Q3 2022 Culp Inc Earnings Call

[music].

Good morning, and welcome Culp incorporated third quarter 2022 earnings Conference call.

All participants will be in listen only mode. If you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After today's presentation will be an opportunity to ask questions. Please.

Please note that this event is being recorded.

I would like to turn the call over to MS. Dru Anderson. Please go ahead.

Thank you good morning, and welcome to the Culp Conference call to review the company's results for the third quarter of fiscal 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 youre 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 these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is included in the tables to the press release included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at <unk> dot.

Com.

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

With that I will now turn the call over to his Culp, President and Chief Executive Officer. Please go ahead Sir.

Thank you so much drew and good morning, and thank you for joining us today.

I would like to welcome you to the quarterly conference call with analysts and investors.

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

I will begin the call with some opening comments and objective and <unk>.

Ken will then review the financial results for the quarter.

I will then briefly update you on strategic actions specific to each of our operating segments.

And after that Ken will review, our fourth quarter and fiscal 2020 to business outlook.

And then we will be pleased to take your questions.

As expected the third quarter was significantly challenged by a convergence of factors that affected our performance.

Sales were generally in line with expectations, despite being tempered somewhat in our mattress fabrics business.

And they did reflect stable demand for our products as compared to the third quarter of last year.

We also saw some impact from the pricing actions we've taken.

As compared to the same pre pandemic period two years ago.

Sales for the quarter were up nicely at approximately 17%.

However, profitability for the quarter was pressured more than expected, particularly in our mattress fabrics business.

Despite headwinds of the fundamentals of our business remains solid and we have the financial strength to support our business in the current environment.

In each of our segments, we continue to execute our product driven strategy with an emphasis on design creativity innovation and servicing the evolving needs of our customers.

Our diversified global platform and robust supply chain.

Have enabled us to consistently meet our customer delivery commitments in the face of numerous challenges and we are well positioned to capitalize on planned new program and expanding market opportunities.

Notably we opened our third Haiti facility during the third quarter, which will allow us to expand our near shore capacity for cut and sewn upholstery kits and to complement our already strong sewn mattress cover business.

And also to support future growth and build supply chain resiliency.

We have also made considerable investments in our business during the past nine months, including this new cut and sew facility in Haiti, a new innovation campus in high point, North Carolina, and higher inventory balance to protect against supply chain disruption.

That inventory balance and those expenditures will also support our valued customers and to get ahead of rising raw material costs.

As a result of these strategic investments our cash position has declined during fiscal 2022.

We now expect our cash position to stabilize during the fourth quarter.

Importantly, while it is always our intent and desire to grow our revenues and profits. We understand that we are facing an uncertain demand and cost environment.

We will be laser focused on generating cash and keeping our expense expense structure in line.

With whatever revenue backdrop might arise.

Looking ahead, we have a number of focused initiatives for the fourth quarter and continuing into fiscal 2023.

Our first objective is to grow sales and specifically focusing on our mattress fabrics division in doing so.

Our mattress fabrics business has seen significant planned new placements that we have won with customers customers and we are waiting for them to rollout.

The timing for new product Rollouts by our customers would normally have been in our third quarter or at the start of the calendar year.

But we have seen some customer delays and we now expect these launches will commence this summer.

We have opportunities for sales growth in both mattress fabrics and sewn covers but we especially look to rebound sales in our sewn cover business where inventory at our customers has delayed the timing of new orders.

We are also reorganizing our sales effort and our sales team within our mattress fabrics business to continue leveraging our re imagine three D rendering service to develop a more tailored and much more personal sales relationship with our customers.

And offering enhanced speed to market.

We are also effectively utilizing the talent of our brand experienced managers and the expertise of our service personnel and our global platform to secure new opportunities.

We also have an amazing location at our new design and innovation center at conga in yards and high points.

The design teams from our various businesses are collaborating and for the first time in years, we are presenting all of our products and the same shelf space.

Customers across our divisions have been Arabian about the atmosphere and the opportunities for development and we believe we will continue to see success from this location.

We also have the <unk> trade show next week. This was the first real mattress Tradeshow in four years, and we will be featuring an express line of fabrics offering a curated quick ship options to further champion our global service capability and flexibility.

We will also debut new collections, focusing on sustainability and luxury and both the aesthetics and technical performance encompassing development and fabric forming processes.

New innovation with excellent service is paramount for the future and we are executing on both.

In our upholstery fabrics business, we will continue marketing the strength of our lives smart portfolio of products offering performance ease of cleaning durability and sustainability.

We remain very excited about our lives smart brands and their acceptance in the marketplace.

We will also continue pushing and we are optimistic about the recovery of our hospitality business as consumers return to the office and hotels begin to renovate again for travelers.

In tandem with the plan for increasing sales, we will also work to maximize our efficiency and optimize our global platforms.

Proper customer service is equally as important is building sales and we have reestablished through these uncertain times.

Supply chain flexibility and redundancy are critical.

Our multi country platform offering production and sourcing capabilities in six countries, USA, Canada, China, Haiti, Vietnam, and Turkey is vital to our success and allows us to meet our customers, where they are and how they want to do business with us.

In both businesses, we have competitive advantages with our global presence to service our customers and we have proven it throughout the last year with an excellent service record.

As we look ahead the heavy lifting in establishing these platforms is complete and we're going to be more strategic to balanced output from all facilities as we meet demand.

Our balanced product mix across our global platform is critically important to overall profitability.

As already commented our most recent enhancement as our new Haiti operation for cutting so upholstery kits and that is now operational and we are growing the capabilities of this facility every week.

This is our third building in Haiti again with two existing facilities for mattress covers already in operation.

Another objective and a top priority is our emphasis on managing and stabilizing our solid cash position and.

And as mentioned, we will work to achieve this regardless of the industry environment.

Notably we continued to maintain a strong balance sheet with solid liquidity.

We will continue following our formalized capital allocation strategy, which is available on our website.

We will utilize and strategically reduce our investment in inventory to generate sales and to protect us from macro disruptions.

<unk> cost pressure.

We will continue to control, our corporate overhead and SG&A costs, just as we have done this fiscal year.

We have already made significant capital expenditures in recent years, and we do not anticipate major needs in the near term.

We will aggressively manage costs overall in response to the industry environment.

Overall, we remain diligently focused on maintaining balance sheet strength and continuing to reward our shareholders with a regular quarterly dividend.

Although we do expect the current pressures to continue near term we are certainly working to mitigate these challenges with the initiatives I just mentioned as well as other actions, including additional price increases taking effect in both of our businesses during the fourth quarter to help further offset rising cost.

We are seeing some improvement in labor and labor conditions, and we are intentionally focused on retaining existing and newly trained employees.

We also expect to see a more normalized product mix in our mattress fabrics business during the fourth quarter.

I remain very optimistic about <unk> future as we continue to demonstrate the competitive strength of our innovative product offerings and diversified global platform.

We look forward to the opportunities ahead to deliver long term profitable growth and value for our shareholders.

And lastly, I just want to thank our dedicated employees around the world for their resiliency and their commitment to the long term success of coal.

Their spirit is inspiring to me and I'm proud to be part of their team.

Also want to celebrate the completion of our first global giving initiative Abilene named share the love and.

In February all of Culp worldwide facilities participated to support their local communities and those in need.

A special thank you to our employees for contributing in such a meaningful way.

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 third quarter net.

Sales were $80 3 million up one 2% compared with the prior year period the.

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

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

Net loss for the third quarter was 289000 or <unk> <unk> per diluted share compared with net income of $2 1 million from <unk> 17 per diluted share for the prior year period, notably the net loss and earnings per diluted share for the third quarter. This fiscal year were significantly impacted by an abnormally high tax rate for the quarter.

Which I'll discuss in a few minutes.

Our overall operating performance was affected by several headwinds, namely operating inefficiencies within our mattress fabrics global platform due to an unfavorable product mix impacting our U S and Canadian locations as.

As well as the continued rapid rise in freight raw material and labor costs and operating 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 10% compared to 12, 4% for the period same period a year ago.

