Q1 2022 Culp Inc Earnings Call

September 2, 2021

[music].

Good morning, and welcome to the Culp, Inc. First quarter 2022 earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to drew Anderson. Please go ahead.

Thank you good morning, and welcome to the Culp Conference call to review the company's results for the first quarter of fiscal 2022.

As we start let me state that this morning's call will contain forward looking statements about the business financial condition and prospects of the company.

Forward looking statements are statements that include projections expectations or beliefs about future events or results or otherwise are not statements of historical fact.

The actual performance of the company could differ materially from that indicated by the forward looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q.

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 and.

In addition, during this call the company will be discussing non-GAAP financial measurements.

Reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included in the tables to the press release included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at Culp Dot com.

A slide presentation with supporting summary financial information is also available on the company's website as part of the webcast of today's call.

With that I will now turn the call over to <unk> Kaul, President and Chief Executive Officer of Culp. Please go ahead Sir.

Good morning, and thank you for joining us today.

I'd like to welcome you to the Culp quarterly conference call with analysts and investors.

With me on the call today are Ken bowling, our Chief Financial Officer, and Boyd Chumbley President of our upholstery fabrics business.

I'll begin the call today with some opening comments and Ken will then review the financial results for the quarter.

I will then update you on the strategic actions in each of our operating segments and after that Ken will review, our second quarter and fiscal 2022 full year business outlook.

We will then be happy to take your questions.

For the first quarter, we are very pleased to report a solid start to fiscal 2022 with overall sales and operating income in line with expectations.

And sales, reaching their highest first quarter level since fiscal 2003.

Our results reflect strong top line growth driven by higher demand for both our mattress and residential upholstery fabric products.

And each of our businesses, we executed our product driven strategy with a continued emphasis on design creativity and innovation.

We also benefited from our expanded market reach and the continued resilience of our flexible global platform.

Despite supply chain disruption and pressures on profitability, we are passionately dedicated to servicing the needs of our customers in both of our divisions have excelled and using our robust platform and long term supply relationships to make sure that we meet our customer commitments.

We believe this is an advantage for coal as customer service is more important than ever in the face of supply chain disruption.

While we are optimistic about the ongoing strength of our sales trends we.

We do continue to navigate headwinds relating to rising freight and raw material costs labor shortages, our customer supply chain constraints for non fiber components and other pandemic related challenges.

Our previously implemented price increases for both of our businesses did help to offset certain inflationary pressures and foreign currency fluctuations to some extent during the first quarter.

But with great raw material and labor costs continuing to rise. We are now taking further pricing action via surcharges in both businesses during the second quarter to assist in covering these rapidly increasing costs.

Despite these challenges we continue to invest in our business and expand our capacity.

With our diversified manufacturing and sourcing capabilities, along with our innovative products and digital design strategies, we expect to have additional opportunities to capture market share with new and existing customers.

We are also excited about the September opening of our new innovation campus in downtown High point, North Carolina, which will bring together, our most innovative and creative minds and foster collaboration among our businesses.

We believe this will be a transformative space for call and allow us to share best ideas across our divisions and better showcase our full expansive product lines to our customers.

Importantly, we have the financial strength to support our business in the current environment.

And we believe we are well positioned for continued growth as market conditions evolve.

We also remain grateful for the extraordinary efforts and resilience of our associates all around the world.

We are extremely proud of their hard work that our adaptability and their dedication in the face of ongoing challenges.

I will now now I'll turn the call over to Ken who will review the financial results for the quarter. Thanks, Steve 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 here.

Here are the financial highlights for the first quarter net sales were $83 million up 29% compared to the prior year period.

David will go into more detail on divisional operations in a moment. The company reported income from operations of $6.0 million up 76% compared with income from operations of $10.0 million for the prior year period.

Net income for the first quarter was $5.0 million or <unk> 18 per diluted share compared with a net loss of $9.0 million or 22 per diluted share for the prior year period, which included a $10.0 million noncash net income tax charge. Excluding this income tax charge non-GAAP adjusted net income.

For the first quarter of last year was $1 million or <unk> <unk> per diluted share.

The current quarter reflected an impressive sales performance for both divisions, but our overall operating performance was affected by several headwinds.

Namely higher freight and raw material costs labor shortages and unfavorable foreign exchange rate fluctuations among other factors.

I'll comment on divisional performance in a moment.

Trailing 12 months, adjusted EBITDA was $20 million or six 3% of net sales compared with $12 million or four 8% of net sales for the same period last year, reflecting a year over year improvement of 66%.

Consolidated return on capital for the trailing 12 month period was 15, 5%.

The effective income tax rate for the first quarter of this fiscal year was 28, 7% compared with 283, 7% for the same period a year ago.

Our effective income tax rate during the first quarter of this fiscal year was affected by the mix of taxable income that is mostly earned by our foreign operations located in China and Canada.

Each have higher income tax rates in the U S.

Income tax expense during the first quarter of last fiscal year was significantly higher than the current quarter because of the $10.0 million net income tax charge I mentioned earlier.

Looking ahead to the rest of this fiscal year. We currently estimate that our consolidated effective income tax rate for the second quarter will be approximately 30%.

Based on the facts, we know today.

Additionally, we are currently projecting cash income tax payments of approximately $6.0 million for fiscal 2022.

And importantly, our estimated cash income tax payments for this fiscal year, our management's current projections only and can be affected over the year by actual earnings from our foreign subsidiaries located in China, and Canada, Haiti versus annual projections.

As well as changes in foreign exchange rates associated with our China operations in relation to the U S dollar.

Now, let's take a look at our business segments.

For the mattress fabrics segment sales for the <unk>.

First quarter were $44.0 million up 19% compared with last year's first quarter, which was impacted by the COVID-19 pandemic.

Operating income for the quarter was $9.0 million compared with operating income of $9.0 million a year ago with an operating income margin for the quarter of eight 4% compared with five 1% a year ago, an increase of 330 basis points.

Our improved operating performance for the first quarter as compared to the first quarter of last year, primarily reflects a solid increase in sales somewhat offset by increased raw material prices freight cost unfavorable foreign foreign currency fluctuations in Canada and China.

And inefficiencies due to labor shortages in the U S and Canada.

As compared to the fourth quarter of last years, five 3% operating income margin our improved operating performance, primarily driven by a favorable product mix and the price increase implemented during the first quarter to help cover expected inflationary pressures.

But our results were further affected by operating inefficiencies due to labor shortages and additional increases in freight and raw material costs, particularly during the second half of the quarter.

We are implementing a surcharge during the second quarter to help offset these pressures.

We're also continuously working to control cost.

Notably the surcharge the surcharge will not take effect until midway through the quarter, resulting in a temporary cost price lag that will affect our operating performance during the period.

Return on capital for the trailing 12 month period for mattress fabrics was 19, 6%.

For our policy fabrics segment sales for the first quarter were $40 million up 41% over the prior year, which was impacted by the COVID-19 pandemic.

Operating income for the quarter was $5.0 million compared with $3.0 million a year ago with an operating income margin of five 7% compared with $10 seven 5% a year ago, a decrease of 180 basis points.

Despite our topline growth operating performance for the first quarter as compared to the first quarter of last year and also compared to the fourth quarter of last year seven 2% operating income margin.

