the board in March 2020, as previously disclosed the company temporarily suspended the share repurchase program during the fourth quarter of last fiscal year, given the economic uncertainty related to cold and 19 with.
Net I'll turn the call back over to it.
Thanks, Tim let me start with the mattress fabrics business.
We were especially encouraged by the strong growth and sales and operating income for the mattress fabrics segment during the second quarter.
We built them and then there's some generated during the last eight weeks of the first quarter.
Utilizing our product driven strategy for both mattress fabrics and sewn covers.
As well as our global supply chain and dedicated attention to our customers.
The strength and flexibility of our global manufacturing and sourcing operations and.
And the United States, Canada, Haiti, Asia, and Turkey enabled us to support current demand and served and need for our mattress fabric and cover customers.
We are also pleased with the continued growth and our sewn mattress cover business the demand trend from mattress cover now exceeding pre covenant levels.
This trend is driven by the ongoing growth and the bus study and space and.
And we continue to work collaboratively with new and existing customers to develop fresh and innovative products.
Our sown cover production capabilities, and the U.S., Haiti, and Asia, along with our vertical ability to provide innovative product offerings from fabric to stone cover.
Because that is this a strategic integrated advantage and supporting the rapidly changing demands of our customers.
Additionally, our building expansion in Haiti was completed during the second quarter, providing additional capacity and enhancing our ability to produce and covers.
We're also excited about ongoing developments and product innovation, including expanding our specialty finish options to include features for sustainability and.
And from our Covenant protection and other wellness related properties.
We also remain pleased with the continued opportunities for innovation through our re imagined culp home fashions, our threed rendering services, which have allowed us to continue showcasing our products and support our customers through virtual design collaboration in the face of travel limitation.
Our virtual design and this began before the pandemic and since that time these capabilities such strength in our position with customers.
We expect that our increased fiber capacity in North America, resulting from our investments and additional equipment will be available during the fourth quarter fiscal 2021.
We also believe the domestic mattress industry and in turn our business will benefit from the recent preliminary anti dumping duties imposed on US department of Commerce on mattress imports from seven countries.
Additionally, despite these ongoing uncertainty.
Relating to the pandemic.
We'll continue to focus from our commitment to environmental sustainability.
We have now achieved landfill free status with both of our us manufacturing facilities, which reflects our ongoing effort to promote sustainable production across our operations.
One additional shutdowns or significant disruption and our customer supply chain from raw materials other than Patrick.
We believe we are well positioned and mattress fabrics to execute our strategy and increased market share during the second half of fiscal 2021.
Now, let me turn from attention to the positive fabric segment.
We were also very pleased with the solid growth and our upholstery fabrics business.
For the second quarter.
Our residential upholstery business saw significant increase in sales compared with prior year period, driven primarily by the increase consumer focus on the and home experience and overall comfort.
Through our strong platform and Asia, including our expanded cut and sew capabilities and Vietnam, and our stable long term supplier relationships.
We were able to respond quickly to the upsurge in demand from our customers and increase our market share.
We have also generated historically strong backlog in our residential upholstery business, reflecting the ongoing favorable demand trends for the segment.
On line are highly durable stain resistant netsmart performance fabrics as well as our line of less smart and evolve performance plus sustainability fabrics continue to experience favorable demand trends.
We also recently launched mid Smart Ultra the next step in our lives Smart performance brand evolution and.
This new product line features and anthem microbial finish and silver on non technology to protect the fabric from mold mildew and an order, causing bacteria and has been well received and our recent showings.
We are focused on promoting these product line and building our strong brand performance products under our lives smart umbrella.
These lists more performance fabrics are important drivers of our residential growth.
Well hospitality business remained under pressure, while the ongoing COVID-19 disruption to continue to affect the travel and leisure industry.
These lingering pressures also affected lead window products, our window treatment and information business during the quarter.
While sales for our hospitality business remains relatively stable as compared with first quarter, we expect that and disruption and hospitality and leisure will continue to affect this business and the near term.
Additionally, while we saw solid sequential improvement and our operating income as compared to the first quarter fiscal 2021.
Our second quarter results compared to the prior year period were materially affected by unfavorable China exchange rate fluctuations and smell and some impact from sales mix.
We expect these factors will continue to affect our operating income during the third quarter.
Despite these pressures we were encouraged by our solid operating margin and the second quarter.
We are encouraged from historically strong backlog in our residential and commercial business and are confident and our ability to meet customer and.
We expect a strong performance in our residential and poultry business to continue absent any additional payment related shutdowns or material disruption to our customers supply chain.
Tim will now discuss the general outlook from the third and fourth quarters resistant school year, and we were going to take some questions.
At this time due to the continued economic impact of the co and 19 pandemic and the lack of visibility EPS grew as duration or ultimate impact we are providing only limited financial guidance for fiscal 2021, although.
Although subject to unforeseen changes that may arise and connection with the pandemic. We are encouraged by the ongoing execution of our product driven strategy and continued strength and demand for home furnishing products as well as our opportunities from market share growth. Considering these factors, we expect sales and operating income for the third quarter. This fiscal.
Year to be profitable and prior year period with the mattress fabric segment continuing.
Continuing its strong year over year rebound and the upholstery fabrics segment facing ongoing headwinds related to foreign exchange rate fluctuations associated with this operations located in China.
Customer supply chain constraints and sales mix.