Trailing 12 months adjusted EBITDA was $15 3 million or four 8% of net sales compared to $8 8 million or three 3% of net sales for the same period last year, reflecting a year over year improvement of 73%.

Consolidated return on capital for the trailing 12 month period was 8%.

The effective income tax rate for the third quarter of this fiscal year was 129% compared with 28, 8% for the same period a year ago.

The significant increase in the Companys effective income tax rate for the third quarter of this fiscal year is due to the company's mix of income between the U S and as foreign jurisdictions.

During the third quarter of this fiscal year, we incurred higher pre tax losses from our U S operations as compared with the third quarter of last fiscal year.

As a result since all of our taxable income is earned by our foreign jurisdictions located in China and Canada the.

The income tax expense, we incur in stemmed from taxable income from our foreign jurisdictions that was much higher than our consolidated taxable income during the third quarter this fiscal year as compared the prior year period.

We are currently projecting cash income tax payments of approximately $3 5 million for this fiscal year importantly, our estimated cash income tax payments through 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 projection.

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.

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

For the mattress fabrics segment sales were $38 4 million down 4% compared to last year's third quarter.

Sales for the quarter, which included pricing and surcharge actions that were in effect. During the period were relatively stable as compared to the third quarter last fiscal year.

However, top line performance was tempered by a significant weakness in mattress cover sales.

As well customer delays in launching new products sales were also affected by a traditional seasonal slowdowns.

Widespread resurgence of Covid and the impact of inflationary pressures on consumer spending as well as weather disruptions at some of our facilities.

Operating income for the quarter was <unk> 4 million compared with $3 3 million a year ago with an operating income margin of <unk>, 9% compared with eight 5% a year ago.

Our operating performance for the third quarter of this fiscal year was significantly pressured by operating inefficiencies within our global platform due to an unfavorable product mix impacting our U S and Canadian locations and.

An unfavorable product mix, mainly in first not maximizing production across all of our onshore nearshore and offshore locations.

In the third quarter as we serviced committed demand we were unbalanced with higher amounts of offshore production, which impacted efficiency and our ability to cover fixed costs in our north American locations.

Operating performance for the quarter was also affected by higher freight raw materials labor costs ongoing labor challenges, including inefficiencies due to hiring and training new employees in the U S and Canada and record levels of Covid Absenteeism in January and also inefficiency due to normal holiday shutdowns at certain of our locations.

We did take selective pricing action during the third quarter to help offset these rising costs and we are implementing additional targeted price increases during the fourth quarter to further mitigate inflationary pressures.

For the upholstery fabrics segment sales for the third quarter were $41 9 million up two 7% over the prior year.

This growth in sales was driven by solid demand for our products, even when compare to an especially strong sales performance during the prior year period.

<unk> remained well above pre pandemic levels and we continue to benefit from a robust platform in Asia are stable long term supplier relationships and the success of our product innovation strategy, including the continued popularity of our lives lift smart portfolio of performance products.

Our sales resource. We're also supplemented by the pricing of surcharge actions that were affected during the quarter.

Additionally, topline performance in our hospitality business continued to recover from pre from pandemic related impacts during the third quarter with higher sales in both our hospitality contract business and our read window products business.

Operating income for the quarter was $2 4 million compared with $3 9 million a year ago with an operating income margin of five 8% compared with nine 5% a year ago.

Our operating performance was affected by higher freight and raw material costs start up costs for our new Haiti facility unfavorable foreign currency fluctuations in China, and a lower contribution from our re window products business.

We took additional pricing action during the third quarter to help cover a portion of the continued rise in operating costs and this actually began to favorably impact our results in the latter part of the quarter.

Although the temporary cost price lag effect of the operating performance for the third quarter, we will benefit during the fourth quarter from the full impact of this additional pricing action.

Notably we have done a better job in our upholstery fabrics business and keeping up with the cost price pressures, although it has been with a temporary lag for.

For the fourth quarter, we do expect to be more normalized cost pressure for this segment, assuming there are not more changes where inflation for our raw materials.

Now I'll turn to the balance sheet, we reported $22 2 million and total cash and investments and no outstanding debt under our $30 million unsecured revolving credit facility as of the end of the third quarter. This compares with $46 nine and total cash and investments and no outstanding debt as of the end of last fiscal year.

Cash flow from operations and free cash flow was negative $12 4 million and negative $18 5 million respectively for the first nine months of this fiscal year.

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

And investment of $17 1 million in higher inventory levels to protect against supply chain disruption and 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.

Importantly, approximately 25% of this increase was a result of higher raw material costs through the revaluation of our inventory.

Another $5 3 million investment in capital expenditures, including expenditures for machinery equipment, and <unk> investments as well as expenditures related to our new innovation campus.

$1 9 million in payments for the new building for our new building lease and startup expenses associated with our Haiti upholstery cut and sew operation.

And increased accounts payable payments related to a return to normal credit terms as.

Suppose the extended terms previously granted we response to the COVID-19 pandemic.

Additionally, during the first nine months of this fiscal year, we paid $4 1 million in regular quarterly dividends.

And spent $1 8 million on share repurchases.

The company did not repurchase any shares during the third quarter of this fiscal year, leaving approximately $3 2 million available under our current share repurchase program.

Finally, as we have discussed we remain focused on maintaining a strong financial position and disciplined execution of our capital allocation strategy. During these uncertain times.

Over the course of this fiscal year, we are strategically committed significant funds for organic investment in our business to positively positioned the company for future growth as external conditions normalize.

Based on our current and expected uses of cash in our business outlook for the remainder of this fiscal year, we expect total cash and investments to stabilize during the fourth quarter with that I'll turn the call over to you.

Thank you Ken.

Just give a few more comments about each division.

And with the mattress fabrics segment.

Despite the headwinds in this business Culp home fashions has remained focused on product innovation and creative designs and personalized customer attention.

We had a very favorable showing at the recent Las Vegas market.

And we are excited about the positive response from customers.

Also the strength and flexibility of our global manufacturing and sourcing operation has enabled us to support the evolving needs of our customers throughout the quarter.

This platform continues to provide us with a competitive advantage for opportunities to expand our market reach across new and existing customers with preferred model offering onshore nearshore and offshore capabilities.

Looking ahead, we are enthusiastic about our strong new placements and product development opportunities for next fiscal year.

However, there is some weakening in the domestic mattress industry in EMEA impact demand and lead to additional temporary delays of new product Rollouts.

Rising cost also continue to pressure our profitability, but we are implementing additional targeted price increases during the fourth quarter to further mitigate these higher costs.

We also expect a more normalized product mix during the fourth quarter, and we remain committed to controlling costs, managing and reducing our inventory retaining talent and improving our operating efficiencies.

Now a few comments on the upholstery fabrics segment.

We were pleased by the better than expected growth in sales for the third quarter and notably the $41 9 million in third quarter sales is the highest quarterly level.

Since our 2006 fiscal year.

We were also excited to open our new Haiti facility during the quarter. We finally started shipping products and facility in January and we look forward to increasing production and reducing startup cost over the upcoming months.

Looking ahead, we expect some of the current near term headwinds may continue to pressure our results during the fourth quarter.

We also expect a slowdown in new business for the residential home furnishings industry as compared to the peak experienced during the post COVID-19 stay at home surge.

Which may temper the level of growth in sales from our residential fabric products.

Additionally, our sales and operating performance for the fourth quarter as compared sequentially to the third quarter will be affected by the timing of Chinese new year holiday, which fall substantially within the fourth quarter.

But despite these external conditions, we remain encouraged by the generally favorable demand trends.

We are confident in our ability to navigate these pressures as we leverage our product driven strategy and innovative products, along with our flexible Asian platform stable supply chain partners and expanded capacity in Haiti to sustain our competitive advantage and expand our market reach.

We are well positioned for the long term and we look forward to the opportunities ahead as we continue to support our valued customers.

Now Ken is going to discuss the general outlook for the fourth quarter of this fiscal year and then we'll take some questions.

Although we are well positioned over the long term with our product driven strategy and flexible global platform. We continue to navigate near term uncertainty in the macroeconomic environment, including significant inflationary pressures a challenging labor market fluctuation in foreign currency exchange rates and customer supply chain disruption we.

