Q3 2021 Culp Inc Earnings Call
[music].
Okay.
Please standby.
Good day, ladies and gentlemen, and welcome to the Copes third quarter 'twenty 'twenty One earnings conference call. Today's call is being recorded and at this time for opening remarks, and introductions I would like to turn the call over to MS. Dru Anderson. Please go ahead.
Thank you good morning, and welcome to the Culp Conference call to review the company's results for the third quarter of fiscal 2021.
And we start let me state that this morning's call will contain forward looking statements about the business financial condition and prospects of the company.
Forward looking statements are statements that include projections expectations or beliefs about future events or results or otherwise are not statements of historical fact.
The actual performance of the company could differ materially from that indicated by the forward looking statements because of the 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.
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 of 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 of 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.
And at Culp Dot com or in the slide presentation with supporting summary financial information 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 the is called President and Chief Executive Officer. Please go ahead Sir.
Thank you and good morning, Thank you very much for joining us today.
I would like to welcome you to the Culp quarterly conference call with analysts and investors.
With me on the call today are Kimball and our Chief Financial Officer, and Boyd Chumbley President of public most of the fabrics.
And we end the call with some opening comments and Ken will then review of the financial results for the quarter.
I will then update you on the strategic and our teams in each of our operating segments.
And after that Ken will review, our fourth quarter fiscal 2021 business the outlook and of course, we'll then be happy to take your questions.
Okay. So we are energized by our financial performance for the third quarter of fiscal 2021.
These results reflect strong growth and sales and operating performance compared to the prior year period as well the exceptional execution of our current driven strategy and the continued resilience of our robust global platform.
These results would not have been possible without the hard work and perseverance of our dedicated team of associates around the world.
The termination indulgence, including strict adherence and safety protocols.
And minimize the spread of COVID-19.
Have enabled us to continue operating our business with minimal disruption, while also meeting the rapidly changing needs of our customers.
We are tremendously grateful for their tireless efforts and unwavering commitment to operational excellence during this unprecedented time.
We are encouraged from the performance of both of our mattress fabrics and upholstery fabric segment during the quarter.
Our growth in both segments was driven by a combination of strong demand for our products and the benefits of market share gains from product innovation.
And as consumers and remain focused on the home environment.
Our diversified manufacturing and sourcing capabilities, along with our stable supply chain have allowed us to effectively service the increased demand from both new and existing customers.
Our design and innovation emphasis along with our strength and the strengthening virtual and digital marketing services are helping us gain greater market share and both businesses.
We are winning additional placements of brick and mortar retail and and online e-commerce channels.
In addition to our positive momentum and sales and operating performance our cash flows and balance sheet also remains strong and we ended the quarter with $51 $8 million and total cash and investments with no outstanding debt.
While we are pleased with this cash position going into the fourth quarter of fiscal 2021. It is important to note that our cash will be affected by our strategic investments and working capital and and planned capital expenditures, which will be more robust during the fourth quarter.
In addition, our fourth quarter expenditures will include the recent acquisition of the remaining 50% ownership interest and our Haiti cut and sew operation.
These strategic investments are important for us to bolster our supply chains and of our efficiencies and preparation for and we expect will be of strong fiscal 2022.
We're also pleased to announce that our board of directors of reinstated our share repurchase program, which was previously suspended in the April 2020, due to pandemic related uncertainties.
While our primary focus with our capital allocation strategy remains of investments for organic growth and of course, maintaining our regular quarterly dividend. We do believe and it's important to have the ability to acquire shares and opportunistic price points.
Looking ahead, we are very optimistic regarding the ongoing strength of industry demand trends and we believe our business will continue with solid performance during the fourth quarter of fiscal 2021 and extending in the fiscal 2022.
We're also pleased with the recent of fourth quarter acquisition of the remaining 50% ownership interest and our Hayden from our mattress cover platform.
You have proven to be an ideal nearshore location for the growing business.
The benefit of the strategic investment comes from enhancing the capacity of this operation, which has always been set up as the pure manufacturing center. The supports our domestic sales growth and promote our fabric and sewn cover model.
We have of preferred supply chain for our mass discovers utilizing culp fabrics, and and onshore nearshore and offshore strategy.
When evaluating the expectations for the fourth quarter. It is critical to understand that the full impact of this year's shutdowns for the Chinese new year holiday effects of the entirely in the fourth quarter and compared to other years when the timing of the holiday of split between Q3 and Q4.
Sequentially as compared to our third quarter performance because of the significant pressure for upholstery fabrics, and we effectively lose three to four weeks of production and sales.
