Q2 2024 Culp Inc Earnings Call

December 5, 2023

Good day and welcome to the Culp, Inc. Second quarter fiscal 2024 earnings conference call.

All participants will be in a listen only mode.

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

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on a touchtone phone.

Draw. Your question. Please press Star then two.

Please note this event is being recorded.

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

Thank you good morning, and welcome to the Culp Conference call to review the company's results for the second quarter of fiscal 2024.

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

We're looking statements are statements that include projections expectations or beliefs about future events or results or otherwise you 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 S. T SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q.

Additional risks and uncertainties that we do not presently know about or that we currently considered to be immaterial may also affect our business operations and financial results.

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 Culp Dot com.

At this time I will turn the call over to his Culp, President and Chief Executive Officer of Culp. Please go ahead, yes.

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

I would like to welcome everyone to the <unk> quarterly conference call with analysts and investors.

Joining me on the call are Ken Bowling, our Chief Financial Officer, Boyd Chumbley, President of our upholstery fabrics business and Tommy Bruno President of our mattress fabrics business.

I will begin the call with some detailed comments, including a discussion of key points and topics for the quarter and for both businesses as well as priorities as we look ahead.

After that Ken will review the financial results for the quarter and then ill briefly review our business outlook for the third quarter of fiscal 'twenty four and we will then take your questions.

So I'd like to open with a general update of some overriding theme and discuss the current state of our business within the overall furniture embedding industries.

I will further discuss some critical actions we are undertaking in both businesses and I will expand on these comments to illustrate where culp is headed.

First we are pleased to report both sequential and year over year improvement in our consolidated sales and operating performance for the quarter.

Despite the challenging industry environment and ongoing demand softness within the two industries we service.

These results are satisfying as we believe we are outperforming general market conditions in both businesses.

Secondly, we continue to be excited about the comprehensive transformation within our CHF mattress fabrics business.

And we are pleased to be gaining market position in the face of units slowness in the domestic mattress industry.

Our 19, 6% year over year sales growth and.

And 90% improvement year over year operating loss represent strong evidence of our progress and the effectiveness of our CHF leadership.

Third although market conditions are also pressuring the residential home furnishings industry, our upholstery fabrics business continues to enhance its profitability. Despite these pressures.

And demand remained solid and our growing hospitality business.

And finally, we are continuing our diligent focus on prudent financial management, including maintaining a strong balance sheet and ensuring an appropriate level of working capital, while also making strategic capital investments, especially in the mattress fabrics segment to further support our recovery and efficiency.

So providing more detail on Q2 Q2 results again, our performance for the second quarter was in line with our expectations.

With consolidated sales and operating improvement both sequentially and year over year.

This was a solid outcome, it's industry demand remains soft within residential furniture and bedding.

The strong sequential and year over year sales growth in our mattress fabrics business, a seven 4% improvement sequentially and a 19, 6% improvement year over year was primarily driven by new fabric and cover placements during the period.

As well as SKU rationalization and the repricing of some underperforming skus.

As we have discussed in previous reports, we are pricing new placements. We received in line with current raw material one operational costs and this along with the re merchandise Skus has resulted in higher average selling prices overall.

While our unit volume was slightly down as compared to the prior year. We believe we are performing considerably better as compared to the significant unit contraction experienced by the domestic mattress industry through the first nine months of the 2023 calendar year.

This demonstrates the Chf's revenue has grown not only because of the higher average selling prices, but also because we have made gains with customers in a difficult market environment.

We expect to continue this trend of growing chf's market position.

CHF also achieved a 90% improvement in operating results as compared to the prior year period, and a 33% improvement as compared sequentially to the first quarter.

While not yet back to profitability, we are pleased with CHS trajectory.

The material reductions of our losses for the quarter were driven by balanced inventory management higher sales better pricing and margin and our ongoing focus on operational efficiencies and cost reduction initiatives across our locations.

For the upholstery fabric segment, we report significantly improved operating income as opposed to the prior year period due to better inventory management fixed cost savings and other operational efficiencies along with continued solid demand in our hospitality contract business.

But as expected sales within our residential fabrics business were lower as compared to the second quarter of last fiscal year due to ongoing softness in the home furnishings industry and shifting consumer spending trends.

While we understand that the furniture and bedding environment remains challenged.

We are managing the aspects of our business, we can control taking necessary steps to withstand current market conditions.

And position our business for renewed growth.

As detailed in earlier quarters, we have made platform changes to our cut and sew profile in both mattress fabrics and upholstery and the cost benefits from those adjustments are paying off.

We are also focused on managing our operational efficiencies across our fabric platforms, therefore, lowering overall costs.

Beyond Q2, we believe our continuing recovery will be punctuated by our mattress fabrics segment, where our execution of a comprehensive transformation plan is laying the foundation for steady gains.

I'm going to expand more on the mattress fabrics transformation plan momentarily, but our sequential and year over year operating improvement reflect some of the initiatives we've undertaken internally to manage our business.

Now while this challenging industry environment is expected to continue our market position is strong and growing and we are expecting to considerably better second half of fiscal 'twenty for <unk>.

Including a return to positive adjusted EBITDA in the third quarter.

And a return to consolidated operating profitability by the end of this fiscal year.

Regardless of the current demand backdrop, we expect sequential and year over year operating improvement to continue and.

And we are not factoring in industry tailwind to accomplish this.