We expect net sales for the fourth quarter of this fiscal year to be slightly lower as compared to the fourth quarter last fiscal year, and we expect consolidated operating income for the fourth quarter of this fiscal year to be comparable to the fourth quarter of last fiscal year.

Notably our expectations for the fourth quarter of this fiscal year are based on information available at the time of this call and reflects 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 range of $6 8 million to $7 million depreciation and amortization is expected to be approximately $7 4 million to $7 6 million for this fiscal year.

Finally.

As Ed has already mentioned as a top priority, we will be aggressively focused on generating free cash flow and our fiscal 2023 with that we'll now take your questions.

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

Using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

So I will pause momentarily to assemble the roster.

Our next question come from Budd <unk>.

Water Tower research. Please go ahead.

Good morning.

Is.

Boyd.

Okay.

Maybe give us a little bit of a high level.

You said there is a lot of opportunities in mattress fabrics and has had great placements.

Maybe you could add a little color are you seeing new customers into it.

And what are the trends that you're seeing.

He gave you some some.

Oh.

Optimism on flows.

Yeah.

The longer term future.

Yes, Thank you Barton.

Yeah look we recognize and understand that.

We've been talking about some of this business that we see on the horizon.

Thought it would be materializing in Q3.

We have some expectation now that it might be.

Materialized in Q4, and there may be some things in the back of the quarter, but now just looks like the.

Some of that's come in in the summertime.

Give you a little color on it we just have built a really solid.

Service platform.

We have the ability to meet our customers.

And any location, where they want to be serviced.

Also have.

Just an outstanding opportunity the way, we're marketing our products today, both fabrics and sewn covers.

With some really.

Highly skilled <unk> rendering services and then just some just some excellent personnel talent to develop new items.

We are just seeing whether it be new customers or existing customers.

Traditional retail or bed in the box, we just we see placements that we've won.

And so we just without giving specific names of people our customers our retailers that it might be we just.

We know it's there so the optimism for US is really strong for the business to you when we've done the heavy lifting to get there.

The platform in place and now we just kind of waiting for these to materialize. So Justin businesses, Okay, but resetting new business at current cost was a big help to us as we get those things in the marketplace.

And has it just been the.

Supply chain disruptions that have caused them to delay their programs.

And do you see that that.

Dissipating you said youre seeing some better labor so it looks like maybe we're coming to the to the backside of this problem yes.

Yes, I hope, so, but I am not speculate to some degree on this I can't speak that it is.

This issues across every customer there can be different situations, but there was such a surge of just a general business.

Post Covid and at the same time, there were some significant material shortages not of our product but of other items that our customers needed to make mattresses and so as that whats going on is the industry is starting to catch up now I just think it.

Customers and retailers have been had slowed down changing out lines on the normal cadence because they they just kind of will get caught up.

So I'm not sure there's any one thing, but it does feel a lot more.

Yes, I think just the obviously has taken a breath now and people are catching up and it's starting to get back to some normalized conditions that we think will be very favorable for call.

Thanks, guys.

Thank you.

Well I had to take pricing, we've seen that through the <unk>.

Economy.

Are you getting much resistance nobody ever likes price increases but.

As long as it's Debbie.

Good work.

Are we seeing any much resistance to it or is it just.

Theyre understanding that those are things that just humming.

I would say.

Happy Laboy comment too because he has been more frontline with it on the upholstery side no. One likes it you said that very well no one likes to do price. So we've done a couple of combinations of some price increases that are more permanent and some surcharges to deal with freight and other things and up until now we've had fairly fairly good success in.

Customers have understood the need there and I don't think to date, we have depressed consumer spending with what's been pass through but I would tell you. If we have to continue going up then yes, I feel like I feel like it's there will be pressure.

To receive those we need to now.

Get some normalized conditions settle our product mix pull these lag of price increase that we now have coming to fruition for our fourth quarter and operate efficiently for our customers and try to deliver with the value. They expect so.

Paul do you want to comment at all whether that's been a challenge.

Sure.

But generally there certainly is a <unk>.

Common understanding in the industry about the rising cost.

That has taken place.

So I think there is.

<unk> that there's a degree of this is just necessary and is happened to be passed along.

Do feel that we have approached fits in.

Fair and appropriate way generally with.

New orders placed.

So.

Again, nobody ever likes increases, but I think that there's an understanding in the market that they are necessary and we've approached it in a proper way.

And I think Budd just just to make you probably know thats youre savvy in the business for a long time, but it will help as we get to new product introductions.

At least it gives us the chance in our on our customers a chance to reset all of these new items and where our costs really are versus to have enough catch up something that was placed years ago.

That will be a positive when new products start to come through.

Okay, just a couple a couple more from me hospitality.

You continue to like what should we be seeing in there can you talk about the new program for sure.

Make sure gives you that feeling good optimism and hospitality.

I'll, let I'll, let boyd speak to this in more detail, but I think hospitality for us has been through co but a difficult.

Product line because.

People aren't going to their offices, they weren't traveling and staying in hotels and so some of the some of the remodeling of our development work was put on hold but we're now starting to see that come back pretty strong, especially on the fabric side and I'll, let Bob talk to you about how he's managing cost and price in that business and then what you might see for that.

<unk> read windows.

Yeah, and just again as you say from a general perspective, we are certainly seeing accelerated demand.

In the hospitality segment.

It appears the consumer.

Is beginning to devote more spending to travel.

And so yes, we started seeing a nice lift in that segment of our business in Q3.

And continuing so I do think we're seeing a more.

We'll rebound occurring in the hospitality market.

And as <unk> says we have.

Again in that area also implemented some pricing actions that were necessitated through cost increases.

Which will including within our.

Read window products business.

Which will.

Benefit as we go forward into the next quarter.

We get those pricing actions more realized.

But yes, very favorable on the hospitality business seeing a nice shift in the trends of that business is it the demand starts to accelerate considerably.

Considerably now above where it.

It had gone during the throes of the pandemic.

Okay.

And finally for me.

Talk a little bit about if theres anything new coming at live smart.

Yeah.

We've made some great innovations, there, which which next.

On the horizon there.

Yes, Thank you boat and definitely the lift smart category performance products continues to be a key driver of our business.

We're very pleased with the reception.

Really all of the products under that umbrella, we are continuing to see.

A particular growth with the.

Evolve, which is the product that.

In the sustainability area.

So that seems to be just gathering more and more momentum and acceptance in the marketplace.

We have.

Our new flooring free product, that's just been lost as well.

And.

So we just continue to innovate in that area.

Add on to the.

The portfolio of products that we have there additional.

Additional new introductions in the wings as well.

Okay, well my last comment is just a.

Culp for an awfully long time.

I've seen these kinds of.

Challenging times before and I don't remember a time in culp fishery, whether its spring and it always hasn't been fun for you all but.

In past times I would've been more worried about the company I'm not at this time.

Financial condition has remained.

It remains solid during these challenging times, so congratulations too.

To all of you for for leading the company through that.

These times are certainly good luck on.

Hopefully, we all get to easier times.

Im not sure Thats helpful.

I hope so.

Thank you Bob Yes, we appreciate your comments, there and it's something that our board is.

Certainly very keenly aware oven.

We have lived through.

Through highs and lows in this business and we certainly understand the importance of being strong financially to weather whatever may come at us. So thanks for recognizing that.

Yeah.

Good luck. Thank you.

Thanks.

Thank you. Our next question comes from Anthony <unk> with Sidoti <unk> Company go ahead.

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

So first just curious so when you look at your products in both segments can.

Can you just talk about.

What portion of your business would you say ultimately is sold to.

The lower end consumers versus kind of higher income and other consumers are just just wanted to.

One of the major mattress retailers talk about weakness on their low end consumer lines. So just wondering if you could parse out.

Sure.

What youre seeing as far as.

Products sold and.

And ultimately the end.

And users.

Yes, good question, Anthony and it'll be hard to do it by.

Actual percentages I will tell you that call for.

Historically speaking if we look at our upholstery fabric business, we have generally been.

Just on a middle middle range, but primarily China hit the sweet spot of the middle of the market.

On the mattress side, we have normally been more broad from high to low, but so many of the units.