We also expect sales and operating income for the fourth quarter of this fiscal year to be dramatically improved for both segments as compared to the fourth quarter of last fiscal year, but.
Based on current expectations, including the 4 million investment and additional net machines for our mattress fabric segment that we mentioned last quarter capital expenditures for this fiscal year and now expected to be and the eight and a half to $9 million range depreciation and amortization is expected to be approximately seven and happening and for this fiscal year.
With that we will now take your questions.
Thank you.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If he is using a speaker phone. Please make sure you at least function is turned off line, you signature, which I equipment.
Again press Star one if youd like to ask a question will posture just from on it so everyone the opportunities and signal for questions.
And our first question is Bobby Griffin with Raymond James. Please go ahead.
Good morning, Brian Thanks for taking my questions.
Good morning, Bernie and Bob.
So I guess first I want to talk about and just before commentary here. So good momentum here and mattresses you referenced it but I think in the prepared remarks, and very good backlog and upholstery record level backlog. So maybe just help me connect the dots between backed type and momentum and then maybe in the sales commentary and B.
Roughly comparable year over years or is there a timing issue or is the currency hurting your top line or is there anything else share that might be driving that or or just general conservative or just conservatism and the guidance.
Yes. Thank you Bob Good question, and thanks for asking and and I'll give you our commentary I'll break it down by Division if thats. Okay. And then can you certainly can share can chime in too.
On the mattress fabrics and you suffer a number there is some seasonality and our Q3 being and generally and normally weaker quarter with our holiday shutdowns really across all locations, we have that and US Canada and also in Haiti, and what I like 42 for Q3, as and the mattress fabrics and signet.
Secondly, improve year over year.
Which we're very happy with on the upholstery side and the.
The residential backlog to rise sales remain historically high there.
There are some headwinds for that business net currency and.
And really more so maybe for the sales on our customer supply chains, which I would say for that business, if raw materials and capacity for our customers improve and there are certainly some upside for that business not only for both businesses.
A little bit of capacity or raw material being up for both sides of the business to.
To get a little better and our customer side, we could ship than more fabs that we have prepared so that is and upside to the Q3 that could do there.
Okay and feel free to add to that seemed like the operating they recovered all I think the key there is the is the year over year improvement that we're looking at and the and the seasonality part of it and of course on the upholstery side. The the headwinds that will continue and have to face.
So those are factors and is generally a story Bobby of for third quarter mattress fabrics and is continuing to rebound very wet and.
And upholstery, they're just being a bit cautious and some of the headwinds is fee.
Okay. Okay. That's helpful. And then if you look at you look at the business and how you guys and ramp backup production stops and the words efficiency versus historical levels within within mattresses.
Throughput getting back closer to normal from from your side, taking the other industry supply chain GAAP. It seems like the supply chains more non fabric related issues and then on your products.
Yes, if you think back on NAV mattress side really over the last couple of years, we did from significant capital expenditure were to really build a world class platform, both and the us and in Canada that gets complemented by our yearly strategic level options.
Haiti Asia and Turkey. So, we're really pleased with our platform and the more volume.
We run through it the better that will perform well.
We have built the platform this debt will thrive efficiently with volume and so we are to see the sales start to rebound and our expectation is that we'll keep going and that does help us quite a bit with our efficiencies and mattress fabrics side.
Okay, and and hedges being a dark and you get practically price yet.
Weighted to the currency changes happening and China or is that still from maybe maybe more force you'd have to make some adjustments.
Yes ill, let boyd speak to that and I'll, just tee it up a little bit over time, we have shown as these currency impacts in this case primarily related.
And the China Foreign exchange rates.
For sure and we do our best to adjust our cost and things within China to offset some of that but if there are continued pressures and we do have to adjust our prices and we always said theres and we'll do that import and domestic to year timeline. How are you thinking about that yes, no that's exactly right Evan.
We're always currency is a consideration and our business and when we see periods, where there is a more significant than more.
More rapid movement and yes, we always monitor that and take Smith take necessary actions when appropriate. So we're evaluating all of that right now and price.
Price considerations and adjustments were one of the things that we will be considering.
Perfect I appreciate the details and best of luck here and in them from the quarter.
Thank you. Thank you appreciate it every day.
Hey, guys. A reminder, fitness start weighted to ask the question and next question is Marco Rodriguez with Stonegate capital markets. Please go ahead.
Oh good morning, everybody. Thank you for taking my questions.
Moving norco Jose from and more cash.
Hi, I wanted to do a follow up on the.
The part questions there in regard to I guess.
The guidance and it relates to mattress fabrics and specifically here first.
And the seasonality.
Just kind of want to get your guys' Fox on and.
If you can and what sort of perhaps.
Demand you saw perhaps pull forward from from quarters at comp or was this may be kind of pent up demand and nobody were shocked and during the shutdowns and how that impacted kind of the above expectation revenue growth you saw in Q2, and then if you can kind of low area.
Historically.
The Q3, Q2 seasonality of being down about 2% to 3%.
If I add up all of that in terms of working already from needs and provide a little more color and how you guys and thinking about that and how we should.
Okay, I'm going to let me start represents a sales and I'll, let Karen and finish it off a little bit of thoughts towards how are we thinking about our look for benefits. This think about or the mattress fabrics segment and we do have we have significant tailwinds and that business and some that you're touching on that have already happened and some that we see might be comment.
