Q4 2022 Culp Inc Earnings Call
customersfor us.
Generally the mattress business, as you know, has always been more of a just in time delivery cycle. So i- maybe you car out on the mattress side- bed in a box or mattress in a box type of customers are probably is a lot of inventory in the system on on products like that. But traditional mattress business probably not large backlogs, maybe just weaker conditions we're feeling. And then on the fallststrey side- I think it's for ure it's higher backlogs than everyone of the experience and boyi don't knowif you have an idea of a time line. I'm sure if varies back customer.
Yes I think we're still looking at several months out at minimum before we start to see more normalization there, the preCOVID type backlogs in lead times. So I think there's still some number of months of runout to go.
So can to get to a comparable cash ization at the end of Q1. If you're going to have a siz operating loss, I guess that that that means that a you're not going to spend a a lot of capital and a bance of of depreciation, but be you're going to be working down some working capital as well, where the source of cash coming from a primarily receivables are. Will there will be a significant inventory reduction at the end of Q1. If So, going going to quantify what your thoughts are? Well, I think you know our focus will be on inventory. I mean, we we made significant- we're good good- progress in Q4, our inventory with down almost 9% from Q3. We want to continue that effort in Q1. Of course we have the balance with the opportunities that we that get presented before us. But Yeah, I think the we're looking for a, a a material contribution from inventory as well. As you said, we're going to very carefully monitor CapEx and just to limit spending there unless you actually need it. You know we're not going to spend it, So it's. And of course you know continuing to focus on prudent accounts payable, you know management as well as keep laser focusused on our accounts receivable receipt, our accounts accounts receivable performance. So it's all kind of PL in there. But inventory is going to be a major focus for sure.
And again you think it's a 9% reduction or what's the kind of number that you get to at the end of.
She was, but I can't look. I mean don't want to quantify that they just it will be material. We're going to have have to really focus on that and, of course, as you said, the cover, the losses we're going to have to make. We're to have to make a material contribution, for sure.
But I comment on the inventory, maybe simply the C H, F and we have touched on this in previous calls. We still a significant part of our inventory on that part is raw material. So that is product that we're not worried about moving. It's the time line of move in and we've got to generate volume to move it. So we see opportunities to produce the inventory and it is hard to pend to down on a on a number. We'll get to, but there'll be significant focus on both moving fabric that are in stock to the customers that have taken it and two opportunities for new customers as well as just getting the run schedules a little better So we can work on yarns, bit of our than purchased.
So first' there's some that wasn T there.
And did I hear you right, you're going to you have a $2 million cost savings program and is at an annual number. And where do you see that? In which divisions and what kind of actions are you taking? Yes, what's that? Most of those actions, or generally all those actions, have been taken on the mattress fabric side of the business and it's coming from several areas. I mean it's labor cost productions, but salied and hourly it's some right size.
Product shifting for certain aspects of the business we have. Some of our segments may not be perform as others, So we're going to scale back production of those items. We're going to selectx, our global platform to make the products in the most advantageous cost spot. There's a lot of material improvements, such as order quantities, you know, just managing the efficiency of the business better. Dropping some yars is just being more efficient in the business. In these current terms it's mostly on the mattress side and if we complement that with them, an ounced pric con actions we're going to need to do and then maybe get a little volume relief on new products. That's where we see improvement being potentially there.
And the pricing actions. Have they been announced and it can quantify that we haven't announced those yet? We'll be announcing those in on our quarter in Q1 to be effective for Q2.
Okay okay, Thank you very much for taking my questions. Good luck on the balance of of this's going to be a difficult period for all of us. Some phrase.
Sir Thank you Bob, have a good day and the happy anniversary.
Thank you, Thank huto, and have you forth everybody.
I just.
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Our next question.
From Anthony lebidenssky.
From sidodian and Compass.
Please go ahead.
And gentlemen and thank you for taking the questions So.
So first I guess you're just looking at the cost savings. Just just to follow up on the previous question from. But as far as that two million savings program is, as far as the timing of that I mean.
Should we expect that kind of evenly throughout the year or, like you know, can? Maybe you can help me out as far as us thinking about the, the timing of those expense savings?
Yes good, good question, Anthony. I think you would the way we would look at that as maybe maybe the back end of Q1, but primarily Q2, three and four.
Is where that would spread.
Okay got it the esscent. Thanks for that, and then.
And as far asi know, some of the new product rollouts could be delayed because of just all the uncertainty that it's out there. But that being, I know that's a high focus for you guys as far as.
Keeping an eye on innovating a products. So can you share with us some of the examples that you hope to be able to roll out in fiscal' 23? What are some of the exciting new things that you hope to bring to market?
In your segments.