<unk>.

The units that make a difference to cover our fixed costs in our facility so with our domestic north American platforms in mattress fabrics.

Helps us to have more units running through the facility and it is a fair commentary to say that.

On the lower end of the market is under more pressure today for sure.

Because of.

Tax returns being delayed or stimulus being.

Curtailed or whatever it might be or just general weakness there is some.

Theres more business at the higher middle to high and low.

But it doesn't mean, we can't be very successful because with our mattress cover expansion, we have away from fabric to cover it again at almost any price point.

And our sales have been relatively stable and I think they continue to will be we just need to get need to get our product mix more more tailored. So we're running our assets more effectively it will be important for us.

I don't if that answers your question.

Yes.

Definitely thank you for the color is very helpful.

In terms of the price increases taken in the ones that you plan for <unk> can you just kind of go over that as far as like I know, it's not across the board, it's more strategic but.

Can you just give us a sort of a.

So some additional color as to what you guys are thinking as far as the impact of that.

Hey, Anthony This is Kent, you mean like the back of the financial impact.

How much was part of the quarter, Yes, I think the quarter and then I guess whats implied in your guidance for <unk>.

Yeah, I think if you look at the upholstery I mean, the game there is pretty much.

Was all priced.

So that was.

That difference was pretty much all price for four.

For CHF for the mattress fabrics business you had about.

You had about 6% of the total sales.

Amount for the quarter being price. So you had a little bit of.

Fall back there.

Without the price, but you had a nice impact from price in that business as well.

Got it okay. Thanks for that.

Looking to <unk>.

Fourth quarter is that what we should expect as well as far as the impact of pricing, Yes, I think I think for again for <unk> I would say probably <unk> got.

More you've got the effect of the full effects of the price increase from previous so you got a little bit more impact there.

Probably.

About 5% of that amount would be.

Would be price impact.

On the sales and.

And then for CHF, it's probably about.

About 657%.

Mhm, Okay. Thanks for that Ken and then.

As you mentioned, obviously you guys continue to have a strong balance sheet.

As we look at.

Our capital allocation.

Yes.

Is it safe to say that you guys are still committed to raising the dividend longer term.

Any thoughts about share.

Share repurchases. After you guys built up some cash.

Yes Anthony.

Really good question.

As we always talk about we are very disciplined with our capital allocation strategy and of course, we publish it.

Everywhere, it's easily available on the website.

Just as of late we've.

We've chosen priorities to invest in the business with Capex.

We spoke of and then certainly our invest organically and the inventory position to be prepared for what we might see our protect against any costs further cost pressure and we're also just as a conservative company and we like to have a solid cash balance without debt and it is a priority for us to continue with the <unk>.

<unk> quarterly dividends and increasing those dividends and I think we have now.

Our non year record of increasing the annual dividend and we carry that through the Covid period. So.

For sure that's a strategy, we'll take in in terms of bond buying stock. It's one of our one of the tools we can utilize.

In this current quarter, we felt like we had taken.

Use a lot of cash or some really positive reasons inclusive of the dividend and we want it to be to.

To stay to our roots and be conservative and make sure. We have a strong cash balance with no debt. So we just kind of weigh all of those things against each other.

Got it well thank you very much and best of luck going forward.

Yes, Sir Thank you Anthony.

Okay, maybe I have a question. Please press Star then one.

Our next question comes from Marco Rodriguez Stonegate capital markets. Please go ahead.

Good morning, everyone and thank you for taking my questions. Good morning.

Marco Marco.

Hey, guys I was wondering if maybe you can talk a little bit about in your prepared remarks, you talked about reorganizing the sales force.

Can you maybe discuss how long that might take are there any sort of meaningful cost associated with that and then if you can also maybe talk about what were the drivers behind this change.

Thank you Mark and good questions. Thanks for picking that up and it's not going to take much time, we're doing some pretty.

Pretty strong moves here just ahead of our <unk> trade show next week, which we talked about and these arent necessarily.

Fundamentally.

Whole, new sweeping changes, but we are just reallocating accounts moving.

<unk>.

The talented salespeople and brand managers to where they need for the way the customers want to be sold we have really gotten advantaged with a.

Three D rendering service and we just have some.

Some talented folks that really embrace that and some customers that really embrace it and some that want to work through traditional way. So we just want to meet meet customers how they want to be served.

We also always with our sales focus and the mattress side want to reward our sales people for growing the business with commission and then of course the margins. There. So just kind of reallocating personnel and reallocating performance based on based on.

Margin and growth I think it would be very positive because we are going to be taken advantage of.

Strong technical capabilities.

And probably a much more personal level of service and a faster more efficient way of selling customer side, we're excited about it.

Got it okay I understand.

And then kind of dovetailing into one of the second areas of your focus here in your prepared remarks about maximizing efficiencies.

Can you maybe talk a little bit about your capacity utilization levels right now.

How that sort of working out or how you are envisioning that just kind of given the.

Recent capacity additions you've done over the last year or so and then if you can also kind of dovetailing to that.

The labor situation I know you sort of address that one of the prior questions, but just kind of how that is also meaningfully or put it into the equation for maximizing efficiencies that you guys can go forward.

Right.

Yes, you are picking up on those comments were talking about where we.

We need to maximize efficiency in all our plants to maximize profitability and so kind of what we're trying to get out there is we feel like we've done an extraordinarily good job.

Maintaining stable sales.

Level and we do have customers now.

This age of anti dumping and all the things that have gone on making products all over the world and our global platform is very well.

Situated to service these customers from almost any location.

And so we're proud of ourselves for finding these opportunities we think it's really.

A really good thing but.

For us to really maximize our profitability in mattress fabrics.

We have to we have to have a stable mix across the whole platform.

I guess, what's kind of been lagging in Q3 was a north American <unk>.

Platform is just not running as full as we want it to run so we're delivering customer and delivering the need I don't want you to misunderstand My comments, we're happy with the offshore sales and again not only demonstrates our ability to meet customers, where they want to be serviced.

But to optimize we need the sales to.

To complement our strong demand for North America. So those plants, just arent running at full capacity right now because of.

The demand we see in the North American business, they will and in some of these things come to fruition that we see out there will be much better positioned but we have some high fixed cost that we need to cover by running those plants.

Understood and the labor aspects.

Oh I'm sorry on the labor challenges have definitely improved some now I think thats, what youre asking.

In Q3, we had significant.

Hi, rain retraining.

Sign on bonus all kinds of challenges we had was pertaining our labor force that is much much better now, but we certainly have higher wages than we had pre pandemic, but labor cost is not is not a major factor in our cost per yard.

So we can absorb that with our pricing actions and the labor situation is more stable, we're able to get.

Personnel to run equipment, now, which is a good thing.

Got it.

And then just kind of dovetailing onto the question about pricing.

<unk> heard from the other mattress retailers, whether it's the traditional guys or the bed in the box.

They've obviously been raising prices over the last year. So just given the raw material inflation, but it seems to kind of be approaching materially approaching an area, where it might be depressing consumer demand. So I'm wondering if you can maybe talk about what you might be hearing or seeing from your customers as it relates to the sort of dynamics or what your thoughts are there.

Yes, I think it's a.

It's a good question Mario and I don't I don't have the absolute answer to that I think.

We thought about that a lot as we look at what's happened to costs in the business is there a point where consumers.

Consumers will defer their spend or something else. If it does become too expensive and we are certainly aware of that.

The way the way I would look at it not to not to Dodge the question because I.

I think the way I would look at that is.

New new products will solve a lot of that if we can get new exciting products rolled out to the market.

Absorb the current cost situation, we'll have a better chance trying to just raise prices on things that are already place is challenging but to move to some new items will will reenergize consumer in the marketplace and Thats why we keep pointing to some of the new new products, we see that are lined up to come through.

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

Thank you Marco.

This concludes our call excuse me. This concludes our question and answer session I would like to turn the conference back over to Mr. Cope for closing remarks. Please go ahead.

Thank you very much operator and again. Thank you all for your participation and your interest in coal we look forward to updating you on our progress next quarter have a great day.

Okay.

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

[music].