Essentially it's evident we are making strong progress in our pace could be accelerated when we do eventually see macro industry growth.

We are well prepared with our innovative product offerings creative designs resilient global manufacturing and sourcing platform strong leadership teams and focused financial management.

These hallmarks of our business will support us into the future.

I will now expand a little more on the ongoing business transformation within Culp home fashions, our mattress fabrics segment.

Under the leadership of Division President Tommy Bruno.

As we've detailed before our transformation plan focuses on long term improvement in every facet of the business, including quality sales marketing and operational processes supply chain optimization employee engagement and organizational management structure.

As mentioned earlier, we are working to replace or re merchandize underperforming skus and optimize our sales strategy to focus on partner selection.

<unk> segmentation and execution of our product assortment.

We believe CHF improvement as our best short term opportunity to grow revenue and to strengthen our year over year as well as our sequential performance.

Tommy in the CHF management team remains dedicated to operational excellence, even after our previous cost saving adjustment to our domestic North Carolina cut and sew capabilities, we continue with our robust global platform featuring manufacturing and sourcing capabilities in six countries.

States, Canada, Turkey, Haiti, China and Vietnam.

We are providing our mattress fabric and sewn cover customers with the agility and value they need for their business.

Combining this platform with our expertise in design and product innovation, we are making excellent progress for sustainable improvement in fiscal 'twenty for <unk>.

Even as the domestic mattress industry continues to experience significant unit slowness.

While this mattress industry contraction may remain for some period. We also know it's not permanent and we are improving our performance through new placements SKU rationalization, and reprice incumbent Skus and more efficient operations.

Our recovery and CHF is not fully dependent on the industry environment and.

And we expect to see significant progress with steady sustainable improvement in CHF this year and beyond.

So turning for a minute to culp upholstery fabrics, we are pleased with the continued and better profitability of this business.

Consistently division President Boyd Chumbley and a strong leadership team have managed effectively in the midst of abnormal tumultuous times.

<unk> has grown its profitability with a focus on operational efficiencies and proactively taking strategic actions to reduce our cost structure.

While also supporting customers with our flexible global platform.

I believe <unk> has been best in class and servicing customers through challenging supply chain conditions.

And our design and product excellence combined with our effective global platform has led the way.

This quarter the U S operating performance improved both sequentially and significantly year over year as a result of better inventory management lower fixed costs, resulting from <unk> prior restructuring of our cut and sew platform.

Our freight costs and a more favorable foreign exchange rate associated with operations in China.

The U F also had another solid hospitality contract business quarter in.

<unk> sales accounted for 33% of segment sales for the second quarter.

While this percentage remains higher than normal due to pressured residential sales. It does reflect the ongoing strength of our hospitality contract business as well as its importance to our overall strategy of product diversification for this segment.

Also we remain committed to adjusting tuf's global platform for the fabrics portion of our upholstery business as we look to provide options within our supply chain in China, Vietnam and multiple other new countries.

Customer service is a hallmark recall and a diversified platform is a critical strategy, providing improved risk management and a more stable supply base.

While we know this tough environment is likely to continue co propulsion fabrics remains well positioned with our strong global platform and our innovative product offerings, including our popular portfolio of lip smart performance products and other new product technologies.

We also believe we have seen the bottom and residential furniture demand as manufacturer and retail inventories are largely back to normal and we are seeing increases in newly written fabric orders, which will support the second half of fiscal 'twenty four.

We also expect the upholstery fabric segment will continue to benefit <unk> through the remainder of fiscal 'twenty, four with better inventory management, a solid hospitality contract fabric business, including our read window business and a rationalized cut and sew platform.

So lastly, I'd like to highlight our constant focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital.

I am very pleased with the management team for its continued effort and effectively managing our cash and total liquidity positions.

We ended the quarter with $15 $2 million in cash and no outstanding borrowings and we had total liquidity of 41 $4 million in cash <unk>.

Our cash and borrowing availability under our domestic credit facility.

We are continuing to carefully manage inventory against current demand levels.

And we are strategically investing in our business, especially within our mattress fabrics segment to support future profitable sales growth and further improve operating efficiencies.

I'll now turn the call over to Ken who will review the financial results for the quarter and then I'll review the outlook for the third quarter of this fiscal year.

Thanks, Dave here are the financial highlights for the second quarter, starting with consolidated results net sales were $58 7 million.

Up 6% compared with the prior year period, the company reported a loss from operations of $2 2 million for the second quarter.

Compared with a loss of operations of $11 9 million for the prior year period.

Which included $6 7 million related to certain inventory impairment and other charges and restructuring related expenses during the period.

The $2 2 million loss from operations for the quarter also compares favorably with the $3 $1 million loss from operations for the previous quarter.

Net loss for the second quarter was $2 $4 million or <unk> 19 per diluted share.

Compared with a net loss of $12 $2 million or <unk> 99 per diluted share for the prior year period.

Our overall operating performance for the second quarter as compared to the prior year period was positively affected by a number of factors.

Including that better inventory management.

Here sales and better pricing and margins for the mattress fabrics segment Fig.

<unk> cost savings in the upholstery fabric segment improved operating efficiencies in both segments.

And a more favorable foreign exchange rate associated with operations in China.

This year over year improvement in operating performance was partially offset by lower revenue digital posted fabric sales and higher SG&A expense due primarily to increased compensation expense.

Higher professional and consulting fees and increased sampling expense driven by new product rollout among other factors.

