Q2 2022 Culp Inc Earnings Call

December 2, 2021

Good day and welcome to the Culp incorporated second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero.

Should you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After today's presentation, there'll be an opportunity to ask questions. To ask a question you may press star then one on a touchtone phone. To withdraw your question please press star then two. Please note this event is being recorded. I'd now like to turn the conference over to Dru Anderson. Please go ahead.

To ask a question you May press Star then one on a touchtone phone to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I'd 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 second 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.

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.

We're 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.

In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of the non-GAAP financial measurements to the most directly comparable GAAP financial measurements are 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.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. I will now turn the call over to Robert Culp, President and Chief Executive Officer of Culp. Please go ahead, sir.

Alright 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.

I will now turn the call over to his culp.

President and Chief Executive Officer of Culp. Please go ahead Sir.

Good morning, and thank you 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 Ken Bowling, our Chief Financial Officer, and Boyd Chumbley, the President of our upholstery fabrics business.

I would 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.

For today I will begin the call 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 business outlook for the third and fourth quarters of fiscal 2022. We will then be happy to take some questions.

I will then update you on the strategic actions in each of our operating segments.

And after that Ken will review, our business outlook for the third and fourth quarters of fiscal 2022.

We will then be happy to take some questions.

As previously announced our results for the second quarter reflected lower than expected sales, primarily for our upholstery fabrics segment. Several external factors affected our sales results for the quarter. Particularly COVID-19 related shutdowns in Vietnam, and customer supply chain constraints for non-fabric components.

Several external factors affected our sales results for the quarter.

Taken early COVID-19 related shutdowns in Vietnam, and customer supply chain constraints for non fabric components.

Profitability also remains pressured in both of our businesses by the continued rapid rise in freight raw material and labor costs. Despite the challenging macroeconomic environment situations, I'm extremely proud of how our global platform and our associates have responded over the last 18 months to build a more robust supply chain that has kept pace with demand and met the delivery needs of our valued customers.

Despite the challenging macroeconomic environment situations.

I'm extremely proud of how our global platform and our associates have responded over the last 18 months to build a more robust robust supply chain that has kept pace with demand and met the delivery needs of our valued customers.

Looking ahead, we are pleased with the shutdowns in Vietnam have been lifted, but the rapidly rising cost and the disruption throughout the industry supply chains do continue. Many of our customers have delayed their previously planned rollout and their new product launches.

Many of our customers have delayed their previously planned rollout and their new product launches.

We also believe that many customers have excess inventory for fabric and cover products that were purchased to support their expanding backlogs as they wait for their supply chain issues to subside. As a result, we expect it could take some time for customers to work through their existing fabric and cover inventory levels.

As a result, we expect it could take some time for customers to work through their existing fabric and cover inventory levels.

We also have some concern that inflationary pressures are causing some slowing in new business from the peak levels of last year. Leading to some lower demand once customers fulfil their existing backlogs. Although the demand appears to remain high with comparing to pre COVID-19 levels.

Leading to some lower demand once customers customers fulfill their existing backlogs.

Although the demand appears to remain high with comparing to pre COVID-19 levels.

Based on these factors, we expect the current headwinds will continue to pressure results during the second half of this fiscal year, especially during the third quarter. But we expect to see a meaningful rebound in our business beginning in the fourth quarter and continuing into next fiscal year.

We are positioned very well with stronger supply chain, strategic inventory reserves and growth opportunities as a result of our innovation and strong delivery performance. We also expect some improvement in customer supply chain disruption by the fourth quarter of this fiscal year, which is traditionally a strong seasonal period.

We also expect some improvement in customer supply chain disruption by the fourth quarter of this fiscal year, which is traditionally a strong seasonal period.

Notably, if we meet our expectations for the third and fourth quarters and for the full fiscal 2022 year, we will sustain significant sales gains as compared to pre-COVID-19 levels fiscal 2020. We are also implementing further pricing actions during the third quarter to help offset current inflationary pressures and we do expect to open our new Haiti facility during the third quarter, which will increase our capacity for cut and sewn upholstery kits.

We are also implementing further pricing actions during the third quarter to help offset current inflationary pressures and we do expect to open our new Haiti facility during the third quarter, which will increase our capacity for cut and sewn upholstery kits.

Our strong global platform together with our long term supplier relationships does continue to provide a distinct competitive advantage. Allowing us to quickly respond to the evolving needs of our customers. We frequently hear positive feedback from our customers regarding the value of our supply chain and delivery record. Supporting our belief that we are continuing to outperform our competitors, which will support our future growth.

US to quickly respond to the evolving needs of our customers.

We frequently hear positive feedback from our customers regarding the value of our supply chain and delivery record supporting our belief that we are continuing to outperform our competitors, which will support our future growth.

We also remain focused on innovation and creative designs in both of our businesses and we are confident in our product-driven strategy. The recent opening of our new innovation campus in downtown High point, North Carolina has been extremely well received by our customers providing them with a hands-on first-class experience for viewing the scope of our products from fabric to sewn cover.

The recent opening of our new innovation campus in downtown High point, North Carolina has been extremely well received by our customers providing them with a hands on first class experience for viewing the scope of our products from fabric to sewn cover.

Our balance sheet remains solid and I am extremely pleased that we have once again increased our annual dividend, making this the ninth consecutive year of dividend increases. Importantly, we have the financial strength to support our business in the current environment and we look forward to the opportunities to deliver value for our customers employees and shareholders in fiscal 2022 and beyond.

Importantly, we have the financial strength to support our business in the current environment and we look forward to the opportunities to deliver value for our customers employees and shareholders in fiscal 2022 and beyond.

So with that, 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. Here are the financial highlights for the second quarter. Net sales were down $74.6 million down 3% compared with the prior-year period.

$74 6 million down 3% compared with the prior year period.

The company reported income from operations of $1.6 million compared with income from operations of $4.5 million for the prior-year period. I'll comment in more detail on divisional sales and operating performance in a moment.

I'll comment in more detail on divisional sales and operating performance in a moment.

Net income for the second quarter was 851,000 or 7 cents per diluted share compared with net income of $2.4 million o 19 cents per diluted share for the prior-year period. Our overall operating performance was affected by several headwinds, namely lower sales, higher freight and raw material costs unfavorable foreign exchange rate fluctuations and inefficiencies due to labor shortages in the US and Canada among other factors.

Our overall operating performance was affected by several headwinds, namely lower sales higher freight and raw material costs unfavorable foreign exchange rate fluctuations and inefficiencies due to labor shortages in the U S and Canada among other factors.

These pressures were partially offset by lower total SG&A expense for the quarter due primarily to lower accrued incentive compensation expense. On a percentage of sales basis, total SG&A came in at 12.2% compared to 12.7% for the same period a year ago. Trailing 12 months adjusted EBITDA was $17.5 million or 5.5% of net sales compared. Compared to $11.2 million or 4. 3% of net sales for the same period last year, reflecting a year over year improvement of 56%.

Trailing 12 months adjusted EBITDA was $17 5 million or five 5% of net sales compared.

Compared to $11 2 million or four 3% of net sales for the same period last year, reflecting a year over year improvement of 56%.

Consolidated return on capital for the trailing 12 month period was 11.8%. The effective income tax rate for the second quarter of this fiscal year was 34.3% compared with 41.4% for the same period a year ago. Our effective income tax rates are affected over the fiscal year by the mix of taxable income that is mostly earned by our foreign subsidiaries located in China, and Canada, which have higher income tax rates as compared to the US federal rate.

The effective income tax rate for the second quarter of this fiscal year was 34, 3% compared with 41, 4% for the same period a year ago.

Our effective income tax rates are affected over the fiscal year by the mix of taxable income that is mostly earned by our foreign subsidiaries located in China, and Canada, which have higher income tax rates as compared to the U S federal rate.

Looking ahead to the rest of this fiscal year. We currently estimate that our consolidated effective income tax rate for the annual period will be in the 30% to 40% range based on the facts we know today. The income tax rate for the third and fourth quarters could vary based on the facts and circumstances for those specific quarters.

The income tax rate for the third and fourth quarters could vary based on the facts and circumstances for those specific quarters.

Additionally, we are currently projecting cash income tax payments of approximately $3.6 million for fiscal 2022. Importantly, our estimated cash income tax payments for this fiscal year are management's current projections only. And can be affected over the year by actual earnings from our foreign subsidiaries located in China, and Canada versus annual projections changes in foreign exchange rates associated with our China operations in relation to the US dollar as well as the timing of when significant capital projects will be placed in the service, which determines the deductibility of accelerated depreciation.

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

as the timing of when significant capital projects will be placed in the service, which determines the deductibility of accelerated depreciation.

Now, let's take a look at our business segments. For mattress fabrics segment sales were $40.9 million up 2.1% compared with last year's second quarter. Operating income for the quarter was $3.1 million compared with $4.4 million a year ago with an operating income margin of 7.7% compared with 10.9% a year ago.

Operating income for the quarter was $3 1 million compared with $4 4 million a year ago with an operating income margin of seven 7% compared with 10, 9% a year ago.

Operating performance for the second quarter as compared to the prior-year period was negatively affected primarily by higher freight raw materials and labor costs. Inefficiencies due to ongoing labor shortage in the US and Canada and unfavorable foreign currency fluctuations in China and Canada. The price increase in freight surcharge implemented during the first half of fiscal 2022 have helped us offset a portion of the current inflationary pressures we are facing.

Deficiencies due to ongoing labor shortage in the U S and Canada and unfavorable foreign currency fluctuations in China and Canada.