We do expect further near term pressures relating the foreign currency fluctuations and China as well as continued constraints and our customers' supply chain for farm and other non fabric components, which could delay of their scheduled delivery of our fabric orders.
We are learning of more potential from shortages for our customers and our furniture and mattresses and we understand this could temper the temporarily and mute some of our anticipated revenue growth and Q4.
Also while we're on the raw material and commodity costs have remained relatively stable through the first nine months of fiscal year.
We do expect some increase from these costs as well as increased freight cost to affect our businesses and the near term.
Notably we are announcing price increases in both divisions during the fourth quarter to help mitigate the ongoing pressures just mentioned.
Nevertheless, Nevertheless, we are confident and our ability to withstand these headwinds and we believe we will deliver solid results and the fourth quarter and preparation for a strong fiscal 2022 year.
We are especially excited by our mattress fabrics segment, which is expected to continue its strong rebound in Q4.
We are well positioned for growth and look forward. The opportunities ahead for both our business segments with continuing opportunities to capture market share.
I'll now turn the call over to Ken who will review the financial results for the quarter.
As mentioned earlier on the call we have posted slide presentations to our Investor Relations website that cover key performance measures. We have also posted our capital allocation strategy.
I also want to note that as a result of the sales a luxury during the fourth quarter of last year. The financial results for the whole necessity segment are excluded from the reported financial performance of our container and operations and presented as a discontinued operation and our consolidated financial statements.
Here of the financial highlights for the third quarter net sales were $79 3 million up 15, 8% compared with prior year period.
Both of it and it's had a strong sales performance for the quarter, you're able to go into more detail on divisional operating performance and a moment.
On a pre tax basis. The company reported income from continuing operations of $3 1 million, which included 1 million and other expense related mostly to foreign exchange rate fluctuations associated with our operations located in China compared with pretax income from continuing operations of $2 $7 million per the prior year period, which included.
$282000 and other expense.
Notably the foreign exchange charges included and the other expense line items for both the third quarter and the first nine months of this fiscal year are mostly non cash and are mostly offset by income tax deductible foreign exchange losses associated with our China operations.
The current quarter was affected by the unfavorable foreign exchange rate fluctuations I, just mentioned as well as higher SG&A expenses due primarily to increased incentive compensation costs offset somewhat by lower <unk> and marketing expenses, mostly associated with the upholstery fabrics segment.
On a percent of sales basis total SG&A came in at 12, 4% compared to 12, 9% for the same period a year ago net.
Net income from continuing operations was $2 1 million of 17 cents per diluted share for the third quarter compared with net income from continuing operations of 1 million or <unk> <unk> per diluted share for the prior year period.
The effective income tax rate for the third quarter of this fiscal year was 28, 8% compared with 60% for the same period a year ago.
The decrease and the company's effective income tax rate from the third quarter. This fiscal year is mostly due to income tax deductible foreign exchange losses associated with the operations in China.
Additionally, the 60% effective tax rate for the third quarter of the prior fiscal year was adversely affected by the global intangible low taxed income per guilty tax assessed on forward earnings for that quarter, which no longer applies due to an exemption under the U S. Treasury regulations enacted during our first quarter of this fiscal year.
As a reminder, the company's effective income tax rate is impacted over the fiscal year by the mix and timing of actual earnings from our U S operations and our foreign subsidiaries located in China, 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 for the fourth quarter will be in the 30% to 35% range based on the facts and we know today.
Trailing 12 months of adjusted EBITDA as of the end of the third quarter of this fiscal year was $11 $8 million of four 4% of sales.
Now, let's take a look at our business segments for the mattress fabrics segment sales were $38 6 million up 15, 1% compare of last year's third quarter.
Operating income for the quarter was $3 3 million compared with $1 8 million a year ago with operating income margin of eight 5% compared with five 3% of year ago and increase of 320 basis points.
Our improved operating performance of the third quarter, primarily reflect higher sales offset somewhat by unfavorable shy of foreign exchange rate fluctuations from mattress covers and our customer supply chain constraints, resulting from non fabric components.
For the upholstery fabrics segment sales for the third quarter of $40 7 million up 16, 4% over the prior year.
Operating income for the quarter was $3 9 million compared with $3 million a year ago with and operating income margin of nine 5% compared with eight 7% of year ago. Our improved operating performance of the third quarter, primarily reflects the significant increase in sales for our residential business and lower SG&A costs through the cost containment and.
The marketing and <unk> areas offset somewhat by unfavorable foreign exchange rate fluctuations and sales mix.