Sure I think about it. If we look about two different to bark the business most, let'll start with maybe the holstery side and Boyd, I'll let you, I'll let you comment. If I'm missitting something here, I' let ill in details. I'm thinking there's an excitement there for our lismart products. I think we'll continue to see strong potential and new placements with our sustainability products: liftsmart, ofolall and, I think,'re. We're prettyoptimistic about the recovery of the hospitality business, specifically on the fabic side where those fabric applications can fit. I think there's opportunity in both those parts. Boy well, you touch on and I'll do matter fabrics, that for you.
Sure and yes if the strength in the lift smart umbrella of products that we offer, that certainly remains a core strength forus and I'd say especially the evolve, the sustainability product that we have introduced to the marketplace- and you know the reality of it is- while, while that has been available for a couple of marketts, these are a couple of market seasons where there was not a lot of new introduction being done. So as we came out of the most recent April furniture market and certainly our most recent fabric showing season here in May, we have really seen renewed interest and additional receptpance to these products and again, especially the, the evolve, lifsmart evolve- is really gaining a lot of traction. We are hearing from a lot of people that there is going to be a need and is a need at in the retail environment and in the market for new products. We're expecting much, much more significant introductions in that light in October . So remain very optimistic for for that entire category of our product offering.
Got's color. anthy, I could out a touch on the mattress start, if you want, with just what it's me but gets me excited about. That is- and I we talked about it in Q3 release and q4- we have made significant sales presentation changes, meaning a lot of digital technology, a lot of brand experience management, a lot of just very.
Very sophisticated development and customer service process and we are seeing projects be in place. It's both fabrics and covers for national brands and rollout that are scheduled really for for this current fiscal year. What's going on- and boy touched on it so much is. Retailers, in our view, just have not put a lot of new product on the floor as they've come out of the COVID-19 search, and so now if business starts to get a little more challengge, it gets a bit weaker. We see optimism for new products and retailers want to push things on the floor to drive customer excitement, and that's that's where our optimism lives, because we know we've won better placement position on things that are scheduled to be launched. We just are not able to control yet when they will actually physically launch.
So that gives hopefully some colors to what we're seeing and while we're having a hard time estimating the timeline. But while we're also pretty optimistic about the future.
Got it okay. So it sounds like because of these initiatives as far as new product innovation, that should help you to come out faster in the recovery once we're past this.
Tough period here and just to follow up also on the sustainable product, the focus for with smart evolve generally is that a higher margin type of products for you guys versus others.
Yes Anthony, typically the performance category does have somewhat higher margins. So yes, that category continues to grow. For us that should have some impact there.
Got it okay. A member of boys able to do that two ways. We talked performance. We think about that Anthony, it's a.
It's a sustainability product along with having a lot of performance features and cleanability, So it really is an excellent product that is demanded. No, we can offer it mostti ways. Doesn't have to have both, but a performance and sustainability product is pretty special offering we have.
Got I got it understood and then as far as the hospitality business.
It can you give us a timecessestto, like you know what?
How P that you know just just Sood in terms of you know the overall impact on the business. I know you talked about top line recovery and within that business can you just.
I know you guys don't quantify specifically how much that is, but sort of any kind of color where that is now versus a year ago versus two years ago.
Yes Anthony this is Boyd and I'll be glad to address that we this we've talked about before during the two thousand.
21 year the hospitality typically lags what's happening in residential and with the, the stay at home focus. During that COVID-19 time period we certainly saw more increase and on the order demand from the residential side than we did initially from the hospitality side.
We have seen that now certainly flip to where the hospitality growth is coming back again as more and more traveling has started to take place. We did- and again you're right, we don't normally disclose those percentages of our business, but I will put it in this perspective- our F Y 21 saw our hospitality business as a percent of our overall business declineed quite, quite significantly in F Y 22. that came back not quite to the normal levels or the levels that we had grown to preCOVID, but not that far off. And certainly as we're moving into this fiscal year we're seeing continued strength in that segment of our business. So I think we will see a return to be in a percent of our overall business.
Similar to what was prior to COVID-19.
That but that's very helpful color. And then I know you guys are very focused on managing your CapEx. May have missed this, but can did you give a number for CapEx for the year that you expect, or just wanted to follow up us? No Anthony, we did not. We're just like I said right now:'re we're? You know, we're looking at every single expenditure and just very just managing that very closely. And so it will be. It will be limited, for sure, as we go through this time, but we did not give a total at this point.
Got understood all right well that. Thank you very much. Best of the luck and have a great holiday weekend.
Thank you have may very.
Our next question.
But the got of watertower had. He M sorry for the follow up, but there is. There was a notable, or is a notable, bankruptcy in the, in the, in the macro side of the business. I just wanted to make sure they ask if the receivables have been appropriately reserve for, for that or that be an issue that we have to address going forward.