The price increase in freight surcharge implemented during the first half of fiscal 2022 have helped us offset a portion of the current inflationary pressures we are facing however.

However, the lag in price realization, as well as competitive market pressures that limit us from immediately passing it on all of our cost increases, are expected to continue affecting our operating performance in the near term. And we may need to consider further pricing actions if operating costs continue to rise. For our policy fabrics, segment sales for the second quarter were $33.7 million down 8.5% over the prior year.

For our policy fabrics segment sales for the second quarter were $33 7 million down eight 5% over the prior year.

Operating income for this quarter was $1 million compared with $3.3 million a year ago with an operating income margin of 3.1% compared with 8.9% a year ago. Operating performance was primarily affected by lower sales in our residential business as well as higher freight costs start-up costs for our new Haiti facility, unfavorable foreign currency fluctuations in China, and lower contribution from our re windows products business.

Operating performance was primarily affected by lower sales in our residential business as well as higher freight costs start up costs for our new <unk> facility.

Unfavorable foreign currency fluctuations in China, and lower contribution from our re windows products business we.

We implemented a freight surcharge during the second quarter to help offset rising freight costs. But due to the continued rapid increase in operating material cost we are instituting an additional price increase during the third quarter to help cover a portion of these inflationary pressures. Here are the balance sheet highlights, we reported $36.6 million and total cash and investments and no outstanding borrowings at the end of the quarter compared with $46.9 million in total cash and investments and no outstanding debt as of the end of last fiscal year.

But due to continued rapid increase in operating material cost we are instituting an additional price increase during the third quarter to help cover a portion of these inflationary pressures.

Here are the balance sheet highlights, we reported $36 6 million and total cash and investments and no outstanding borrowings.

at the end of the quarter compared with $46.9 million in total cash and investments and no outstanding debt as of the end of last fiscal year.

Cash flow from operations and free cash flow were negative $1.3 million and negative $5.8 million respectively for the first six months of the year. As we continue to invest in our business, our cash flow from operations and free cash flow during the first half of this fiscal year were affected by the following uses of cash. Increased inventory purchases to support our valued customers to get ahead of rising raw material costs and to strategically improve our in-stock position ahead of the Chinese new year holiday. $3.9 million investment in capital expenditures, including the expenditures for machine and equipment and IT investments as well as expenditures related to our new innovation campus. 1.4 million in payments for the new building lease and startup expenses associated with our Haiti operation in upholstery and cuts and sew operation and increased accounts payable payments related to a return to normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic.

As we continue to invest in our business, our cash flow from operations and free cash flow. During the first half of this fiscal year were affected by the following uses of cash.

Increased inventory purchases to support our valued customers to get ahead of rising material cost rising raw material costs and to strategically improve our in stock position ahead of the Chinese new year holiday.

$3 9 million investment in capital expenditures, including the expenditures for machine and equipment and it investments as well as expenditures related to our new innovation campus.

One 4 million in payments for the new building lease and startup expenses associated with our Haiti operation in upholstery and cuts opera cut and sew operation and increased accounts payable payments related to a return to normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic.

Additionally, during the first six months of this fiscal year, we paid $2.7 million in regular 40 dividends and spent $1.8 million on share repurchases. While we're pleased with our solid balance sheet going into the third quarter. It is important to note that we will continue to utilize cash for strategic investments in working capital, planned capital expenditures and investments in our operations located in Haiti. Based on our current expected uses of cash in our business outlook for the second half of this fiscal year, we expect total cash and investments to be lower at the end of the third quarter as compared to the end of the second quarter, but to increase by the end of the fourth quarter.

While we're pleased with our solid balance sheet going into the third quarter. It is important to note that we will continue to utilize cash for strategic investments in working capital planned capital expenditures and investments in our operations located in Haiti.

Based on our current expected uses of cash in our business outlook for the second half of this fiscal year, we expect total cash and investments to be lower at the end of the third quarter as compared to the end of the second quarter, but to increase by the end of the fourth quarter.

The company repurchased approximately 73,000 shares of our common stock during the second quarter, leaving approximately $3.2 million available under our current share repurchase program. With that, I will turn the call back over to you.

Thank you, Ken. I'll begin with the mattress fabrics business. While mattress fabrics sales for the second quarter were in line with our expectations. Revenue was somewhat affected by our customer supply chain constraint for non-fabric components and existing inventory levels for mattress fabrics and covers.

I'll begin with the mattress fabrics business.

While mattress fabrics sales for the second quarter were in line with our expectations.

Revenue was somewhat somewhat affected by our customer supply chain constraint for non fabric components and existing inventory levels for mattress fabrics and covers.

This caused our customers to temporarily delay taking some orders and pushed some new product launches into subsequent quarters while working through those limitations. However, we expect these pressures will be alleviated over the medium term.

However, we expect these pressures will be alleviated over the medium term.

Despite the challenging environment during the quarter, we rely on our product-driven strategy with a focus on design creativity and innovation supported by the utilization of our resilient manufacturing and sourcing platform to service the needs of our customers. Our onshore nearshore and offshore supply chain strategy. As well as our fabric to cover model remains a preferred platform, especially for our sewn mattress cover customers.

Our onshore nearshore and offshore supply chain strategy.

As well as our fabric to cover model remains a preferred platform, especially for our sewn mattress cover customers.

Looking ahead, our market position remains solid with strong new placements and product developments for fiscal 2023. Rising costs continue to pressure our profitability, but our team remains committed to ongoing efforts to control internal costs, improve efficiencies and take reasonable pricing actions to mitigate and manage inflation.

Rising costs continue to pressure our profitability, but our team remains committed to ongoing efforts to control internal costs improve efficiencies and take reasonable pricing actions to mitigate and manage inflation.

Over the long term, we are well-positioned to sustain our competitive advantage and leverage our compelling business model to further expand our market reach. Especially as our customer supply chain disruption and inventory positions began to normalize. Now I'll make a few comments on the upholstery fabrics segment. Our second-quarter results were disappointing largely driven by lower sales in our residential business due to COVID-19 related shutdowns of our sourcing partners and our customers in Vietnam throughout most of the quarter.

Now I'll make a few comments on the upholstery fabrics segment.

Our second quarter results were disappointing largely driven by lower sales in our residential business due to COVID-19 related shutdowns of our sourcing partners and our customers in Vietnam throughout most of the quarter.

These shutdowns were expected to be short term but instead lasted significantly longer than anticipated and limited our ability to ship orders, both within and outside of Asia. Residential sales were also pressured by our customer supply chain constraints and labor shortages with our US facilities, which significantly reduced our ability to ship prepared fabric orders.

Residential sales were also pressured by our customer supply chain constraints and labor shortages with our U S facilities, which significantly reduced our ability to ship prepared fabric orders.

Despite the headwinds in our residential business, we were encouraged by the recovery in our hospitality business during the second quarter led by our hospitality contracts fabric business. We also saw a measurable improvement in our read window products business during the last month of the quarter.

We also saw a measurable improvement in our read window products business during the last month of the quarter.

We are pleased that the shutdowns that affected our Vietnam customer's in sourcing partners during the quarter are now lifted and we have resumed shipping at normal lost capacity. Additionally, we expect to begin production at our new Haiti facility during the third quarter, which will expand our capacity for cut and sewn upholstery kits and mitigate some risk with nearshore capabilities that complement our strong Asian platform.

Additionally, we expect to begin production at our new Haiti facility during the third quarter, which will expand our capacity for cut and sewn upholstery kits and mitigate some risk with near shore capabilities that complement our strong Asian platform.

Looking ahead, there are lingering near term challenges related to our customer supply chain constraints and existing levels of fabric inventory for the residential business. Also while we believe demand trends remain favorable for the home furnishings industry. There is an expected slowdown in new business from the peak experienced during the post-COVID-19 stay at home search.

Also while we believe demand trends remain favorable for the home furnishings industry. There is an expected slowdown in new business from the peak experienced during the post COVID-19 stay at home search.

But despite these external conditions, our business is well-positioned for the long term with our product-driven strategy and innovative product offerings, including our popular portfolio of LiveSmart performance products as well as our flexible agent platform, our long term supplier relationships and our expanded capacity in Haiti.

We are also encouraged by the recent Showtime fabric market, where our products received favorable reactions and strong support from our customers. Above all, we remain focused on meeting the changing needs of our valued customers and upholstery fabrics. Ken will now discuss the general outlook for the third and fourth quarters of this fiscal year and then we'll take some questions.

Above all we remain focused on meeting the changing needs of our valued customers and upholstery fabrics.

Ken will now discuss the general outlook for the third and fourth quarters of this fiscal year and then we'll take some questions.

We continue to navigate uncertainty in the macroeconomic environment related to customer supply chain disruptions for non-fabric components, significantly inflationary pressures, a challenging labor market and fluctuation in foreign currency exchange rates, although we are well-positioned over the long term with our product-driven strategy and flexible global platform.

And labor market and fluctuation in foreign currency exchange rates, although we are well positioned over the long term with our product driven strategy and flexible global platform.

The current headwinds are expected to continue pressuring results throughout the second half of this fiscal year, especially during the third quarter. As a reminder, the third and fourth quarters will also be affected by the timing of the Chinese new year holiday, which begins at the end of the third quarter and continued into the beginning of the fourth quarter.