It was negatively affected by the dramatic increase in freight costs and by lower sales in our read windows products business as well as startup cost in our new Haiti facility or.

Our operating performance as compared to the first quarter of last year was also pressured by foreign currency fluctuations in China.

Notably our previously implemented price increase has helped offset foreign currency exchange rate fluctuations to some extent as intended but we.

We are implementing an additional freight surcharges during the second quarter to help cover the continued rise in freight cost.

We also began to see growing project backlog and our read window products business during the first quarter.

Given the typically longer term timeframe for project installations, which can often range was six to nine months. There is a temporary lag between the impact of the pandemic related disruption and improved results for this business.

Return on capital for the trailing 12 month period for the upholstery fabric segment was an impressive 74, 3%.

Here are the balance sheet highlights, we reported 44 million and total cash and investments and no outstanding borrowings as of the end of the quarter compared with $51.0 million and total cash and investments and no outstanding debt at the end of the prior year period.

We generated cash flow from operations of $7.0 million and negative free cash flow was 782000 for the first three months of the year.

Compared with cash flow from operations of $16.0 million of free cash flow of $10 million for the same period last year.

As we continue to invest in our business, our cash flow from operations and free cash flow. During the first quarter were affected by increased inventory purchases due to higher sales.

Capital expenditures, including expenditures for machinery equipment, and it investments as well as expenditures related to our new innovation campus.

Incentive bonus.

Incentive bonus compensation and payments for the new building lease associated with our Haiti.

Haiti upholstery Fetsko operation.

During the first quarter, we invested $7.0 million in the business through capital expenditures and payments associated with our new building lease in Haiti.

We paid $5.0 million in regular 40 dividends and spent 723000 on share repurchases.

While we are very pleased with our solid balance sheet going into the second quarter. It is important to note that we will continue to utilize our cash for strategic investments in working capital planned capital expenditures and investments in Haiti with a significant portion of that spending taking place during the second quarter the.

The company repurchased approximately 49000 shares of common stock during the first quarter of the year and repurchased approximately 48000 additional shares through August 31.

Leaving approximately $9.0 million available under our current share repurchase program with that I'll turn the call back over to you.

Thank you Ken I will begin with the mattress fabrics business.

We were encouraged by the strong level of sales for this business during the first quarter, our topline performance up 19% compared to last year and up 11% compared to the pre print pre pandemic first quarter of fiscal 2020.

Was driven by the continued strength of our product offerings and was supplemented by the price increase implemented during the first quarter to help offset certain inflationary pressures.

Additionally, demand trends for the sewn mattress covers remained strong and our onshore near shore and offshore supply chain strategy as well as our fabric to cover model continued to provide a preferred platform that gives customers the agility and value they need for their business.

As we look ahead, we expect that current inflationary conditions labor shortages and other near term headwinds will continue to impact the mattress fabrics business during fiscal 2022.

So we are confident in our ability to navigate these challenges.

As mentioned earlier, we are adding a surcharge during the second quarter to help offset inflationary more inflationary pressures, while also working diligently to control costs.

Is demand is demand trends remained strong we believe this business is well positioned for the long term.

We have the supply chain to continue meeting our customer commitments and we expect to continue increasing our operating income margin towards the end of the fiscal year as we benefit from innovative products creative designs digital marketing strategies pricing actions and eventual mitigation of costs.

Now I'll turn to the upholstery fabrics segment.

We were pleased by the continued strong growth in sales for this business as well during the first quarter.

41% compared with the prior year period, and up 26% compared with a pre pandemic first quarter of fiscal 2020.

The growth the growth in upholstery fabrics was driven by a significant increase in our residential business compared to last year and was also supplemented by a price increase that was effective during the quarter.

We continued to benefit from growth in our market reach the flexibility of our Asian platform and the success of our product innovation strategy, including the ongoing popularity of our lives smart portfolio of products.

We are especially encouraged by popular lift smart evolved products, which offer both performance and sustainability.

We believe the consumer desire for products with our sustainability focus will only gain more traction as we move beyond the COVID-19 pandemic.

However, our hospitality business, particularly read window products remained under significant pressure in the first quarter from the ongoing COVID-19 disruption that continues to affect the travel and leisure industry.

Looking ahead, we remain encouraged by the strong backlog in our residential upholstery business, reflecting continued favorable demand and attraction to our innovative product.

We are also pleased to begin seeing some rebound in demand for hospitality fabrics and.

And we have built our largest project backlog since the beginning of fiscal 2019 and read window products.

As Ken mentioned the timeframe for project installations in this business can range from six to nine months. So there is an expected lag between the backlog and the corresponding results.

We do expect that near term headwinds, including rising freight and labor costs customer supply chain constraints and ongoing pandemic related disruptions such as quarantine and shutdown requirements currently affecting our sourcing partners and Vietnam.

May temporarily pressure, our upholstery business during the year.

However, with our flexible Asian platform and the upcoming addition of our new Haiti platform as well as our long term supplier relationships and our product driven strategy. We are very confident in our ability to navigate these challenges.

We believe we are well positioned to sustain and enhance our competitive advantage over the long term.

We continue to deliver innovative products that meet the needs of our customers.

I'll now turn back to Ken to discuss the general outlook for the second quarter and fiscal 'twenty two full year and we will then take some questions.

Although subject to uncertainties, we are encouraged by the execution of our product driven strategy and the resilience of our global platform as well as our expanding market reached the financial outlook. We are providing for the second quarter of this fiscal year as a sequential comparison to the first quarter rather than a comparisons with prior year period due to the current inflationary.

<unk> and volatility that were not present during the prior year period we.

We expect our sales and consolidated operating income income for the second quarter of this fiscal year to be comparable to the first quarter of this fiscal year with an expected consistent performance for our mattress fabrics business and an expected improvement in operating margins for our prostate fabrics business.

For the full fiscal year, we expect net sales to continue to increase moderately with the projected increase between 8% to 12%.

And consolidated operating income to increase significantly with a projected increase between 20% to 25% in each case as compared to last fiscal year.

The projected year over year improvement in Arkansas elevated operating income mostly relates to our expected improvement in operating performance by our mattress fabrics segment.

Notably our expectations for the second quarter and the full fiscal 2022 year are based on the information that is available at the time of this webcast presentation.

And reflect certain assumptions by management regarding our business and trends. Additionally.

Additionally, based on current expectations capital expenditures for this fiscal year expected to be in the 10 to $15.0 million range are.

Our capital investments will focus on our ongoing strategy of maintenance capex centered in our mattress fabrics business as well as spending in our upholstery fabrics business with investments and read Windows and our new 80 startup at.

At the corporate level Capex spending will include investments in it infrastructure and security as well as our new innovation campus in high point, North Carolina, depreciation and amortization is expected to be approximately seven $5 million to $8 million for fiscal 2022 with that we'll now take your questions.

We will now begin the question and answer session.

Ask a question you May press Star then one on your Touchtone phone.

People are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

Our first question today comes from Anthony <unk> with Sidoti <unk> Company.

Yes, good morning, and thank you for taking my questions. So certainly.

Got it.

Even with all of the cost headwinds that are out there. So I guess firstly just wanted to ask about the pricing actions that you took in the quarter.