And so for certain.
The faster than expected recovery for the business at the sales level is no doubt impacted by strong home targets that were generated by COVID-19. So that gives us just a focus on home environment updating upgrading your comfort values, whether it be furniture or mattresses are.
There's certainly a focus on health.
People want a healthier more well known nicely.
On top of that there is a lot and antidumping is a tailwind there could come we're optimistic that we're on and make a difference.
Half of that their go forward headwinds for us and we're excited about our innovation. Some of the things is on there that are really need from the product side, the fabric and sewn covers.
And we are getting market share, we're winning market share gains and thats a profound near 2021.
And we have new capacity and dose fabric formation and and in Haiti for fabric and some coverage that we think of net deferred so theres tailwinds and have lifted kind of a a rising tide lifting all boats with the pandemic, but we're really confident in our market share gains and our product driven strategy to carry forward past.
Past Q3 and going into next year.
And just wonder if you want to give any context and how you're thinking about guidance for Q3, Mark as you know much more details around assets and so on thinking about the the general list of market share and in general.
Tailwind trends.
Yes, Marco this is key and I think and you look at as we low.
Look at the past couple of quarters here, we've had debt sequential improvement from the from the lows back and the first towards growth to now and then as we pivot toward the second half of the year you.
It's more of a year over year and so when we look at the cost of seasonality for apparel for mattress fabrics has and is an issue, but when you look at the you know the seasonality part of Thats. The reason why that sequential growth. This is Doug and keep going but that said the year over year impact that we're looking at is going to be significant and.
So we're very encouraged about that and then of course for both businesses as we look to the to the fourth quarter.
We are.
Decided to see that continued business level going into the fourth quarter or force compared to a very growth quarter last year, we see dramatic improvements on both sides. So it's a it's a definitely a year over year peer.
Pivot situation, but obviously to continue that performance as we as we take what we've got and we continue that performances and second half of the year.
Got it very very helpful. And then in terms of your market share gains and if we can talk about mattress fabrics here for a minute can you maybe I'll talk a little bit about what sort of feedback or color you are getting from the customer and that's why you're.
Why you are increasing and that market share versus our competitors and what sort of the main drivers behind that.
Yes sure Marco. Thank you. Good question those two two things I see first.
We have for some time and we're working on this well before any.
'cause a 19 times indication is a dedicated product driven strategy and we put a lot of emphasis and to innovation.
From fabric to finish cover so.
So we really believe we have a preferred model.
Designing innovative fabrics, and then now being able to take them and have the growing from the box space to us and as Conor not from advantage and units and layer that product focus on top of a very robust global supply chain and.
Especially in mattress covers with our North American platform.
Cash flow in Haiti, and then backed up and really strong with Culp China.
Just as it just as a win and strategy. So I think its design and service really are two factors driving us into new placements and I guess, what's there and we're very excited about market share, it's really across the board to us and new exciting bed in the box space and everyone is.
His and feedback, but it will also have and some gains with our legacy business we call it.
For new product lines, and the rollout in calendar year 2021.
Got it very helpful. And then in terms of the gross margin pickup that you saw here in Q2, obviously the volume is up quite a bit the efficiencies are that you've also put into the system is also great and just wondering if you can maybe comment on those.
Those capital investments shipment and additional capacity you have and potential new volumes that should come through that business.
And next.
Okay and then the next year.
Have you by channel reset the.
The operating margin performance to where maybe you're above that low 20% growth margin that you saw on for all the.
Thank you dumping issue.
This year or around imaging reported.
Yeah, Mark already in the us.
I'll start and we have you can you can jump in I think you have touched on this a little bit ago, given the all day improvements that we've made over the years and Thats really set us up.
Before being able to take advantage of this increase in sales and media.
The structural changes that we made moving moving certain products and different locations and getting to be able to take maximum.
We've been able to maximize that debt moved them and that is certainly help.
So I think as we obviously as we look forward and that was definitely a factor in the second quarter, but as we look for those.
Those are those are going to be.
And Cox contribute to the improvement in the third fourth quarter beyond.
And as far as you know I don't I don't remember the second part of that question scores were the gross margin, but I think that to me what I've. Just described is really the where we are where we are at today.
And all the improvements we've made so we have I don't know you want to add and anything to that or yeah. We've added and we did last quarter, we announced a 4 million dollar additional capital expenditure on.
Average forming equipment, that's from North America.
Thats. An addition to our Haiti expansion that we had done and got completed and second quarter. So and then we will make an and not in our capital allocation strategies and making sure we keep.
And opportunities available for further organic expansion, because we just need to see some opportunities comment and I guess the force.
Our share of the more volume we put through our platform.
There is margin opportunities to improve.
And as our debt you want to talk about what that is and yes. There is opportunity to improve yeah, I think to one other one to one other point related to our you know the 4 million dollar investment that we talked about I mean that certainly will give us increased capacity, but that also gives us and flexibility to trade out older.
Mid four new more efficient equipment and gives us the flexibility to ramp up production up and down and so all that is a is a part of our strategic effort to be more nimble more and more and this will be ready for each day, the customer can provide or give us as far as demand. So all those come.
And the play and and again to all the efficiency movements that we've made the investment that we're going to make.
All of those will contribute in the future.
Their sales and if I could squeeze one more question and shore quick on the upholstery fabrics side, the supply constraints from outside of that the fabrics.
