Culp Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 31, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the CALP, Inc. 1st Quarter Fiscal 20 24 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask Please note this event is being recorded. I would now like to turn the conference over to Drew Anderson, please go ahead.

Speaker 1

Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the Q1 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. Forward looking statements are statements that include projections, expectations or beliefs 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 ks and Form 10 Q.

Speaker 1

Additional risks and uncertainties that we do not presently know about or that we currently consider 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 measurements is included in the tables to the press release, Included is an exhibit to the company's 8 ks filed yesterday and posted on the company's website atculp.com.

Speaker 1

I will now turn the call over to Iv Culp, President and Chief Executive Officer of Culp. Please go ahead, Iv.

Speaker 2

Thank you, Drew, and good morning, everyone, and thank you for joining us today. I would like to welcome you to the quarterly conference call with analysts and investors. With me on the call are Ken Bowling, Chief Financial Officer Boyd Chumbley, President of our Upholstery Fabrics Business and Tommy Bruno, President of our Mattress Fabrics business. So today, I'll 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 I will then briefly review our business outlook for the Q2 of fiscal 2024, And we will then take your questions.

Speaker 2

Regarding the current state of our business and the overall furniture and bedding industries, I want to review some overriding themes we discussed last quarter and detail some critical actions we are continuing to execute within both businesses. I will also expand on our comments with a few important points that illustrate where Culp is today. Number 1, we are encouraged by our better than expected operating improvement for the quarter, both sequentially and year over year, despite the ongoing industry malaise and demand softness within the 2 industries we service. Number 2, We remain excited about the progress of our comprehensive transformation within our CHF mattress fabrics business, and we are pleased to be gaining market position in the face of some contraction in the domestic mattress industry. Number 3, although market conditions are also pressuring the residential home furnishings industry, our upholstery fabrics business has remained profitable despite these pressures, and demand remains quite solid in our growing hospitality business.

Speaker 2

And number 4, we are continuing our diligent focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital. So going to theme number 1, Our results for the Q1 reflected better than expected operating performance, both sequentially and year over year, even as industry demand remains soft, especially in residential home furnishings. However, our operating performance improved despite pressure on sales due to internal improvements within both businesses. The strong sequential and year over year improvement in our mattress fabrics business, A 45% improvement sequentially and a 52% improvement year over year was supported by the rollout of new fabric and cover placements during the period. As we have commented for some time now, these new programs are priced in line with current raw material and operational costs, and we expect these new programs to grow Holcomb Fashion's market position in fiscal 2024.

Speaker 2

The operating improvement in the CHF business was also driven by our ongoing focus on operational efficiencies production initiatives across our locations, and I will expand more on this shortly. I do want to emphasize The mattress fabrics sales for the quarter were flat compared to the prior year period, which is a solid performance in the face of difficult industry conditions and certainly reflects our growing position in the market. For the Upholstery Fabrics segment, We saw operational improvements and fixed cost savings along with solid demand in our hospitality contract fabric business and improvement for Read Window. But as expected, sales within our residential fabrics business were lower as compared to the Q1 of last fiscal year, which notably was a strong quarter due to a lift in sales following pandemic related shutdowns in China and the quick recovery that the upholstery furniture industry was experiencing at that time. Our sales for residential fabrics, this quarter were certainly affected by the ongoing softness in the home furnishings industry and shifting consumer spending trends following the pandemic stay at home surge.

Speaker 2

While we do understand that the furniture and bedding environment remains challenged, We will continue to manage 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 on both mattress fabrics and upholstery, and the cost benefits from these adjustments are coming to bear. We are also focused on managing our operational efficiencies I'll expand much more on the Mattress Fabrics transformation plan momentarily, but our sequential and year over year operating improvement reflects some of these initiatives we have undertaken internally to manage our business. While this challenging industry environment is expected to continue for some time, our market position is strong and improving. And we believe we are poised for a considerably better second half of fiscal twenty twenty four, and that's November to April by the calendar, with a return to operating profitability in this fiscal year.