Importantly, with regard to SG&A expense as business conditions improve and demand for our products rise.

We believe that we will get significant leverage from the increased sales.

Adjusted EBITDA for the period was close to breakeven at negative 247000 <unk>.

As compared to adjusted EBITDA of negative $8 2 million for the prior year period.

The effective income tax rate for the second quarter. This fiscal year was a negative 27%.

Compared with a negative 10, 4% for the same period a year ago.

Our effective income tax rate for the quarter was impacted by the company's mix of earnings.

Between our U S and foreign subsidiaries with an operating loss in the U S. While China, Canada generate income that was taxed at higher rates as compared to the U S.

Based on current assumptions, we expect cash income tax payments.

Approximately $3 $2 million for this fiscal year.

Importantly, our estimated cash income tax payments for fiscal 'twenty four are management's current projections only and can be affected by a variety of factors over the course of the year.

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

Yeah.

For the mattress fabrics segment.

Sales of the second quarter were $31 4 million up 19, 6% compared with last year's second quarter.

This increase in sales was mostly driven by new fabric and sewn cover placements that are priced in line with current costs and to a lesser extent SKU rationalization and the repricing of some underperforming skus.

To reflect skus to reflect current cost.

In each case. This has resulted in higher average selling price compared to historically per unit prices.

While the domestic mattress androgen remains pressured by ongoing demand softness, we believe we're outperforming industry trends and making gains with customers through our new product rollouts.

Operating loss for the quarter was $936000, a 90% improvement compared to an operating loss of 9 million a year ago, which included $5 million related to certain inventory impairment charges and losses from inventory closeout sales.

This substantial reduction in operating loss was driven by balanced inventory management higher sales better pricing and margins and improvement in operating efficiencies. These factors were partially offset by higher SG&A expense during the period.

For the upholstery fabrics segment sales for the second quarter were $27 3 million down 14, 9% over the prior year period.

Sales for our residential fabric business for the quarter were affected by ongoing softness in the residential home furnishings industry. However, demand remained solid and our hospitality contract business during the second quarter with sales of this business accounted for approximately 33% of the upholstery fabric segment's total sales.

Operating income was $1 4 million for the second quarter up significantly compared with 262000 in the second quarter of last fiscal year, which included approximately $1 million and higher than normal inventory markdowns.

Operating margin for the second quarter was five 1% again, a significant improvement compared to the prior year period.

Operating performance for the second quarter was positively affected by better inventory management lower fixed cost, resulting from the restructuring of this segment's cut and sew platforms through an early periods lower freight costs and a more favorable foreign exchange rate of social with operations in China.

These factors were partially offset by lower residential fabric sales and higher SG&A expense during the period.

Now I'll turn to the balance sheet, we reported $15 2 million of total cash and no outstanding debt as of the end of the second quarter for.

For the first six months of this fiscal year cash flow from operations and free cash flow were negative $4 $5 million and a negative $5 6 million respectively.

As expected our cash flow from operations and free cash flow during the period were affected by operating loss and planned investments in capital expenditures, mostly related to the mattress fabrics transformation plan there was minimal impact from working capital changes during the quarter.

Capital expenditures for the first six months of this fiscal year with $2 million base.

Based on current expectations capital spending for this fiscal year is projected to be in the range of $5 million to $6 million and we will send or mostly on a maintenance capex and quick payback projects focused on improving quality and efficiency in our mattress fabrics business.

Based on current expectations depreciation for this fiscal year is expected to be approximately $7 million.

With respect to liquidity as of the end of the second quarter, we had $41 4 million consisting of the $15 2 million and total cash and $26 2 million and availability under our asset based domestic credit facility.

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

We do not expect any repurchase activity during the third quarter of this fiscal year as we remain focused on preserving liquidity and being positioned to explore future growth opportunities.

With that I will turn the call over to Eric to discuss the general outlook for the third quarter and then we'll take your questions.

Thank you Ken.

Due to the uncertainty in the macro environment, we are only providing financial guidance for the third quarter of fiscal 'twenty four.

We expect consolidated net sales for the third quarter to be sequentially comparable to the second quarter of fiscal 'twenty, four and moderately higher as compared to the third quarter of fiscal 'twenty three.

Even in the face of ongoing demand headwinds.

We expect consolidated operating loss for the third quarter of fiscal 'twenty four it has a range of one two to $1 $6 million.

Sequentially improved from the second quarter results and a significant improvement compared to the $7 $8 million operating loss for the prior year period.

Again, I will comment that we believe we are poised for a considerably better second half performance.

With a return to consolidated operating profitability by the end of the fiscal year.

Finally, we will continue to be laser focused on balanced financial management with the goal of always maintaining a strong balance sheet, especially with regard to ensuring a strategic balance in our working capital.

We are optimistic about <unk> future and we know the financial stability is paramount to our success.

With that operator, we can take some questions.

We will now begin the question and answer session.

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

If you are using a speakerphone please pick up your handset before pressing the key.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

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

Okay.

The first question today comes from Budd <unk> with a water tower research. Please go ahead.

Thank you and good morning.

Yeah.

Sharon Boyd Tommy.

Dave I wanted.

And congratulations on the improvement in the quarter it's.

Very heartening to see that.

Dave You mentioned that you think you are starting to see bottoming in some parts of the residential industry, obviously upholstery and <unk>.

Bankruptcies are slightly different can you give us a little bit more color on what youre hearing from your customers in terms of what they're seeing going forward in their confidence that we may be at bottoms in these areas.