Yes Thank you, butud. Good question and that's something we just learned about on Saturday morning, So we're still kind of gathering our day are around it. That customer has been a good customer for us and we certainly, in our support the restructure, pleased to tell you there's really no impact to us for Q4 and we're just now managing the impact to our business and the opportunity we see. But for now, with more to learn, we feel pretty good and feel like that's not going to be a major impact to call.
Okay good, all right. Well, Thank you very much and again happy holidays.
Thank you.
This concludes our question-and-answer session. I would now like to turn the conference back over to ifcop for any closing remarks.
Thank you so much operator, and again thank you all for your participation and your interest in coulp. Have happy fourth of joh holiday and we look forward to updating you on our progress next quarter.
The conference has now concluded.
Thank you for attending today's presentation.
You may now disconnect.
I.
Good morning and welcome to the cope Inc. fourth quarter earnings conference call. All participants will be in listen only mode.
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I would now like to turn the conference over to Drew Anderson.
Please go ahead.
Thank you, good morning and welcome to the callul conference call to review the company's results for the fourth quarter and fiscal 2022 year.
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 or statements that include projections, expectations or beliefs about future events or result or otherwise, are not statements of historical fact. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties.
These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10 -q.
You are cautioned not to place undue reliance on forward-looking statements made today, and each such statements 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 measurements is included in the tables to the press release, included as an exhibit to the company's eight -k, filed yesterday and posted on the company's website at call com.
A slide presentation with supporting summary financial information is also available on the company's website as part of the webcast of today's call.
I will now turn the call over to infcalk. President and Chief Executive Officer of calk. Please go ahead, sir.
Good morning and thank you for joining us today. I'd like to welcome you with the quarterly conference call with analyst and investors.
And with me on the call today are Kim boeling, our Chief Financial Officer, and Boyd chumley, our President of our holstery fabrics business.
I will begin the call with some opening comments, and kenim will then review the financial results for the quarter and the full year.
I will then briefly update your own strategic actions specific to each of our operating segments.
And after that, Ken will review our first quarter fiscal 2023 business outlook, and we'll then be pleased to take any questions.
As previously announced, our results from the fourth quarter were significantly challenged by the unexpected shutdown of our China facilities due to covidt-related restrictions, affecting both of our businesses.
And by further weakening in domestic mattress industry sales.
However our operating loss for the quarter was somewhat better than expected, as our matchress fabric segment experienced slightly higher sales than previously anticipated during the last two weeks of the quarter.
We were also able to return a small number of employees to our coul China locations at the end of April and facilitate product shipments in a limited.
Capacity.
Importantly, we have maintained our strong customer relationships despite this disruption, as we have balanced and diversified supply chains in both businesses.
Much effort has gone into our delivery platforms and we fully understand the importance of customer service in our competitive industry.
We also ended the quarter with a higher cash position than expected, with $14.6 million in cash and investments and no spending borrowings.
In addition, we are pleased to announce the caussing of our new secured credit facility, which enhances the company's financial flexibility and is expected to provide us with sufficient liquidity to navigate the ongoing headwinds.
Our fiscal year. Last year started off strong for both of our businesses, with moderate pressure on profitability and supply chain disruption.
However as the year progressed, the rapid rise in inflation, changing consumer spending patterns, covet R disruption and other geopolitical events materially affected the performance of our businesses.
We took several pricing and cost-reduction actions throughout the year to help mitigate these pressures, but with the ongoing volatility, we are now taking additional measures to align our business to meet current demand trends and diligently manage our liquidity.
These measures include reducing inventory, limiting capital expenditures and other discretionary spending and limating under utilized equipment, reducing production schedules and making other workforce adjustments as needed to match demand.
We are also planning to announce additional pricing action during the first quarter.
We are strategically taking these steps to adapt to the near-term challenges, while ensuring that we remain well positioned to continue to meet the needs of our customers both now and win conditions normalize.
In addition to these actions and considering the current and expected business environment.
Our Board of Directors has made the difficult decision to suspend the company's quarterly cash dividend.
Although we are confident in our business strategy, the duration of the current challenges is unknown and we believe that preserving capital is in the best interest of the company, to support future growth opportunities and the long-term interest of our shareholders.
We understand the importance of the decision for our shareholders and we will continue to reassess our dividend policy each quarter.
A key objective in a top priority is our emphasis on managing and stabilizing our solid cash position.
And we will continue our emphasis on reducing inventories, limiting capital expenditures and controlling overhead costs. Our intent is to always maintain our strong balance sheet.
Our associates around the world continue to persevere, delivering innovative products, creative designs and exceptional service for our customers.
We are especially proud of the tremendous resilience of our China aso kids who have energetically returned to work following eight weeks of shutdowns and are diligently working to ship product and resume operations at normalized capacity.