Here are the balance sheet highlights, we reported $51 8 million and total cash and investments and no outstanding borrowings as of the end of the third quarter up from $38 7 million net cash position as of the end of last fiscal year for.
For the first nine months of this fiscal year, we incurred $4 3 million of capital expenditures and spent $3 9 million a regular quarterly dividends.
We also generated cash flow from operations of $21 7 million and free cash flow of 17, $17 1 million for the first nine months of this fiscal year.
Compared with negative cash flow from operations of 519000, and negative free cash flow of $4 $7 million per the prior year period.
This year over year improvement reflects higher earnings and a focus of attention on working capital management. During the first nine months of this fiscal year.
While we are very pleased with our fortified balance sheet born out of the fourth quarter. It is important to note that our cash position will be affected by our strategic investments and working capital.
And capital expenditures and the acquisition of the remaining 50% ownership interest and our Haiti 80 cut and sew operations. During this period.
On March <unk> 2021, and the board of directors reinstate of the Companys share repurchase plan, which was previously suspended last April due to the economic uncertainty related to the COVID-19 pandemic.
The company did not repurchase any shares during the third for this fiscal year, leaving the full $5 million available under the share repurchase program of two approved by the board in March 2020.
With that I'll turn the call back over to Ed.
Thank you Ken let me start with the mattress fabrics business.
And we're very pleased by the strong growth and sales and operating performance for the mattress fabrics segment during the third quarter, which is historically, our most challenging quarter due to seasonality within the mattress industry and holiday shutdowns and certain of our locations.
And our significant increase in sales, 15% year over year compared to the prior year period was driven by and ongoing consumer focused on the at home experience.
And we also benefited from market share gains across the diversified group of new and existing customers.
The strength and flexibility of our global manufacturing and sourcing operations and the United States, Canada, Haiti, Asia, and Turkey and.
Enabled us to support current demand and serve the needs of our mattress fabric and cover customers.
In addition, we believe the domestic mattress industry and in turn our business began to realize some benefits during the quarter from the preliminary anti dumping duties and pellets in October 2020 by the U S Department of Commerce on mattress imports from seven countries.
And are cautiously optimistic that this tailwind will continue during the fourth quarter of fiscal 2021 and beyond.
We remain especially pleased with the growth and our sewn mattress cover business and the ongoing consumer acceptance of the box spending trend and both e-commerce and traditional retail outlets.
We continue to work collaboratively with new and existing customers to develop fresh and innovative products utilizing our fabric to cover of expertise.
We are also excited about our recent strategic investment to acquire the remaining 50% ownership interest and our sewn mattress cover joint venture and Haiti.
Which was completed at the beginning of the fiscal 2021 and fourth quarter.
And again full ownership of the Hany platform, we increased our flexibility and enhance our capacity to meet growing customer demand, while also maintaining certain commitments to our previous joint venture partner through the supply agreement.
As we look to the fourth quarter and beyond we are excited about our enhanced digital contact management platform, which allows us to work with customers from concept ideation and three D mapping to product lifestyle, the cycle management and final merchandising.
And the digital and competencies to support our FERC and design capabilities exceptional service and speed the market.
We also remain focused on developed developments and product innovation, including expanding our specialty finished options.
Finally, our increased fiber capacity and North America, resulting from our investment and additional equipment will also be available during the fourth quarter further enhancing our ability to meet the rapidly changing needs of our customers.
By and additional shutdowns or greater than expected disruption and our customers' supply chain for raw materials other than fabric.
We believe we are well positioned to increase market share during the fourth quarter of fiscal 2021.
We have a compelling business model supported by innovative products creative designs and dedicated service and and efficient global platform.
Now I'll turn to the upholstery fabrics segment.
We were especially encouraged by the better than expected growth and our upholstery fabrics sales for the third quarter, 16% year over year.
This growth reflects the significant increase from our residential business compared to the prior year period, partially offset by lower sales from our hospitality business, which remained under some pressure through the pandemic related disruptions the continued to affect the travel and leisure industries.
The increased demand and our residential upholstery fabrics business was fueled by strong consumer focus on the home.
We also benefited from the success of our product innovation strategy, including the continued popularity of our lip smart product portfolio, which has remained aligned with consumer preferences by focusing on cleanability ease of maintenance sustainability and anti microbial technology.
And in addition to our lives smart flagship brand, we now have lift smart evolve lift smart outdoor and led smart ultra fabric lines and we recently launched <unk> smart barrier, plus which features enhanced moisture protection and and Cleanability is another offering and our lives smart brand evolution.