Speaker 2

Regardless of the current demand backdrop, We expect continued progress in improving our operating results, but we understand the speed of our recovery may be affected by overall industry trends. We would like to see some macro tailwinds to allow recovery to happen quicker. We are well prepared for the long term And our strong leadership teams, innovative product offerings, creative designs and a resilient global manufacturing and sourcing platform will support us into the future, especially when the environment improves. The second important thing to expand on is the business transformation update within Colpum Fashions, our Mattress Fabrics segment. Under the leadership of Division President, Tommy Bruno, along with his restructured management team.

Speaker 2

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 we said, we believe CHF improvement is our best short term opportunity for recovery and growth from our current levels. Tommy and the CHF management team remain focused on operational excellence as well as balancing our product mix to proper volumes and steady run schedules. Even after our previous cost statement adjustment to our domestic North Carolina cut and sew capabilities, We continue with a robust global platform featuring manufacturing and sourcing capabilities in 6 countries: the U. S, Canada, Turkey, Haiti, China and Vietnam.

Speaker 2

Our combination of onshore, nearshore and offshore options provide 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 2024. Overall, as we've mentioned, the domestic mattress industry is experiencing significant contraction with industry reports showing aggregate reductions of 10% in dollars 20% in units through the 1st 6 months of calendar 2023. But notably again, CHF revenue over the same general period has remained flat indicating that CHF has made gains with customers in a difficult While the mattress industry slowness may remain for some period, we still expect to improve our performance through new programs and improved operations. Our recovery in CHF is not fully dependent on the industry environment.

Speaker 2

And assuming our sales volumes Sustainable improvement in CHF this year and beyond. The 3rd important theme is the continued profitability of Culp Upholstery Fabrics. I've detailed just now a lot of excitement about CHF, but it is equally as important to note the steady performance of CUF. Division President Boyd Chumley and his strong leadership team have managed effectively in the midst of abnormal tumultuous times. CUF has maintained profitability with a focus on improving operational efficiencies and proactively taking strategic action to reduce our cost structure to align with demand levels, while also always supporting our customers with our flexible global platform.

Speaker 2

I believe CUS has best in class in servicing our customers and our design and product excellence combined with an effective global platform has led the way. Our improved operating costs within CUF began with the restructuring of our cut and sew upholstery kit platform in China during the Q2 of last fiscal year and then continued with the rationalization of our upholstery cut and sew platform in Haiti near the end of last fiscal year. We took further action in Haiti this quarter to discontinue production of cut and sew and upholstery kits at this location based on demand softness. This step further reduces CUS cost structure and avoids losses that would have otherwise been incurred while allowing this business to continue to support customers through its strong Asian supply chain. Notably through these actions and other improvements Just one quick aside, I do want to again reiterate that while we have discontinued production of upholstery cut and sew kits in Haiti, Our Haiti cut and sew platform for mattress covers remains an integral part of our strategic plan.

Speaker 2

Now turning back to CUF, We are also adjusting our global platform for the fabrics portion of our upholstery fabrics business. As we look to provide options within our supply chain in China, Vietnam and multiple other new countries. Customer service is a hallmark for Kohl and a diversified platform provides improved risk management and a more stable supply base. Of note, our hospitality contract business accounted for 33% of segment sales for the Q1. While this percentage is higher than normal due to lower residential sales, it does reflect the ongoing solid performance of our hospitality contract business as well as its importance to our overall strategy of product diversification for this segment.

Speaker 2

While the tough demand environment may continue for some time, Culp Upholstery Fabrics remains well positioned for the long term with a scalable global platform and innovative product offerings, including our popular portfolio of LiveSmart performance products and our new product technologies. We are also beginning to see increases in newly written fabric orders, And we believe we will see the benefit from this in the second half of fiscal twenty twenty four. Similar to the Q1, we also expect the Upholstery Fabrics segment will continue to benefit Culp through the remainder of fiscal 2024 with improved inventory management, A solid hospitality contract fabric business, improvement in our Read Window business and a rationalized cut and sew platform. And lastly, I'll shift to the 4th theme, which is constant focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital. I'm very pleased with the management team for its continued effort in maintaining our cash and total liquidity position.