And speakers your customers and you have a sort of sense as far as and what they're taking timeframe wise or the kind of the patch bad debt low supply constraints.
And backlog and more normalized environment and fuel.
Yes, Mark and this was boys the.
There's progress being made I think throughout the industry there.
There are adjustments to capacity that are taking place to meet this significantly higher level of demand.
And there is a lot of that underway and I think progress is being made.
It's probably going to take another quarter or so to.
Where we see the the impacts of new capacity coming on stream.
I think part of those difficulties are both the.
Constraints and staffing and hiring and training, but also there's been some constraints on the component supply side such as phones. So.
Another issue that's kind of.
Held back some of the throughput.
And that probably is going to carry forward a bit during this current quarter. So I think we're going to see some steady improvement in that regard, we certainly hear that from from our customers that capacity more capacity is coming on stream.
So it's just going to take a little more time, better, but I think we'll look at another quarter.
And then probably see certainly and fourth quarter growth.
Much more improve and in that regard.
Got it thanks, a lot guys I really appreciate your time.
Thank you Mark Thank you.
And as a reminder, that is star one if you would like to ask a question and well pause for just a minute.
And there are no further questions at this time.
Thank you operator, and again, thanks, everyone for your participation and your interest and call. We look forward to updating you on our progress next quarter and have great day.
And this concludes today's call. Thank you for your participation you may now disconnect.
And.
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Good day and welcome to the Culp second quarter 2021 earnings Conference call. Today's call is being recorded at this time for opening remarks and introductions I'd like to turn the call over to Mr. Anderson. Please go ahead and.
Thank you good morning, and welcome to the Culp Conference call to review the company's results for the second quarter of fiscal 2021.
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.
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.
These risks and uncertainties are described in our regular SEC filings, including the Companys. Most recent filings on form 10-K and form 10-Q.
You are cautioned not to tell a undue reliance on forward looking statements made today and each such statement speaks only as of today, we undertake no obligation to update or 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 either 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 dotcom.
Or in the slide presentation with supporting summary, financial information and its also available on the company's website and part of the webcast of today's call.
With that I will now turn the call over to his call President and Chief Executive Officer of call. Please go ahead Sir.
Thank you Andrew good morning, and thanks to everyone for joining us today.
I would like and welcome you to the Culp quarterly conference call with analysts and investors with.
With me on the call it a day or 10, bowling Chief Financial Officer, and Boyd Chumbley Gardiner from our upholstery fabrics business.
And we'll begin the call from opening comments and Ken will then review the financial results for the quarter.
And then update you on the strategic actions and each of our operating segments.
After that Ken will review, our third and fourth quarter fiscal 2021 business outlook. We will then be happy to take from questions.
We are pleased with our strong performer from second quarter fiscal 2021.
Which reflects the tireless efforts of our associates around the world and the strength and resilience of our global platform.
And if we continue to navigate our way through these uncertain times, our top priority remains to the health and safety of our employees customers suppliers and the communities we serve.
We are incredibly proud of our team's continued drive and deliver innovative products and satisfy the evolving needs from our customers. While also integrating enhance safety practices and new ways of working virtually throughout our business.
Overall, we are very pleased with the top line performance for both our mattress fabrics, and new and upholstery fabrics and.
This faster than expected recovery indicates an increased consumer focus on the home environment as well as our ability to service. This increasing demand you all strong level platform and stable supply chain.
We are also benefiting from market share gains as our innovative products are resonating well with both new and existing customers.
Additionally, we delivered significant sequential improvement and operating income that's compared with first quarter consistent with our expectations.
We further strengthened our balance sheet with increased liquidity total cash and investments reached $56.5 million.
Based on the strong financial performance and excellent cash flow for the first half of the year. We are pleased to announce and our board of directors approved a 5% increase and our quarterly dividend, marking the eighth consecutive year of income.
This is consistent with our capital allocation strategy and our commitment to generate value for our shareholders.
We also expect to continue investing and working capital and planned capital expenditures during the second half of the year.
Additionally, we have decided to maintain the suspension and of our share repurchase plan at this time.
These strategic decisions are based on our disciplined approach to capital allocation and as described in our capital allocation strategy, which is posted on our website.
The ongoing uncertainty related and Dakota, 19th and payment, including at least in certain cases and governmental considerations from new shutdown measures.
It's certainly a factor we're taking into consideration with respect to capital utilization.
But we are also working to remain strategically position during the current environment.
And our current approach to capital allocation is conservative in terms of managing short term called and 19 uncertainty, but we also believe it is appropriately aggressive and allows us to be opportunistic and growth opportunities that may present themselves, both organically and otherwise.
As always and to the strategy. These islands continually there's no current facts and circumstances.
Looking ahead, our customers ability to meet their demand is being challenged by the black spot trading constraints related primarily to non fabric components as well as some labor shortages, which could temporarily delay their scheduled delivery of fabric orders from our divisions.
Additionally, the ongoing impact and duration of the cover my team and he is and that remains unknown.
We are prepared for a range of macroeconomic scenarios and we are confident and our ability to weather these near term headwinds.
Barring additional shutdowns, we are optimistic based on our current industry demand trends and market share opportunities that we will deliver strong results for the second half of this fiscal 2021.
We believe the coal and become a stronger company, both financially and competitively and we were pretty cover and 19 and we are well positioned for continued growth.