Sure Budd I'll, let.

I'll, let Bob comment more specifically than Tommy <unk> launched but the comment I made.

In the script is we do believe we've seen the bottom in residential home furnishings upholstery fabric sales.

Sales and we really say thats, primarily due to inventories of both manufacturers and retailers seem to have corrected and back to a normal level. So while we arent, we arent, saying that the industry is getting stronger and we recognize we still have a tailwind.

We just think for us do with inventories flushed out its more normal ordering course, and we're able to.

See our sales grow and incoming orders pick up boy would you add any more to that.

Yes.

That's exactly right. We are we did during the quarter see some pickup in our incoming orders.

At the beginning of the quarter and.

Really throughout much of the quarter.

And again as you say you have I think that is partly a result of the inventory now being depleted.

In terms of furniture inventory in the pipeline at both manufacturers and retailers and so we are now seeing the benefit of retail orders coming through to us in fabric quarters.

So I think with that.

Certainly I think from market perspective, it's likely that the retail sales will continue to be soft for a period of time, but I think from our standpoint.

We have seen and probably will continue to see some better business due to those factors.

Got you so it's really not it's not the fundamental demand, but as much as it is the fact that what was really hampering sales force.

The.

Manufacturers over inventory position and really exists is extending them into the.

And to their customers over inventory that prevented them from adding new products.

New placements.

A fair way to think about it.

I think that is fair, but I do think that we are with our broad product offering.

Innovative products that we do have the opportunity for share gains with our customer base and our ability to reliably supply. So I think those things also will benefit us in the in the coming quarters. So I think so a couple of those factors are coming into play but this is <unk>.

At the same youre going to keep hearing from US as we look ahead here in the short term is we arent and I've said it kind of clear we aren't factoring industry improvement for our improvement we're going to improve our business because were getting better operationally and we're making.

<unk> with customers and Thats going to happen in both businesses. So we're not going to rely on market macro tailwind that will come some point, but for now we're going to make our steady sequential improvement just because we're going to do a better job not only operationally, but also in growing our share.

And do you have many more things to do in upholstery fabrics and <unk> to get that you've made some changes of sourcing and obviously you had to take your inventory.

Medicine.

In the quarter and previous quarters. So are there any initiatives that give you confidence that you can actually improve the margins there.

I think Budd you've called out a couple of a things that we have already done that or did.

<unk> certainly assist with our performance in Q2 and will on an ongoing basis.

Where we did restructure our global cut and sew platform.

And align that with.

With the current demand in and did some consolidation there to have all of that now in our Asia platform.

And so I think thats.

One of the key things that we have done.

I think we will also have one of the other key task that we have is continuing to expand our global platform.

As we keep looking at supply in locations other than China, and we've made great progress on that and expanding within Vietnam. We've got a couple of other countries that were very heavily invested in involved in right now too.

Develop platforms in some other locations. So thats one of the key things I think as we're seeing as our objective over this second half of our year.

And mattress fabrics has been.

Also a main topic because.

As already get back to a double digit operating margin.

Basis on a profitable basis.

Tommy how are you how are you seeing that whats the timeframe to getting back to a double digit.

<unk> operating margin importantly, double digit operating margin.

But.

We are we continue to focus like Dave mentioned in his prepared comments on taking market share.

At.

At the correct margins on an ongoing basis, we continue to look at our assortment for SKU rationalization and improved profitability.

And an extremely large initiative that we're undergoing is looking at our efficiency and operational improvements across all facets of our operation.

As those things start to continue to layer in sequentially.

We believe we will be back in double digit profitability.

Later this year early in fiscal year 2025.

Gross margin gross margin, yes, right yes.

So, but I think for us to get back to you know, we always have our the CHF business with double digit operating income target and what we're saying is we're going to keep making our steady sequential improvements.

In the current depressed market environment.

We say, we're going to return to consolidated operating profitability in the fourth quarter, that's not normal profitability. That's not that so we'll look at we'll springboard will get stop our losses in springboard into FY 'twenty five with every goal of moving back to normal historical margins at the operating line, but it just takes time and.

We will need some tailwind as we go all the way back yet and we know those will come we just had a hard time, knowing exactly when so both that help us understand that.

It does indeed, thank you very much and congratulations and good luck and listen to me to others for other questions. Thank you.

Thank you both have a good day.

The next question comes from Anthony <unk> with Sidoti. Please go ahead.

Yes, good morning, and thank you for taking the questions. So first just still continued great job, maintaining a strong balance sheet.

Difficult operating environment.

So first I guess my first question here is as far as the.

Excuse me.

ASP increases you talked about at CHF and you sort of.

Can you guys, maybe I'll put a number on that as far as.

Much asps drove the overall sales increase and what is your confidence level in terms of being able to maintain these higher asps.

Yes, Anthony it's a combination of two things driving Asps. One is the types of programs that we're getting that are higher and programs in the market.

And then in general.

We're mix our product mix is driving our asps based on.

The mix of covers and.

And higher end fabrics.

I mean, Anthony we say.

The units are down.

The industry units are reported down almost everywhere and we are units are slightly down we think we're outperforming on units, but we're getting a lot of our sales gained majority of it is is better better prices better margins new products priced properly all the things we didn't do it for a period of time, the Tommy and his team are really correct.

So we're seeing that that offset so that's why we're really encouraged we're growing our sales without unit, where we are where we expect they will eventually be.