These lift smart performance fabrics are important drivers of our growth and the residential business.
Our residential business also continued to benefit from a robust platform and Asia, including our expanded cut and sew capabilities and Vietnam and are stable long term supplier relationships.
The strength and flexibility of this platform allowed us to respond quickly to meet increased demand from our customers and grow our market share.
The backlog and our residential upholstery business remains historically strong reflect reflecting the favorable demand trends for this business.
Looking ahead and as mentioned the full impact of shutdown for the Chinese new year holiday within the month of February <unk> calls from extensive pressure.
We do expect the solid performance from our residential upholstery business to continue.
Of course, absent additional pandemic related shutdowns or material disruption and our customer supply chain.
And we are confident and our ability to meet the demand.
And we are also cautiously optimistic that the vaccine Rollouts continue pent up demand for travel and leisure activities will ultimately benefit our hospitality business, although the timing of this return still remains somewhat uncertain.
Ken will now discuss the general outlook for the fourth quarter of this fiscal year and we will then take some questions.
Although subject to uncertainties related to Covid, 19, pandemic and potential disruption and our customer supply chains. We are encouraged by the execution of our proud of driven strategy and continued strength and demand for home furnishing products as well as opportunity for market share growth, we expect sales and operating income for the fourth quarter this fiscal year to be.
Dramatically improved compared to the prior year period, the fourth quarter of last year was materially affected by global shutdowns related to the COVID-19 pandemic.
We expect our net sales for the fourth quarter, the approximately 40% higher compared to the prior year period with the increase with increase and mattress fabric sales expected to be moderately higher than this percentage and the increase and upholstery fabrics. There is expected to be moderately lower and this percentage.
Notably as Ed mentioned earlier operating performance of the upholstery fabric segment has been affected by the timing of holiday shutdowns for the Chinese new year holiday, which voluntarily and the company's fourth quarter. Recognizing this impact consolidated operating income of <unk> is expected to be and the range of $1 2 million of $1 70 and for the fourth quarter.
This compares to 18 million operating loss from continuing operations for the fourth quarter of last fiscal year, which included $13 7 million and asset impairment charges exclude.
Excluding these charges adjusted operating loss from continued operations for fourth quarter of last fiscal year was $4 3 million.
Based on our current expectations, including the four main investment and additional net machines for our mattress fabrics business the <unk>.
Mentioned on previous calls.
Capital expenditures for this business the fiscal this fiscal year together with the recently completed fourth quarter investment and our Haiti operations are.
Now expect to be and the 9 million of the 10 made of range.
Depreciation and amortization is expected to be approximately $7 5 million and this fiscal year.
With that and we'll now take your questions.
Thank you and ladies and gentlemen to ask a question and that is star one on your telephone keypad. Please note that if you're on a speakerphone pick up your handset or de press. Your mute function. So that we can hear your question again that is star one on your telephone keypad and we'll go first to Budd sketch of water Tower research.
<unk>.
Okay.
Good morning, Ken and good morning.
Gradually during the quarter ruling.
And the navigation can you hear me okay.
Yes, Sir and good morning, and.
And more of it in the morning.
And congratulations to you and your team for navigating during the slow.
Unusual pandemic from.
Terrific job.
Of course of obviously my first of all of it and I'm sure you're sort of the with families and the team members and stay well and ultimately get vaccinated.
And then you've addressed a lot of it's going well the script and I just want you to go maybe of.
And for me I'm getting some questions on the seasonality difference this year versus last year, and maybe the year before which is maybe the more selling and comparison between the third quarter and the fourth quarter is can you kind of put it and framing as to what's most important is the Chinese new year, though the most of.
The bringing of poultry the most impacted because you've also got the issue was weather affecting the farmers and.
And in.
And the middle part of the country, you've got the antidumping, which seems to actually have lowered the amount of of.
And the import so far so of the whole lot of docs that are going on and maybe you can connect with the puts and the relative rank order force.
Yes, Thank you Bob.
Good very good questions and I would first start and thank you for recognizing.
Our people our associates are just extraordinary efforts and.
I mean, everyone started some of these times just unprecedented times, we can't be more grateful for the efforts of Brazilians can ask these how do you want to say that our people have.
Demonstrated during this period, we're very proud very proud to be where we are and what.
And would not have been possible without everyone's effort. So thanks for recognizing that the current means a lot.
Looking at the comparison to Q3 and Q4.
First of all of both quarters are significantly better than last year. So whatever that's worth we're very happy with that and then you're picking up on a lot of the really good points, it's not a fair or.