Although these shutdowns dramatically affected sales for our residential polstery fiabrics business and our mattress cover business during the fourth quarter of fiscal 2022 and, to a lesser extent, the first month of fiscal 2023, this has notably been the first instance of any material COVID-related ruption for our China operations since the pandemic began.
Throughout the past few years, our Asia platform has been a reliable strength for our business, with our dedicated associates and stables of pply chain partners demonstrating their capacity to meet demand.
While we value the benefit provided through our Asia platform, we are focused on continuing to diversify our supply chain, and we are especially pleased with developments in Haiti. This near shore operation gives us excellent potential to improve our reactivity to demand shifts and to service our customers better.
Our Haiti platform is an excellent complement to our North American and our Asian platforms, as we believe an onshore, nearstore and offshore balance in production will serve us well in the future.
Looking ahead, we expect the prevailing macroeconomic pressures and retail softness will continue to affect our business through at least the first half of fiscal 2020. -three and.
We believe our market position remains solid, with new plan placement and product development opportunities that we expect to materialize as market conditions improve.
As previously mentioned, in our third quarter investor call, I touched on many points that we expect to be accretive to our revenue, specifically in mattress fabrics.
We continue to see opportunity being generated from our innovation, design expertise, reorganized sales, focused brand management experiences, digital presentation tools and our new innovation campus.
In upholstery fabrics, we remain pleased with the growth of our listmarart portfolio of brands, as well as the steady return of fabric sales in our hospitality segment.
Growth from these projected improvements is being stunted by weaker business conditions and delayed retail product rollouts.
But we believe a core focus on product innovation will eventually be rewarded.
We remain focused on generating cash, keeping our expenses in line with demand trends and ensuring that we have adequate liquidity. Importantly, we remain optimistic about coulp's future.
With all that, let me turn the call over to Ken, who will review the financial results for the quarter and the full year. Thanks if, 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 location strategy here. The financial highlights for the fourth quarter.
Net sales were 56.9 million, down 28% compared with the prior year period.
The company reported LO some operations of five point four million, compared with income from operations of one point six million for the prior year period.
I'll comment into more detail on divisional sales and operating performance in a moment.
Net loss for the fourth quarter was fixed ill, or 49 centsperdiluted share, compared with net income of one point five mill, or 12 cents perdiluted share for the prior year period.
Our overall operating performance for the fourth quarter was significantly pressured by lower sales, operating inefficiencies at our U's and Canadian locations due to the rapid and material decline in revenues.
Unfavorable foreign exchange rate fluctuations in China and additional employee training costs and operating inefficiencies at our new hayier postery cut and so facility as a continued to scale capacity to its fu-planned output level.
These pressures were partially offset by lower total SC expense for the quarter, due primarily to lower incentive compensation expense.
For the full fiscal year, net sales were 294.8 million, down 2% as compared to the previous year.
Income from operations for the full fiscal year was 678 thousand, compared with income from operations of 12.1 million for the prior year.
Net loss for the full fiscal year was three point two M, or 26 cents per diluted share.
Comparable net income of three point two Min or 26 cents per solutus share for the prior year.
Operating performance for the current year was affected by the factors I noted earlier in the fourth quarter, as well as higher freight raw material and labor costs.
Other pressures effects in the year were startup costs for the new Hay postery cut and's facility operating inefficiencies in our mattress fabric segment related to the product mix within the segment's global platform.
And labor shortres in the U's and Canada, among other factors.
These pressures were partially offset by lower total estena expense for the year, due primarily to lower incentive compensation expense.
Adjusted EBITDA for this fiscal year was eight men, or 3% of sales, compared 18.5 men, or 6% in net sales for the last fiscal year.
And solidate return on capital for this fiscal year was zero, 7%.
The effective income tax rate for the fourth quarter of this fiscal year was a negative 4%, compared with 37% for the same period a year ago.
The effective income tax rate for the full fiscal twent thousand, 20 to 20 and 20 year was negative 888% compared with 71% for the prior year.
Our effective income tax rates for the fourth quarter and for the full fiscal year were affected by the company's mix of income between the U's and its foreign jurisdictions.
We encouraged significant pretax losses in the? U's operations during these periods and, as a result, the income tax expense we encouraged stem from taxable income from our foreign jurisdictions that exceed our consolidated taxable loss in the? U S.
Additionally, the effective income tax rate for the fourth quarter this fiscal year was adversely affected by change in estimate adjustments that stem from a higher-than-expected actual pretax loss incurred by the? U's operations.
Compared to estimates as of the end of the third quarter this fiscal year.
Our income tax payments total three point one Min for this fiscal year and we currently expect cash income tax payments ofapproximately three point two Min for the fiscal 2023 year.