Good morning, and welcome to the golf incorporated third quarter 2022.

Two earnings conference call.

All participants will be in listen only mode. If you need assistance. Please signal conference specialist by pressing the star key followed by zero.

After today's presentation will be an opportunity to ask questions. Please.

Please note that this event is being recorded.

I would like to turn the call over Lezbro Anderson. Please go ahead.

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

To take no obligation to update or to revise forward looking statements.

In addition, during this call the company will be discussing non-GAAP financial measurements, a reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is included in the tables to the press release included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at <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.

With that I will now turn the call over to his Culp, President and Chief Executive Officer. Please go ahead Sir.

Thank you so much drew and good morning, and thank you for joining us today.

I would like to welcome you to the quarterly conference call with analysts and investors.

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

I will begin the call with some opening comments and objective.

And Ken will then review the financial results for the quarter.

I will then briefly update you on strategic actions specific to each of our operating segments.

After that Ken will review, our fourth quarter and fiscal 2020 to business outlook.

And then we will be pleased to take your questions.

As expected the third quarter was significantly challenged by a convergence of factors that affected our performance.

Sales were generally in line with expectations, despite being tempered somewhat in our mattress fabrics business.

And they did reflect stable demand for our products as compared to the third quarter of last year.

We also saw some impact from the pricing actions we've taken.

As compared to the same pre pandemic period, two years ago sales for the quarter were up nicely at approximately 17%.

However, profitability for the quarter was pressured more than expected, particularly in our mattress fabrics business.

Despite headwinds in the fundamentals of our business remains solid and we have the financial strength to support our business in the current environment.

In each of our segments, we continue to execute our product driven strategy with an emphasis on design creativity innovation and servicing the evolving needs of our customers.

Our diversified global platform and robust supply chain.

Have enabled us to consistently meet our customer delivery commitments in the face of numerous challenges and we are well positioned to capitalize on planned new programs and expanding market opportunities.

Notably we opened our third Haiti facility during the third quarter, which will allow us to expand our near shore capacity for cut and sewn upholstery kits and to complement our already strong sewn mattress cover business.

And also to support future growth and build supply chain resiliency.

We have also made considerable investments in our business during the past nine months, including this new cut and sew facility in Haiti, a new innovation campus in high point, North Carolina, and a higher inventory balance to protect against supply chain disruption.

That inventory balance and those expenditures will also support our valued customers and to get ahead of rising raw material costs.

As a result of these strategic investments our cash position has declined during fiscal 2022.

So we now expect our cash position to stabilize during the fourth quarter.

Importantly, while it is always our intent and desire to grow our revenues and profits. We understand that we are facing an uncertain demand and cost environment.

We will be laser focused on generating cash and keeping our expense expense structure in line.

With whatever revenue backdrop might arise.

Looking ahead, we have a number of focused initiatives for the fourth quarter and continuing into fiscal 2023.

Our first objective is to grow sales and specifically focusing on our mattress fabrics division in doing so.

Our mattress fabrics business has seen significant planned new placements that we have won with customers customers and we are waiting for them to rollout.

The timing for new product Rollouts by our customers would normally have been in our third quarter or at the start of the calendar year.

But we have seen some customer delays and we now expect these launches will commence this summer.

We have opportunities for sales growth in both mattress fabrics and sewn covers but we especially look to rebound sales in our sewn cover business where inventory at our customers has delayed the timing of new orders.

We are also reorganizing our sales effort and our sales team within our mattress fabrics business to continue leveraging our re imagine three D rendering service to develop a more tailored and much more personal sales relationship with our customers.

And offering enhanced speed to market.

We are also effectively utilizing the talent of our brand experienced managers and the expertise of our service personnel and our global platform to secure new opportunities.

We also have an amazing location at our new design and innovation center at conga in yards and high points.

The design teams from our various businesses are collaborating and for the first time in years, we are presenting all of our products and the same shelf space.

Customers across our divisions have been Arabian about the atmosphere and the opportunities for development and we believe we will continue to see success from this location.

We also have the Esper trade show next week. This is the first real mattress tradeshow in four years, and we will be featuring an express line of fabrics offering a curated quick ship options to further champion our global service capability and flexibility.

We will also debut new collections, focusing on sustainability and luxury in both aesthetics and technical performance encompassing development and fabric forming processes.

New innovation with excellent service is paramount for the future and we are executing on both.

In our upholstery fabrics business, we will continue marketing the strength of our live smart portfolio of products offering performance ease of cleaning durability and sustainability.

We remain very excited about our lives smart brands and their acceptance in the marketplace.

We will also continue pushing and we are optimistic about the recovery of our hospitality business as consumers return to the office and hotels begin to renovate again for travelers.

In tandem with the plan for increasing sales, we will also work to maximize our efficiency and optimize our global platforms.

Proper customer service is equally as important is building sales and we have reestablished through these uncertain times.

Supply chain flexibility and redundancy are critical.

Our multi country platform offering production and sourcing capabilities in six countries, USA, Canada, China, Haiti, Vietnam, and Turkey is vital to our success and allows us to meet our customers, where they are and how they want to do business with us.

In both businesses, we have competitive advantages with our global presence to service our customers and we have proven it throughout the last year with an excellent service record.

As we look ahead the heavy lifting in establishing these platforms is complete and we're going to be more strategic to balance output from all facilities as we meet demand.

Our balanced product mix across our global platform is critically important to overall profitability.

As already commented in our most recent enhancement as our new Haiti operation for cut and sew upholstery kits and that is now operational and we are growing the capabilities of this facility every week.

This is our third building in Haiti again with two existing facilities for company sewn mattress covers already in operation.

Another objective and a top priority is our emphasis on managing and stabilizing our solid cash position and.

And as mentioned, we will work to achieve this regardless of the industry environment.

Notably we continued to maintain a strong balance sheet with solid liquidity.

We will continue following our formalized capital allocation strategy, which is available on our website.

We will utilize and strategically reduce our investment in inventory to generate sales and to protect us from macro disruptions.

<unk> cost pressure.

We will continue to control, our corporate overheads and SG&A costs, just as we have done this fiscal year.

We have already made significant capital expenditures in recent years, and we do not anticipate major needs in the near term.

We will aggressively manage costs overall in response to the industry environment.

Overall, we remain diligently focused on maintaining balance sheet strength and continuing to reward our shareholders with a regular quarterly dividend.

Although we do expect the current pressures to continue near term we are certainly working to mitigate these challenges with the initiatives I just mentioned as well as other actions included additional price increases taking effect in both of our businesses during the fourth quarter to help further offset rising cost.

We are seeing some improvement in labor and labor conditions, and we are intentionally focused on retaining existing and newly trained employees.

We also expect to see a more normalized product mix in our mattress fabrics business during the fourth quarter.

I remain very optimistic about <unk> future as we continue to demonstrate the competitive strength of our innovative product offerings and diversified global platform.

We look forward to the opportunities ahead to deliver long term profitable growth and value for our shareholders.

And lastly, I just want to thank our dedicated employees around the world for their resiliency and their commitment to the long term success of coal.

Their spirit is inspiring to me and I am proud to be part of their team.

Also want to celebrate the completion of our first global given initiative Abilene named share the love and.

In February all of copes worldwide facilities participated to support their local communities and those in need.

A special thank you to our employees for contributing in such a meaningful way.

With that I'll now turn the call over to Ken who will review the financial results for the quarter. Thanks, Dave 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 of the third quarter net.

Sales were $80 3 million up one 2% compared with the prior year period the.

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

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

Net loss for the third quarter was 289000 or <unk> <unk> per diluted share compared with net income of $2 1 million or <unk> 17 per diluted share for the prior year period, notably the net loss and earnings per diluted share for the third quarter. This fiscal year were significantly impacted by an abnormally high tax rate for the quarter.

Which I'll discuss in a few minutes.

Our overall operating performance was affected by several headwinds, namely operating inefficiencies within our mattress fabrics global platform due to an unfavorable product mix impacting our U S and Canadian locations as.

As well as the continued rapid rise in freight raw material and labor costs and operating 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 10% compared to 12, 4% for the period same period a year ago.