Even on the appropriate of comparison from look at Q4 sequentially. The Q3 and to your question of blank and nodes and as we mentioned in the script the.
All of the facts of the Chinese new year shutdowns impacted culp upholstery fabrics fully in the fourth quarter really mainly in February.
The impact of the fourth quarter, mainly in February.
Cash like this we can lose three to four weeks of production and sales and one quarter.
And when we've seen that from previous years, it's not really abnormal.
And it's better for us from the Chinese new year timing spreads over Q3, and Q4 as opposed to hit them all in one quarter.
And also generally speaking this is really in all of Culp upholstery fabric impact with Paul and fashions that we expected to be consistent sequentially.
They are also often factors and I would say today that that's the number one factor of the Chinese new year timing, but there also are some other things pressures from Q4 of course, we're watching the currency close and we'll be able to that.
And with our price adjustments and now raw material allocation, primarily from as you mentioned you can mute our sales somewhat in Q4, we think we've built some of that and but we would have to be aware, if thats more significant than than you might think.
All of that being said, our belief and expectation is for a really solid Q4, and a strong start to fiscal year 'twenty. Two so we're excited about the business and kind of about the market share growth.
Thank you for the egg.
And then just.
Just last week, it's pretty much of a February event for Chinese new year, that's pretty much over and.
And we don't see any effectiveness for next year right now of acceptance when we get to the third and fourth quarter again, we have to.
Figure out where Chinese new warheads, and Thats the way to look at it yes, that's right.
And that's what I thought I mean that we are starting to see the mills, we don't take nearly as long of the Chinese new year shutdown and some of our supplier and partner Mills do so they're all starting to come back on stream. This week. So yeah, that's pretty much of February event.
For us right.
And your balance sheet is impressive at the end of the quarter with over $50 billion of liquidity and no.
No debt.
Kevin you talked about the fact that you've got.
And it looks like about $6 million.
And $5 million to $6 million book of Capex that youre going to spend and the fourth quarter of that so is it.
Right so the expected.
But yes, the caveat, but capex and the investment in Haiti.
Okay, and then you've got the interest rate and that will show up on of Chocolate line right the ship and acquisition line.
Pardon.
The.
And with the Haiti acquisition will show up on a separate line on the cash flow, yes, yes, yes, yes.
Yes, we're working all of that App, and yes that will be handled but I just wanted to make sure that everybody do and addition to our Capex, we had that debt debt investment as well.
Can you Peg, where you think cash winds up at the end of the fourth quarter of Wearables and what do you think it will be at the end of the fiscal year.
Yes, but that's of great question.
And we don't guide debt, but I will say, obviously based on our investments and the fourth quarter and we're going to we're going to use of some of that cash that we ended the third quarter with and that's what we've always strive for the build our cash position.
The strong enough to be able to react to investments.
Either and Thats the practice of our opportunities.
Things down the road of acquisitions of whatever so I think we will use of cash and in the fourth quarter, but we will still be.
B and a strong position as we go into FY 'twenty two it's just.
We've got these investments to get behind us but.
We will be we feel very good about our prospects and where our cash position will be at year end.
And for next year do we need the similar amount of cash capital expenditures of what was.
And what is and what's your best guess today I know you can change that and opportunities will happen, but is there any number that we can model and for Capex for next year.
Yes, we what we do if there is if there is considered the kind of a normal.
What we call maintenance Capex year, which we feel is and the $5 million to $7 million range. That's what we would say.
And a year, where where there is no either additional opportunities for more equipment or investment of whatever so I would say that in a normal maintenance maintenance mode, We would say $5 million to $7 million per capex.
But we're getting and 15 knit machines and that's the that's the big bump this year right and we don't do we have more room from lower cats more debt.
Change next year, if we need them.
Well the CSR budgets and we do have we do have space allocated.
It's easy for us to expand the capacity and several locations and whether we decide to do it will be determined but I do think for all of the things I've watched Ken worry of worry about cash balance does not been ones and worried about I know, where we feel in a good position there and from our asset.
And we feel great you have the ability to do more strategic things if we decide to do them right. So so we like our position.
We think we've done a lot and we think we're in great position, but if opportunities present themselves, we'll be able to take advantage of them.
And am I right churn that we've seen a little bit of stretch out in terms of engaged sales of book.
All of our receivables.
Yes, we have.
Great.
Our dsos or day sales outstanding and they are lower than they were obviously at the end of last year, but they have.
Have moved up a little bit from from Q2, and and that's mainly just due to our customers.