Speaker 2

We ended the quarter with $16,800,000 in cash and no outstanding borrowings, And we had total liquidity of $42,300,000 consisting of cash and borrowing availability under our domestic credit facility. I have repeatedly, through my remarks, mentioned the softness within our industries, and that has been most evident to us by several recent closures within the furniture And remember, this is on the heels of several bankruptcies we witnessed in the last year as well. We are seeing some suppliers, competitors and customers endure financial difficulty and it gives us more appreciation for our financial stability and its importance to our future. We are managing accounts receivable effectively and we do not have any material exposure with respect to the recent closures. I am grateful to our credit teams and divisional management for how we conduct Culp's business with a lens towards the future and careful partner selection.

Speaker 2

We fully recognize that The management of Culp's strong balance sheet is a critical initiative and we believe we are well positioned to focus on investing and optimizing our global manufacturing platform and growing profitable sales. I'll now turn the call over to Ken, who will review the financial results for the quarter, and then I'll briefly review the outlook for the Q2 of this fiscal year. Ken? Thanks, Iv. Here are

Speaker 3

the financial highlights for the Q1. Starting with consolidated results, net sales were $56,700,000 down 9 The company reported a loss from operations of $3,100,000 which included $517,000 in mostly non cash restructuring related charges associated with the discontinued production of cut and stone upholstery kits in Haiti during the quarter as if discussed earlier. Excluding this $517,000 adjusted loss from operations for the quarter was $2,600,000 A better than expected improvement as compared with a loss of operations of $4,700,000 for the prior year period and a loss from operations of $4,000,000 for the Q4 of last year. Net loss for the Q1 was $3,300,000 or $0.27 per diluted share compared with a net loss $5,700,000 or $0.47 per diluted share for the prior year period. Net loss for the quarter included the $517,000 restructuring related charges I just mentioned.

Speaker 3

Our overall operating performance for the Q1 as compared to prior year period was positively by improved margins on new products, improvement in operating efficiencies and lower overhead costs in both segments, a higher contribution from Hospitality Fabrics in the Re Window business and a more favorable foreign exchange rate associated with China. This year over year improvement in operating performance was partially offset by margin pressures due to lower sales and higher SG and A expense. SG and A expense was higher than last year due to increased compensation expense mostly related to wage inflation and higher incentive compensation or pools, higher professional fees and increased sampling expense driven by new product rollouts in both businesses. Importantly, with regard to SG and A expense, as business conditions improve and demand for new products rise, we believe that we'll get significant leverage from the Free sales. Adjusted EBITDA for the period was close to breakeven at negative $416,000 as compared to adjusted EBITDA of negative $2,700,000 for the prior year period.

Speaker 3

The effective income tax Rate for the Q1 of this fiscal year was a negative 26.5% compared with a negative 18.7% 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 and Canada generated income that was taxed at higher rate as compared to the U.

Speaker 3

S. Our cash income tax payments totaled $1,100,000 for the Q1 of this fiscal year. And based on Current expectations, we currently plan for cash income tax payments of approximately $3,200,000 for the entire fiscal 'twenty four year. Importantly, our estimated cash income tax payments for fiscal 2024 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 business segment.

Speaker 3

For the Mattress Fabrics segment, sales for the Q1 were 29 $2,000,000 down 0.5 percent compared to last year's Q1, outperforming overall industry trends. Operating loss for the quarter was $1,400,000 a 52% improvement compared to an operating loss of $2,900,000 a year ago. This operating improvement was driven by new placements priced in line with current costs, improvements in operating efficiencies and lower costs resulting from the restructuring and rationalization of this segment's mattress cover platform initiated last fiscal year, offset somewhat by higher SG and A expense. For the Upholstery Fabrics segment, sales for this Q1 were 27,400,000 down 17.4% over the prior year period, which was a strong quarter due to a lift in sales following pandemic related shutdowns in China. Sales for our residential fabric business for the quarter were affected by ongoing softness in the residential home furnishings industry.