I'll now turn the call over to Kim who will review the financial results for the quarter. They see it as mentioned earlier on the call. We have posted slide presentations to our Investor Relations website that cover key performance measures. We've also posted our capital allocation strategy. I also want to note that has resolved and sell the luxury during the fourth quarter of last.
Here are the financial result for the home accessories segment are excluded from the reported financial performance of our continuing operations and presented as a discontinued operation and our consolidated financial statements.
Here are the financial highlights from the second quarter net sales was 76.9 million up 10.5% compared with the prior year period.
Both divisions had a strong sales performance for the quarter. The it will go into more detail and divisional operation performance in a moment.
On a pre tax basis. The company reported income from continuing operations of 3.9 million, which included 680000 of other expense relating mostly to foreign exchange rate fluctuations associated with our operations and China.
This compared with pre tax income from continuing operations of 4.5 and there for the second quarter of last year, which included only nine 9000 and other expense.
The current quarter was affected by the unfavorable foreign exchange rate fluctuations I, just mentioned as well as higher asking and I expect the prime assets, a higher accrued incentive compensation expense.
Offset somewhat by lower TNT and marketing expenses.
On a percentage of sales basis total assets. They came in at 12.7% compared to 13.1% for the same period a year ago.
Net income from continuing operations was 2.4 million or 19 cents per diluted share for the second quarter compared.
Compared with net income from continued operations of 2.2 may and for 18 cents per diluted share for the prior year period.
The effective income tax rate for the second quarter. This fiscal year was 41.4% compared with 50.1% the same period a year ago.
The effective income tax rate is affected over the fiscal year by the mix and timing of actual earnings from our U.S. operating and foreign subsidiaries located in China, and Canada, which have higher income tax rate as compared to the U.S. federal rate.
Looking ahead to the rest of this fiscal year, we estimate that our consolidated effective income tax rate and from income tax rate for the third and fourth quarters.
For this fiscal year will be to will be in the range of 40% to 50% based on the facts and we know today.
So in 12 months adjusted EBITDA as of the end of the second quarter of this fiscal year was $11.5 million or 4.5% of sales.
Yeah, I'll take a look at our two business segments for the mattress fabric segment sales were 40 million up 12.2% compared to last years second quarter.
Operating income for the quarter was for the quarter was $4.4 million compared with 3.3 million a year ago with an operating income margin of 10.9% compared with 9.2% a year ago.
Our improved operating performance for the second quarter, primarily reflects the benefit from fixed cost absorption from higher sales and improve operating efficiencies, resulting from fully maximizing our production capacity.
So the focus average segment sales for the second quarter to $36.8 million up 8.7% over the prior year opera.
Operating income for the quarter was 3.3 million compared with 3.5 million year ago, with an operating income margin of 8.9% compared with 10.2% a year ago operating performance was materially affected by unfavorable China foreign exchange rate fluctuations as well as from impact from sales mix offsets from.
And by lower spending on PMT and marketing expenses.
Here the balance sheet highlights.
We reported 56.5 main and total cash and investments and no outstanding borrowings as of the and the quarter up from about 38.7 million net cash position.
As of the end of last fiscal year.
For the first six months of this fiscal year, we occurred to me and a capital expenditures and spent 2.6 million our regular quarterly dividends cash.
Cash flow from operations and free cash flow were 22.7 million and 20.5 million respectively.
For the first six months of the year compared with cash flow from operations and free cash flow of 8.2 million and 5.6 million respectively for the prior year period. This.
This year over year improvement reflects the focus and attention on working capital management during the first half of the year.
While we are extremely pleased with our strong cash position and fortified balance sheet going into the second half of the year. It is important to note that our cash position will be affected by our strategic investments and working capital and planned capital expenditures during this period.
The company did not repurchase any share from the second quarter, leaving the full 5 million available under the share repurchase program approved by the board and March 2020, as previously disclosed the company temporarily suspended the share repurchase program during the fourth quarter of last fiscal year, given the economic uncertainty related to cold and 19 with that.
Now I'll turn the call back over to it.
Hi, scam, let me start with the mattress fabrics business and.
We were especially encouraged by the strong growth and sales and operating income for the mattress fabric segment during the second quarter.
We built them and then there from generated during the last eight weeks of the first quarter.
Utilizing our product driven strategy for growth mattress fabrics and sewn covers.
And as well as our global supply chain and dedicated essentially to our customers.
The strength and flexibility of our global manufacturing and sourcing operations and.
And the United States, Canada, Haiti, Asia, and Turkey, and able to support current demand and served and these were mattress fabric and cover customers.
We're also pleased with the continued growth of our son mattress cover business with the mantra and from mattress cover now exceeding pre cousins levels.
This trend is driven by the ongoing growth and the bus studies space and we continue to work collaboratively with new and existing customers to develop fresh and innovative products.
Our southern copper production capabilities, and the U.S., Haiti, and Asia, along with our vertical ability to provide innovative product offerings from fabric to some cover.
Because I noticed that the strategic integrated advantage and supporting the rapidly changing demands of our customers.
Additionally, our building mismatch and in Haiti was completed during the second quarter, providing additional capacity and enhancing our ability to produce and covers.
We're also excited about ongoing developments and product innovation, including expanding our specialty finish options to include features for sustainability and its and microbial protection and other wellness related properties.