The paint on net terms.
I will say that we have been very pleased with our customers' pain.
We've done very well with our with our customers paying as they agreed to pay and of course, that's been reflected and our cash position and our credit team does a great job working with our customers and we've been we've done very well there and thats been a real strength to our cash position is timing of receipts for shredder that's correct.
Yes.
And it really well over the last couple of years led smart.
<unk> was a.
Really good innovation I think you've extended that would flow of number of other programs and now all of the part of Michelle is.
Really become a more important part of mattress.
Is there anything else on cap the weekend that you can tell us now I realize some of that may be competitive, but what sort of the SAP now and what are you most excited about.
Yeah. Good good question Tyler.
And you hit on a couple of really good ones.
Right for us and innovation and design of our critical pieces and I believe we are flourishing and both businesses.
The set and upholstery.
We were thrilled the success of low smart and <unk>.
Now thats cleaner more sustainable with anthem, a couple of protection for the fabric and we of waterproof options. So that list Mark portfolio is really on trend with consumers' demand for performance fabrics.
On the mattress side, we do also asks and specialty finishes and development and we are.
And we're excited about the strong cover platform.
And it just gives us that helps us innovate from fabric to cover and so we're not just stuck to the fab and suddenly more and we get a greater content share of a fee.
Finished mattress.
And.
The new things we're excited about.
There is definitely going to be of more technical story of push of four antimicrobial fabrics and we believe the much stronger push and system the ability.
No thats going to be a major focus post pandemic.
Also think both business and from another.
Other way of thinking of innovation, we're really pleased with our digital and virtual presentation capabilities.
The second pay big dividends and help them streamline and and then from new business.
And then I think it's worth saying I'm, probably getting a little outside of your question here, but really excited about the diversity of our customer base.
Net of more more solid more diverse customer base and patent awhile and both businesses from high and the low end from traditional e-commerce from an import to domestic and and of course from fabric to sewn cover our son of upholstery.
And then just one more thing we are optimistic about lead window and the hospitality business as the world gets better and we know the business has some room to recover so all.
And all of that I'm excited about a lot of things, but certainly very excited about our future.
Oh, okay.
The number that much of your flight and you've got allowing the play right now.
Last from me the easy questions on tax and currency.
You've given us a tax effect.
And any cash taxes of general argue of what's the what's the cash impact of what you're paying and and how long of its currency thing.
And we think it's going to be in the fourth quarter.
If rates stay where they are and what do you see for the fourth quarter.
Well, let me, let me talk about cash taxes first and me right now obviously, we're paying the cash taxes in Canada and China.
And we pay very little cash tax and the U S.
A very small amount and thats and.
That's really for the for.
For the foreseeable future of the way.
The way we were of structure.
As far as.
Foreign exchange.
We have seen a little bit of weakening and the RMB This past month.
Not a lot, but it certainly has slowed down so if if if that stays calm or stable throughout the quarter, then and the.
The effects really around the world will be far less than they were and the first nine months. So we're hoping that's the case so far so good with one month end of the quarter, almost and it's been pretty calm, but it all depends on where that rate moves.
For the next few months.
And as all of the currency RMB or is there of the Canadian dollar and.
And from each currency.
Currency impacts of <unk>.
Elsewhere, and albeit in the knees right now, but yes, Canadian we do have Canadian exposure, but not nearly to the extent and we have the RMB exposure.
Okay, Alright, well that does that for me and thank you and good luck for the for the quarter and sort of the beginning of next year.
Thank you Pat and thanks Laura.
Our next question will come from Marco Rodriguez of Sterne came.
Capital markets.
Good morning, everybody. Thank you for taking my questions.
One of the marker and ongoing.
I was wondering if maybe you guys can distinguish a little bit more time and.
And for some more color around some of the.
I guess supply chain constraints that your customers are kind of seen and I know that you had mentioned the form delays raw material inflations.
Can you just maybe.
Sort of a rank out where you're seeing the biggest constraint and anything else you might be seeing and if at all possible.
And you are kind of sharing in terms of and win those.
The constraints might be walks through the if you will.
Yes. Thank you Mark of the Zev I'll give you of my feedback on that and we certainly are not experts on.
Supply chain is outside of fabric and we understand our fabless supply chain as well, but there are some some external things that impact our customers that are going on and we're trying to learn every day and getting different opinions about that really throughout the day back a little bit throughout COVID-19, there has been the lift in the business.
First several quarters and I mean, we havent been perfect for sure, but generally are all of our supply of platforms have been really stable and we have Matt.