Due to the uncertain and rapidly changing inflationary environment, the lack of visibility related to the duration and magnitude of customer supply chain disruptions and uncertainty related to the impact of the new Omicron environment of the Coronavirus, we have withdrawn our previously issued annual guidance for this fiscal year and have only provided a limited outlook for the third and fourth quarters until the current volatility stay stabilized.

provided a limited outlook for the third and fourth quarters until the current volatility stay stabilized.

Stay stabilized.

We expect our net sales and consolidated operating income for the third quarter of this fiscal year to be sequentially comparable to the second quarter of this fiscal year. We expect a strong improvement in net sales and operating income for the fourth quarter of this fiscal year as compared to both the sequential growth the sequential third quarter of this fiscal year and as compared to the fourth quarter of last fiscal year.

We expect a strong improvement in net sales and operating income for the fourth quarter of this fiscal year as compared to both the sequential growth the sequential third quarter of this fiscal year and as compared to the fourth quarter of last fiscal year.

Our confidence in this anticipated fourth-quarter rebound comes from expected improvement in our customer supply chains and recognition of our customer placements and the scheduled timing for their release in a traditionally seasonal strong quarter. As well as positioning with our solar supply chains, strategic inventory levels and pricing actions that will cover us more adequate in the fourth quarter.

Traditionally seasonal strong quarter as.

As well as positioning with our solar supply chains.

Strategic inventory levels and pricing actions that will cover us more adequate in the fourth quarter.

Notably, our expectations for the third and fourth quarters of this fiscal year are based on information available at the time of this call and reflect certain assumptions by management regarding the company's business and trends and the projected impact of the ongoing headwinds. Additionally, based on current expectations, capital expenditures for this fiscal year are now expected to be in the $10.3 million to $10.7 million range.

And trends and the projected impact of the ongoing headwinds.

Additionally, based on current expectations capital expenditures for this fiscal year are now expected to be in the $10 3 million to $10 7 million range or.

Our capital investments will focus on the ongoing strategy of maintenance CAPEX, centered in our mattress fabrics business as well as spending in our upholstery fabrics business with investments in read Windows, and our new Haiti startup. 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 $7.4 million to $7.6 billion for this fiscal year. With that, we will now take your questions.

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 $7 4 million to $7 6 billion for this fiscal year.

With that we will now take your questions.

We will now begin the question and answer session. To ask a question you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Anthony <unk> with Sidoti and company. Please go ahead.

Yes, good morning, and thank you for taking the questions. So I know you guys did it pretty good overview of the two different segments. I just wanted to see if we can get a better understanding of the timing shifts basically of shipments it sounds like there are some months some things going on with new product launches. Some of it is just your sustomers are asking to hold off on shipments. So just wanted to if you could just kind of separate the two to just give us a better understanding of the timing issues that are surrounding the back half outlook.

So I know you guys did it.

Pretty good overview of the two different segments just wanted to see if we can get a better understanding of the timing shifts basically of shipments it sounds like there's some some months some things going on with new product launches. Some of it is just just Europe.

Customers are asking to hold off on shipments. So just just wanted to if you could just kind of.

the two to just give us a better understanding of the timing issues that are surrounding the back half outlook.

The timing issues that are surrounding the back half outlook.

Yes, Anthony. Thank you for the question and good morning. I'll start and certainly let Boyd chime in too. There are some nuances between the two businesses. So your question is excellent. In the upholstery fabrics business, we have built up strategically some products in advance of the Chinese new year, but we also built up some inventory in preparation as our customers had planned to expand capacity to meet surge levels with demand.

Time into it is there are some nuances between the two businesses. So your question is excellent.

In the upholstery fabrics business.

we have built up strategically some products in advance of the Chinese new year, but we also built up some inventory in preparation as our customers had planned to expand capacity to meet surge levels with demand.

So what we've seen in some cases, our supply chain has been fulfilling better and keeping up with market demand and our lead times are more normal today. So we are prepared to deliver in what would normally be increased levels of capacity in some cases the customers haven't caught up to him. Boyd, you may want to add to that to some degree as while we're seeing a little delay in some of the shipping there.

So we are prepared to deliver in what would normally be increased levels of capacity in some cases, the customers haven't caught up to him.

Boyd you may want to add to that to some degree is while we're seeing a little delay in some of the shipping there.

No, I think that very well covers what's happened on the fabric side of the business and then additionally to that, as we've discussed, we had the disruption on the cut and sew portion of our business. From Vietnam in second quarter. But with that now, Vietnam now being back fully restored with capacity there and with the Haiti operation now coming on stream, we certainly see more normalized shipping patterns for the second half of the year on our cut and sew business as well. I think Anthony and then just to keep tacking onto that and spin into mattress fabrics, Tom, you should expect.

Very well covers what's happened on the fabric side of the business and then additionally to that.

As we've discussed we had the disruption on the cut and sew portion of our business.

From Vietnam in second quarter, but with that now Vietnam now being back fully restored with.

Capacity, there and with the Haiti operation now coming on stream, we certainly see.

A more normalized shipping patterns for the second half of the year on our cut and sew business as well.

I think Anthony and then just to keep tacking onto that and spin into mattress fabrics, Tom you should expect.

I mean, we would expect some sequential improvement in our policy fabric from Q2 to Q3. And where when we talk about mattress fabrics, especially mattress covers, normally, in the end of our Q3, we will see strong ramp-ups of new product rollouts, often target around calendar year January. Because of some of the demand in the business and just dealing with supply chain and making sure current orders can be delivered, a lot of those rollouts and we would expect normally for mattress fabrics in Q3 are being pushed into Q4 or later. So that's why it's a slight difference. And both businesses were able to deliver. And in each case I guess it's because our customers can't pull it all through that we've prepared. But it is a little different quarter to quarter. Upholstery is to start to improve some in Q3 where mattress fabrics may not feel that improvement until Q4.

And our policy fabric from Q2 to Q3.

And where when we talk about mattress fabrics, especially mattress covers normally in the end of our Q3, we will see.

Drawn ramp ups of new product Rollouts, often target around calendar year January because of some of the demand in the business and just dealing with supply chain and making sure current orders can be delivered a lot of those rollouts and we would expect normally for mattress fabrics in Q3 are being pushed into Q4.

Or later, so that's why it's a slight difference in both businesses were able to deliver.

And in each case I guess.

because our customers can't pull it all through that we've prepared. But it is a little different quarter to quarter. Upholstery is to start to improve some in Q3 where mattress fabrics may not feel that improvement until Q4.

Got it okay. Thanks, Phil. So that explanation and then I guess just from an overall demand perspective. It sounds like you expect maybe a little bit of moderation versus a year ago at peak levels, but is it safe to assume that you guys are still seeing demand above pre-pandemic levels?

A year ago.

At our peak levels, but is it safe to assume that you guys are still seeing demand above pre pandemic levels.

Anthony. This is Dave again, That's an excellent question too and it is an important nuance to think about when we speak about sales slowing. When we say that, we mean they're slowing as you pointed out from a very high peak that we were seeing last year at this time. As everything we had was shipping quick and we were to stay at home response to boost it really the entire industry. The business and our customers know, we believe is still at a high level compared to pre-COVID-19 levels and they are working through really strong backlogs. It's just at the level has subsided somewhat on new orders as compared to that peak of last year.

When we say that we mean theyre slowing as you pointed out from a very high peak that we were seeing last year. At this time is everything we had was shipping quick and we were to stay at home response to boost it really the entire industry.

The business and our customers know, we believe is still at a high level compared to pre COVID-19 levels and they are working through really strong backlogs. It's just at the level has subsided somewhat on new orders as compared to that peak of last year.

We feel that's a little more acutely is in some cases our customers have ordered more fabric as we talked about to support increased production levels to work the backlog that the capacity is not fully in place. So it's really a timing issue. And again, our supply chain has been solid in most of our backlogs are now at normal lead times. So again, it's just timing of when we can start to deliver it. So generally we do see positive long term trend in the order level, which does continue supporting our business.

I have ordered more fabric as we talked about to support increased production levels to work the backlog that the capacity is not fully in place. So it's really a timing issue and again our supply chain has been solid in most of our backlogs are now at normal lead times. So again, it's just timing of when we can start to deliver it.

So generally we do see positive long term trend and the order level, which does continue supporting our business.

Got it, okay. And the last question for me as far as the planned price increases. Is it both for the third and fourth quarter or just for the third quarter that you are planning. Can you give us the magnitude of price that you're planning to do? Yes, Anthony, this is Ken. If you look at Q2. The impact kind of the cumulative impact of that increases we've done so far. That's around 3% or so of total income.

Is it both for the.

So the first and fourth quarter or just for the third quarter that you are planning can you give us.

No.

You said that youre acquiring.

To do.

Yes, Anthony this is Ken.

If you look at Q2.

The impact kind of the cumulative impact.

All of that.

Increases we've done so far.

Thats ground around 3% or so of total income.

Now, our total sales. And so when you look at the rest of the year I mean, we do have more coming in but those are going to accumulate over the period of time. So it's going to be higher of course than we are today. But they come in at different times, so they are going to be staggered, but I think by the time the end of the third quarter gas that they will all be in place at that point.

But.

They come in at different times, so they are going to be staggered, but I think by the time the end of the third quarter gas that they will all be in place at that point.

Yes.

Okay, got it, alright, well, thank you very much and best of luck going forward. Thank you, Anthony, have a good day. The next question comes from Budd <unk> with Water Tower Research. Please go ahead.

Thank you Anthony we have a good day.

The next question comes from Budd <unk> with water Tower Research. Please go ahead.