We also remain pleased with the continued opportunities for innovation through our re imagined call home fashions, our threed rendering services, which and a lot of continue showcasing our products and support our customers through virtual design collaboration and the pace of travel limitation.
Our virtual design and thus began before the pandemic and since that time these capabilities such strength in our position with customers.
We expect that our increased average capacity in North America, resulting from our investment and additional equipment will be available from the fourth quarter fiscal 2021.
We also believe that must've mattress industry and in turn our business will benefit from the recent preliminary anti dumping duties imposed on US department of Commerce on mattress imports from seven countries.
Additionally, despite these ongoing uncertainty.
Relating to the pandemic.
Continued focus from our commitment to environmental sustainability.
We've now achieved landfill free status is both of our U.S. manufacturing facilities, which reflects our ongoing effort to promote sustainable production across our operations.
Barring additional shutdowns or significant disruption and our customer supply chain from raw material other than Patrick.
We believe we are well positioned and mattress fabrics to execute our strategy and increase market share during the second half fiscal 2021.
Now, let me turn from the pension to the upholstery fabric segment.
We were also very pleased with the solid growth and our upholstery fabrics business.
For the second quarter.
Revenue, so upholstery business saw a significant increase in sales compared with prior year period, driven primarily by the increase consumer focused on the and home experience and overall comfort.
Through our strong platform and Asia, including our expanded cut and sew capabilities and Vietnam, and our stable long term supplier relationships.
We were able to respond quickly to the upsurge in demand from our customers and increase our market share.
We have also generated historically strong backlog and our residential and wholesale business, reflecting the ongoing favorable demand trends for this segment.
Our line of highly durable stainless system Netsmart performance fabrics as well as our line of lift smart evolve performance plus and sustainability fabrics continue to experience they have and will demand trends.
We also recently launched live smart Ultra the next step in our lives Smart performance brand evolution and.
And this new product line feature from anthem, I, probably off non us and silver on and technology.
To protect the fabric from mold mildew, and an order, causing bacteria and has been well received and our recent showings.
We are focused on promoting these product line and building our strong brand performance products under our lives smart umbrella.
These lifts more performance that was quite important drivers of our residential growth.
Well hospitality business remained under pressure, while the ongoing cup and 19 disruption they continue to affect the travel and leisure industry.
These lingering pressures also affected lead window products, our window treatment and installation business during the quarter.
While sales for our hospitality business remained relatively stable as compared with first quarter, we expect that and disruption and hospitality and leisure and we'll continue to affect this business and the near term.
Additionally, while we saw solid sequential improvement and our operating income as compared to the first quarter fiscal 2021 and.
Our second quarter results compared to the prior year period were materially affected by unfavorable China exchange rate fluctuations and smell and some impact from sales mix.
We expect these factors will continue to have thoughts on operating income during the third quarter.
Despite these pressures we were encouraged by our solid operating margin and the second quarter.
We are encouraged from historically strong backlog in our residential and poultry business and our confidence and our ability to meet customer and we.
We expect the strong performance and our residential upholstery business to continue absent any additional pandemic related shutdowns or material disruption to our customers supply chain.
Tim will now discuss the general outlook from the third and fourth quarters for this fiscal year, and we were going to take some questions.
At this time due to the continued economic impact of the code and 19 pandemic and the lack of visibility EPS grew its duration or open the impact we are providing only limited financial guidance for fiscal 2021, although.
Although subject to unforeseen changes that may arise in connection with the pandemic. We are encouraged by the ongoing execution of our product driven strategy and continued strength and demand for home furnishing products as well as our opportunities for market share growth. Considering these factors, we expect sales and operating income for the third quarter of this fiscal.
Year to be comparable from prior year period with the mattress fabric segment.
Continuing its strong year over year rebound and the upholstery fabric segment faced and ongoing headwinds related to foreign exchange rate fluctuations associated with its operations located in China.
Customer supply chain constraints and sales mix.
We also expect sales and operating income for the fourth quarter of this fiscal year to be dramatically improved for both segments as compared to the fourth quarter of last fiscal year, but.
Based on current expectations, including before me and investment in additional net machines for our mattress fabrics and that we mentioned last quarter capital expenditure for this fiscal year and now expected to be and the eight and a half the 9 million dollar range depreciation and amortization is expected to be approximately seven and half me and for this fiscal year.
With that we will now take your questions.
Thank you.
If he would like to ask a question. Please signal by pressing star one on your telephone keypad. If he is using a speaker phone. Please make sure. Your mute function is turned off and why your signal to reach I equipment.
Again press Star one if you like to ask a question well posture, just small mid to low everyone the opportunities and signal for questions.
And our first question is Bobby Griffin with Raymond James. Please go ahead.
Good morning, Brian Thanks for taking my questions.
Good morning, Bernie Bottler and Bob.
So I guess first I wanted to talk about and just before commentary here. So good momentum here and mattresses you referenced it but I think in the prepared remarks, and a very good backlog and a pull through record level backlog. So maybe just help me connect the dots between when that type and momentum and then maybe in the sales commentary would be.
Roughly comparable year over years or is there a timing issue or is the currency hurting the top line or is there anything else there and it might be driving that or or just general conservative just conservatism and the guidance.
Yes. Thank you body's good question and thanks for asking and I'll give you are and commentary I'll break it down by division and if that's okay. And then can you certainly can share can chime in too.