While even drives more optimism as we look at it that way.

Mhm, Okay got it got you, Okay and then.

I guess as far as this whole.

Transformation process, that's been taking.

Taking place at the.

CHF I guess, if we were in a kind of a baseball game what inning are we in as far as the process. What are some of the initiatives left to do.

Yes, Anthony So I would say, we're still in the middle innings, we're still continuing to work on.

Changing some things within our product assortment to drive productivity through all of our Skus, we're still continuing to work on operational efficiencies. After we made some restructuring changes within our leadership team.

So in general I would say, we're still in the middle innings.

I think its generally a two year transformation process and I would just feel comfortable.

We're going to show steady improvement through that process on our way back to historical results over time.

Mhm.

Got you, Okay and then.

As far as the SG&A.

I know you guys talked about that being up because of some higher business.

Investments.

Can you share with us a little bit more details on how should we think about SG&A going forward.

Yes, Anthony this is Ken I think as we've said we've.

SG&A is up but it's due to factors that are really supporting the business were putting the right people in the right seats.

We're getting back on the road again to traveling to customers and shows.

We've had some restructuring things relating to our sampling with the new with the business levels being up we are sampling a lot more with new program. So all those factor in and I think when you look at where we are currently with our SG&A we feel.

Very good about where we are we feel that going forward if sales start to rise we will get that positive leverage.

So we think we're well positioned we've just gotta.

The lift going forward and get that positive leverage, but overall, we see that SG&A is an investment and we feel like we're in good shape at this point on both sides of the fence.

Got you, Okay, all right that's.

Thats all I had thank you very much and best of luck.

Thank you. Thank you thanks Anthony.

This concludes our question and answer session.

I would like to turn the conference back over to Mr. <unk> for any closing remarks.

Okay.

Thank you operator and again, thank you to everyone for your participation and your interest in call and we certainly 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.

Okay.

Yes.

[music].

Yes.

[music].

Good day.

To Culp, Inc. Second quarter fiscal 2024 earnings conference call.

All participants will be in a listen only mode.

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

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on a touchtone phone.

Well, let's try your question. Please press Star then two.

Please note this event is being recorded.

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

Thank you good morning, and welcome to the Culp Conference call to review the company's results for the second quarter of fiscal 2024.

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

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

The actual performance of the company could differ materially from that indicated by the forward looking statements because of various risks and uncertainties.

These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q.

Additional risks and uncertainties that we do not presently know about or that we currently considered to be immaterial may also affect our business operations and financial results.

Included as an exhibit to the company's 8-K filed yesterday and posted on the company's website at Culp Dot com.

At this time I will turn the call over to F Culp, President and Chief Executive Officer of Col. Please go ahead, yes.

Thank you drew and good morning, and thank you for joining US today I would like to welcome everyone to the <unk> quarterly conference call with analysts and investors.

Joining me on the call are Ken Bowling, our Chief Financial Officer, Boyd Chumbley, President of our upholstery fabrics business and Tommy Bruno President of our mattress fabrics business.

I will begin the call with some detailed comments, including a discussion of key points and topics for the quarter and for both businesses as well as priorities as we look ahead.

After that Ken will review the financial results for the quarter and then I will briefly review our business outlook for the third quarter of fiscal 'twenty four and we will then take your questions.

So I'd like to open with a general update of some overriding themes and discuss the current state of our business within the overall furniture embedding industries.

I will further discuss some critical actions we are undertaking in both businesses and I will expand on these comments to illustrate where culp is headed.

First we are pleased to report both sequential and year over year improvement in our consolidated sales and operating performance for the quarter, despite the challenging industry environment and ongoing demand softness within the two industries we service.

These results are satisfying as we believe we are outperforming general market conditions in both businesses.

Secondly, we continue to be excited about the comprehensive transformation within our CHF mattress fabrics business.

And we are pleased to be gaining market position in the face of units slowness in the domestic mattress industry.

Our 19, 6% year over year sales growth and.

And 90% improvement year over year operating loss represents strong evidence of our progress and the effectiveness of our CHF leadership.

Third although market conditions are also pressuring the residential home furnishings industry, our upholstery fabrics business continues to enhance its profitability. Despite these pressures.

And demand remained solid and our growing hospitality business.

So providing more detail on Q2 Q2 results again, our performance for the second quarter was in line with our expectations with consolidated sales and operating improvement both sequentially and year over year.

This was a solid outcome, it's industry demand remains soft within residential furniture and bedding.

As well as SKU rationalization and the repricing of some underperforming skus.

As we have discussed in previous reports, we are pricing new placements. We received in line with current raw material and operational costs and this along with the re merchandise Skus has resulted in higher average selling prices overall.

This demonstrates that CHS revenue has grown not only because of the higher average selling prices, but also because we have made gains with customers in a difficult market environment.

We expect to continue this trend of growing chf's market position.

CHF also achieved a 90% improvement in its operating results as compared to the prior year period, and a 33% improvement as compared sequentially to the first quarter.

While not yet back to profitability, we are pleased with CHS trajectory.

For the upholstery fabrics segment, we report significantly improved operating income as opposed to the prior year period due to better inventory management fixed cost savings and other operational efficiencies along with continued solid demand in our hospitality contract business.

While we understand that the furniture and bedding environment remains challenged.

We are managing the aspects of our business, we can control taking necessary steps to withstand current market conditions and position our business for renewed growth.