Trailing 12 months adjusted EBITDA was $15 3 million or four 8% of net sales compared to $8 8 million or three 3% of net sales for the same period last year, reflecting a year over year improvement of 73%.

Consolidated return on capital for the trailing 12 month period was 8%.

The effective income tax rate for the third quarter. This fiscal year was 129% compared with 28, 8% for the same period a year ago.

The significant increase in the Companys effective income tax rate for the third quarter of this fiscal year is due to the company's mix of income between the U S and as foreign jurisdictions.

During the third quarter of this fiscal year, we incurred higher pretax losses from our U S operations as compared with the third quarter of last fiscal year.

As a result since all of our taxable income is earned by our foreign jurisdictions located in China and Canada the.

The income tax expense, we incur in stemmed from taxable income from our foreign jurisdictions that was much higher than our consolidated taxable income during the third quarter of this fiscal year as compared the prior year period.

We are currently projecting cash income tax payments of approximately $3 5 million for this fiscal year <unk>.

Importantly, our estimated cash income tax payments through 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 the 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.

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

For the mattress fabrics segment sales were $38 4 million down 4% compared to last year's third quarter.

Sales for the quarter, which included pricing and surcharge actions that were in effect. During the period were relatively stable as compared to the third quarter last fiscal year. However, topline performance was tempered by significant weakness in mattress cover sales.

As well as customer delays in launching new products sales were also affected by traditional seasonal slowdowns the widespread resurgence of COVID-19 and the impact of inflationary pressures on consumer spending as well as weather disruptions at some of our facilities.

Operating income for the quarter was <unk> 4 million compared with $3 3 million a year ago with an operating income margin of 9% compared with eight 5% a year ago.

Our operating performance for the third quarter. This fiscal year was significantly pressured by operating inefficiencies within our global platform due to an unfavorable product mix impacting our U S and Canadian locations and unfavorable product mix, mainly infers not maximizing production across all of our onshore nearshore and offshore locations.

In the third quarter as we service committed demand, we were unbalanced with higher amounts of offshore production, which impacted efficiency and our ability to cover fixed costs in our north American locations.

Operating performance for the quarter was also affected by higher freight raw material labor cost ongoing labor challenges, including inefficiencies due to hiring and training new employees in the U S and Canada and record levels of Cobot absenteeism in January and also inefficiency due to normal holiday shutdowns at certain of our locations.

We did take selective pricing action during the third quarter to help offset these rising costs and we are implementing additional targeted price increases during the fourth quarter to further mitigate inflationary pressures.

For the upholstery fabrics segment sales for the third quarter were $41 9 million up two 7% over the prior year.

This growth in sales was driven by solid demand for our products, even when compare to an especially strong sales performance during the prior year period.

Demand remained well above pre pandemic levels and we continue to benefit from a robust platform in Asia are stable long term supplier relationships and the success of our product innovation strategy, including the continued popularity of our lives lift smart portfolio of performance products.

Our sales resource. We're also supplemented by the pricing of surcharge actions that were affected during the quarter.

Additionally, topline performance in our hospitality business continued to recover from pre from pandemic related impacts during the third quarter with higher sales in both our hospitality contract business and our read window products business.

Operating income for the quarter was $2 4 million compared with $3 9 million a year ago.

With an operating income margin of five 8% compared with nine 5% a year ago.

Our operating performance was affected by higher freight and raw material costs startup costs for our new Haiti facility unfavorable foreign currency fluctuations in China, and a lower contribution from our re window products business.

We took additional pricing action during the third quarter to help cover a portion of the continued rise in operating costs and this actually began to favorably impact our results in the latter part of the quarter.

Although the temporary cost price lag effect of operating performance for the third quarter, we will benefit during the fourth quarter from the full impact of this additional pricing action.

Notably we have done a better job in our policy fabrics business and keeping up with the cost price pressures, although it has been with a temporary lag for.

For the fourth quarter, we do expect to be more normalized cost pressure for this segment, assuming there are not more changes or inflation for our raw materials.

Now I'll turn the balance sheet, we reported $22 2 million of total cash and investments and no outstanding debt under our $30 million unsecured revolving credit facility as of the end of the third quarter. This compares with $46 nine and total cash and investments and no outstanding debt as of the end of last fiscal year.

Cash flow from operations and free cash flow was negative $12 4 million and negative $18 5 million respectively for the first nine months of this fiscal year.

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

And investment of $17 1 million in higher inventory levels to protect against supply chain disruption and 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.

Importantly, approximately 25% of this increase was a result of higher raw material costs through the revaluation of our inventory.

Another $5 three main investment in capital expenditures, including expenditures for machinery equipment, and it investments as well as expenditures related to our new innovation campus.

$1 9 million in payments for the new building for our new building lease and startup expenses associated with our Haiti upholstery cut and sew operation.

And increased accounts payable payments related to our return to normal credit terms as.

As opposed to extended terms previously granted we response to COVID-19 pandemic.

Additionally, during the first nine months of this fiscal year, we paid $4 1 million in regular quarterly dividends.

And spent $1 8 million on share repurchases.

The company did not repurchase any shares during the third quarter. This fiscal year, leaving approximately $3 2 million available under our current share repurchase program.

Finally, as we have discussed we remain focused on maintaining a strong financial position and disciplined execution of our capital allocation strategy.

During these uncertain times.

Over the course of this fiscal year, we are strategically committed significant funds for organic investment in our business to positively position the company for future growth as external conditions normalize.

Based on our current and expected uses of cash in our business outlook for the remainder of this fiscal year, we expect total cash and investments to stabilize during the fourth quarter with that I'll turn the call over to you.

Thank you Ken.

I'll just give a few more comments about each division.

Again with the mattress fabrics segment.

Despite the headwinds in this business Culp home fashions has remained focused on product innovation and creative designs and personalized customer attention.

We had a very favorable showing at the recent Las Vegas market.

And we're excited about the positive response from customers.

Also the strength and flexibility of our global manufacturing and sourcing operation has enabled us to support the evolving needs of our customers throughout the quarter.

This platform continues to provide us with a competitive advantage for opportunities to expand our market reach across new and existing customers with preferred model offering onshore nearshore and offshore capabilities.

Looking ahead, we are enthusiastic about our strong new placements and product development opportunities for next fiscal year.

However, there is some weakening in the domestic mattress industry in EMEA impact demand and lead to additional temporary delays of new product Rollouts.

Rising cost also continue to pressure our profitability, but we are implementing additional targeted price increases during the fourth quarter to further mitigate these higher costs.

We also expect a more normalized product mix during the fourth quarter, and we remain committed to controlling costs, managing and reducing our inventory retaining talent and improving our operating efficiencies.

Now a few comments on the upholstery fabrics segment.

We were pleased by the better than expected growth in sales for the third quarter and notably the $41 9 million in third quarter sales is the highest quarterly level.

Since our 2006 fiscal year.

We are also excited to open our new Haiti facility during the quarter. We finally started shipping products from the facility in January and we look forward to increasing production and reducing startup cost over the upcoming months.

Looking ahead, we expect some of the current near term headwinds may continue to pressure our results during the fourth quarter.

We also expect a slowdown of new business for the residential home furnishings industry as compared to the peak experienced during the post COVID-19 stay at home surge.

Which may temper the level of growth in sales from our residential fabric products.

Additionally, our sales and operating performance for the fourth quarter as compared sequentially to the third quarter will be affected by the timing of Chinese new year holiday, which fall substantially within the fourth quarter.

But despite these external conditions, we remain encouraged by the generally favorable demand trends.

We are confident in our ability to navigate these pressures as we leverage our product driven strategy and innovative products, along with our flexible Asian platform stable supply chain partners and expanded capacity in Haiti to sustain our competitive advantage and expand our market reach.

We are well positioned for the long term and we look forward to the opportunities ahead as we continue to support our valued customers.

Now Ken is going to discuss the general outlook for the fourth quarter of this fiscal year and then we'll take some questions.

Although we are well positioned over the long term with our product driven strategy and flexible global platform. We continue to navigate near term uncertainty in the macroeconomic environment, including significant inflationary pressures a challenging labor market fluctuation in foreign currency exchange rates and customer supply chain disruption we.