Speaker 3

However, demand remains solid in our upholstery in our hospitality contract business during the Q1, with sales for this business accounted for approximately 33% of the Upholstery Fabrics segment's total sales. Operating income and operating margin for the quarter were $1,300,000 and 4.8 percent, 145 3.20 basis point improvement, respectively, compared with the prior year period. This operating performance was positively affected by a higher Contribution from Hospitality Fabrics and Rig Window Business, lower costs resulting from the restructuring of this segment's cut and sew platforms during earlier periods and a more favorable foreign exchange rate associated with this segment's operations in China as well as other operational improvements. These factors were partially offset by lower residential fabric sales and higher SG and A during the period. Now I'll turn to the balance sheet.

Speaker 3

We reported $16,800,000 in total cash and no outstanding debt as of the

Speaker 4

end of the Q1.

Speaker 3

Cash flow from operations and free cash flow were negative $4,400,000 and negative $4,200,000 respectively for the 1st 3 months of this fiscal year. Our cash flow from operations and free cash flow during the period were affected by an operating loss and investments in working Capital expenditures mostly related to the Mattress Fabrics transformation plan. Capital expenditures for the 1st 3 months of this Full year were $513,000 Based on current expectations, capital spending for this fiscal year is projected in the mid range of $5,000,000 to 6,000,000 and we'll center mostly on 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 7,000,000 With respect to liquidity, as of the end of the Q1, we had $42,300,000 consisting of $16,800,000 in total cash and 25 point $5,000,000 in borrowing availability under our asset based domestic credit facility. Borrowing availability under this facility is based on calculation using certain of the company's accounts receivable and inventory determined on a monthly basis.

Speaker 3

The company did not repurchase any shares during the Q1 of this leaving $3,200,000 available under our current share repurchase program. Despite the for future growth opportunities. With that, I'll turn the call over to Iff to discuss our general outlook for the Q2 of this fiscal year, and then we'll take your questions. Iff?

Speaker 2

Thank you, Ken. Due to the continued volatility in the macro environment, we are providing only limited financial guidance for the Q2 of fiscal 2024. We expect consolidated net sales for the Q2 to be comparable to the Q2 of fiscal 2023, driven by further improvement in the Mattress Fabrics segment, but offset by lower residential upholstery fabrics sales. We expect consolidated operating loss for the Q2 of fiscal 2024 that is in the range of $2,200,000 to $2,600,000 A significant improvement compared to the $11,900,000 operating loss for the prior year period. We still include approximately $6,000,000 relating to certain inventory impairment charges, losses from inventory closeout sales and greater than normal inventory markdowns.

Speaker 2

Again, I will comment that we believe we are poised for a considerably better second half performance with a return to operating profitability this fiscal year. Finally, we will continue to be laser focused on prudent financial management with the goal of always maintaining a strong balance sheet, especially with regard to ensuring strategic balance in our working capital. We are optimistic about Culp's future, And we know that financial stability is paramount to our success. So with that, we will now take questions.

Operator

We will now begin the question and answer session. Our first question comes from Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

Speaker 5

Good morning and thank you for taking the questions. So first, just a quick comment. Overall, perfect job of maintaining a strong balance sheet and Certainly nice to see solid gross profit gains here in the quarter. So first Yes, sure. So first question here for CHF, so you mentioned that new placements are in line with current costs and that's great to hear.

Speaker 5

So I guess for the quarter, can you give us just kind of a rough breakdown between pricing and unit volumes? We'd love to hear your thoughts on that.

Speaker 3

Yes. Anthony, I mean, we I think we've mentioned this before. I mean, We priced new products to capture the cost and that pricing flows throughout the year. I mean, obviously, We were right in line with sales and units were close as well. So really, Wasn't a big difference at all, pretty consistent on

Speaker 5

both sides.

Speaker 2

We were building in the mattress fabrics business, Anthony, and you hopefully hear our excitement As we talk about the business, it's such a strong turnaround that's underway and we're growing dollars and units. We're a unit driven company, so we're not going to have success without also growing the units. So we're doing both.

Speaker 5

Got you. Understood. Okay. Okay. So I mean, so before COVID, I mean, the gross margin at CHF was in the mid teens and even higher in prior years.

Speaker 5

So given the transformation underway, do you think it's reasonable that you could get back to at least double digit Segment margin sometime this fiscal year?