Most of the demand put in front of us. So we haven't seen really any shortage of material for our production. Yes. There are now from price raw material price increases were hearing about comment on yarns, we're hedged on that so far we're here and on that come in on freight.
And so thats why we are going to have to implement from some price increases in both businesses and Q4, but what we're thinking about and what maybe you're hearing about more is there have been over the quarter.
Shortages for our customers of different components, they use to build furniture and mattresses and I guess the most topical one now today is after the <unk>.
As already of pressure on the supply chain because of the expanded need and demand and then with the the.
The the freeze of the power grid, and Texas that have shut down the vast majority of chemical production that would feed and the phone and.
That's just causing some concern for supply of or what I think the relatively short term, but whether it's two to three weeks or four to six weeks of six to eight weeks I think it's still to be determined so the hearing customers with different level of allocation amount.
And.
Obviously, we're ready to ship and fabric, but if they can't get the other components to make the furniture and mattresses and which ones of town. We think we have built into our Q4 and we've already estimated that to some degree, but we just have to watch that and see.
As it impacts us more but we do take the short term I don't think of anything and the extent certainly not beyond Q4, and our opinion, but again I'm not an expert on that and just.
The short term impact we got to watch.
Got it and.
You mentioned net.
You are going to push through price increases.
Im assuming thats Youre, obviously, both segments can.
Can you just kind of come from has that price increase already long story.
Those have all.
The and announced now and in process or have been announced.
So and our upholstery business the.
And the price increases will be on written orders new written order of not on orders that have already been received and on the <unk>.
Mattress fabric side of it will be on or and shippable orders and a future date.
The business or is this different from that way, but they are both being announced and the and will take effect and the fourth quarter.
Got it understood.
And then kind of shifting gears.
Prepared remarks, and you mentioned market share gains.
It out.
A few different reasons.
And the kind of helping you guys and attain those gains.
And maybe maybe you can ranked and in regard to kind of of what Youre seeing the most success right now.
Okay, Yes.
Thank you Mark and good.
Question, and we're trying to put some color around it.
And while we see it.
So I think first and Thats, probably isn't the most important today, but it has been and over the last six months win and market share because of the having strong stable supply chain, we are outperforming and delivering product and we have a great global model and both businesses.
And I'd say, the the higher lengthening and now today is our innovation and design are flourishing and this isn't just a nice patterns and.
Pretty colors, but its performance so the talking about with with smart portfolio and further development with sewn covers and both businesses.
That's probably top of list today, and then right under that as we just have a very broad range of customers now and bus businesses.
Definitely more robust from years past, that's more actual customers and its more channels and our product is going into.
So we're seeing our products play.
Yes.
The new National and Rollouts for 2021 or if it's.
People roll and our products and the.
Areas, where supply has been avoided and.
We just have great belief that our market share trends going to continue and Q4 and also in 2022.
And the extent.
And then you guys and the path of had mentioned.
And when you do the wall in this call, but the <unk>.
Consumers really kind of focused on comforting, the home and and that sort of helping drive some of the level of demand and you guys see here recently.
With the vaccine and starting to kind of get rolled out here and.
And then a possible return to normalcy from time by maybe fall and winter of later this year.
And how you guys kind of thinking about how consumer demand might evolve.
Yes, and it's also a good question Mark on and certainly you are totally right and everyone in our space and has talked about the lift we've had.
From this strong and puts us on home being the safe place.
And and wanting to update your home is guaranteed and going to entertain more on your home and we have definitely seen the trend of consumers wanting to update that.
I think we look at it and you know our business is always kind of thinking about.
The options for what's coming at us and the.
The really good positivity for us as we think of have we have a strong backlog and our upholstery business, which is which was great.
We know we're winning market share, we see ourselves pricing non new rollouts.
Travel and leisure and gets more popular we're poised to capitalize on that with.
And our read window and hospitality.
The expectations that Amit.
And we assume more stimulus will be coming into the market. So.
And that's going to provide I think more opportunities for us to share.
<unk> products and then.
Again, a more diverse customer base and have the more customers to sell through of the very very positive trends. So I think it's important for of using our market.
We've been the definitely been buoyed by the strong demand for homes, but there is much more under the surface of that that's going to drive our business next year.
And it's much more fundamental of the fundamentals of the business are strong.
So really whatever and he knows whats coming and I do what are the effects of what we face and who knows what will face and the future but.
And we're excited about the prospects we have.
And the stick and thanks, guys I really appreciate your time.
Thanks Marco.