We expect net sales for the fourth quarter of this fiscal year to be slightly lower as compared to the fourth quarter last fiscal year, and we expect consolidated operating income for the fourth quarter of this fiscal year to be comparable to the fourth quarter of last fiscal year.

Notably our expectations for the fourth quarter 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 range of $6 8 million to $7 million depreciation and amortization, we expect to be approximately $7 4 million and $7 6 million for this fiscal year.

Finally.

As Ed has already mentioned as a top priority, we will be aggressively focused on generating free cash flow and our fiscal 2023 with that we'll now take your questions.

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

Using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then two.

At this time, we'll pause momentarily to assemble the roster.

Our next question comes from Budd <unk>.

Water Tower research. Please go ahead.

Good morning.

Is.

Voyage.

Sure.

English maybe you can give us a little bit of a high level.

You said, there's a lot of opportunities in mattress fabrics and has had great placements, maybe you could add a little color or are you seeing new customers into it.

And what are the trends that you're seeing.

He gave you some some.

Optimism on those.

And the longer term future of that.

Yes, Thank you Barton.

Yes look we recognize and understand that.

We've been talking about some of this business that we see on the horizon.

We thought it would be materializing in Q3.

We had some expectation now that it might.

Materialized in Q4, and then there may be some things on the back of the quarter, but now just looks like some of that's come in in the summertime.

You gave a little color on it we just have built a really solid.

Service platform.

We have the ability to meet our customers.

And any location, where they want to be serviced.

We also have.

Just an outstanding opportunity the way, we're marketing our products today, both fabric Samsung covers.

Some really.

Highly skilled <unk> rendering services and then just some just some excellent personnel talent to develop new items, and we were just seeing whether it be new customers or existing customers.

Traditional retail or bed in the box.

We just we see placements that we've won.

So we just without giving specific names of people our customers our retailers that it might be we just.

We know it's there so the optimism for US is really strong for the business to you when we've done the heavy lifting to get the.

The platform in place and now we're just kind of waiting for these to materialize.

And business is okay, but resetting new business at current cost was a big help to us as we get those things in the marketplace.

And has it just been the <unk>.

Supply chain disruptions that have caused them to delay their programs.

And do you see that dissipating you said youre seeing some better labor. So it looks like maybe we're coming to the to the back side of those problems.

Yes, I hope, so, but I am not speculate to some degree on this I can't speak that it is.

This issue is across every customer there can be different situations, but there was such a surge of just a general business.

Post Covid and at the same time, there were some significant material shortages not of our product but of other items that our customers needed to make mattresses and so as that was going on as the industry is starting to catch up now I just think it.

Customers and retailers have been has slowed down changing outlines on the normal cadence because they they just kind of will get caught up.

So I'm not sure there's any one thing, but it does feel a lot more.

Yes, I think just the honest he's taken a breath now and people are catching up and it's starting to get back to some normalized conditions that we think will be very favorable for call.

Thanks, guys.

Thank you.

Well I had to take pricing, we've seen that through the <unk>.

Economy.

Are you getting much resistance I wanted nobody ever likes price increases but.

As long as it's dominated.

Good work.

Are we seeing any much resistance to it or is it just.

Theyre understanding that those are things that just coming yes.

I would say.

And now I'm happy to avoid comments here because he has been more frontline with it on the upholstery side. There's no one likes it you said that very well no one likes.

To do price. So we've done a couple of combinations of some price increases that are more permanent and some surcharges to deal with freight and other things end.

Up until now.

We've had fairly fairly good success and customers have understood the need there and I don't think to date, we have depressed consumer spending with what's been pass through but I would tell you. If we have to continue going up then yes, I feel like I feel like it's there will be pressure.

To receive those we need to know.

Get some normalized conditions settle our product mix pull these lag a price increase that we now have coming to fruition for our fourth quarter and operate efficiently for our customers and try to deliver with the value. They expect so.

Paul do you want to comment at all whether that's been a challenge.

Sure.

But generally there certainly is a common understanding in the industry about the rising cost.

That has taken place.

So I think there is.

<unk> that there is a degree of this is just necessary.

As happened to be passed along.

I do feel that we have approached this in a in.

In a fair and appropriate way generally with.

New orders placed.

So.

Again, nobody ever likes increases, but I think that is.

There's an understanding in the market that they are necessary and we've approached it in a.

Proper way.

And I think budgets just submit you've probably noticed youre savvy in the business for a long time, but it will help as we get to new product introductions.

At least it gives us the chance on arc on our customers a chance to reset all of these new items and where our costs really are versus to have enough catch up something that was placed years ago. So that that will be a positive when new products start to come through.

Okay, just a couple a couple more from me hospitality.

You continue to like what you're seeing in there can you talk about the new programs.

What makes you what gives you that feeling good optimism and hospitality.

I'll, let I'll, let boyd speak to this in more detail, but I think hospitality for us has been through co but a difficult.

Product line because.

People aren't going to their offices, they weren't traveling and staying in hotels and so some of it.

Some of the remodeling of our development work was put on hold but we're now starting to see that come back pretty strong, especially on the fabric side and I'll, let <unk> talk to you about how he's managing cost and price in that business and then what you might see for that plus read windows.

Yes, just again as you say from a general perspective, we are certainly seeing accelerated demand.

In the hospitality segment.

<unk>.

It appears with consumer is.

It's beginning to devote more spending to travel.

And so yes, we started seeing a nice lift in that segment.

Segment of our business in Q3.

Continuing.

So I do think we're seeing a more full rebound occurring in the hospitality market.

And as <unk> says we have.

Again in that area also.

<unk> implemented some pricing actions that were necessitated through cost increases.

Which will including within our read window products business.

Which will.

Benefit us as we go forward into the next quarter as.

As we get those pricing actions more realized.

But yes, very favorable on the hospitality business seeing a nice shift in the trends of that business as the demand starts to accelerate.

Suitably now above where it.

It had gone during the throes of the pandemic.

Okay.

And finally for me.

Talk a little bit about if theres anything new coming at live smart.

Yeah.

We've made some great innovations there.

Next.

On the horizon there.

Yes, Thank you boat and definitely the lifts smart category performance products continues to be a key driver of our business.

Very pleased with the receptor.

Really all of the products under that umbrella, we are continuing to see.

A particular growth with the.

Evolve, which is the product that.

In the sustainability area.

So that seems to be just gathering more and more momentum and acceptance in the marketplace.

We have.

Our new flooring free product, that's just been launched as well and so we just continue to innovate in that area.

Add on to the.

The portfolio of products that we have there and additional.

Additional new introductions in the wings as well.

Okay well.

My last comment is just a follow up call for an awfully long time.

<unk> seen these kinds of.

Challenging times before and I don't remember a time in culp history, whether it's spring.

It always hasn't been fun for you all but.

In past times I would've been more worried about the company I'm not at this time to your financial conditions remained.

Solid job during these challenging times so congratulations to all of you for for leading the company through these times are Joe certainly good luck on it.

Hopefully, we all get to easier times.

Im not sure Thats helpful.

I hope so.

Thank you Bob Yes, we appreciate your comments there and it is something that our board is.

Certainly very keenly aware oven.

We have lived through.

Look through highs and lows in this business and we certainly understand the importance of being strong financially to weather whatever may come at us. So that's thanks for recognizing that.

Good luck. Thank you.

Thank you.

Thank you. Our next question comes from Anthony <unk> with Sidoti and company go ahead.

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

So first just curious so when you look at your products in both segments can.

Can you just talk about.

What portion of your business would you say ultimately is sold to the.

The lower end consumers versus kind of higher income and other consumers just just wanted to.

One of the major mattress retailers talked about weakness on their low end consumer lines. So just wondering if you could parse out.

Sure.

What youre seeing as far as.

Products sold.

And ultimately.

At the end users.

Yes, good question, Anthony and it'll be hard to do it by.

Actual percentages I will tell you that call for historically.

Historically speaking if we look at our upholstery fabric business, we have generally been.

So on a middle middle to upper range, but primarily China hit the sweet spot of the middle of the market.

On the mattress side, we have normally been more broad from.