Good morning, Ken, Boyd. If you could you said it would take, I think your quote was some time for your customers to work through the additional problems that they had before they could get through to your fabric inventory. Can you quantify that maybe it's different by segment and probably is. Maybe give us an idea of what you think that time is.

Ken Boyd.

Sure.

If you could you said it would take I think yes, I think your quote was some time for your customers to work through the additional.

Problems that they had before they could get get through to the your fabric inventory can you quantify that maybe.

Maybe it's different by segment it probably is.

Maybe give us an idea of what you think that time is.

Yes, I mean, Budd, for sure a good question. We're just trying to be a little hesitant when we talk about some time, but we really obviously, what we're seeing the strong rebound for Q4, we think it starts fan. So it's not a long term thing. We think it would be Q4, and then heading into next year. Okay. I am sorry. In both businesses, although the rebound for Q4 will be first in mattress fabrics and then continuing strong for both through the rest of the year. Gotcha. Let me put out maybe this is maybe I don't mean it to be unfair, but it's probably a difficult question. If Haiti had been online during the second quarter for all of the second quarter. Would that have done for your Vietnam Operation? Would you how what kind of impact would you have had?

We're just trying to be a little.

The hesitancy when we talk about some time, but we really obviously, what we're seeing.

The strong rebound for Q4, we think it starts fan so it's not a long term thing.

We think it would be Q4, and then heading into next year.

Okay.

I am sorry in both in both businesses, although the rebound for Q4 will be first in mattress fabrics here and then continuing strong for both through the rest of the year.

Gotcha.

Let me put out maybe this is maybe I don't mean it to be unfair, but it's probably a difficult question. If he had been online during.

The second quarter for all of the second quarter.

Would that have done for your Vietnam Operation would you how what kind of impact would you impact.

Yes, Budd, this is Boyd and certainly and of course, the Haiti operation is coming online as we had planned. It really has been no delay in that facility coming on stream, but if that facility had been in place earlier. Certainly, we would have had an opportunity to shift some of the Vietnam production that was being disrupted by Covid. We could have shifted some of that potentially to the Haiti operation, which would have helped in regards to the disruption that we saw in Q2.

It really has been no delay in that facility coming on stream, but if that facility had been in place earlier.

Certainly we would have had an opportunity to shift some of the.

Vietnam production that was being disrupted by Covid, we could shift some of that potentially to the Haiti operation, which would have.

Helped in regards to the disruption that we saw in Q2.

We were able to shift some of the Vietnam production back to China for a period of time, so we weren't fully without capability of supplying cut and sewn kits during that time period. But yes, if Haiti had been available sooner, we certainly could've taken advantage of that situation as well. And so just for bogs analogy or Boyd with let's just shift back to China was an amazing statement to your supply chain, but that came at a cost because of the tariffs and some of the impacts that have been. While we moved to Vietnam in the first place. That is correct.

Fully without capability of supplying cut and sewn kits during that time period, but yes, if haiti had been available sooner, we certainly could've taken advantage of that situation as well and so just for bogs analogy or Boyd with let's just shift back to China was an amazing statement to your supply chain, but that came at a cost because.

As of the tariffs and some of the impacts that have been.

While we moved to Vietnam in the first place that is correct.

There was some cost. Okay. That makes good sense. One of the words that now been apparently retired by the chairman of the fed was transitory and talking about inflation and I don't think anybody in the business where orders has believed transitory for some time.

That makes good sense.

One of the words that now been apparently retired by the chairman of the fed was transitory and talking about inflation and I don't think anybody in the business where orders has believed transitory for some time, but.

What is the status of what you're seeing in terms of inflation now? Sre you seeing additional price increases in the last couple of weeks that are going on? Or are we seeing any moderation in the rate of increases or where we're coming from?

<unk> are going on.

Or are we seeing any moderation in the.

The rate of increases or where we're coming from.

Budd. This is Boyd again. I'll first speak in regards to the upholstery fabrics business. And we certainly have continued to see additional increases from an inflationary environment. We've seen additional increases in the recent weeks. So there are inflationary pressures that are continuing to emerge most recently related to energy costs and raw material costs.

From an inflationary environment, we've seen additional increases in the recent weeks.

So there are inflationary pressures that are continuing to emerge.

Most recently related to energy costs and raw material costs.

There are ongoing inflationary pressures. Other costs such as freight. I think we've seen those costs likely have peaked. But yes, to answer your question, we are continuing to see additional inflationary cost pressures.

Other costs such as freight.

I think we've seen those costs likely have peaked.

But yes to answer your question, we are continuing to see additional inflationary cost pressures.

Okay, but that sound like that is talking about energy that's in the kind of the factors of production. And if you've seen freight peak, that's probably peaks and we're probably not too far away from our peak on that as well. I would suspect I mean, those things have a way of factoring through our supply chain and economy over a period of time. So would that be the right way to think about it or am I being too optimistic?

And if you've seen freight peak, that's probably peaks and we're probably not too far away from our peak on that as well.

I would suspect I mean, those things have a way of factoring through our supply chain and economy over a period of time, so would that be the right way to think about it or am I.

Being too optimistic.

I think we're just in an uncertain environment right now, Budd. There's been a lot of volatility that we've seen from month to month and week to week. So I'm not sure there is how to think about that just yet other than as we are seeing these cost pressures. We are taking the necessary actions at the time and we will continue to respond accordingly with whatever occurs. I think we're thinking about it like you are, Budd we do hope we've we're at a peak of some of those costs. Raw materials is probably the one that I worry about the most that might have more information on that hopefully you are right about right and I know. We're not totally sure. On the mattress side, I'll just add in one more thing that's an impact as labor costs. Because of our strong North American production level in mattress fabrics, we have had an impact from labor and certainly, we have higher labor rates. But what's impacted us more in the past has been so much labor shortage and the inefficiency of being able to train and get new associates to operate efficiently. The good news is we have significant improvement there and in a much better shape as we get to middle of Q3 with a much stronger labor position. So even at somewhat higher rate, having an efficient labor rate will be inefficient labor force will be a big help to us there. That starts to limit some of the pressures in leasing that part of the business.

There's been a lot of volatility that we've seen from month to month and week to week. So I'm not sure there is.

How to think about that just yet other than as we are seeing these.

Cost pressures, we are taking the necessary actions at the time and we will continue to respond accordingly with whatever occurs I think we're thinking about it like you are Budd we do hope we've we're at a peak of some of those cost raw materials is probably the one that I worry about the most that might have more information on that hopefully you are right about right and I know.

We're not totally sure.

On the mattress side I'll, just add in one more thing thats, an impact as labor costs.

Does have our strong north American production level in mattress fabrics, we have had an impact from labor and certainly we have higher labor rates, but what's impacted us more in the past has been so much labor shortage and the inefficiency of being able to train and get new associates to operate efficiently. The good news.

significant improvement there and in a much better shape as we get to middle of Q3 with a much stronger labor position. So even at somewhat higher rate, having an efficient labor rate will be inefficient labor force will be a big help to us there. That starts to limit some

of the pressures in leasing that part of the business.

Yes, we've heard from a lot of people that they've been shortage in terms of being able to get appropriate associates. Can you quantify are you are at where you want to be in terms of your labor force? Or what's the shortage now versus maybe what it was two weeks ago four weeks ago six weeks ago? It is significantly drastically improved from where it was six weeks ago. So for whatever reason, we just had a nice, we've done a great job recruiting, a great job of engagement.

Appropriate associates or can you quantify are you are you at.

Where you want to be in terms of your labor force for which the shortage now versus maybe what it was two weeks ago four weeks ago six weeks ago.

It is significantly drastically improved from where it was six weeks ago. So for whatever reason, we just had a nice who've done a great job recruiting a great job of engagement.

We found a lot of success replacing or refilling jobs that were open, especially on our knight in off shifts. That was one of the biggest problem area was. We're not all the way filled but where we are in a place now where we can operate our equipment, which makes a big difference to our efficiency.

I can understand that. Last for me. I noted that inventories are up like $16 million year over year to kind of the highest level that I've seen since I guess the late 1990s when the company was being run with a different discipline. And not as an asset light company, which had been over now for the last decade or more so. Is any of that inventory at risk? And is it finished goods with raw material? I worry about that I guess other investors might too.

Last for me I noted that inventories are up like $16 million year over year to kind of the highest level that I've seen since I guess the late 19 nineties when the company was being run with a different it's a.

A different discipline.

<unk> is an asset light company, which had been over now for the last decade or more so.

Is any of that inventory risks.

And is it finished goods with.

Raw material.

I worry about that I guess other investors might too.

Yes, Budd. This can all begin and Dave you can jump in. I think as far as the buildup is I think I pointed this out I mean part of it has been customer-related. Customers pushing back getting ready for Chinese new year, all that's finished goods. We have increased our raw materials on the mattress fabric side to get ahead of the price increases. So it is both sides of it.

This can all began and Dave you can jump in with you and I think as far as the buildup is I think I pointed this out I mean part of it has been.

Customer related.

Customers pushing back getting ready for Chinese new year, all that's finished goods.

<unk> increased our raw materials on the sea on the mattress fabric side to get ahead of the price increases. So it is it is both sides of it.

But those have all been recent increases in preparation for these periods. So I don't see any exposure there as far as. We don't believe there's any exposure in the upholstery side of the business that is more finished goods. Prepared ahead of Chinese new year, and ready for the expanded capacity levels, our customers expect to get to. And on the mattress side, yes. It's a lot of raw materials that have been purchased in advance of pricing pressure that we can knit or weave or make a cover out of in any direction that we get pulled.