Importantly, our estimated cash income tax payments for fiscal 2023. our management's current projections only and can be affected over the year by actual earnings from our foreign subsidiaries located in China canada- versus annual projections, changes in the foreign exchange rates associated with our China operations and other factors.
Now let's take a look at our business segments.
For the mattress fabrics segment, sales for the fourth quarter were 29.9 million, down thirty-point 6% compared to last year's fourth quarter.
Sales for the quarter, which included pricing and surcharge actions that were in effact during the period, reflected industry weakness and domestic matacro sales, with customers curtailing inventory purchases and delaying the timing of new product rollouts in response to smalllow retail demand.
We believe this energy softness is primarily due to inflationary pressures ofaffacing consumer spending, particularly for mattress products in the lower mid-range price points.
Sales were also affected by the cover rage shutdowns of our Co China platform, which halted production and distribution of our film mattress covers produced in China.
Operating off for the quarter was two point nine million, compared with the operating income of two point three million a year ago.
Our operating performance for the fourth quarter this fiscal year was significantly pressured by the rapid and material detim revenues for the quarter, causing operating inefficiencies at our U's Canadian facilities.
Results for the quarter were also affected by lower mattress cover sales due to the D to thecovid-related lockdowns in China.
For the opposing February segment sales for the fourth quarter with 27.2 men, down 25% over the prior year.
Sales for the postfi products were significly expected during the fourth quarter, primarily due to cogrt weight shutdowns of our facilityities of China and, to a lesser extent, a slowdown in new business for the residential home furnishings industry.
However top line performance in our hospitality business continued to recover from pandemic-related impacts during the quarter, with higher sales in both our hospitality contract business and our RE windows products business compared to the fourth quarter of last fiscal year.
Sales results for the fourth quarter were supplemented by the pricing and surcharge's actions that were in effect during the period, as compared to prior year.
Operating loss for the quarter was 116 thousand, compared with two point six main ion income a year ago.
Our operating performance for the fourth quarter this fiscal year was primarily pressured by lower sales, as well as unfavorable foreign currency fluctuations in China and additional employee training cost and operating inefficiencies at our new Haiti cuttoso facility as it continues to scale capacity to its school planned output level.
The pricing has surchargeed. Actions implemented throughout the year, including the for realization of the additional price increase that was in effect for new orders during the fourth quarter, helped offset the increased freight and raw material costs during this period.
Now turn the balance sheet. We reported 14.6 million total cash and investments and no outstanding debt as of the end of this fiscal year. This compares a 46.9 million total cash and investments and no outstanding debt as of the end of last fiscal year.
Cash flow from operations and REE free cash flow negative 17.4 mill and negative 24.3 remain respectively. For this fiscal year. Our cash flow from operations and free cash flow during this fiscal year were affected by the following uses of cash.
Higher inventory levels to help navigate supply chain disruption and support our valaed customers. Importantly, approximately 30% of the increase in inventory was a result of higher raw material costs. Through the revaluation of our inventory.
5.7. main investment in capital expenditures, including expenditures from machinery equipment on it security infrastructure investments.
As well as expenditures related to our new innovation campus.
two point five million payments for the new building lease, startup expenses and other costs associated with ramping up our new haitia hosty cutinil operation. And increased accounts payable payments related to our return to normal credit terms, as opposed the extended terms previously granted in response to to COVID-19 pandemic.
Additionally, during this fiscal year we paid five point five mion in regular quarterly dividends and one point eight million for share repurchases of our common stock.
The company did not repurchase any shares during the fourth quarter of this fiscal year, leaving approximately three point two main available under our current share repurchase agreement.
Despite the current share repurchase auanorization, we do not expect to repurchase any shares during the first quarter of fiscal 2020. -three.
With that, I'll turn the call back over, be it.
Thanks kenim. I'll just give you a few more comments about each division, beginning with the mattress fabric segment.
Despite the headwinds in this business, co-home fashions has maintained a continued focus on its product-driven strategy, with an emphasis on innovation design creativity, quality and personalized customer service.
In response to the ongoing headwinds, management is taking decisive action to further reduce expenses and improve operating efficiencies, with the targeted annual cost savings of approximately $2 million.
We're also planning to announce additional pricing action during the first quarter that will be effective for the second quarter of fiscal 2020. -three.
Looking ahead, we are optimistic about planned new programs and product development opportunities for fiscal 2023, but industry weakness is expected to continue for some period of time, which may reduce demand for mattress, fabric and cover products and delay the timing of new product rollouts.
We have an excellent supply chain platform within CHF, with manufacturing and sourcing operations across six countries.
Customer service and reactivity remain our core and we will be prepared to respond to changing demand scenarios and meet our customers where they want to be serviced.
Now I'll turn over to the poulstery fabric segment.