As detailed in earlier quarters, we have made platform changes to our cut and sew profile in both mattress fabrics and upholstery and the cost benefits from those adjustments are paying off.

We are also focused on managing our operational efficiencies across our fabric platforms, therefore, lowering overall costs.

Beyond Q2, we believe our continuing recovery will be punctuated by our mattress fabrics segment, where our execution of a comprehensive transformation plan is laying the foundation for steady gains.

I'm going to expand more on the mattress fabrics transformation plan momentarily, but our sequential and year over year operating improvement reflects some of the initiatives we've undertaken internally to manage our business.

Now while this challenging industry environment is expected to continue our market position is strong and growing and we are expecting a considerably better second half of fiscal 'twenty four including a return to positive adjusted EBITDA in the third quarter.

And a return to consolidated operating profitability by the end of this fiscal year.

Regardless of the current demand backdrop, we expect sequential and year over year operating improvement to continue.

And we are not factoring in industry tailwind to accomplish this.

Essentially it's evident we are making strong progress in our pace could be accelerated when we do eventually see macro industry growth.

We are well prepared with our innovative product offerings creative designs resilient global manufacturing, new sourcing platform strong leadership teams and focused financial management.

These hallmarks of our business will support us into the future.

I will now expand a little more on the ongoing business transformation within Culp home fashions, our mattress fabrics segment.

Under the leadership of Division President Tommy Bruno.

As mentioned earlier, we are working to replace or re merchandize underperforming skus and optimize our sales strategy to focus on partner selection.

Proper segmentation and execution of our product assortment.

We believe CHF improvement as our best short term opportunity to grow revenue and to strengthen our year over year as well as our sequential performance.

If states, Canada, Turkey, Haiti, China and Vietnam.

We are providing our mattress fabric and sewn cover customers with the agility and value they need for their business.

Combining this platform with our expertise in design and product innovation, we are making excellent progress for sustainable improvement in fiscal 'twenty for <unk>.

Even as the domestic mattress industry continues to experience significant unit slowness.

A recovery in CHF is not fully dependent on the industry environment and.

And we expect to see significant progress with steady sustainable improvement in CHF this year and beyond.

So turning for a minute to culp upholstery fabrics, we are pleased with the continued and better profitability of this business.

Consistently division President Boyd Chumbley and a strong leadership team have managed effectively in the midst of abnormal tumultuous times.

<unk> is growing its profitability with a focus on operational efficiencies and proactively taking strategic actions to reduce our cost structure.

While also supporting customers with our flexible global platform.

I believe <unk> has been best in class and servicing customers through challenging supply chain conditions.

And our design and product excellence combined with our effective global platform has led the way.

This quarter <unk> operating performance improved both sequentially and significantly year over year as a result of better inventory management lower fixed costs, resulting from <unk> prior restructuring of the cut and sew platforms.

Our freight costs and a more favorable foreign exchange rate associated with operations in China.

<unk> also had another solid hospitality contract business quarter in.

<unk> sales accounted for 33% of segment sales for the second quarter.

Customer service is a hallmark recall and a diversified platform is a critical strategy, providing improved risk management and a more stable supply base.

While we know this tough environment is likely to continue.

Propulsion fabrics remains well positioned with our strong global platform and our innovative product offerings, including our popular portfolio of Lyft smart performance products and other new product technologies.

We also expect the upholstery fabric segment will continue to benefit through the remainder of fiscal 'twenty four with better inventory management, a solid hospitality contract fabric business, including our read window business and rationalized cut and sew platform.

So lastly, I'd like to highlight our constant focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital.

I am very pleased with the management team for its continued effort and effectively managing our cash and total liquidity positions.

We ended the quarter with $15 $2 million in cash and no outstanding borrowings and we had total liquidity of 41 $4 million in cash <unk>.

Our cash and borrowing availability under our domestic credit facility.

We are continuing to carefully manage inventory against current demand levels.

And we are strategically investing in our business, especially within our mattress fabrics segment to support future profitable sales growth and further improve operating efficiencies.

I'll now turn the call over to Ken who will review the financial results for the quarter and then our view of the outlook for the third quarter of this fiscal year.

Thanks, Dave here are the financial highlights for the second quarter, starting with consolidated results net sales were $58 7 million up 6% compared with the prior year period. The company reported a loss from operations of $2 2 million for the second quarter.

Compared with a loss of operations of $11 9 million for the prior year period.

Which included $6 7 million related to certain inventory impairment and other charges and restructuring related expenses during the period.

The $2 2 million loss from operations for the quarter also compares favorably with the $3 $1 million loss from operations for the previous quarter.

Net loss for the second quarter was $2 4 million or <unk> 19 per diluted share.

Compared with a net loss of $12 2 million or <unk> 99 per diluted share for the prior year period.

Our overall operating performance for the second quarter as compared to the prior year period was positively affected by a number of factors.

Including that better inventory management.

Here sales and better pricing and margins for the mattress fabrics segment.

<unk> cost savings in the upholstery fabric segment improved operating efficiencies in both segments.

And a more favorable foreign exchange rate associated with operations in China.

This year over year improvement in operating performance was partially offset by lower residential postal fabric sales and higher SG&A expense due primarily to increased compensation expense.

Higher professional and consulting fees and increased sampling expense driven by new product rollout among other factors.

Importantly, with regard to FCA expense as business conditions improve and demand for our products rise.