How much was price signal.

How much of a benefit was pricing in the quarter.

Just so we can get a handle on.

Sure.

Unit volume growth versus versus pricing.

Yes, Anthony this is Ken.

Consolidated basis, and keep in mind that the price increases kind of came in at different times during the quarter. So it was about two 5% impact.

For the quarter versus the <unk>.

Total increase in sales.

Got it okay, alright, that's very helpful. Okay and then.

Can you talk about strong backlog those reference in the <unk>.

<unk> ultra business, how should we think about that.

The <unk>.

As far as <unk> and <unk>.

The cadence of that backlog to turn into revenue.

Yes, Anthony this is Boyd and we continue to see.

Strong demand in the residential side of our business.

And the backlogs today remain in.

Relatively relative to even pre pandemic remain at good levels very good levels, we have seen the backlogs our backlogs come down from the peak as our output.

Has been able to align with the demand, but we still have very strong backlogs in that business.

Industry.

Bill is reporting extended backlogs.

In many cases are.

Manufacturers are reporting.

Still having record backlogs, so backlog and residential continues to be strong and certainly supports.

That going forward into this fiscal year and as mentioned earlier the in our hospitality business, we are seeing increasing.

Orders coming in in the hospitality area as travel has started to return.

In the read window products business those backlogs are up now too.

Levels that we haven't seen in a couple of years so.

There is a lag time between those orders coming in and when that will be realized in sales as those projects get installed.

That certainly is we're optimistic about what we're seeing in the backlogs for really all segments of our business.

Anthony This is Dave I wanted to just to tack on a bit to what Boyd with sand a little bit of a nuance. It's important for everyone to understand about residential upholstery backlogs, we still have as Boyd mentioned very healthy backlogs.

What you should know is because of our strong supply chain and the network and the flexibility of our platform.

We're absorbing that backlog and actually shipping product to customers. So having a crazy extended backlog, which we hear about a lot in the industry is not positive we want a strong backlog that we're actually shipping and pulling through demand and we're seeing that start to happen. So while we love the backlog, we have we wanted to be manageable and our supply chain.

It allowed us to get it to a very manageable place that's encouraging for us and the service.

Service standpoint, because we are passionate about servicing customers meeting commitments and that's what we're doing.

And both businesses, especially proud of what Boyd and his team have done on the residential upholstery side.

Alright, Thanks, a lot.

And voice for that detailed explanation so as far as labor shortages, obviously, it's an issue that's prevalent throughout many different businesses.

Can you talk about.

That you are taking to try to minimize the impact.

Yes, Anthony that's a really good question I would say for the mattress fabrics business, which is <unk>.

Primarily a north American supply chain for us at least five percentage.

That's where we see the most labor challenges. So we're doing a lot of things internally.

To engage our employees more effectively to recruit employees more effectively and just trying to build build our business that does come with some wage pressure, although I would tell you. If we can get a more stable workforce, we can offset so many other cost of training and things of that nature. So I don't worry about wage <unk>.

Costs, we just we need to do what we need to do to get stable Labor force.

And then on top of that haven't are flexible platform and remember in mattress fabrics, we operate across six countries either through our own facilities or through supply chain partners.

We just have to be prepared to move items.

To where we can get them.

And Thats part of our strategy forever and that's part of that is inherent strategy of the business will use it more in times like this.

So just flex our muscle and again be sure we're meeting our customer commitments.

Through our very robust supply chain.

Okay, well, thank you very much.

All the best of luck.

Thank you. Thank you Anthony.

Yes.

Our next question comes from Budd <unk> with water Tower research.

Good morning, Good morning, Ken Good morning Boyd.

Gratulation to you and your team.

Good morning.

Navigating niche these challenging times I just want to make sure I understand when you looked at the inflation and the uncertainties. It is there any way you can rank them for us and give us what are the the most pressing problems and maybe put some color or some quantification on that.

Yes, but I'll start and Boyd can certainly jump in I think it's really when you look by division.

I think that on the upholstery side. When you look at I guess, a sequential look freight is a huge issue right has been one that's been pressuring us really starting last year and has really gotten worse.

On the upholstery side were not doing with the same labor pressure as the mattress side, but freight certainly only upholstery side and has been a big factor.

I think for mattress fabrics, its raw material prices.

Those had been steadily increasing labor, obviously is a big issue as we continue to try to hire folks to not only hire and keep them keep them higher.

But those are the.

Various pressures, but when you kind of define it by division those are the ones that kind of rise to the top.

And in the raw materials and mattresses, primarily foam where is the what's the raw material, which given you, though the biggest issue.

Yes, I would say I'll, just clarify a bit on what Ken said for sure. The most concerning go forward on the mattress side as labor, but raw materials to Ken's point.

That would be more of a customer a customer challenge and that would impact our delivery to a customer when we say raw materials, we mean more.

<unk> laminates.

Finishing things we need to run our products. So there is definitely a rising.

Material cost to us coming in.

But I would I would put that secondary behind labor as it go forward concern.

And when you put your freight surcharge in Europe surcharges is that a temporary surcharge or do you think it's going to become a permanent surcharge or will you wrap that into a price increase that becomes permanent how do we think about that.

Yes, Budd this is Boyd and I think with the volatility we have seen in the great pricing and particularly that just extreme acceleration.

Or increase in rates there, we thought that the surcharge was the way to go because it's just a lot of uncertainty around.

What will happen from here so.

It.

It could become a longer term just depending on where those freight rates remain and again there is a high degree of uncertainty as to how that will play out. So we're with the surcharge we are poised to react in whatever way it might play out from here.

And that's really the reason, we decided to approach it in that manner.

This is Dave I'll tack onto Boyd's comments, he is exactly right both businesses have already done.

Our price increase to offset some of the pressure, we just felt like without knowing where it's going and seem to be changing almost every week.

Our surcharges more appropriate for the second action.

So we can pass on what was appropriate not too much not too little and then being able to react either way.

I'd want you to know that besides where not just passing on every increase began we're also trying to do a lot of work.

Shifting our supply chains, and then trying to do a lot to mitigate our income and costs. So our intention is not to pass everything on we just want to pass along what's appropriate and then be able to react if we have to do more we'll do more if we can pull some of that back we'll pull it back only when it looks appropriate.

There's a lot of nuance to it I'm just trying to figure out the right direct mix.

Okay, and I was trying to understand if there is no containers have been a big issue and particularly I guess.

No.

It's coming from Asia.

Going back are you seeing any change in that condition at all or is it.

Container prices in the container availability changing at all or is it getting better or worse.

How are you seeing in recent weeks.

I would describe it Budd as it has continued to be upward pressure in the most recent weeks.

On pricing.

Availability, we havent per hour.

Moves of containers to our North American distribution points, we haven't had too.

Too much difficulty and availability to this point are creating disruption, but certainly the costs have continued to escalate and the most currently.

Okay, just a couple of modeling questions if I could.

Ken You had said I think if I got it right.

The tax rate that youre projecting or planning for the second quarter was 30%.

Did I hear yes that is correct and you normally have a 35% habit for the year. What are you thinking it's going to be is it still 35 overall.