Despite the significant disruption in residential business during the fourth quarter due to covert related shutdowns in China, we sustained our focus on innovation and creative design. We continued to ramp up in production at our new Haiti upholery ut And so facility during the quarter, and we also expanded our options for fabric development and sourcing, offering greater diversification and supply chain resiliency within our global platform.
We are also pleased the shutdowns of significantly curtailed our China operations through April and may have now been lifted, when we are currently operating at normal capacity.
However we note that lingering constraints from the shutdowns may continue during the first quarter of fiscal 2020. -three.
Looking ahead, we believe our psty fabrics business is well positioned for the long term with its scalable global platform and its sustained focus on innovative product offerings, including our popular portfolio of liissmart performance products and a growing hospitality fabric business.
However we expect to slow down. A new retail business for the residential home furnaces industry may affect demand for the residential business for some period.
kenim'is now going to discuss the general outlook in the first quarter of fiscal 2023 and they'll take any questions.
We continue to navigate a convergence of headwinds, including significant inflationary pressures, that are affecting consumer spending.
A challenging labor market cover-related disruption in China and other geoplinical events.
Although the company remains well positioned over the long term with its product-driven strategy and flexible dloble platform, their current conditions are likely to continue psure results to at least the first half of fiscal 2020. -three and.
Due to the continued volatility in the macro environment, we are providing only limited sequential financial guidance for the first quarter of fiscal 2023. at this time.
We expect net sales for the first quarter of fiscal 2023 to be comparable to the fourth quarter of last fiscal year.
While we still expect a material consolidated operating loss for the first quarter of fiscal 2023, we do expect a moderate improvement as compared to the loss incurred during the fourth quarter of last fiscal year.
We also expect our cash position as of the end of the first quarter of fiscal 2023 to be comparable through our cash position as of the end of last fiscal year.
In conclusion, as we continue to weather the current challenges, we will be laser-focused on prudent financial management, with the goal of always maintaining a strong balance sheet, especially with regard to ensuring a strategic balance in our working capital.
With that, we'll take your questions.
We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypod if you're using a speaker phone.
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At this time. We will pause momentarily to assemble our roster.
Our first question today comes from Bud bug at of water tower.
Please go ahead.
Good morning is good morning, can boy, I guess the question, the question I have is to really to assess the health of your customers and their inventory, current inventory, and their financial capacity. I'm talking about the manufacturing customers, both in reach and is. A hostery and mattress is maybe you could give us some color, to the extent that you can, without talking about individual customers.
Yes But thank you and good morning. Nice to hear from you.
Yes for sure we don't want to talk any details about specific customers but.
Generally I would say one our one of our strengths in our cash position or.
Management for the last period of time has been really Sol the receivables, So we're been pleased with that. What we're facing, probably on a customer level, is that I think a lot of our customers have are still working off high backlogs, have inventory in place that we have shipped them and are using to fill orders they have, while they're also seeing some slowness in their market which is maybe limiting what they're bring in from usth. So we have done a real nice job, as we've touched on and many previous calls of delivering demands. So even through the surge we kind of kept up. We never built a really large backlog and we just kept kept Shi in our customer. And so now I think we are faced with some- some of our customers on both sides of the business that have inventories of our product and other things and they're finishing out their backlog and not pulling new things from us, at least currently. So I excited to we get about new product landins and all the things we talk about that's growing. We're getting new product to offset stuff that's not moving. We're not able to gain on the total quite yet, But if you want to add anything through the customer.
I would just echo what you said. There is, which is, a lot of our residential furniture manufacturing customers still have backlogs that they are working down and while those backblog have been coming down, I think a number of them are still in position where they'are in pretty good shape of having backlogs to are still work through.
That does vary and within our customer base, and there's some that backlogs have been brought down further than others, and I think it's just a general assessment of the industry. That remains the picture of where it is today.
Show two questions combined on that. Is there any difference between auphostery and mattress and at the current rate of the sales and their workdown, how long would it take before their inventories are better balanced or better in?
It reached normal cyes.
But I think there's maybe a little bit of a difference between a upholstery and mattress customers for us.
Generally the mattress business, as you know, has always been more of a just in time delivery cycle. So i- maybe you car out on the mattress side- bed in a box or mattress in a box type of customers are probably is a lot of inventory in the system on on products like that. But traditional mattress business probably not large backlogs, maybe just weaker conditions we're feeling. And then on the alllststrey side- I think it's for ure, it's higher backlogs than most. Every one of the experience boy, I don't knowifyou have an idea, a time line, I'm sure if various back customer.
Yes I think we're still looking at several months out at minimum before we start to see more normalization there- the preCOVID type backdogs and lead times. So I think there's still some number of months of runout to go.