On the mattress fabric sales you suffer a number there is some seasonality and our Q3 being and generally and normally weaker quarter with our holiday shutdowns really across all locations, we have gotten us Canada and also in Haiti, and what I would I guess I'd point, you to for Q3 as and the mattress fabrics side Signet.
Currently improved year over year.
Which we're very happy with on the upholstery side.
The residential backlog do rise does remain historically high there.
There are some headwinds for that business net currency and.
And really more so maybe for the sales on our customer supply chains, which I would say for that business with raw materials and capacity for our customers improve and there's certainly some upside.
That business not only for both businesses and a little bit of capacity, a raw material being up for both sides of the business to.
To get a little better and our customer side, we could ship them more fabs that we have prepared so that is an upside to the Q3 there could be there.
You can feel free to add to that Youd like no. I think we have you covered all I think the key there is the is the year over year improvement that we're looking at and the and the seasonality part of it and of course on the upholstery side. The Headways debt will continue and have to face.
Those are factors and it's generally a story Bobby of their third quarter mattress fabrics is continuing to rebound very wet and.
And upholstery, and this being a bit cautious and some of the headwinds and speed.
Okay. Okay. That's helpful and then it when you look at you know you look at the business and how you guys would ramp back up production stuff and the words efficiency versus you know historical levels within and Weve been mattresses.
Throughput getting back closer to normal from from your side or the other industry supply chain GAAP. It seems like the supply chains more non fabric related issues and then on your products.
Yes, you know if you think backbone of NAV to side really over the last couple of years. We did from significant capital expenditure were so really build a world class platform from within the U.S. and in Canada and gets complemented by our yearly strategic level options.
80, Asia and Turkey. So, we're really pleased with that platform and the more volume.
We run through it the better that will perform.
We have built a platform that will drive efficiently with volume and so were the key to sales start to rebound and our expectation and that will keep going but that does help us quite a bit with our efficiencies and mattress fabrics side.
Okay, and and heavy gaining a dark and you get passionately price yet.
Weighted to the currency changes happening and China or is that still maybe but maybe more afford you'd have to make some adjustments.
Yeah, I'll, let boyd speak to that and I'll, just keep it up a little bit older time, we have shown as these currency impacts in this case primarily related.
And the China Foreign exchange rates.
For sure and we do our best to adjust our cost and things within China to offset some of that but if there are continued pressures and we do have to adjust our patches and the all assets and we'll do that and bought a unit speak to your time line. How are you thinking about that yeah, no that's exactly right Evan.
We're always trying to see is a consideration and our business and when we see periods, where there is a more significant than more.
More rapid movement and yes, we always monitor that and take Smith take necessary actions when appropriate. So we're evaluating all of that right now and price considerations and adjustments were one of the things that we will be considered.
Perfect I appreciate the details and best of luck here and there and then from the quarter.
Thank you and I appreciate it every day.
Hi, guys. A reminder, and just start why did you ask a question. Our next question is Marco Rodriguez with Stonegate capital markets. Please go ahead.
Oh, good morning never got low thank you for taking my questions.
And then look I was and work day, Oh, Hi, I want to do a follow up on on one.
Part questions there in regard to I guess.
The guidance and it relates to mattress fabrics and specifically here first.
And the seasonality I'm, just kind of want to get your guys' Fox on and.
If you can and what sort of perhaps.
Demand you saw perhaps pull for from from quarters that comp or was this may be kind of pent up demand that nobody was shocked and during the shutdowns and how that impacted kind of the the above expectation and revenue growth you saw in Q2, and then if you can kind of total area.
Historically the.
And that Q3 to Q2 seasonality is being down about 2% to 3%.
Well, if I add up all of that and working already from beaten pot line. How long are you guys and thinking about that and how we should think about.
Okay, I'm going to let me start up and this is you have and I'll, let Karen and finish it off a little bit of thought towards how we think about I look forward, but just think about it the mattress fabric segment, and we do hair and have significant tailwinds and not business and some that you're touching on that have already happened and some that we you might be coming.
And so from a certain.
The faster than expected recovery for the business at the sales level is no doubt impacted by strong from targets that were generated by COVID-19. So that gives us just a focus on home environment updating upgrading your comfort value, whether it be furniture or mattresses.
There's certainly a focus on health.
And want to healthier more well known nicely.
But on top of that there is a lot and antidumping as a tailwind that could come and we're optimistic that we'll find and make a difference.
But on top of that their go forward headwinds for us and we're excited about our innovation. Some of the things is on there that are really need from the product side, the fabric and so and cover.
And we are getting market share, we're winning market share gains and thats it for calendar year 2021.
And we have new capacity and both fabric formation and new and in Haiti for fabrics and sewn covers that we think are much different so there's tailwinds and have lifted kind of a a rising tide lifts all boats with the pandemic. So we're really confident in our market share gains in our product driven strategy and carries forward path.
Past, the Q3 and going into next year.
It depends on if you want to give any context and how you're thinking about guidance for Q3, Mark as you may well have more details around and epithets and so I'm thinking about the the general lift of market share and in general tailwind trends.
Yes, Marco this is key and I think and you look at you know as we.
Look at the past couple of quarters here, we've had debt sequential improvement from the from the lows back and the first quarter to now and then as we pivot toward the second half of the year.
It's more of a year over year and so when we look at a course of seasonality for power for mattress fabrics was and is an issue, but when you look at the you know the seasonality, Florida. That's the reason why that sequential growth. This doesn't keep going but that said the year over year impact that we're looking at is going to be significant and so.