Prepared ahead of Chinese new year, and ready for the expanded capacity levels, our customers expect to get to and on the mattress side, yes. It's a lot of raw materials that have been purchased in advance.

Of pricing pressure that we can knit or weave or make a cover out of in any direction, we get pulp so.

It feels like a positive position that's poised for an upturn in the market. A lot of companies these days are really focusing on higher inventory just because of the uncertainty so we feel good from that standpoint. And expecting that to turn in the fourth quarter.

A lot of companies. These days are really focusing on higher inventory just because of the uncertainty so we.

We feel good from that standpoint, and and and.

And expecting that to turn in the fourth quarter.

Okay.

Do you think inventories go backwards, I mean, everybody's talking today about having more inventory than less inventory. Adjusted time seems to be something now moving to the past. People were talking about having pockets of additional supply because they're worried about things like which we've experienced now for the last two quarters supply chain. So about $16 million, how much would you drawdown?

Adjusted time seems to be something now moving to the past, but people were talking about having pockets of additional supply because they're worried about things like which we've experienced now for the last two quarters supply chain. So.

About $16 million, how much would you draw down.

Yes, I think again this is Ken. I think for the fourth quarter, of course, we think we can take a big sizable chunk out of that and then from there, you looked at over the past year I think it was in mid-fifties. At one time I think last year the 40, I think is $47 million was low. So I think going forward it obviously depends on the uncertainty that we're looking at as far as what our customers are doing. But I don't know Boyd I think it would stay a little bit higher than normal. I think certainly and we feel strongly that our service reputation and our reliability for service throughout this volatile time period has certainly been an advantage for us.

<unk> looked at over the past year I think it was in mid fifties.

At one time I think I think last year. The 40, I think is $47 million was low.

So I think going forward it obviously depends on the.

The uncertainty that we're looking at as far as what our customers are doing but I don't know Boyd I think it would stay a little bit higher than normal I think certainly and we feel strongly budd that our service reputation and our reliability for service throughout this volatile time period.

certainly been an advantage for us.

Yes, I think as we look at our inventory strategically now versus what we did in number of years past, we certainly see it as a strategic advantage to be able to offer exceptional service continually to our customer base. So I think I understand that because I think that's that is the reputation of coal and with the stronger balance sheet. You have, I think you've got that strategic advantage. So good luck on the third and the fourth quarter and look forward to talking to you again shortly.

In number of years past, we certainly see it as a strategic advantage to be able to offer exceptional service.

Continually to our customer base, so I think.

I understand that because I think thats that is the reputation of coal and with the stronger balance sheet.

You have I think you've got that strategic advantage. So good luck on the third and the fourth quarter and look forward to talking to you again shortly.

Thank you. The next question comes from Marco Rodriguez with Stonegate Capital Markets. Please go ahead. Good morning, guys. Thank you for taking my questions. Good morning, Marco. Hey, guys. I was wondering if you can maybe we can talk a little bit about the outlook that you had in your prepared remarks. Obviously, you called out a few headwinds that are impacting the second half of the year inflation lowering demand, high customer inventory levels. Supply chain issues at your customers. So I understand the Q3 guidance in light of that. But maybe if you can talk a little bit about Q4, your expectations there for a stronger improvement. If inflationary pressures are less and temporary and supply chain issues don't seem to be rectified anytime soon, what sort of giving you the confidence for Q4 for that strong improvement?

The next question comes from Marco Rodriguez with Stonegate capital market. Please go ahead.

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

Good morning Martin.

Hey, guys I was wondering if you can maybe we can talk a little bit about the outlook.

That you had in your prepared remarks, obviously, you called out a few headwinds that are impacting the second half of the year inflation lowering demand high customer inventory levels.

Ply chain issues at your customers. So I understand the Q3 guidance in light of that.

But maybe if you can talk a little bit of off Q4, your expectations there for a stronger improvement.

Inflationary pressures are less and temporary supply chain issues don't seem to be rectified anytime soon what.

Sort of giving you the confidence for Q4 for that strong improvement.

Thank you, Marco, good question. And that's something we've talked a lot about and we've touched on throughout, it comes down to a timing question. And then Q4 also being traditionally a strong seasonal period historically. And as we've been saying internally and to anyone we've spoken to investors, our customers, our suppliers, it's not really a question of if it is going to come back strong it's when. So we've got built a solid supply chain, terrific production locations, and as Boyd mentioned a few times, we're outperforming our competitors in delivery. And we hear this all the time and we do think that's driving new opportunity. So in Q4, let's think about some of the good things. We will be fully operational in Haiti for upholstery kits. And we have both businesses then operating with some combination of onshore, nearshore and offshore capabilities. So really boosting and ramping up the supply chain even more. We'll be much more covered to inflationary cost in our business in Q4. With the price increases and surcharges are being in place and our labor situation, as I touched on, has stabilized nicely now which helps quite a bit on the mattress fabric side. We strategically built some good inventory levels that we've touched on in both finished goods and raw materials.

Throughout it comes down to a timing question and then Q4 also being traditionally a strong seasonal period historically.

And as we've been saying internally and to any one we've spoken to investors our customers our suppliers, it's not really a question of.

If it is going to come back strong it's win.

So we've got built a solid supply chain terrific production locations and as Boyd mentioned, a few times, we're outperforming our competitors in delivery and we hear this all the time and we do think that's driving new opportunity.

So in Q4 lets think about some of the good things will be fully operational in Haiti for upholstery kits and.

And we have both businesses then operating with some combination of onshore nearshore and offshore capabilities, so really boosting and ramping up the supply chain even more.

We'll be much more covered to inflationary cost in our business in Q4.

With the price increases.

Surcharges are being in place and our labor situation as I touched on has stabilized nicely now which helps quite a bit on the mattress fabric side.

We strategically built some good inventory levels that we've touched on in both finished goods and raw materials.

And we're positioned well as our customers start to increase their capacity levels. And we think it will just be a strong pull-through of that. And we also are hearing about new strong placement and conditions for both businesses. And we just see expectations for windows customers are now scheduling through all of those new items and that all seems to be pointing much more towards Q4. And then just a couple more quick things. Our new innovation campus has been a home run. We had Showtime there are a couple of weeks ago, and just great momentum coming from that Showtime market. And then we just think we're in a strong position with our market reach for medium to long term. And just very much looking forward to what we think with our price actions finally to catch a little hole to some more normalized conditions in Q4. So I hope that helps.

That and we also are hearing about new strong placement and conditions for both businesses and we just see expectations for windows customers are now scheduling through all of those new items and that all seems to be pointing much more towards Q4.

And then just a couple more quick things our new innovation campus has been a homerun.

We had Showtime there are a couple of weeks ago, and just great momentum coming from that Showtime market.

And then we just we just think we're in a strong position with our market reach for medium to long term.

And just very much looking forward to what we think.

With our price actions finally to catch a little hole to some more normalized conditions in Q4, so I hope that helps.

Very helpful. Thanks, I appreciate that. I also wanted to kind of follow up on a prior question as it relates to, in your prepared remarks, you discussed kind of the potential dampening of demand due to prices. And I understand the difficult year over year comps. But is there, and I heard your response that demand is a bit better than pre-COVID-19 levels. I just want to make sure that, I guess, what I'm trying to get at is whether or not inflation these price increases are really starting to impact the consumers' ability or willingness rather to buy new stuff?

I also wanted to kind of follow up on a prior question as it relates to.

In your prepared remarks, you discussed kind of the <unk>.

Central dampening of demand due to prices and I understand the difficult year over year comps.

But is there and I argue or.

Response to that.

Demand is.

A bit better than pre COVID-19 levels, I, just want to make sure that.

I guess, what I'm trying to get at is whether or not inflation. These price increases are really starting to impact the consumers' ability or willingness rather too to buying the stock.

I mean that's a great question, Marco, and one we've talked about a lot and we spoke about it and Boyd sitting here beside me shaking his head. Qe asked every customer we saw during our Showtime market about that exact question. And we just aren't hearing that concern yet. Fair Boyd? Yes. That's the feedback we've received. We wander same. I know the increases we're passing on arent going to be the kind of thing that would disrupt the market, but we do know with some of our customers have done increases as high as the mid to higher teens, I guess. But we just, we have not heard of a dampening of the demand. Got it and. I mean down from the peak, but we're not here, it's still at a high level. So we're really trying to, we're not really hearing that yet. Got it. Okay, and the last question for me.

During our Showtime market about that exact question and we just aren't hearing that concern yet.

Fair Boyd So we've received we wander same.

I know I know the increases we're passing on arent going to be the kind of thing that would disrupt the market, but we do know with some of our customers have done increases as high as the mid to higher teens, I guess, but we just we have not heard of <unk>.

A dampening of demand.

Yes.

Got it and.

<unk>.

Down from the peak, but we're not here, it's still at a high level. So.

We really were not yet not yet no.

Got it got it Okay and last question for me.

You guys, in your prepared remarks also called out some competitive pressures potentially impacting your ability to push through cost increases or raise your prices in your mattress fabric segment. Can you maybe expand a little bit more on that and what you're seeing? I think, Marco, and good question too. And we tried to be smart in the way, we talk about the competitive pressures are not as much about us ultimately being able to pass it through. It's the timing of when we can do it. So we will get there. We just lag on it. So there is just always competitive pressure when we're dealing with customers and trying to think long term for developing big business with our most trusted partners. Sometimes we just can't pass it as quick as we want so we do it in chunks and do it over stage periods, where ultimately we catch up to the full effect. But just not immediately. Boyd, do you want to add anything to that or how you think about it from pricing?