Speaker 2

Well, Anthony, we I'll let Tommy make some comments what he's seen. Sure. It probably won't be It's bold to tell you exactly when that's going to happen, but in our all the investor information that we're putting out through our new deck, Sort of a minimum standard for our expectation in the CHF business is double digit operating income percent. And we certainly have every intention of being at that in our intermediate future. Now whether we can get all the way to double digit Profitability, in this fiscal year, TBD, but we are expecting to return to both in division and consolidated in this year.

Speaker 2

Tom, anything you would add as you're just going through the process?

Speaker 4

No, I think that's a good representation of the improvement. I think, Anthony, we expect it to be sequentially higher quarter over quarter And with the objective of getting back to historical profitability rates.

Speaker 5

Okay. That sounds good. And then For CUF, the residential, obviously, as you called out is softer. But Are you seeing any notable customers moving away from Culp? Or is it just is that you're just seeing that Customers are just ordering less across the board now.

Speaker 2

I'll let Boyd speak to that question, Anthony.

Speaker 3

Yes, Anthony. No, we're really not seeing any dramatic changes in our customer base. I think this is more just an overall industry demand situation that we're being impacted with. And of course, we have to remember too that for this quarter, we were comparing to an abnormally high Q1 of last year due to the Pandemic. So the extreme pandemic induced swings in demand over the last several years Have made year over year comparisons difficult.

Speaker 3

So but no, to answer your question, don't see that we're having Any changes in our customer mix in any significant way? This is more just industry wide demand depression at the moment. Anthony, as Boyd has worked here with Culp

Speaker 2

for almost 40 years and we have seen our shares of ups and downs in the residential Business over many, many times and we always think and it has typically bared itself out, We gain market position in times like this. And typically, when these times pass, we find ourselves in better position. And this is no different. We believe on our side, we are actually gaining market position now. And we think it's fully driven by This is slowness in the current industry.

Speaker 2

Supply chains are adjusting, new products are being rolled on the floor. Remember, we skipped about a year of new intros in that business for a little bit as no one needed to relaunch retail. So as that starts to happen, we're pretty Optimistic about where it's going to go and we noted in our script that we are now starting to see new written orders Gradually increase. So we are seeing optimism as we look past probably looking past Q2, but we do see those sales levels starting to pick back up.

Speaker 5

That's great to hear. And then last question before I turn the call over to others. I guess probably a question for Ken. So inventory management has certainly been a nice source of cash, So nice job with that. So do you think you can further reduce inventories?

Speaker 5

How about cash flows? How should we think about that?

Speaker 3

Yes, Anthony, that's I mean, as we look to grow the business on both sides, I mean, we both teams have done If you look over the last 6 quarters, they've done a remarkable job of getting inventory down and really meeting demand. And so as we Proceed ahead into the next quarters, our focus is going to be on growing the business. And as we said in the prepared remarks, Balancing inventory with sales, and that's that we preach that every day. So is there some opportunity to continue to efficiencies in inventory, probably some, but right now, we've got to make sure we've got the right amount of inventory on hand to support growth. And so but that said, we're going to be very careful about balancing both as we grow the business.

Speaker 5

Understood. Okay. Well, thank you very much and best of luck.

Speaker 2

Thank you, Anthony. Have a great day. Happy weekend. You too. Yes.

Speaker 2

Likewise.

Operator

Our next question comes from Budd Bugatch with Water Tower Research. Please go ahead.

Speaker 6

Hi, good morning. Thank you for taking my questions. First, I just want to comment that I know it's been a very tumultuous time For everybody, congratulations on keeping the financial condition at Culp pretty strong making it through these times.

Speaker 2

Thank you.

Speaker 6

Thank you. You're welcome and thank you. I guess the first question is, You talk about the improvements in CHF and I guess I would love to get some Color on that, maybe anecdotally what you've done, what you talk about some of the operational cost efficiencies. Do you have some examples of what that Was or maybe put some color to numbers on

Speaker 2

that? Yes. And I'll let Tommy speak to that, Budd, because he's living it. He's listening. We're happy to have him here with us in the office and not on the plant floor.