We believe that we'll get significant leverage from the increased sales.

Adjusted EBITDA for the period was close to breakeven at negative 247000.

As compared to adjusted EBITDA of negative $8 2 million for the prior year period.

The effective income tax rate for the second quarter of this fiscal year was a negative 27%.

Paired with a negative 10, 4% for the same period a year ago.

Our effective income tax rate for the quarter was impacted by the company's mix of earnings between our U S and foreign subsidiaries with an operating loss in the U S. While China, Canada generated income that was taxed at higher rates as compared to the U S.

Based on current assumptions, we expect cash income tax payments.

Of approximately $3 $2 million for this fiscal year.

Importantly, our estimated cash income tax payments for fiscal 'twenty four are management's current projections only and can be affected by a variety of factors over the course of the year.

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

For the mattress fabrics segment.

Sales of the second quarter were $31 4 million.

19, 6% compared with last year's second quarter.

They reflect skus to reflect current cost.

In each case. This has resulted in higher average selling price compared to historically per unit prices.

While the domestic mattress androgen remains pressured by ongoing demand softness, we believe we're outperforming industry trends and making gains with customers through our new product rollouts.

The upholstery fabrics segment sales for the second quarter were $27 3 million down 14, 9% over the prior year period.

Sales for our residential fabric business for the quarter were affected by ongoing softness in the residential home furnishings industry. However, demand remains solid and our hospitality contract business during the second quarter with sales of this business accounted for approximately 33% of the upholstery fabric segment's total sales.

Operating margin for the second quarter was five 1% again, a significant improvement compared to the prior year period.

Operating performance for the second quarter was positively affected by a better inventory management lower fixed cost, resulting from the restructuring of this segment's Clayton so platforms doing early periods lower freight costs and a more favorable foreign exchange rate associated with operations in China.

These factors were partially offset by lower residential fabric sales and higher SG&A expense during the period.

Now I'll turn to the balance sheet, we reported $15 2 million of total cash and no outstanding debt as of the end of the second quarter for.

For the first six months of this fiscal year cash flow from operations and free cash flow were negative $4 $5 million and a negative $5 6 million respectively.

There was minimal impact from working capital changes during the quarter.

Capital expenditures for the first six months of this fiscal year with $2 million.

Based on current expectations capital spending for this fiscal year is projected to be in the range of $5 million to $6 million and we will send or mostly on maintenance Capex and quick payback projects focused on improving quality and efficiency in our mattress fabrics business.

Based on our current expectations depreciation for this fiscal year is expected to be approximately $7 million.

With respect to liquidity as of the end of the second quarter, we had $41 4 million consisting of the $15 2 million and total cash and $26 $2 million availability under our asset based domestic credit facility.

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

We do not expect any repurchase activity during the third quarter of this fiscal year as we remain focused on preserving liquidity and being positioned to explore future growth opportunities with that I will turn the call over to Eric to discuss the general outlook for the third quarter and then we'll take your questions.

Thank you Ken.

Due to the uncertainty in the macro environment, we are only providing financial guidance for the third quarter of fiscal 'twenty four.

On the face of ongoing demand headwinds.

We expect consolidated operating loss for the third quarter of fiscal 'twenty four is a range of one two to $1 $6 million.

Sequentially improved from the second quarter results and a significant improvement compared to the $7 $8 million operating loss for the prior year period.

Again, I will comment that we believe we are poised for a considerably better second half performance.

With a return to consolidated operating profitability by the end of the fiscal year.

We are optimistic about <unk> future and we know the financial stability is paramount to our success.

With that operator, we can take some questions.

We will now begin the question and answer session.

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

If you are using a speakerphone please pick up your handset before pressing the key.

If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

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

Okay.

The first question today comes from Budd <unk> with a water tower research. Please go ahead.

Thank you and good morning.

Yeah.

Shang buoyed in Tommy.

Dave I wonder.

And congratulations on the improvement in the quarter.

Heartening to see that.

Dave You mentioned that you think.

Youre starting to see bottoming in some parts of the residential industry, obviously upholstery and.

Bankruptcies are slightly different can you give us a little bit more color on what youre hearing from your customers in terms of what they are seeing going forward and their confidence that we may be a bottoms in these areas yes.

Yes, sure Budd I'll, let.

Ill, let Bob comment more specifically than Tommy <unk> launch, but the comment I made.

In the script is we do believe we've seen the bottom in residential home furnishings upholstery fabric sales.

We just think for us there with inventories flushed out its more normal ordering course, and we're able to.

See our sales grow and incoming orders pick up boy would you add any more to that.

Yes.

That's exactly right. We are we did during the quarter see some pick up in our incoming orders.

At the beginning of the quarter and.

Really throughout much of the quarter.

And again as you say you have I think that is partly a result of the inventory now being depleted.

In terms of furniture inventory in the pipeline at both manufacturers and retailers and so we are now seeing the benefit of retail orders coming through to us in fabric quarters.

So I think with that.

Certainly I think from market perspective, it's likely that the retail sales will continue to be soft for a period of time, but I think from our standpoint.

We have seen and probably will continue to see some better business due to those factors.

Got you so it's really not it's not the fundamental demand, but as much as it is the the fact that what was really hampering sales orders.

The.

Manufacturers over inventory position and really exist extending devin.

And to their customers over inventoried that prevented them from adding new products.

The replacements.

A fair way to think about it.