Well, yes, we had projected last quarter that would be in the 35% area. We came in at $28. Seven. This time, so I think based on what we know today and based on the mix of what we see we're seeing approximately 30% should hold for the for the year second quarter as well as the year.

Second quarter, so for the balance of third and fourth quarter as well.

Correct.

Okay.

You said I think Capex 10 to $15.0 million in the second quarter was.

Did you put a number to the second quarter. If you did I missed it.

No. We did not ill just say that a sizable portion of that is going to be in the second quarter.

We spent.

One nine are rounded up to $2 million in the first quarter.

Guidance to entertain and a half so.

I would say that you're probably going to be at least by the end of the second quarter, you're probably going to be at least.

Well over half spent for sure.

Q2 was a significant.

Difficult projects come online in Q2, correct between common yards, our innovation campus and 80 for <unk> correct.

A lot happened into the half year.

Understanding congratulations on that and condolences to the people who are paid for.

We've had to go through.

I think you put out a relation.

Shortly you will note that impacted your geography.

But Haiti comes on at the end of the second quarter, you think or is that.

Yes.

Third the third facility that we have there for upholstery cut and sew. It comes online in the second quarter.

And yet, but I would say thank you. Thank you for the comments about Haiti. We are we are significant distance from that earthquake region, but certainly just a terrible thing for the country of Haiti, and we're doing quite a bit here from a humanitarian side to do a lot of donation to that country, it's beautiful country.

People that want to work and more opportunity. So we're thrilled to be their special place for us and an important part of the future for call.

Sure.

Yes.

I appreciate your.

Europe should show on their behalf.

And last from me just talk about the mattress unit side and what the impact has been now that we've gone through the second round of the.

Of the anti dumping, we're seeing attract mattress units quarter Joe.

Every year every month.

But what are you seeing its coming for Europe business, because it's a little complicated a little more complicated for COVID-19 because now you've got the.

So so we can't quite figure out what the unit side looks like can you give us a feeling of how.

It looks <unk>.

In terms of mattress units were yardage units or some way to frame that in terms of some color.

Yes, it's a good question, Bob and Youre right trying to follow the antidumping numbers is choppy.

<unk> I think it has definitely been impacted some.

In the last.

Short term period from foam shortages and other things that are maybe for some importing that wouldn't be.

Normal.

We see we see optimism on units and what we see as so much investment being done.

From Nufarm companies, new fulfillment companies.

New setups to deliver mattresses in North America.

For us, we're very optimistic on fabric yards in and cut and sewn covers.

Thank.

I think we see a strong demand and we would expect over over the longer term to go back to the sales levels, we were and our strong days.

A good recovery that we think will have happened over the medium to long term.

Hi.

I'm sorry go ahead, so we're confident with the units.

And did you see that in the second quarter with a unit.

If you.

Measuring and I'm sure you look at it differently than we have to because you'll get to see some numbers, we don't get to see.

In the first quarter in our first quarter, sorry in the quarter that just ended yes sure. Yes. So we are seeing.

Very definitely definitely strong used especially on cut and sew covers.

Then continuing building.

Uniform nits so eas.

Some mix there, but yes units both fabric and covers are increasing.

And last just reacting to one of the things you said Youre seeing new are you seeing new startups and like I remember the days when we had the digitally native brand explosion.

With with a lot of the marketing companies or are you seeing that again and we're seeing more of those developed by adult we saw a retracement in some of those yes, im not seeing new new mattress brands I'm, just seeing more infrastructure for supplying the current brands.

<unk> seen an explosion of new.

New.

In consumer items, I'm, not seeing that I guess some.

Our focus on delivering adhere and is any of that.

The anti dumping country companies coming to the states.

Yes.

We hear rumors of that all the time, how for sure that won't be at the end of the day is I guess there is still a question, but we do hear we do hear rumors of that.

And thats, an opportunity as well as a potential challenge for coal price.

I would see it as an opportunity because.

It's important to note.

Yes, antidumping is on the mattress, it's not not relative to the components like fabric recovers, but what we would do in that case, if that if that was an option for new new.

Companies, who are looking for mattress covers we could still flex our muscles in both Haiti and Asia to deliver covers here.

Here it could be assembled in a matrix it actually makes it much easier for us to find the end customer of ours versus two years ago. When we were having to trying to chase that all around the world the much better to have a final.

Final supply chain, where we know where to deliver the product.

Great. Okay, that's terrific well good luck on the on the balance of the second quarter and the balance of the year.

Thank you Budd Thanks, Bob.

And again, if you have a question. Please press Star then one.

Our next question comes from Marco Rodriguez with Stonegate capital market.

Good morning, everyone. Thank you for taking my questions.

Good morning America.

I was wondering if.

Used to kind of follow up on some of the line of questioning when it comes to the price increases and surcharges.

Just wondering if you could provide any sort of customer feedback youre, receiving just trying to get a sense.

I know some of this stuff is contractual but kind of wondering if you have some kind of color on customer sentiment, if theyre spike significant pushback or.

These are things that are happening across multiple industries. So it's kind of just any and accepting.

These increases.

Mark This is Boyd and I can speak from the upholstery fabrics side of the business.

Certainly this is.

Industry wide.

Pressures that are occurring so.

The same pressures that we have been under our customers are based in multiple ways as well.

So where no one likes price increases are certainly an understanding in the marketplace today that these steps are necessary.

So for that reason.

Not seeing significant pushback.

Because it's understood as to what's happening throughout the industry today and that these steps are really.

Something that are necessary.

Not too much pushback.

Boyd said that really well Marco if you have I'll add just a little color there to pick up the mattress side same.

Same comments no one is surprised by certainly none of our customers like it but I do think we've we've done a good job passing on what's appropriate at the right time frame.

Not necessarily immediately usually with some lag now might not be perfect. All the time for.

For quarterly results. It is the right strategy for the long term view of the business. So I think.

I think it's been generally accepted well.

As well as these things could be.

Got it and then just following up on a question in the prior caller.

In terms of that.

Unit sales or the unit movements on the mattress fabric side I was wondering maybe if you could perhaps frame it.

From a growth rate perspective, if you have that information in here in this last quarter from your more shall we call it traditional mattresses versus the bed in the box.

Yes, we don't always break it out that way Marco because we.

When we sell covers it's also fueling our fabric supply as well so yes, yes, mark I'll jump in there too.

Product mix goes a long way when you look at our sales from quarter to quarter and and.

With covers versus yards of fabric, it's very difficult to even on both sides you can't really nail down our per unit.

So we just look at it in total we know that as Dave said earlier.

Nits, we had strong growth in knits, we had strong growth in covers.

So from the standpoint of unit growth for sure there, we got the benefit of the price increase as well.

But.

I think it's difficult to quantify but we would say that we got again, we've seen it again there were significant unit growth and we got the benefit of the price increase as well.

And we've seen from an industry standpoint, we're seeing growth in traditional <unk>.

Retail and e-commerce, so we see growth across the whole chain I.

I don't see it stronger one of the other stuff, which is which is good for pulp we have abilities to sell through both channels.

Got it very helpful and then.

Coming back to one of the comments you made.

On the prepared remarks on your call about.

<unk> fabric side I believe you.

You called out.

Lynch Mark.

Involved.