Potentially impacting your ability to push through cost increases or raise your prices in your mattress fabric segment can you maybe expand a little bit more on that and what youre seeing.

I think Marco and had some good question too and we tried to be.

Smart in the way, we talk about the competitive pressures are not as much about us ultimately ultimately being able to pass it through its the timing of when we can do it. So we will get there we just lag on it. So there is just always competitive pressure.

When we're dealing with customers and trying to think long term for developing <unk>.

Big business with our most trusted partners, sometimes we just can't pass it as quick as we want to we do it in chunks and do it over stage periods, whereas ultimately be catch up to the full effect, but just not immediately but do you want to add anything to that or how you think about it from pricing.

Yes, I mean, I would just agree with what you said there, but there's typically a lag that will take place. But yes, I don't see any other significant impacts from that. Yes. So it's not as much about passing that through, Marco, it is just how quickly can get it through. Got it, understood. I appreciate your time, guys. Yes, sir. Thank you, Marco.

Yes, I don't see any other significant impacts.

From that yes. So.

It's not as much about passing that through market is just how quickly can get it through.

Got it understood I appreciate your time guys.

Yes, Sir thank you Margaret.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Culp for any closing remarks. Thank you, operator, and again, thank you all 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.

Thank you operator and again, thank you all for your participation and your interest in call. 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]. Yeah. [music]. [music].

Yeah.

[music].

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

After today's presentation there'll be an opportunity to ask questions.

To ask a question you May press Star then one on a touchtone phone to withdraw your question. Please press Star then two.

Please note this event is being recorded.

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

Thank you good morning, and welcome to the Culp Conference call to review the company's results for the second 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.

In addition, during this call the company will be discussing non-GAAP financial measurements, a reconciliation of the non-GAAP financial measurements to the most directly comparable GAAP financial measurements are 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 <unk> 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.

I will now turn the call over to his culp.

President and Chief Executive Officer of Culp. Please go ahead Sir.

Good morning, and thank you 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 Ken bowling, our Chief Financial Officer, and Boyd Chumbley President of our upholstery fabrics business.

For today I will begin the call 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 business outlook for the third and fourth quarters of fiscal 2022.

We will then be happy to take some questions.

As previously announced our results for the second quarter reflected lower than expected sales primarily for our upholstery fabrics segment.

Several external factors affected our sales results for the quarter, particularly COVID-19 related shutdowns in Vietnam and customer supply chain constraints for non fabric components.

Profitability also remain pressured in both of our businesses by the continued rapid rise in freight raw material and labor costs.

Despite the challenging macroeconomic environment situations.

Extremely proud of how our global platform and our associates have responded over the last 18 months to build a more robust robust supply chain that has kept pace with demand and met the delivery needs of our valued customers.

Looking ahead, we are pleased with the shutdowns and Vietnam have been lifted, but the rapidly rising cost and the disruption throughout the industry supply chains do continue.

Many of our customers have delayed their previously planned rollout and their new product launches.

We also believe that many customers have excess inventory for fabric and cover products that were purchased to support their expanding backlogs as they wait for their supply chain issues to subside.

As a result, we expect it could take some time for customers to work through their existing fabric and cut.

Over inventory levels.

We also have some concern that inflationary pressures are causing some slowing in new business from the peak levels of last year.

Leading to some lower demand once customers customers fulfill their existing backlogs.

Although the demand appears to remain high with comparing to pre COVID-19 levels.

Based on these factors we expect the current headwinds will continue to pressure results. During the second half of this fiscal year, especially during the third quarter, but we expect to see a meaningful rebound in our business beginning in the fourth quarter and continuing into next fiscal year.

We are positioned very well with stronger supply chain strategic inventory reserves and growing opportunities as a result of our innovation and strong delivery performance.

We also expect some improvement in customer supply chain disruption by the fourth quarter of this fiscal year, which is traditionally a strong seasonal period.

Notably if we meet our expectations for the third and fourth quarters and for the full fiscal 2022 year, we will sustain significant sales gains it's compared to pre COVID-19 levels of fiscal 2020.

Our strong global platform together with our long term supplier relationships does continue to provide a distinct competitive advantage.

<unk> us to quickly respond to the evolving needs of our customers.

We also remain focused on innovation and creative designs in both of our businesses and we are confident in our product driven strategy.

Our balance sheet remains solid and I am extremely pleased that we have once again increased our annual dividend, making this the ninth consecutive year of dividend increases.

So with that I'll now 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 are the financial highlights for the second quarter net sales were <unk>.

$74 6 million down 3% compared with the prior year period.

The company reported income from operations of $1 6 million compared with income from operations of $4 5 million for the period for the prior year period.

I'll comment in more detail on divisional sales and operating performance in a moment net.

Net income for the second quarter was 851000 or seven cents per diluted share compared with net income of $2 4 million or <unk> 19 per diluted share for the prior year period.

These pressures were partially offset by lower total SG&A expense for the quarter due primarily to lower accrued incentive compensation expense on a percentage of sales basis total SG&A came in at 12, 2% compared to 12, 7% for the same period a year ago.

Trailing 12 months adjusted EBITDA was $17 5 million or five 5% of net sales.

Compared to $11 2 million or four 3% of net sales for the same period last year, reflecting a year over year improvement of 56%.

Consolidated return on capital for the trailing 12 months period was 11, 8%.

The effective income tax rate for the second quarter of this fiscal year was 34, 3% compared with 41, 4% for the same period a year ago.

The income tax rate for the third and fourth quarters could vary based on the facts and circumstances for those specific quarters.

Additionally, we are currently projecting cash income tax payments of approximately $3 6 million for fiscal 2022.

As the timing of when significant capital projects will be placed in the service, which determines the deductibility of accelerated depreciation.

Now, let's take a look at our business segments for mattress fabrics segment sales were $40 9 million up two 1% compared with last year's second quarter.

Operating income for the quarter was $3 1 million compared with $4 4 million a year ago with an operating income margin of seven 7% compared with 10, 9% a year ago.

Operating performance for the second quarter as compared to the prior year period was negatively affected primarily by higher freight raw materials and labor costs.

Inefficiencies due to ongoing labor shortages in the U S and Canada and unfavorable foreign currency fluctuations in China and Canada.

The price increase in freight surcharge implemented during the first half of fiscal 2022 have helped us offset a portion of the current inflationary pressures we are facing.

However, the lag in price realization as well as competitive market pressures that limit us from immediately passing it on all of our cost increases are expected to continue affecting our operating performance in the near term and we may need to consider further pricing actions if operating costs continue to rise.

For our policy fabrics segment sales for the second quarter were $33 7 million down eight 5% over the prior year.

Operating income for this quarter was $1 million compared with $3 3 million a year ago with an operating income margin of three 1% compared with eight 9% a year ago.

Operating performance was primarily affected by lower sales in our residential business as well as higher freight costs start up costs for our new 80 facility.

Unfavorable foreign currency fluctuations in China, and lower contribution from our re windows products business we.

We implemented a freight surcharge during the second quarter to help offset rising freight cost.

But due to continued rapid increase in operating material cost we are instituting an additional price increase during the third quarter to help cover a portion.

These inflationary pressures.

Here are the balance sheet highlights, we reported $36 6 million of total cash and investments and no outstanding borrowings.

At the end of the quarter compared with $46 9 million in total cash and investments and no outstanding debt as of the end of last fiscal year.

Cash flow from operations and free cash flow were negative $1 3 million and negative $5 8 million respectively for the first six months of the year as.

As we continue to invest in our business, our cash flow from operations and free cash flow. During the first half of this fiscal year were affected by the following uses of cash.

$3 9 million investment in capital expenditures, including the expenditures for machine and equipment.

The it investments as well as expenditures related to our new innovation campus.

$1 4 million in payments for the new building lease and startup expenses associated with our Haiti operation in upholstery and cuts opera cut and sew operation and increased accounts payable payments related to a return to normal credit terms as opposed to the extended terms previously granted in response to the COVID-19 pandemic.

Additionally, during the first six months of this fiscal year, we paid $2 7 million in regular 40 dividends and spent $1 8 million on share repurchases.

While we are pleased with our solid balance sheet going into the third quarter. It is important to note that we will continue to utilize cash for strategic investments in working capital planned capital expenditures and investments in our operations located in Haiti.

Based on our current expected uses of cash in our business outlook for the second half of this fiscal year.

We expect total cash and investments to be lower at the end of the third quarter as compared to the end of the second quarter, but to increase by the end of the fourth quarter.

The company repurchased approximately 73000 shares of our common stock during the second quarter, leaving approximately $3 2 million available under our current share repurchase program with that I will turn the call back over to you.

Thank you Ken.

I'll begin with the mattress fabrics business.

Our mattress fabrics sales for the second quarter were in line with our expectations.

Revenue was somewhat somewhat affected by our customer supply chain constraints for non fabric components and existing inventory levels for mattress fabrics and covers.

This caused our customers to temporarily delay taking some orders and pushed some new product launches into subsequent quarters, while working through those limitations.

However, we expect these pressures will be alleviated over the medium term.

Despite the challenging environment during the quarter, we rely on our product driven strategy with a focus on design creativity and innovation supported by the utilization of our resilient manufacturing and sourcing platform to service the needs of our customers.

Our onshore nearshore and offshore supply chain strategy as well as our fabric to cover model remains a preferred platform, especially for our sewn mattress cover customers.