I think that is fair, but I do think that we are with our broad product offering.

Innovative product set.

We do have the opportunity for share gains with our customer base and our ability to reliably supply. So I think those things also will benefit us in the in the coming quarters. So I think it's a couple of those factors are coming into play.

<unk> done a theme you're going to keep hearing from us as we look ahead here in the short term is we arent and I've said it kind of clear we aren't factoring industry improvement.

Our improvement, we're going to improve our business because were getting better operationally and we're making.

<unk> with customers and Thats going to happen in both businesses. So we're not going to rely on market macro tailwind that will come at some point, but for now we're going to make our steady sequential improvement just because we're going to do a better job not only operationally, but also on growing our share.

And do you have many more things to do in upholstery fabrics and <unk> to get that you've made some changes of sourcing and obviously you had to take your inventory.

Medicine.

In the quarter than previous quarters. So are there any initiatives that give you confidence that you can actually improve the margins there.

I think Budd you've called out a couple of things that we have already done that are.

Did certainly assist with our performance in Q2 and will on an ongoing basis.

Where we did restructure our global cut and sew platform and align that with.

With the current demand in and did some consolidation there to have all of that now in our Asia platform.

And so I think thats.

One of the key things that we have done.

We will also have one of the other key task that we have is continuing to expand our global platform.

As we keep looking at supply in locations other than China, and we've made great progress on that and expanding within Vietnam.

We've got a couple of other countries that were very heavily invested in involved in right now too.

Develop platforms in some other locations. So thats one of the key things I think as we're seeing as our objective over this second half of our year.

And mattress fabrics has been.

Also a main topic because.

As already get back to a double digit operating margin.

Basis on a profitable basis.

Tommy how are you how are you seeing that whats the timeframe to getting back to a double digit.

<unk> operating margin importantly, double digit operating margin.

Hey, Bob.

We are we continue to focus like Dave mentioned in his prepared comments on taking market share.

At.

At the correct margins on an ongoing basis, we continue to look at our assortment for SKU rationalization and improved profitability.

And an extremely large initiative that we're undergoing is looking at our efficiency and operational improvements across all facets of our operation.

As those things start to continue to layer in sequentially.

We believe we will be back in double digit profitability.

Later this year early in fiscal year 2025.

Gross margin gross margin, yes, right yes.

So, but I think for us to get back to we always have for the CHS business with double digit operating income target.

And what we're saying is we're going to keep making our steady sequential improvements.

In the current depressed market environment.

We'll need some tailwind so all the way back yet and we know those will come we just had a hard time, knowing exactly when south of that help us understand that.

It does indeed, thank you very much and congratulations and good luck and listen to radio to others for other questions. Thank you.

Thank you both have a good day.

The next question comes from Anthony <unk> with Sidoti. Please go ahead.

Yes, good morning, and thank you for taking the questions. So first just still continued great job, maintaining a strong balance sheet.

Difficult operating environment.

So first I guess my first question here is as far as the.

Excuse me.

ASP increases you talked about at CHF and you sort of.

Can you guys maybe.

Put a number on that as far as.

Asps drove the overall sales increase and what is your confidence level in terms of being able to maintain these higher asps.

Yes, Anthony it's a combination of two things driving Asps. One is the types of programs that we're getting that are higher and programs in the market.

And then in general.

We're mix our product mix is driving our asps based on.

The mix of covers and.

And higher end fabrics.

I mean, Anthony we say.

The units are down.

Industry units are reported down almost everywhere and we are units are slightly down we think we're outperforming on units, but a lot of our sales gained majority of it is is better better prices better margins new products priced properly all the things we didn't do it for a period of time, the Tommy and his team are really correct.

And so we're seeing that that offset so that's why we're really encouraged we're growing our sales without units, where we're where we expect they will eventually be that's why I, even drives more optimism as we look at it that way.

Okay got it got you, Okay and then.

I guess as far as this whole <unk>.

Transformation process that's been.

Taking place at the CHF I guess, if we were in a kind of a baseball game what inning are we in as far as the process. What are some of the initiatives left to do.

Yes, Anthony So I would say, we're still in the middle innings, we're still continuing to work on.

So in general I would say, we're still in the middle innings.

I think its generally a two year transformation process and I just feel comfortable that.

We're going to show steady improvement through that process on our way back to historical results over time.

Mhm.

Got you, Okay and then.

As far as the SG&A.

I know you guys talked about that being up because of some higher business.

Investments.

Can you share with us a little bit more details on how should we think about SG&A going forward.

Yes, Anthony this is Ken I think as we've said we've.

SG&A is up but it's due to factors that are really supporting the business were putting the right people in the right seats.

We're getting back on the road again to traveling to customers and shows.

We've had some restructuring things relating to our sampling with the new with the business levels being up we are sampling a lot more with new program. So all those factor in I think when you look at where we are currently with our SG&A we feel.

Very good about where we are we feel that going forward as sales start to rise we will get that positive leverage.

So we think we're well positioned we've just got to get the lift going forward and get that positive leverage but overall, we see that SG&A is an investment and we feel like we're in good shape at this point on both sides of defense.

Got you Okay, Alright, that's all I had thank you very much and best of luck.

Thank you. Thank you thanks Anthony.

This concludes our question and answer session I.

I would like to turn the conference back over to Mr. <unk> for any closing remarks.

Okay.

Thank you operator and again, thank you to everyone for your participation and your interest in Culp and we certainly 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.

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