Fabric casuals sustainability.

We'll keep you will.

Is that using the same sort of yarn that I believe it was not prior call where you had a cooling type fabric that also had a sustainability angle.

Yes, Marco that's exactly right.

Lyft smart evolve as tax free was first before the other product is called <unk> and what we've done in both businesses is look for combining performance with sustainability. So live smart evolve combines stain performance sustained proof stay.

Stained treatable fabrics, along with sustainability recyclable products.

And then <unk> combines cooling with a same sustainability. So each each business has a different view of our performance means but we do think there's so much momentum around our sustainability type product line and we're pushing that hard in both divisions.

Got it and are you seeing a pickup in demand for the sustainability aspect versus your more traditional fabric. If you will.

Yes, Mark this is Boyd and certainly.

Mentioned, our evolved product on the upholstery side.

Yes, it was one of the.

Leaders in our first quarter in terms of growth.

We're seeing sort of sustainability is certainly resonating with the consumer.

And as also seeming to.

We see very good strong response at the retail level, so without a doubt our products that include the sustainability.

Component are certainly one of our fastest growing product categories right now.

Got it and last quick question for me I don't know if I missed it from a call, but the share repurchases or the average prices you purchased that and if maybe you can discuss briefly the drivers behind those recent purchases.

Yes, Mark this is Ken I think the second part of that we've always said that we would be out there at opportunistic prices and so.

As the stock was.

Trailing down we felt it was time for sure.

For Copel to jump in.

As far as an average.

I think it's.

I don't have an average in front of me, but where.

We've been in the 13 to $31.0 range throughout the period.

More and more toward the 15% to 13 range. So it is an average.

Of.

Of share repurchases.

I'd kind of couch it like that.

Got it very helpful. Thank you guys for your time I appreciate it.

Thank you Mark.

This concludes our question and answer session I would like to turn the call back over to Ed Koch for any closing remarks.

Thank you very much and again, thanks to everyone for your participation and your interest in Culp, we do look forward to updating you on our progress next quarter have a great day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Good morning, and welcome to the Culp, Inc. First quarter 2022 earnings conference call.

All participants will be in listen only mode.

Need assistance, please signal a conference specialist by pressing the star key followed by zero.

Please note this event is being recorded.

I would now like to turn the conference over to drew Anderson. Please go ahead.

Thank you good morning, and welcome to the Culp Conference call to review the company's results for the first quarter of fiscal 2022.

As we start let me state that this morning's call will contain forward looking statements about the business financial condition and prospects of the company.

Forward looking statements are statements that include projections expectations or beliefs about future events or results or otherwise are not statements of historical fact.

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 and.

In addition, during this call the company will be discussing non-GAAP financial measurements.

A slide presentation with supporting summary financial information is also available on the company's website as part of the webcast of today's call.

With that I will now turn the call over to Ed <unk>, President and Chief Executive Officer of Paul. Please go ahead Sir.

Yeah.

Good morning, and thank you for joining us today.

I'd like to welcome you to the Culp quarterly conference call with analysts and investors.

With me on the call today are Ken bowling, our Chief Financial Officer, and Boyd Chumbley President of our upholstery fabrics business.

I'll begin the call today with some opening comments and Ken will then review the financial results for the quarter I will then update you on the strategic actions in each of our operating segments and after that Ken will review, our second quarter and fiscal 2022 full year business outlook.

We will then be happy to take your questions.

For the first quarter, we are very pleased to report a solid start to fiscal 2022 with overall sales and operating income in line with expectations and sales, reaching their highest first quarter level since fiscal 2003.

Our results reflect strong top line growth driven by higher demand for both our mattress and residential upholstery fabric products.

And each of our businesses, we executed our product driven strategy with a continued emphasis on design creativity and innovation.

We also benefited from our expanded market reach and the continued resilience of our flexible global platform.

Despite supply chain disruption and pressures on profitability.

We are passionately dedicated to servicing the needs of our customers in both of our divisions have excelled and using our robust platform and long term supply relationships to make sure that we meet our customer commitments.

We believe this is an advantage for call as customer service is more important than ever in the face of supply chain disruption.

While we are optimistic about the ongoing strength of our sales trends.

Our previously implemented price increases for both of our businesses that helped to offset certain inflationary pressures and foreign currency fluctuations to some extent during the first quarter.

Despite these challenges we continue to invest in our business and expand our capacity.

We believe this will be a transformative space for call and allow us to share best ideas across our divisions and better showcase our full expansive product lines to our customers.

Importantly, we have the financial strength to support our business in the current environment and we believe we are well positioned for continued growth as market conditions evolve.

We also remain grateful for the extraordinary efforts and resilience of our associates all around the world.

We are extremely proud of their hard work their adaptability and their dedication in the face of ongoing challenges.

Here are the financial highlights for the first quarter net sales were $83 million up 29% compared to the prior year period.

Net income for the first quarter was $5.0 million or <unk> 18 per diluted share compared with a net loss of $9.0 million or 22 cents per diluted share for the prior year period, which included a $10.0 million noncash net income tax charge. Excluding this income tax charge non-GAAP adjusted net income.

For the first quarter of last year was 1 million or <unk> <unk> per diluted share.

The current quarter reflected an impressive sales performance for both divisions, but our overall operating performance was affected by several headwinds.

Namely higher freight and raw material costs labor shortages and unfavorable foreign exchange rate fluctuations among other factors.

I'll comment on divisional performance in a moment.

Consolidated return on capital for the trailing 12 months period was 15, 5%.

The effective income tax rate for the first quarter of this fiscal year was 28, 7% compared with 283, 7% for the same period a year ago.

Our effective income tax rate during the first quarter of this fiscal year was affected by the mix of taxable income that is mostly earned by our foreign operations located in China and Canada.

Each have higher income tax rates in the U S.

Income tax expense during the first quarter of last fiscal year was significantly higher than the current quarter because of the $10.0 million net income tax charge I mentioned earlier.

Looking ahead to the rest of this fiscal year. We currently estimate that our consolidated effective income tax rate for the second quarter will be approximately 30% based on the facts we know today.

Additionally, we are currently projecting cash income tax payments of approximately $6.0 million for fiscal 2022.

Importantly, our estimated cash income tax payments for this fiscal year, our management's current projections only and can be affected over the year by actual earnings from our foreign subsidiaries located in China Canon Haiti versus annual projections as well as changes in foreign exchange rates associated with our China operations in relation to the U S dollar.

Now, let's take a look at our business segments.

For the mattress fabrics segment sales for the first quarter were $44.0 million.

19% compared with last year's first quarter, which was impacted by the COVID-19 pandemic.

Our improved operating performance for the first quarter as compared to the first quarter of last year, primarily reflects a solid increase in sales somewhat offset by increased raw material prices freight costs unfavorable foreign foreign currency fluctuations in Canada and China.

And inefficiencies due to labor shortages in the U S and Canada.

<unk> and additional increases in freight and raw material costs, particularly during the second half of the quarter.

Implementing a surcharge during the second quarter to help offset these pressures while also continuously working to control cost.

Notably this first charge the surcharge will not take effect until midway through the quarter, resulting in a temporary cost price lag that will affect our operating performance during the period.