Looking ahead, our market position remained solid with strong new placements and product developments for fiscal 2023.

Over the long term, we are well positioned to sustain our competitive advantage and leverage our compelling business model to further expand our market reach especially as our customer supply chain disruption and inventory positions began to normalize.

Now I'll make a few comments on the upholstery fabrics segment.

These shutdowns were expected to be short term, but instead lasted significantly longer than anticipated and limited our ability to ship orders, both within and outside of Asia.

Residential sales were also pressured by our customer supply chain constraints and labor shortages with our U S facilities.

With significantly reduced our ability to ship prepared fabric orders.

Despite the headwinds in our residential business, we were encouraged by the recovery in our hospitality business during the second quarter led by our hospitality contract fabric business.

We also saw a measurable improvement in our read window products business during the last month of the quarter.

We are pleased the shutdowns that affected our Vietnam customers and shortening sourcing partners. During the quarter are now lifted and we have resumed shipping at normalized capacity.

Additionally, we expect to begin production at our new Haiti facility during the third quarter, which will expand our capacity for cut and sewn upholstery kits and mitigate some risk with nearshore capabilities that complement our strong Asian platform.

Looking ahead, there are lingering near term challenges related to our customer supply chain constraints and existing levels of fabric inventory for the residential business.

Also while we believe demand trends remain favorable for the home furnishings industry. There is an expected slowdown in new business from the peak experience during the post COVID-19 stay at home search.

But despite these external conditions, our business is well positioned for the long term with our product driven strategy and innovative product offerings, including our popular portfolio of Lyft smart performance products as well as our flexible Asian platform, our long term supplier relationships and our expanded capacity in Haiti.

We are also encouraged by the recent Showtime fabric market, where our products received favorable reaction and strong support from our customers.

Above all we remain focused on meeting the changing needs of our valued customers and upholstery fabrics.

Ken will now discuss the general outlook for the third and fourth quarters of this fiscal year and then we'll take some questions.

We continue to navigate uncertainty in the macroeconomic environment related to customer supply chain disruptions for non fabric components significantly insulate inflationary pressures.

And the labor market and fluctuation in foreign currency exchange rates, although we are well positioned over the long term with our product driven strategy and flexible global platform.

The current headwinds are expected to continue to pressure results throughout the second half of this fiscal year, especially during the third quarter. As a reminder, the third and fourth quarters will also be affected by the timing of the Chinese new year holiday, which begins at the end of the third quarter and continued into the beginning of the fourth quarter.

Due to the uncertain and rapidly changing inflationary environment, the lack of visibility related to the duration and magnitude of customer supply chain disruptions and uncertainty related to the impact of the new <unk> environment of Corona virus, we have withdrawn our previously previously issued annual guidance for this fiscal year and have only.

Provided a limited outlook for the third and fourth quarters until the current volatility.

So stay stabilized.

We expect our net sales and consolidated operating income for the third quarter of this fiscal year to be sequentially comparable to the second quarter of this fiscal year.

We expect a strong improvement in net sales and operating income for the fourth quarter of this fiscal year as compared to both the sequential growth the.

<unk> third quarter of this fiscal year and as compared to the fourth quarter of last fiscal year.

Our confidence in this anticipated fourth quarter rebound comes from expected improvement in our customer supply chains and recognition of our customer placements and the scheduled timing for their release.

Traditionally seasonal strong quarter as.

As well as positioning with our solar supply chains.

Strategic inventory levels and pricing actions that will cover us more adequate in the fourth quarter.

Notably our expectations for the third and fourth quarters of this fiscal year are based on information available at the time of this call and reflect certain assumptions by management regarding the company's business.

And trends and the projected impact of the ongoing headwinds and <unk>.

Additionally, based on current expectations capital expenditures for this fiscal year are now expected to be in the $10 3 million to $10 $7 million range or.

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

With that we will now take your questions.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

Is it anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

The first question comes from Anthony <unk> with Sidoti and company. Please go ahead.

Yes, good morning, and thank you for taking the questions.

So.

I know you guys did it.

Pretty good overview of the two different segments just wanted to see if we can get a better understanding of the timing shifts basically of shipments. It's now it sounds like you have some somewhat something's going on with new product launches. Some of it is just just Europe.

Customers are asking to hold off on shipments. So just just wanted to if you could just kind of.

Separate the two to just give us a better understanding of it.

The timing issues that are surrounding the back half outlook.

Yes, Anthony Thank you for the question and good morning. This is <unk> I'll start and certainly let Boyd.

Chime into it is there are some nuances between the two businesses. So your question is excellent.

In the upholstery fabrics business.

We have built up strategically some product in advance of Chinese new year, but we also built up some inventory in preparation as our customers had planned to expand capacity to meet surge levels of demand. So what we've seen in some cases, our supply chain has been fulfilling better and.

Keeping up with market demand and our lead times are more normal today.

We are prepared to deliver at what would normally be increased levels of capacity in some cases, the customers haven't caught up to him.

You may want to add to that to some degree is why we're seeing a little delay in some of the shifting there.

I think that.

Very well covers what's happened on the fabric side of the business is and then additionally to that.

As we've discussed we had the disruption on the cut and sew portion of our business from.

From Vietnam in second quarter, but with that now Vietnam now being back fully restored with.

Capacity, there and with the Haiti operation now coming on stream, we certainly see.

A more normalized shipping patterns for the second half of the year on our cut and sew business as well.

Right and I think Anthony and then just to keep tacking on to that and then as a mattress fabrics, Tom you should expect.

I mean, we would expect some sequential improvement.

Upholstery fabric from Q2 to Q3, and where when we talk about mattress fabrics, especially mattress covers normally in the end of our Q3, we will see.

<unk> ramp ups of new product Rollouts.

<unk> target around calendar year January because of some of the demand in the business and just dealing with supply chain and making sure current orders can be delivered a lot of those rollouts and we would expect normally for mattress fabrics in Q3 are being pushed into Q4 or later so that's why it's a slight difference.

In both businesses were able to deliver.

And in this case I guess, it's because our customers can't pull it all through that we've prepared but it is a little different quarter to quarter upholstery is to start to improve some in Q3 were mattress fabrics may not feel that improvement till Q4.

Got it okay. Thanks for that explanation and then I guess just from an overall demand perspective. It sounds like you expect maybe a little bit of a moderation versus.

A year ago.

Kind of peak levels, but is it safe to assume that you guys are still seeing demand above pre pandemic levels.

Yes, Anthony this is <unk> again, that's a excellent question too and it is an important nuance to think about when we speak about sales slowing.

When we say that we mean are slowing as you pointed out from a very high peak that we were seeing last year. At this time is everything we have with shipping quick and we were to stay in home response to boost it really the entire industry.

The business and our customers know, we believe is still at a high level compared to pre COVID-19 levels and theyre working through really strong backlogs. It's just at the level has subsided somewhat on new orders as compared to that peak of last year.

We feel thats, a little more acutely is in some cases our customers.

I have ordered more fabric as we talked about to support increased production levels to work the backlog that that capacity is not fully in place. So it's really a timing issue and again our supply chain has been solid in most of our backlogs are now at normal lead times. So again, it's just timing of when we can start to deliver it.

So generally we do see positive long term trend.

Order level, which does continue supporting our business.

Got it Okay and then last question for me as far as the planned price increases.

Is it both for the seller.

Third or fourth.

Fourth quarter <unk> for the third quarter that you are planning can you give us.

The magnitude of this.

This is what Youre planning to do.

Yes, Anthony this is Ken.

If you look at Q2, the impact kind of the cumulative impact.

All of that.

Greece's we've done so far.

I'd say, that's ground around 3% or so of total income.

Now our total sales and so when you look at the rest of the year I mean, we do have more coming in but those are going to accumulate over the over the period of time, so it's going to be higher of course than we are today.

But.

They come in at different times, so they are going to be staggered, but I think by the time the end of the third quarter gas that they will all be in place at that point, yes.

Okay got it alright, well, thank you very much and best of luck going forward.

Anthony you have a good day.

The next question comes from Budd <unk> with water Tower Research. Please go ahead.

Good morning.

Ken Boyd.

Good morning Blake.

If you could you said that it would take I think yes, I think your quote was some time for your customers to work through the additional.

Problems that they had before they could get get through to the your fabric inventory.

You quantify that maybe.

Maybe it's different by segment it probably is.

Maybe give us some idea of what you think that time is.

Yes, I mean, we tried yet for sure good question.

We're just trying to be a little.

Hesitant when we talk about some time, but we really obviously when we're seeing the the.

The strong rebound for Q4, we think it starts then so it's not a long term thing.

It would be Q4, and then heading into next year.

Okay.

I am sorry in both in both businesses, although the rebound for Q4 will be first in mattress fabrics here and then continuing strong for both through the rest of the year.

Gotcha.

Let me put out maybe this is it.

I don't mean to be unfair, but it's probably a difficult question. If he had been online during.

The second quarter for all of the second quarter, what would that have done for your Vietnam operation would you.

What kind of impact would you have had.

Yes, Budd this is Boyd and certainly and of course, the Haiti operation is coming online as we had planned.

It really has been no delay in that facility coming on stream, but if that facility had been in place earlier.

Certainly we would have had an opportunity to shift some of the.

Vietnam production that was being disrupted by Covid, we could shift some of that potentially to the Haiti operation, which would have.

Helped in regards to the disruption that we saw in Q2.

We were able to shift some of the Vietnam production back to China for a period of time, so we werent.