A high to low, but so many of the units.

<unk>.

The units that make a difference to cover our fixed costs in our facility so with our domestic north American platforms in mattress fabrics.

Helps us to have more units running through the facility and it is a fair commentary just to say that.

On the lower end of the market is under more pressure today for sure.

Because of.

Tax returns being delayed or stimulus being.

Curtailed or whatever it might be or just general weakness there is some.

There is more business at the higher middle to high then at the low.

But it doesn't mean, we can't be very successful because with our mattress cover expansion, we have away from fabric to cover it again at almost any price point.

And our sales have been relatively stable and I think they have continued to will be we just need to get need to get our product mix more more tailored. So we're running our assets more effectively it will be important for us.

I hope that answers your question, but I hope it helps you.

Definitely thank you for the color is very.

Very helpful.

So in terms of the price increases taken in the ones that you plan for <unk> can you just kind of go over that as far as I can.

No it's not across the board, it's more strategic but the can.

Can you just give us a sort of.

So some additional color as to what you guys are thinking as far as the impact of that.

Hey, Anthony This is Kent, you mean like the financial impact.

How much was part of the quarter, Yes, I think for the quarter and I guess whats implied in your guidance for <unk>.

Yeah, I think for the if you look at the upholstery I mean, the game there is pretty much.

It was all price.

So that was.

That difference was pretty much all price work.

For CHF for the mattress fabrics business you had about.

You had about 6% of the total sales.

Amount for the quarter being price. So you had a little bit of.

Fall back there.

Without the price, but you had a nice impact from price in that business as well.

Got it okay. Thanks for that.

Looking to <unk>.

Fourth quarter is that what we should expect as well as far as the impact of pricing, Yes, I think I think for again for <unk> I would say probably <unk> got.

More you've got the effect of the full effects of the price increase from previous so you've got a little bit more impact there.

Probably.

Back 5% of that amount would be.

Would be price impact.

On the sales and.

And then for CHF, it's probably about.

That 657%.

Mhm, Okay, great. Thanks for that Ken and then.

As you mentioned, obviously you guys continue to have a strong balance sheet.

As we look at.

Our capital allocation.

Yes.

Is it safe to say that you guys are still committed to raising the dividend longer term.

Any thoughts about that sure.

Share repurchases. After you guys built up some cash.

Yes Anthony.

Really good question.

As we always talk about we are very disciplined with our capital allocation strategy and of course, we publish it.

Everywhere, it's easily available on the website.

Just as of late we've.

We've chosen priorities to invest in the business with Capex. Some of the things we spoke of and then certainly our invest organically and the inventory position to be prepared for what we might see our protect against any costs further cost pressure and we're also just as a conservative company and we like to have a solid cash back.

Without that and it is a priority for us to continue with the regular quarterly dividends and increasing those dividends and I think we have now.

Our non year record of increasing the annual dividend and we carry that through the Covid period. So.

For sure that's a strategy will take in terms of bond buying stock. It's one of our one of the tools we can utilize.

Just in this current quarter, we felt like we had taken.

Use a lot of cash or some really positive reasons inclusive of the dividend and we want it to be to.

To stay to our roots and be conservative and make sure we have a strong cash balance with no debt.

So it just kind of weigh all of those things against each other.

Got it well thank you very much and best of luck going forward.

Yes, Sir Thank you Anthony.

Okay, maybe I have a question. Please press Star then one.

Our next question comes from Marco Rodriguez Stonegate capital markets. Please go ahead.

Good morning, everyone and thank you for taking my questions. Good morning, Marco Marco.

I was wondering if maybe you can talk a little bit about in your prepared remarks, you talked about reorganizing the sales force.

Can you maybe discuss how long that might take are there any sort of meaningful cost associated with that and then if you can also maybe talk about what were the drivers behind this change.

Yes, Thank you Mark and good questions. Thanks for picking that up and it's not going to take much time, we're doing some pretty.

Pretty strong moves here just ahead of our <unk> trade show next week, which we talked about and these arent necessarily.

Fundamentally.

A whole new sweeping changes, but we are just reallocating accounts moving.

The talented salespeople and brand managers to where they need for the way the customers want to be sold we have really gotten advantage to with a.

<unk> rendering service and we just have some.

Some talented folks that really embrace that and some customers that really embrace it and some that want to work through a traditional way. So we just want to meet meet customers how they want to be served.

We also always with our sales focus and the mattress side want to reward our sales people for growing the business with commission and then of course the margins. There. So just kind of reallocating personnel and reallocating performance based on based on.

Margin and growth I think it will be very positive because we are going to be taken advantage of.

Strong technical capabilities.

And probably a much more personal level of service and a faster more efficient way of selling customer side, we're excited about it.

Got it okay I understand.

And then kind of dovetailing into one of the second areas of your focus here in your prepared remarks about maximizing efficiencies.

Can you maybe talk a little bit about your your capacity utilization levels right now.

How that sort of working out or how youre envisioning that just kind of given the <unk>.

Recent capacity additions you've done over the last year or so and then if you can also.

Kind of Dovetailing to that.

The labor situation I know you sort of address that one of the prior questions, but just kind of how that is also meaningfully or putting into the equation for maximizing efficiencies that you guys can go forward.

Right.

And you are picking up on those comments were talking about where we need to maximize efficiency in all our plants to maximize profitability and so kind of what we're trying to get at there is we feel like we have done an extraordinarily good job.

Maintaining stable sales.

<unk> level and we do have customers now in this age of anti dumping and all the things that have gone on making products all over the world and our global platform is very well.

Situated to service these customers from almost any location.

And so we're proud of ourselves for finding these opportunities we think it's really a really good thing but.

For us to really maximize our profitability in mattress fabrics.

We have to we have to have a stable mix across the whole platform and so I guess, what's kind of been lagging in Q3 was a north American <unk>.

Platform is just not running as full as we want it to run so we're delivering customer and delivering the need I don't want you to misunderstand My comments, we're happy with the offshore sales and again not only demonstrates our ability to meet customers, where they want to be serviced.

But to optimize we need the sales to.

To complement our strong demand for North America. So those plants, just arent running at full capacity right now because of the.

The demand we see in the North American business, they will and in some of these things come to fruition that we see out there will be much better positioned but.

Have some high fixed cost that we need to cover by running those plants.

Understood and the labor aspects.

I'm sorry on the labor challenges have definitely improved some now I think thats, what youre asking.

In Q3, we had significant.

Hi, rain retraining.

Sign on bonus all kinds of challenges, we had was pertaining to our labor force that is much much better now, but we certainly have higher wages than we had pre pandemic, but labor cost is not is not a major factor in our cost per yard.

So we can absorb that with our pricing actions and the labor situation is more stable, we're able to get.

Personnel to run equipment, now, which is a good thing.

Got it.

And then just kind of dovetailing onto the question about pricing.

<unk> heard from the other mattress retailers, whether it's the traditional guys or the bed in the box Inc.

They've obviously been raising prices over the last year. So just doing the raw material inflation, but it seems to kind of be approaching materially approaching an area, where it might be depressing consumer demand. So I'm wondering if you can maybe talk about what you might be hearing or seeing from your customers as it relates to the sort of dynamics or what your thoughts are there.

Yes, I think it's a.

That's a good question Mario and I don't I don't have the absolute answer to that I think we.

We thought about that a lot as we look at what's happened to costs in the business is there a point where consumers.

Consumers will defer their spend or something else. If it does become too expensive and we are certainly aware of that.

The way the way I would look at it not to not to Dodge the question because I.

I don't know I think the way I would look at that is.

New products will solve a lot of that if we can get new exciting products rolled out to the market.

That have absorbed the current <unk>.

<unk> situation, we'll have a better chance trying to just raise prices on things that are already place is challenging but to move to some new items will will reenergize consumer in the marketplace and Thats why we keep pointing to some of the new new products, we see that are lined up to come through.

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

Thank you Marco.

Yes.

This concludes our call excuse me. This concludes our question and answer session I would like to turn the conference back over to Mr. <unk> for closing remarks. Please go ahead.

Thank you very much operator and again. Thank you all for your participation and your interest in call. We 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.