Return on capital for the trailing 12 month period for mattress fabrics was 19, 6%.

For our policy fabrics segment sales for the first quarter were $40 million up 41% over the prior year, which was impacted by the COVID-19 pandemic.

Despite our top line growth operating performance for the first quarter as compared to the first quarter of last year and also compared to the fourth quarter of last year seven 2% operating income margin.

Was negatively affected by the dramatic increase in freight costs and by lower sales in our read windows products business as well as startup costs in our new Haiti facility.

Our operating performance as compared to the first quarter of last year was also pressured by foreign currency fluctuations in China.

Notably our previously implemented price increase has helped offset foreign currency exchange rate fluctuations to some extent as intended.

We are implementing an additional freight surcharges during the second quarter to help cover the continued rise in freight cost.

We also began to see growing project backlog and our read window products business during the first quarter, but given the typically longer term timeframe for project installations, which can often range was six to nine months. There is a temporary lag between the impact of the pandemic related disruption and improved results for this business.

Return on capital for the trailing 12 month period for the upholstery fabric segment was an impressive 74, 3%.

Here are the balance sheet highlights, we reported 44 million and total cash and investments and no outstanding borrowings as of the end of the quarter compared with $51.0 million of total cash and investments and no outstanding debt at the end of the prior year period.

We generated cash flow from operations of $7.0 million and negative free cash flow of 782000 for the first three months of the year.

Compared with cash flow from operations of $16.0 million of free cash flow of $10 million for the same period last year.

As we continue to invest in our business, our cash flow from operations and free cash flow. During the first quarter were affected by increased inventory purchases due to higher sales.

Capital expenditures, including expenditures for machinery equipment, and it investments as well as expenditures related to our new innovation campus.

Incentive bonus.

Incentive bonus compensation and payments for the new building lease associated with our Haiti.

Haiti upholstery cut <unk> operation.

During the first quarter, we invested $7.0 million in the business through capital expenditures and payments associated with our new building lease in Haiti.

We paid $5.0 million in regular 40 dividends and spent 723000 on share repurchases.

The company repurchased approximately 49000 shares of common stock during the first quarter of the year and repurchased approximately 48000 additional shares through August 31.

Leaving approximately $9.0 million available under our current share repurchase program with that I'll turn the call back over to you.

Thank you Ken I will begin with the mattress fabrics business.

We were encouraged by the strong level of sales for this business during the first quarter, our topline performance up 19% compared to last year and up 11% compared to the pre pre pandemic first quarter of fiscal 2020 was.

It was driven by the continued strength of our product offerings and was supplemented by the price increase implemented during the first quarter that help offset certain inflationary pressures.

Additionally, demand transfer the sewn mattress covers remained strong and our onshore nearshore and offshore supply chain strategy as well as our fabric to cover model continued to provide a preferred platform.

Gives customers the agility and value they need for their business.

As we look ahead, we expect that current inflationary conditions labor shortages and other near term headwinds, we will continue to impact the mattress fabrics business during fiscal 2022.

So we are confident in our ability to navigate these challenges.

As mentioned earlier, we are adding a surcharge during the second quarter to help offset inflationary more inflationary pressures, while also working diligently to control costs.

As demand is demand trends remained strong we believe this business is well positioned for the long term.

We have the supply chain to continue meeting our customer commitments and we expect to continue increasing our operating income margins towards the end of the fiscal year as we benefit from innovative products creative designs digital marketing strategies pricing actions and eventual mitigation of costs.

Now I will turn to the upholstery fabrics segment.

We were pleased by the continued strong growth in sales for this business as well during the first quarter up 41% compared with the prior year period, and up 26% compared with a pre pandemic first quarter of fiscal 2020.

We continued to benefit from growth in our market reach.

Flexibility of our Asian platform and the success of our product innovation strategy, including the ongoing popularity of our lives smart portfolio of products.

We are especially encouraged by a popular live smart evolved products, which offer both performance and sustainability.

We believe the consumer desire for products with our sustainability focus while only gain more traction as we move beyond the COVID-19 pandemic.

Looking ahead, we remain encouraged by the strong backlog in our residential upholstery business, reflecting continued favorable demand and attraction to our innovative product.

We are also pleased to begin seeing some rebound in demand for hospitality fabrics and.

And we have built our largest project backlog since the beginning of fiscal 2019 and read window products.

As Ken mentioned the timeframe for project installations in this business can range from six to nine months. So there is an expected lag between the backlog and the corresponding results.

May temporarily pressure, our upholstery business during the year.

However, with our flexible Asian platform.

And the upcoming addition of our new Haiti platform as well as our long term supplier relationships and our product driven strategy. We are very confident in our ability to navigate these challenges.

We believe we are well positioned to sustain and enhance our competitive advantage over the long term as we continue to deliver innovative products that meet the needs of our customers.

I'll now turn it back to Ken to discuss the general outlook for the second quarter and fiscal 'twenty two full year and we will then take some questions.

<unk> and volatility that were not present during the prior year period we.

For the full fiscal year, we expect net sales to continue to increase moderately with the projected to increase between 8% to 12%.

Consolidated operating income to increase significantly with a projected increase between 20% to 25% in each case as compared to last fiscal year, the projected year over year improvement in Arkansas elevated operating income mostly relates to our expected improvement in operating performance by our mattress fabrics segment.

Notably our expectations for the second quarter and the full fiscal 2022 year are based on the information that is available at the time of this webcast presentation and reflect certain assumptions by management regarding our business and trends.

Additionally, based on current expectations capital expenditures for this fiscal year expected to be in the 10 to $15.0 million range.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

People are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

Our first question today comes from Anthony <unk> with Sidoti <unk> Company.

Yes, good morning, and thank you for taking my questions. So certainly.

Yes.

Even with all of the cost headwinds that are out there. So I guess first I just wanted to.

Ask about the pricing actions that you took in the quarter.

How much was price signal.

How much of a benefit was pricing in the first quarter.

Just so we can get a handle on.

Unit volume growth versus versus pricing.

Yes, Anthony this is Ken.

On a consolidated basis and keep in mind that the price increases kind of came in at different times during the quarter. So it was about two 5% impact for.

For the quarter versus the <unk>.

Total increase in sales.

Got it Okay, alright, that's very helpful and then.

Can you talk about strong backlog those reference in the <unk>.

Eventually Ulster business, how should we think about that.

The.

As far as <unk>.

The cadence of that backlog to turn into revenue.

Yes, Anthony this is Boyd and we continue to see.

Strong demand in the residential side of our business.

And the backlogs today remain in.

Relatively relative to even pre pandemic remain at good levels very good levels, we have seen the backlogs our backlogs come down from the peak as our output.

It has been able to align with the demand, but we still have very strong backlogs in that business.

Industry.

Bill is reporting expanded backlogs.

In many cases are.

Manufacturers are reporting still having record backlogs, so backlog and residential continues to be strong and certainly supports.

That going forward into this fiscal year and as mentioned earlier in our hospitality business, we are seeing increasing.

Orders coming in in the hospitality area as travel has started to return.

In the read window products business those backlogs are up now too.

Levels that we haven't seen in a couple of years so.

There is a lag time between those orders coming in and when that will be realized in sales as those projects get installed.