So can to get to a comparable cash izition at the end of Q1. If you're going to have a sizal operating loss, I guess that that that means that a you're not going to spend a whole a lot of capital and a bance of of depreciation, but be you're going to be working down some working capital as well, where the source of cash coming from a primarily receivables are. Will there LL be a significant inventory reduction at the end of Q1? If So, going going to quify what your thoughts are. Well, I think you know our focus will be on inventory. I mean, we we made significant, we good, good progress in Q4, our inventory with down almost 9% from Q3. We want to continue that effort in Q1. Of course we have the balance with the opportunities that we that get presented before us. But Yeah, I think the we're looking for a a a material contribution from inventory as well. As you said, we're going to very carefully monitor CapEx and just limit spending there unless you actually need it. You know we're not going to spend it, So it's. And of course you know continuing to focus on prudent accounts payable. You know management as well as keep laser focus on our accounts receivable receipt, our accounts accounts receivable performance. So it's all sound of PL in there, but inventory is going to be a major focus for sure.
And again you think it's a 9% reduction or what's the kind of number that you get to at the end of.
She was, but I can't look. I mean don't want to quantify that they just it will be material. We're going to have to really focus on that and, of course, as you said, the cover, the losses we're going to have to make, think we going to have to make a material contribution, for sure.
But I comment on the invent.ory, maybe's LY, the C H F, and we have touched on this in previous calls. We still a significant part of our inventory on that part is raw material. So that is product that we're not worried about moving. It's the time line of move in and we've got to generate volume to move it. So we see opportunities to produce the inventory and it is hard to pend to down on a on a number. We'll get to, but there'll be significant focus on both moving fabric that are in stock to the customers that have taken it and two opportunities for new customers, as well as just getting the run schedules a little better So we can work down yarns that of our been purchased.
So first there's some that N in there.
And did I hear you right, you're going to you have a $2 million cost savings program and is that an annual number? And where do you see that? In which divisions and what kind of actions are you taking? Yes, what's that? Most of those actions, generally all those actions have being taken on the mattress fabric side of the business and it's coming from several areas. I mean it's labor cost productions, but salied and hourly it's some right size.
Product shifting for certain aspects of the business we have. Some of our segments may not be perform as others, So we're going to scale back production of those items. We're going to selectx our global platform to make the products in the most advantageous cost spot. There's a lot of material improvements, such as order quantities. You just managing the efficiency of the business better. Dropping some yars is just being more efficient in the business. In these current terms it's mostly on the mattress side and if we complement that with them, an ounced pric con actions we're going to need to do and then maybe get a little volume relief on new products. That's where we see improvement being potentially there.
And the pricing actions. Have they been announced and it can quantify that wehaven't announced those yet? We will be announcing those in our quarter in Q1 to be effective for Q2.
Okay okay, Thank you very much for taking my questions. Good luck on the balance of of this's going to be a difficult period for all of us. Some phrase.
Sir Thank you Bob, have a good day and the happy anniversary.
Thank you, Thank huto, and have you fourth everybody.
njust.
Again if you have a question, please press star than one.
Our next question.
From Anthony lebidensski.
From sidodian Compass.
Please go ahead.
And gentlemen and thank you for taking the questions So.
So first I guess you RE just looking at the cost savings, just just just to follow up on the previous question from. But as far as the two million savings program is, as far as the timing of that, I mean.
Should we expect that kind of evenly throughout the year? Or, like you know, can maybe've been helpingme out as far as I thinking about the, the timing of those expense savings.
Yes good question, Anthony. I think you would the way we would look at that as maybe maybe the back end of Q1, but primarily Q2, three and four.
Is where that would spread.
Okay I VE got it the esscent. Thanks for that. And then.
And as far asi know, some of the new product rollouts could be delayed because of just all the uncertainty that it's out there. But that being, I know that's a high focus for you guys as far as.
Keeping an eye on the innovating a products you. Can you share with us some of the examples that you hope to be able to roll out in fiscal' 23? What are some of the exciting new things that you hope to bring to market?
In your segments.
Sure I think about it. If we look about two different to embark the business most, let'll start with maybe the holstery side and Boyd, I'll let you, I'll let you comment. If I'm missitting something here I'll let you fillin details. I'm thinking there's an excitement there for our lift smart products. I think we continue to see strong potential and new placements with our sustainability products- liftsmart, ofolall- and I think we're we're prettyoptimistic about the recovery of the hospitality business, specifically on the fabric side, where those ter fabric applications can fit. I think there's opportunity in both, both parts. Boy well, you touch on, then I'll do matter fabrics, that to you.