Speaker 2

We got him. We had to prime out from that. But Tommy, why don't you touch on anything from your

Speaker 4

Yes, sure. Budd, it's really for us improving our gross profit is really a combination of working on our mix, Working on improving previous programs that weren't costed in line with the market conditions through COVID. As it related to operational efficiencies, we continue to really push our supply chain for best cost position on raw materials as well as continuous improvement, quality and manufacturing efficiency initiatives in Stokesdale and in Canada. Other initiatives we're doing is making sure that we're really leveraging our global platform for efficiency and Profitability and balancing those together with our manufacturing assets.

Speaker 6

And Tommy, Can you kind of maybe characterize the importance of that? Was pricing more important than the operational efficiencies? How do you What's the relative mix between the 2?

Speaker 4

Yes, that's a really I don't want to take the easy way out of this question. I would Say that they're equally important, Budd, because we had some programs that weren't profitable that we had to re shift away. But we also have opportunities through a challenging COVID environment to really engage and drive operational improvement as the macro environment And raw materials opportunities have come along. So we're focused equally on both of them.

Speaker 6

And so do we think about them as fifty-fifty kind of improvement, you get 50% of the improved gross margin from pricing and 50% From pricing that you can finally get a hold of or get either through new programs or realigning previously On profitably priced programs and 50% is through operational efficiencies?

Speaker 4

Yes, sir. I would characterize it as fifty-fifty.

Speaker 2

And what I get excited about, Budd, from what Tommy is working on, I agree, it's both half and half, Better pricing and better cost improvement. What makes me excited watching it The business is gradually picking up. We are and we're doing that internally by gaining market position. We've been around this mattress business for some time and we know our position is strong and we're going to have periods where Demand is going to be really high. We just hope that will start to turn a little bit to our favor and having all these operational improvements in place will benefit us so much more when that happens.

Speaker 2

And I think something he said is really important to realize. We always want to leverage our strong global options. That's going to always be important. And if we get the right products priced and manufacture them in the right places, so the right things for U. S, right things for Canada, right things For Asia, right things for Haiti.

Speaker 2

That's where we really have the ability when the cylinder start firing to generate strong profit. So, really good work being done and being prepared for the turnaround.

Speaker 6

Okay. Turning to CUF, Reed is embedded within CUF. And you said that Reed for this quarter looked like about a 3rd of the revenue, so somewhere around $9,000,000 for Read. How did that compare to last year for Read In the Q1, what was that comparison like?

Speaker 3

Yes, Budd, this is Boyd. And Last year Q1, we were around 25% for that that's the total hospitality business As a result of our total sales, which is the way we characterize that. So, 25% last year versus 33% this year. And that percentage was gaining throughout the year last Fiscal year.

Speaker 6

I see. And so then on that basis and REIT's gross margin, How would you characterize that versus the fleet margin, the average margin in CUF?

Speaker 3

Yes. Budd, this is Ken. As we the critical point that we made was REIT had Dramatic improvement year over year from last year. In fact, we were at a loss last year. Now we're making money.

Speaker 3

The margin It's comparable to the overall margin right now for CUF. Obviously, we want to continue to grow both as we make progress over the coming quarters. But we're just excited that, that business has really improved and really contributing this year.

Speaker 6

Okay. That's great. And turning a little bit to the future now, and I know that the guidance for the Q2 in the midst of Very uncertain macro environments been tough and we appreciate what you did give. But if you also did say you're looking to make Operating profitability for the second half of the year and I'm trying to make sure I understand is that do you think You'll be operating profitable for all of the second half of the year or you think you'll be operating profitable for the entire year based upon the improvements that you're seeing in the second half of the year?

Speaker 2

Yes. Thank you, Budd. Good question. And the way we're talking about that is, certainly, we aren't Because we're coming from the 1st couple of quarters, we aren't forecasting operating profitability for the entire year. But we do believe somewhere in that back half of our year, we'll have months and a quarter that will Turn to consolidated operating profitability.

Speaker 2

We don't know if it's going to be the end of 3rd going to 4th, but somewhere in the second half. And a lot of that, we aren't dependent to keep sequentially improving on the macro demand. But if that happens faster, we'll turn faster. But even without its demand at current levels, we will have a quarter in the back half that turns profitable, most likely towards the end of the year, Budd.