We're very encouraged about that and then of course for both businesses as we look to the fourth quarter. You know we are.
All right you size and see that continued business level going into the fourth quarter or force compared to a very growth quarter last year, we see dramatic improvements on both sides. So it's a it's a definitely a year over year, a pivot situation, but obviously to continue for free.
Warm and so as we as we take what we've got and we continue that performances and second half of the year.
Got it very helpful. And then in terms of your market share gains and you can talk about mattress fabrics here for a minute.
And maybe I'll talk a little bit about what sort of feedback or color you are getting from and the customer and that's why you're.
Why you are increasing and that market share versus our competitors and what sort of are the main drivers behind that.
Yes sure Marco. Thank you. Good question those two two things I see first.
We have for some time and we're working on this well before any.
'cause a 19% and indicates years, a dedicated product driven strategy and we put a lot of emphasis and into innovation.
From fabric to finish cover so we really believe we have a preferred model.
And designing innovative fabrics, and then now being able to take them and the growing but and the box space to have finished cover not from advantage and then if you layer that product focus on top of a very robust global supply chain and especially in mattress covers where our north American platform.
Chocolate Haiti, and then backed up and really strong with Culp China.
Just as it just as a winning strategy. So I think its design and service really are two factors driving us into new placements and I guess Watson and what we're excited about market share and it's really across the board to us from new exciting button the box space and everyone is and treat bar, but it will also have and some gains with our legacy business.
We call it.
For new product lines, and the rollout in calendar year 2021.
Got it very helpful. And then in terms of the gross margin pickup that you saw here in Q2, obviously the volumes help quite a bit the efficiencies that you've also put into the system is also great. I'm. Just wondering if you can maybe comment on the day.
Those capital investments, you've made and additional capacity you have and potential new volumes that should come through that business and.
Thanks.
Okay, Htwo and then next year heavy by chair to release that and operating margin performance to where maybe you're you're above that low 20% gross margin that you saw on for all of the.
[noise] antidumping issue or or around and reaching 20.
Yeah, Mark let me, let me off.
I'll start and we have you can you can jump in I think you have touched on this a little bit ago, given the all day improvements that we've made over the years and and that's really set us up for.
For being able to take advantage of this increase in sales and media.
You know that the structural changes that we made moving moving certain products and different locations and getting to be able to take maximum he's been able to maximize that debt moved I mean, that's certainly help so I think as we obviously as we look forward.
That was definitely a factor in the second quarter, but as we look forward.
Those are those are going to be a car and contribute to the improvement in the third and fourth quarter beyond.
And as far as you know I don't I don't remember the second part of that question Ford were the gross margin, but having that to me what I've. Just described is really the where we are and where we're at today.
And all the improvements we've made so we have I don't know you want to add and anything to that or yeah. We've added we did last quarter, we announced a 4 million dollar additional cash capital expenditure on.
Fabric, forming equipment, that's from North America that's.
Thats. An addition to our Haiti expansion that we had done and got completed and second quarter. So and then need and we're making a nod and our capital allocation strategies and making sure we keep.
You know our opportunities available for further organic expansion, because we just need to see some opportunities come on and I guess the.
For sure and the more volume we put through our platform.
There is margin opportunity to improve it.
And I'm not debt you want to talk about what that is and yes. There is opportunities and prove yeah I think to one other one to one other point related to our you know the 4 billion dollar investment that we talked about I mean that certainly will give us the increased capacity, but that also gives us and flexibility to a trade out older.
Mid four new more efficient equipment and gives us the flexibility to ramp up production up and down and so all that is a is a part of our strategic effort to be more nimble more and more and this will be ready for anything to customer care and provide or give us as far as demand. So all those come.
And the play and and again to all the efficiency movements that we've made the investments that we're going to make all of those will contribute in the future.
They are said and if I could squeeze one more question and just real quick on the upholstery fabric side or the supply constraints from outside of the fabrics and.
Because your customers if you have any sort of sense as far as and what they're thinking timeframe wise or that kind of be patched bad debt low supply constraints.
And backlog and more normalized environment, if you will.
Yes, Mark and this was Boyd the you.
You know there's progress being made I think throughout the industry there.
There are adjustments to capacity that are taking place to meet this significantly higher level of demand.
And there's a lot of that underway and I think progress is being made is probably going to take another quarter or so to fully see the debt.
The impacts of new capacity coming on stream.
You know I think part of the difficulties are both from the constraints and staffing and hiring and training, but also there's been some constraints on the component supply side such as phones. So.
That's another issue that's kind of a held back some of the throughput.
And that probably is going to carry forward and they're doing this this current quarter. So I think we're going to see some steady improvement in that regard, we certainly hear that from from our customers that capacity.
Capacity more capacity is coming on stream so.
So is this will take a little more time, but the but I think the you know we'll look at another quarter.
And then probably see certainly in fourth quarter sales are much more improved and in that regard.
Got it thanks, a lot guys I really appreciate your time.
And commodity.
And as a reminder, that is star one if you would like to ask a question and well pause for just a minute.
And there are no further questions at this time.
Thank you operator, and again, thanks to everyone for your participation and your interest and call. We look forward to updating you on our progress next quarter have a great day.
And this concludes today's call. Thank you for your participation you may now disconnect.