Sure and yes if the strength in the lift smart umbrella of products that we offer, that certainly remains a core strength forus and I'd say especially the evolve, the sustainability product that we have introduced to the marketplace- and you know the reality of it is- while, while that has been available for a couple of markets, these are a couple of market seasons where there was not a lot of new introduction being done. So as we came out of the most recent April furniture market and certainly our most recent fabric showing season here in May, we have really seen renewed interest and additional receptpance to these products and again, especially the, the evolve Li smart evolve is really gaining a lot of traction. We are hearing from a lot of people that there is going to be a need and is a need at in the retail environment and in the market for new products. We're expecting much, much more significant introductions in that light in October . So remain very optimistic for for that entire category of our product offering.
Got color anthy Y, I could out a customer on the mattress. Start, if you want, with just what it's me but gets me excited about. That is- and I we talked about it in Q3 release and q4- we have made significant sales presentation changes, meaning a lot of digital technology, a lot of brand experience management, a lot of just very.
Very sophisticated development and customer service process and we are seeing projects be in place. It's both fabrics and covers for national brands and rollout that are scheduled reallyly for for this current fiscal year. What's going on- and boy touched on it so much is: retailers, in our view, just have not put a lot of new product on the floor as they've come out of the COVID-19 search, and so now if business starts to get a little more challengge, it gets a bit weaker. We see optimism for new products and retailers want to push things on the floor to drive customer excitement, and that's that's where our optimism lives, because we know we've won better placement position on things that are scheduled to be launched. We just are not able to control yet when they will actually physically launch.
So that gives hopefully some colors to what we're seeing and while we're having a hard time estimating the timeline. But while we're also pretty optimistic about the future.
Got it okay. So it sounds like because of these initiatives as far as new product innovation, that should help you to come out faster in the recovery once we're past this.
Cough period here and just to follow up also on the sustainable product. The focus for with smart evolve generally is that a higher margin type of product for you guys versus others.
Yes Anthony, typically the performance category does have somewhat higher margins. So yes, that category continues to grow. For us that should have some impact there.
Got it okay. A member of boys able to do that two ways. We talked performance. We think about that Anthony, it's.
It's a sustainability product along with having a lot of performance features and cleanability, So it really is an excellent product that is demanded. No, we can offer it most ways. Doesn't have to have both. But a performance and sustainability product is pretty special offering we have.
gotit got it understood and then as far as the hospitality business.
Can you give us a sense that to like you know what?
How pick that just just so in terms of you know the overall impact on the business. I know you talked about top line recovery and within that business can you just.
I know you guys don't quantify specifically how much that is, but sort of any kind of color where that is now versus a year ago versus two years ago.
Yes Anthony this is Boyd and I'll be glad to address that we this we've talked about before during the two thousand.
21 year the hospitality typically lags what's happening in residential and with the, the stay at home focus. During that COVID-19 time period we certainly saw more increase and on the order demand from the residential side than we did initially from the hospitality side.
We have seen that now certainly flip to where the hospitality growth is coming back again as more and more traveling has started to take place. We did- and again you're right, we don't normally disclose those percentages of our business, but I will put it in this perspective- our FY 21 saw our hospitality business as a percent of our overall business declineed quite, quite significantly in FY 22. that came back not quite to the normal levels or the levels that we had grown to preCOVID, but not that far off. And certainly as we're moving into this fiscal year we're seeing continued strength in that segment of our business. So I think we will see a return to be in a percent of our overall business.
Similar to what was prior to COVID-19.
That that's very helpful color and that I know you guys are a very focused on managing your CapEx. May have missed this, but can did you give a number for CapEx for the year that you expect, or just just wanted to follow up that? No Anthony, we did not. We're just like I said right now. We're we're, you know, we'-re looking at every single expenditure and just very just managing that very closely. And so it will be. It will be limited, for sure, as we go through this time, but we did not give a total at this point.
Got understood all right well that. Thank you very much. Best of the luck and have a great holiday weekend.
Thank you have very.
Our next question.
frombut the got of watertower had M. sorry for the follow up, but there is- there was a notable, or is a notable, bankruptcy in in in the macro side of the business. I just wanted to make sure they ask if the receivables have been appropriately reserve for for that or that be an issue that we have to address going forward.
Yes Thank you. Good question and that's something we just learned about on Saturday morning. So we're still kind of gathering our day are around it. That customer has been a good customer for us and we certainly in our support the restructure. Pleased to tell you, there's really no impact to us for Q4 and we're just now managing the impact to our business and the opportunity we see. But for now, with more to learn, we feel pretty good and feel like that's not going to be a major impact to call.
Okay good, all right. Well, Thank you very much and again happy holidays.
Thank you very.
This concludes our question-and-answer session. I would now like to turn the conference back over to ifcop for any closing remarks.
Thank you so much operator, and again thank you all for your participation and your interest in coulp. Have happy fourth of joh holiday and we look forward to updating you on our progress next quarter.
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