That certainly is we're optimistic about what we're seeing in the backlogs for really all segments of our business.

Anthony This is Dave I wanted to just to tack on a bit towards Boyd with Sam a little bit of a nuance. It's important for everyone to understand about residential upholstery backlogs, we still have as Boyd mentioned very healthy backlogs.

What you should know is because of our strong supply chain and the network and the flexibility of our platform.

It allowed us to get into a very manageable place that's encouraging for us and the service.

Service standpoint, because we are passionate about servicing customers meeting commitments and that's what we're doing.

And both businesses, especially proud of what Boyd and his team have done on the residential upholstery Sun.

Alright, Thanks, a lot.

And voice for that detailed explanation so as far as labor shortages, obviously, it's an issue that is prevalent throughout many different businesses.

Can you talk about.

That you are taking to try to minimize the impact.

Yes, Anthony that's a really good question I would say for the mattress fabrics business, which is <unk>.

Primarily a north American supply chain for us at least five percentage.

That's where we see the most labor challenges, but we're doing a lot of things internally.

Costs, we just we need to do what we need to do to get stable Labor force.

And then on top of that haven't are flexible platform and remember in mattress fabrics, we operate across six countries either through our own facilities or through supply chain partners.

So we just have to be prepared to move items.

To where we can get them.

And Thats part of the strategy Forever and that's part of that's inherent strategy of the business will use it more in times like this.

So just flex our muscle and again be sure we're meeting our customer commitments.

Through our very robust supply chain.

Okay, well. Thank you very much that's all the.

Best of luck.

Thank you. Thank you Anthony.

Yes.

Our next question comes from Budd <unk> with water Tower research.

Good morning, Good morning, Ken Good morning Boyd.

Gratulation to you and your team.

Good morning.

Navigating nisha these challenging times.

I just want to make sure I understand when you look at the inflation in the <unk>.

Certainties is there any way you can rank them for us and give us what are the most pressing problems and maybe put some color or some quantification on that.

Okay.

Yes Budd.

I'll start and Boyd can certainly jump in I think it's really when you look by division.

I think that on the upholstery side. When you look at I guess, a sequential look freight is a huge issue right. It's been one that's been pressuring us really starting last year and has really gotten worse.

On the upholstery side, we're not dealing with the same labor pressure as the mattress side, but <unk> certainly on the upholstery side and that's been a big factor.

I think for mattress fabrics, its raw material prices.

Those had been steadily increasing labor, obviously is a big issue as we continue to try to hire folks and not only hire them keep them keep them higher.

But those are the.

Various pressures, but when you kind of define it by division those are the ones that kind of rise to the top.

In the end.

The raw materials, and mattresses, primarily foam, whereas whats the raw material, which given you, though the biggest issue.

Yes, I would say I'll, just clarify a bit about Ken said for sure. The most concerning go forward on the mattress side as labor, but raw materials to Ken's point.

That would be more of a customer a customer challenge and that would impact our delivery to a customer when we say raw materials, we mean more.

<unk> laminates.

Finishing things we need to run our products. So there is definitely a rising.

Material cost to us coming in.

But I would put that secondary behind labor as it go forward concern.

Yes, Budd this is Boyd and I think with the volatility we have seen in the great pricing and particularly that just extreme acceleration.

Or increase in rates there, we thought that the surcharge was the way to go because there's just a lot of uncertainty around.

What will happen from here so.

It.

It could become a longer term just depending on where those freight rates remain and again there is a high degree of uncertainty.

Certainly as to how that will play out so we're with the surcharge we are poised to react.

Whatever way it might play out from here.

And Thats really the reason, we decided to approach it in that manner.

This is Dave I'll tack onto Boyd's comments. He is exactly right. Both businesses have already done a price increase to offset some of the pressure. We just felt like without knowing where it's going and seem to be changing almost every week.

Our surcharges more appropriate for the second action.

So we can pass on what was appropriate.

Too much not too little and then be able to react either way.

I'd want you to know that besides where not just passing on every increase began we're also trying to do a lot of work.

Shifting our supply chains, and then trying to do a lot to mitigate our income and costs. So our intent is not to pass everything all we just wanted to pass along what's appropriate and then be able to react if we have to do more we'll do more if we can pull some of that back we'll pull it back.

Only when it looks appropriate.

There's a lot of nuance to it I'm just trying to figure out the right the right mix.

Okay, and I was trying to understand if theres no containers have been a big issue and particularly I guess in.

No.

Goods coming from Asia.

Going back are you seeing any change in that condition at all or is that a container prices in the container availability changing at all or is it getting better or worse.

How are you seeing in recent weeks.

I would describe it Budd as it has continued to be upward pressure in the most recent weeks.

On pricing.

Availability, we havent per hour.

Moves of containers to our North American distribution points, we haven't had too.

Too much difficulty and availability to this point are creating disruption, but certainly the costs have continued to escalate in the most currently.

Okay, just a couple of modeling questions if I could.

You had said I think if I got it right.

The tax rate that youre projecting or planning for the second quarter was 30%.

Did I hear yes, yes, that's.

Thats correct and you normally have a 35% habit for the year. What are you thinking it's going to be is still 35 overall.

Thank you.

Well, yes, we had projected the last quarter that would be in the 35% area. We came in at $28. Seven. This time, so I think based on what we know today and based on the mix of what we see we're seeing approximately 30% should hold for the for the year second quarter as well as the year second.

Second quarter show for the balance of third and fourth quarter as well correct.

Okay.

You said I think our Capex 10 to $15.0 million in the second quarter was heavy did you put a number to the second quarter. If you did I missed it no. We did not I would just say that a sizable portion of that is going to be in the second quarter.

We spent.

One nine are rounded up to $2 million in the first quarter.

And the 10 and a half so.

I would say that you're probably going to be at least by the end of the second quarter, you're probably going to be at least.

Well over half spent for sure.

Two of the significant.

Difficult projects come online in Q2, correct between Condon yards, our innovation campus and payday for CES correct. So.

A lot happened in the half year.

Understand and congratulations on that and condolences to the people who are paid for what they've had to go through you I think you put out a relation.

Lee you were not that impacted your geography.

But Haiti comes on at the end of the second quarter, you think or is that still.

Third the third facility that we have there for upholstery cut and sew. It comes online in the second quarter.

And yes, but I would say thank you. Thank.

Thank you for the comments about who we are we are significant distance from that earthquake region, but certainly.

Just a terrible thing for the country of Haiti, and we're doing quite a bit here from a humanitarian side to do a lot of donation to that country. It's a beautiful country terrific people that want to work and more opportunity. So we're thrilled to be there.

Special place for Us and an important part of the future for call.

Understood.

I appreciate your.

Your efforts on their behalf.

Last for me just to talk about the mattress units side and what the impact has been now that we've gone through the second round of the.

The anti dumping we're seeing attract mattress units importer Joe.

Every year every month, but what are you seeing is coming for Europe business, because it's a little complicated a little more complicated for COVID-19 because now you've got the cut.

So so we can't quite figure out what the unit side looks like can you give us a feeling of outlet.

Look.

Just in terms of mattress units.

Our yard in June Richard some way to frame that in terms of some color.

Yes, it's a good question, Bob and Youre right trying to follow the antidumping numbers is choppy.