Fully without capability of supplying cut and sewn kits during that time period, but yes, if haiti had been available sooner, we certainly could've taken advantage of that situation as well and so just for buses and Alexander Boyd with what you shifted back to China was an amazing statement to your supply chain, but that came at a cost because.

Of the tariffs and some of the impacts that have been.

While we moved to Vietnam in the first place that is correct.

There was some cost okay.

That makes good sense.

One of the words that now been apparently retired chairman of the fed was transitory and talking about inflation and I don't think anybody in the business World has believed transitory for some time, but.

What is the status of what Youre seeing in terms of inflation now are you seeing additional price increases in the last couple of weeks.

<unk> are going on or are we seeing any moderation in the.

The rate of increases or where theyre coming from.

Budd. This is Boyd again ill first speak in regards to the upholstery fabrics business and we certainly have continued to see additional increases.

From an inflationary environment, we've seen additional increases in the recent weeks.

So there are inflationary pressures that are continuing to emerge.

Most recently related to energy costs and raw material costs.

So there are ongoing inflationary pressures.

Other costs such as freight.

I think we've seen those costs likely have peaked.

And but yes to answer your question, we are continuing to see additional inflationary cost pressures.

Okay, but <unk> sound like that is talking about energy that's in the kind of the factors of production. So.

And if you've seen freight peak, that's probably peaks.

Probably not too far away from our peak on that as well.

I would suspect I mean, those things they have.

<unk> of factoring through our supply chain and economy over a period of time so.

That would be the right way to think about it or.

Being too optimistic.

I think we're just in an uncertain environment right now Budd.

Been a lot of volatility that we've seen from month to month and week to week. So I'm not sure there is.

How to think about that just yet other than as we are seeing these.

Cost pressures, we are taking the necessary actions at the time and we will continue to respond accordingly with whatever occurs I think we're thinking about it like you are Budd we do hope we've we're at a peak of some of those cost raw materials is probably the one that I worry about the most that might have more inflation on it hopefully you are right about freight and <unk>.

Boyd, we're not totally sure.

On the mattress side I'll, just add in one more thing thats, an impact as labor costs.

Our strong north American production level in mattress fabrics, we have had an impact from labor and certainly we have higher labor rates, but what's impacted us more in the past has been so much labor shortage and the inefficiency of been able to train and get new associates to operate efficiently. The good news is we.

Significant improvement there and in a much better shape as we get to middle of Q3 with a much stronger labor position. So even at somewhat higher rate, having an efficient labor rate will be inefficient labor force will be a big help to us there that starts to limit.

Some of the some of the pressures in leasing that part of the business.

Yes, we've heard from a lot of people that they've been shortage in terms of being able to get appropriate.

Appropriate associates or can you quantify are you are you at.

Where you want to be in terms of your labor force for which the shortage now versus maybe what it was two weeks ago four weeks ago six weeks ago.

It is significantly drastically improved from where it was six weeks ago. So for whatever reason, we just had a nice who've done a great job recruiting a great job of engagement.

It sounds a lot of success, replacing or refilling jobs that were open, especially on our knight in off shifts that was one of the biggest problem area. Once we're not all the way filled but we're in a place now where we can operate our equipment, which makes a big difference to our efficiency correct.

I can understand that.

Last for me I noted that inventories are up like $16 million year over year.

So kind of the highest level that I've seen since I guess, the late 19 nineties when the company was being robbed him with a different it's a.

A different discipline.

<unk> is an asset light company, which had been over now for the last decade or more so.

Is any of that inventory risk.

And is it finished goods with.

Raw material.

I worry about that I guess other investors might too.

Yes Budd.

This can all began in may of you can jump in with you and I think as far as the buildup is I think I pointed this out I mean part of it has been.

Customer related.

Customers pushing back getting ready for Chinese new year, all Thats finished goods.

<unk> increased our raw materials on the sea on the mattress fabric side to get ahead of the price increases. So it is it is both sides of it.

But those have all been recent increases in preparation for these periods. So I don't see any exposure. There are scores. Yes. We don't believe we don't believe there's any any exposure in the upholstery side of the business that is more finished goods.

Of pricing pressure that we can knit or weave or make a cover out of in any direction that we get Paul yes. So.

Feels like a positive position that's poised for for an upturn in the market yet.

A lot of companies. These days are really focusing on higher inventory just because of the uncertainty so we.

We feel good from that standpoint and and.

And our and expecting that to turn in the fourth quarter.

Okay.

Do you think inventories go backwards, I mean, everybody's talking today about having more inventory than less inventory of the <unk>.

The era of just in time seems to be something now moving to the past, but people were talking about having pockets of.

Of additional supply because they're worried about things like which we've experienced now for the last two quarters supply chain. So.

About $16 million, how much would you think that would draw down.

Yes, I think again this is Ken I think for the fourth quarter of course, we think we can take a big sizable chunk out of that and then from there.

You looked at over the past year I think it was in mid fifties.

At one time I think I think last year. The 40, I think is $47 million was low.

So I think going forward it obviously depends on.

<unk> has certainly been an advantage for us so.

Yes, I think as we look at our inventory strategically now versus what we did in number of years past, we certainly see it as a strategic advantage to be able to offer exceptional service.

Continually to our customer base, so I think.

I understand that because I think that is the reputation of coal and with the stronger balance sheets and you have I think you've got that strategic advantage. So good luck on the third and the fourth quarter and look forward to talking to you again shortly.

Thank you.

The next question comes from Marco Rodriguez with Stonegate capital market. Please go ahead.

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

Well good morning Martin.

Hey, guys I was wondering if you can maybe we can talk a little bit about the outlook.

That you had in your prepared remarks, obviously, you called out a few headwinds that are impacting the second half of the year inflation lowering demand high customer inventory levels.

Fly chain issues at your customers. So I understand the Q3 guidance in light of that.

But maybe if you can talk a little bit of off Q4, your expectations there for a stronger improvement in gift.

Inflationary pressures are less and temporary supply chain issues don't seem to be rectified anytime soon what sort of giving you the confidence for Q4 for that strong improvement.

Thank you Mark good question, and that's something we've talked a lot about and as we've touched on.

Throughout it comes down to a timing question and then Q4 also being traditionally a strong seasonal period historically.

And then as we've been saying internally and to any one we've spoken to investors our customers our suppliers, it's not really a question of.

If it is going to come back strong it's win.

So in Q4, I will think about some of the good things will be fully operational in Haiti for upholstery kits.

And we are both businesses then operating with some combination of onshore nearshore and offshore capabilities, so really boosting and ramping up the supply chain even more.

It will be much more covered to inflationary cost in our business in Q4.

With the price increases.

Surcharges being in place and our labor situation as I touched on has stabilized nicely now which helps quite a bit on the mattress fabric side.

We strategically built some good inventory levels that we've touched on in both finished goods and raw materials.

And we're positioned well as our customers start to increase their capacity levels and we think it will just be a strong pull through.

And then just a couple more quick things our new innovation campus has been a homerun.

We had Showtime there are a couple of weeks ago, and just great momentum coming from that Showtime market.

And then we just we just think we're in a strong position with our market reach for medium to long term.

And just very much looking forward to what we think.

With our price actions finally, catching a little hole to some more normalized conditions in Q4, so I hope that helps.

Very helpful. Thanks, I appreciate that.

I also wanted to kind of follow up on a prior question as it relates to.

In your prepared remarks, you discussed kind of the potential dampening demand due to prices and I understand the <unk>.

Year over year comps.

Is there and I heard your response to that.

And it's a little bit better than pre COVID-19 levels I, just wanted to make sure that.

I guess, what I'm trying to get at is whether or not inflation. The price increases are really starting to impact the consumers' ability or willingness rather to combine these stocks.

I mean, that's a great question Marco and one we've talked about a lot and we spoke about it and Boyd sitting here beside me shaking his head we asked every customer we saw.

During our Showtime market about that exact question and we just aren't hearing that concern yet.

Fair Boyd.

So we've received we wanted our same.

I know I know the increases we're passing on arent going to be the kind of thing that would disrupt the market, but we do know that some of our customers have done increases as high as the mid to higher teens, our guests, but we just we have not heard of.

Of a dampening of demand.

Got it and.

But it's still down from the peak, but we're not here, it's still at a high level. So we've really chunky were not yet not yet no.

Got it got it Okay and last question for me.

You guys in your prepared remarks also called out some competitive pressures.

Potentially impacting your ability to push through cost increases or raise your prices in the mattress fabrics segment can you maybe expand a little bit more on that and what youre seeing.

I think Marco and had some good question too and we tried to be.

<unk> smart in the way, we talk about the competitive pressures are not as much about us ultimately ultimately being able to pass it through its the timing of when we can do it. So we will get there we just lag on it. So there is just always competitive pressure.

When we're dealing with customers and trying to think long term for developing <unk>.

<unk> business with dark most trusted partners.

We just can't pass it as quick as we want to we do it in chunks and do it over stage periods, whereas ultimately be catch up to the full effects, but just not immediately but do you want to add anything to that or how you think about it from pricing.

Yes, I mean, I would just agree with what you said there, but there is typically a lag that will take place but.

Yes, I don't see any other significant impacts.

From that yes.

Not as much about passing that through market is just how quickly can get it through.

Got it understood I appreciate your time guys.

Yes, Sir thank you. Thank you Mark.

This concludes our question and answer session I would like to turn the conference back over to Mr. <unk> for any closing remarks.

Thank you operator and again, thank you all for your participation and your interest in call. 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.

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