And again, just as a reminder of that is star one if you'd like to ask a question. We will now go to Anthony and the next day.
Sidoti and company.
And good morning, and thank you for taking the questions. So.
Firstly I just wanted to follow up as far as the backlog is concerned and so the way that you can move the.
Talk about the strength of that backlog, maybe perhaps quantify what youre seeing there with the backlog.
Yes, Sir Anthony I'm going to this day of and I'm going to because of the supply of Bell first failures with the businesses are different and that way and our upholstery segment of the board will touch on and we do get written orders that generate the strong backlog on a macro side with the on more and our forecast model and so we are building two of forecast it seems very.
Strong and I'll, let Laura talked publicly on the backlog and the debt motor side of the upholstery segment.
Yes Anthony.
The backlog position still remains today at significantly higher levels than it and at this point last year.
Really seen that remain somewhat consistent over the last couple of quarters with the.
Backlog well above the.
Prior year levels in.
Incoming orders continue to outpace.
Of the same period last year as well so.
We still see strength from both the standpoint of.
Very good backlogs and.
And the the pace of orders coming in so that seems to have stayed.
We're at a steady I think it's supports as well for the coming quarters.
So that seems to be weighted position.
Got it okay and thank you for that and then.
Far as the of price increases that you are looking to put in place to offset higher costs and windows.
And we offset the higher costs, so will there be some lag.
And by the time, you were able to capture the higher prices.
Yes, Sir Anthony and I think mostly so yes, we're doing that with an expectation of what we think is going to cover it.
And Paul Yes, Anthony this is Ken we've looked at all of the different components and each division is different it's not a it's not a global type same. So each division has looked at there is the facts and circumstances.
And adjusted the prices of accordingly.
Got it thank you very much and then.
You talked about the being excited about the diversity of your customer base.
Just wondering if and when you look at the leasing results here can you talk about the sales increase and the you'd capture just just wanted to see if you can bifurcate the choice growth from new customers versus existing customers and give us some more color about the.
Yeah, I think a lot of that spin and Anthony from our growth and our some of mattress cover business and so for a long time do kind of really good success of being.
The reliable <unk>.
Innovative fabrics supplier and we always sold to furniture manufacturers and we've done that for a long time.
Maybe specifically and the dining business first.
And if theres been more e-commerce brands that have started up we just our platform.
The U S Navy Asia platform combined with our ability to design fabric of cover and innovate is gaining of traction with a lot of the new upstart brands. So the fastest growing part of our business is mattress covers but the reason, it's hard to kind of bifurcated because and offer pull through fabrics.
Yes.
The terrific model for our mattress business to be pulling through.
So <unk>.
Certainly mattress covers are growing and.
The comment of significant part of the business, but it also gives them the fabric. So I may not be answering the question and we can you can talk about from a lot more detail on there, but on the upholstery side.
Okay.
And as we know how to so the amount of service big customers. Because we just have a good supply chain and we can service high demand, but we're now pushing and we're pushing and seeing more broad categories from promotional and the high end.
<unk> share also of e-commerce furniture brands. So it just it feels like we have more channels and both businesses.
The push our fabric suite and our covers two of which is the.
And the partner for both sides and the hospitality business is all the fall and then.
And of course, the hospitality business as a whole another.
And we do our upholstery business.
And we feel good about one of that business can be sometime in the fiscal year 2020. Two weeks, we think travel and leisure will come back and will come back strong.
Got it okay. Thanks for that and then last question from me. So I know you are stepping up your investments thus.
And as far as your Capex and the <unk> joint venture, but one of the trend looking into fiscal 'twenty and beyond hygiene and prioritize your cash flow priorities.
Yes. This is Ken I think as we've done in the past we.
And we actually posted our capital allocation strategy right on the website the give investors a view of exactly what we're thinking.
Our primary purpose, we're going to invest and are in our business to grow organically and through working capital through Capex and we also view the obviously staying debt free.
And as long as we can and then of course, keeping the regular dividend in place and growing at a at a consistent pace. So those are our highest priority of the capital allocation and thats really any year.
Debt when you look at so I would say that as we go into the new year.
That would be our focus.
Like it was this year would be focus next year.
Got it okay, well, thank you very much of us the book.
Thank you Anthony.
And with that we had no other questions I'd like to turn the call back to our presenters for any additional or closing comments.
Thank you operator, and again, thanks to everyone for your participation and your interest in Culp.
We certainly look forward to updating you on our progress next quarter.
Good day.
And with that ladies and gentlemen that does conclude today's call we'd like to thank you again for your participation you may now disconnect.
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