First I think it has definitely been impacted some.

In the last.

Short term period from foam shortages and other things that are maybe for some importing that wouldn't be.

Normal.

We see we see optimism on units and what we see as so much.

Investment being done.

From Nufarm companies, new fulfillment companies.

New setups to deliver mattresses in North America.

US, we're very optimistic on fabric yards in and cut and sewn covers.

Pink.

I think we see a strong demand and we would expect over over the longer term to go back to the sales levels, we were and our strong days.

A good recovery that we think will happen over the medium to long term.

I am.

Sorry go ahead, we're confident with the units.

And did you see that in the second quarter with a unit.

Well.

We measure it and I'm sure you look at it differently than we have to because you'll get to see some numbers, we don't get to see.

In the first quarter in our first quarter, sorry in the quarter that just ended yes sure. Yes. So we are seeing.

Very definitely definitely strong used especially on cut and sew covers.

Then continuing building.

Uniform nits.

So there is some mix there, but yes units both fabric and covers are increasing.

And last just reacting to one of the things you said Youre seeing new are you seeing new startups and I remember the days when we had the digitally native brand explosion.

With with a lot of the marketing companies are you seeing that again and we're seeing more of those develop I thought we saw a retracement or some of those yes, im not seeing new new mattress brands I'm, just seeing more infrastructure for supplying the current brands.

It has seen an explosion of new <unk>.

<unk>.

In consumer items, I'm, not seeing that S&P more focus on delivering it here.

And is any of that.

The anti dumping country companies coming to the states.

Yes, absolutely we hear rumors of that all the time how for sure that will be at the end of the day is I guess there is still a question, but we do hear we do hear rumors of that.

And thats, an opportunity as well as a potential challenge for Culp right.

I would see it as an opportunity because it's.

It's important to note.

Yes, antidumping is on the mattress, it's not not relative to the components like fabric of commerce, but we would do in that case, if that if that was an option for new new.

Companies, who are looking for mattress covers we could still flex our muscles in both Haiti and Asia to deliver covers here.

Here it could be assembled a mattress it actually makes it much easier for us to find the end customer of ours.

Two years ago, when we were having to trying to chase that all around the world So much better to have a.

Final supply chain, where we know where to deliver the product.

Great. Okay, that's terrific well good luck on the on the balance of the second quarter and the balance of the year.

Thank you Budd Thanks, Bob.

And again, if you have a question. Please press Star then one.

Our next question comes from Marco Rodriguez with Stonegate capital market.

Good morning, everyone. Thank you for taking my questions.

Good morning Marco.

I was wondering if.

As to kind of follow up on some of the line of questioning when it comes to the price increases and the surcharges.

Just wondering if you could provide any sort of customer feedback youre, receiving just trying to get a sense.

I know some of their stuff is contractual but kind of wondering if you have some kind of color on customer sentiment, if theyre spike significant pushback or.

These are things that are happening across multiple industries. So it's kind of just being in accepting.

These increases.

Marco This is Boyd and I can speak from the upholstery fabrics side of the business.

Certainly this is <unk>.

Industry wide.

Pressures that are occurring so.

The same pressures that we have been under our customers have faced in multiple ways as well.

So where no one likes price increases are certainly an understanding in the marketplace today that these steps are necessary.

So for that reason.

Not seeing significant pushback.

Because it's understood as to what's happening throughout the industry today and that these steps are really.

That are necessary, so not not too much pushback I think Boyd said that really well Marco you have I'll add a little color there to pick up the mattress side same.

Same comments no one is surprised by it certainly none of our customers like it but I do think we've we've done a good job passing on what's appropriate at the right time frame.

Not necessarily immediately usually with some lag now might not be perfect. All the time for for quarterly results. It is the right strategy for the long term view of the business. So I think.

I think it's been generally accepted well.

As well as these things could be.

Got it and then just following up on a question from the prior caller.

In terms of that.

Unit sales or the unit movements on the mattress fabric side I was wondering maybe if you could perhaps frame it.

From a growth rate perspective, if you have that information here in this last quarter from your more shall we call it traditional mattresses versus the bed in the box.

Yes, we don't always break it out that way Marco because we.

When we sell covers it's also fueling our fabric supply as well so yes, yes, mark I'll jump in there too.

Product mix goes a long way when you look at our sales from quarter to quarter in and.

With covers versus yards of fabric, it's very difficult to even on both sides you can't really nail down our per unit.

So we just look at it in total we know that as Dave said earlier.

Nips, we had strong growth in knits, we had strong growth in covers.

So from the standpoint of unit growth for sure there, we got the benefit of the price increase as well.

But.

I think it's difficult to quantify but we would say that we got again I'm, saying. It again, there was significant unit growth and we got the benefit of the price increase as well.

And we've seen from an industry standpoint, we're seeing growth traditional.

Retail and e-commerce, so we see growth across the whole chain out I don't see it stronger one or the other stuff, which is which is good for pulp we have abilities to sell through both channels.

Got it very helpful and then.

Coming back to one of the comments you made.

The prepared remarks on your call about pulse.

Pulse width fabrics side I believe you.

You called out.

Lynch Mark.

Evolve.

Fabric casuals sustainability.

Okay. If you will.

Using the same sort of yarns that I believe that it was not on a prior call where you had a cooling type fabric that also had a sustainability angle.

Yes, Marco that's exactly right.

Lyft smart evolve its actually was first before the other product is called <unk> and what we've done in both businesses is look for combining performance with sustainability. So it lifts smart evolve combines stain performance stain proof.

<unk> treatable fabrics, along with sustainability recyclable products.

And then <unk> combines cooling with a same sustainability. So each each business has a different view of what performance means but we do think there's so much momentum around our sustainability type product line. So we're pushing that hard in both divisions.

Got it and are you seeing a pickup in demand for the sustainability aspect versus your more traditional fabric. If you will.

Yes, Mark this is Boyd and certainly as Ive mentioned, our evolved product on the upholstery side.

Yes, it was one of the.

Leaders in our first quarter in terms of growth.

That we're seeing so sustainability is certainly resonating with the consumer.

And.

As also seeming to.

We see very good strong response at the retail level, so without a doubt our products that include the sustainability.

Component are certainly one of our fastest growing product categories right now.

Got it and last quick question for me I don't know if I missed this on the call, but the share repurchases or the average prices you purchased that and if maybe you can discuss briefly the drivers behind those recent purchases.

Yes, Marco this is Ken I think the second part of that we've always said that we would be out there at opportunistic prices and so.

As the stock was.

Trailing down we felt it was time.

For <unk> to jump in.

As far as it is an average.

I think it's.

I don't have an average in front of me, but.

We've been in the 13 to $31.0 range throughout the period.

More and more toward the 15% to 13 range, though.

On average.

Of.

Share repurchases, so I would say I'd kind of couch it like that.

Got it very helpful. Thank you guys for your time I appreciate it.

Thank you Mark.

This concludes our question and answer session I would like to turn the call back over to Ed Koch for any closing remarks.

Thank you very much and again, thanks to everyone for your participation and your interest in Culp, we do look forward to updating you on our progress next quarter have a good.

Good day.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q1 2022 Culp Inc Earnings Call

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