Speaker 6

And so even if it does not sufficiently to make the second half overall profitable, but just In the particular quarter in which you reach operating profitability, is that what

Speaker 2

you're saying? Yes, that's what we hope your first statement is right, but that's what today we're saying We're not saying for the whole second half. We're saying we'll turn to profitability in the second half.

Speaker 6

In the second half, okay. And looking farther down the road, so now Going from the near term, intermediate term to a little bit longer term, you continue to exude confidence and comfort longer term. And I think that if I Got your message, Steven, stronger now than it might have been even in some of the past calls. Can you kind of give us a framing of what that looks like? Tell us what we should think about success when you get to success in the longer term?

Speaker 2

Yes, certainly, Budd. Thank you for picking up on that. We certainly understand that we're in a tough period. We're recovering from an Even tougher period, but there is a lot of confidence in all of us as executive management that We see brighter times for the business. We see where we're positioned.

Speaker 2

We see our innovative products and the platform we have to service customers. And we know that our industry is generally over our history been a stable, slow growing industry. We haven't been used to these ups and downs that we've had the last 2, 3 years. That's been that's taken a toll on Our results, but as we get to some stability and the teams that we have in place operating in both divisions are really Confidence inspiring. So when we look out into beyond 2024 and the 2025, 26, I mean we're back to double digit Operating incomes in mattress fabrics and high single digit operating income percentages in upholstery fabrics.

Speaker 2

And we'd like to go past that, but that's our first target to recover to. And I guess it depends on your horizon of medium to long term, but we would see that happen In our medium term as we look out forward.

Speaker 6

Okay. So that gets us to the margin side of that. And then in terms of the top line, you think you can match the industry's slow growing, low to mid single digit kind of growth over time top line?

Speaker 2

Yes, sir. Yes, sir. I mean, ideally in our best days and we hope we can grow faster than the industry grows. That's always our goal. And I don't see why we can't, but we certainly will stay with industry pace and see that steady growth.

Speaker 6

Okay. All right. And last for me, the other thing that I noticed in The quarter was SG and A was a little bit heavier than what we were looking for and operating expenses a little bit heavier. Maybe you can give us some color as to what we why that might have been and what we should expect as we go down the road?

Speaker 3

Yes, Budd. This is Ken. We Listed some of the reasons for the higher. Obviously, wage inflation was a part of it. We did have some higher incentive compensation accrual.

Speaker 3

Keep in mind, we're coming off of a very, very tough year and our the way we're looking at this year is significant improvement. So we've got some opportunity there. We also have some professional fees that just Various professional fees and also and this is something that both divisions had to contend with, with stamping expense. And People forget about that. But this time last year, we didn't have any part of any new programs.

Speaker 3

And now both teams are dealing with new great And new rollouts, and so the sampling expense was higher. So all those reasons kind of impacted all three, the corporate Expense and divisionals, what we're excited about is that we've talked about this in the prepared remarks, as we grow the business, We've got our SG and A level right now is supporting our activities and our business models. As we grow sales, we're going to have Significant leverage opportunity to bank a lot of that profitability and so both SG and A and fixed costs. So we've got everything ready to go. We just need that lift in sales to get that leverage.

Speaker 6

And is there an order of magnitude The sampling costs that you're willing to share and does that go in doesn't that go into gross margin? I mean, sampling costs would be fabric you create or do you take out those That sample cost that you can isolate and then make sure that's showing up in SG and A and operating expense.

Speaker 4

Hey, Budd. The way that we characterize our sampling costs is really as a part of our launches. So it's really a part of our commercial process of sampling, Creating, doing all the development and design work relative to new programs.

Speaker 6

Okay. So it's not just the cost of the firework you produce for the samples You produce or maybe send out to your clients, but it's the wages and the cost inside of there for the team to develop those. There's no sense.

Speaker 4

It's all the cost from sampling, design and launch preparation.

Speaker 6

And that winds up an operating expense.

Speaker 3

Is that right?

Speaker 2

Yes, sir.

Speaker 6

Okay. Thank you. Again, congratulations on navigating through a challenging There are some in the industry that, well, they're not there anymore to do that. Thank you. Thank you very much.

Speaker 2

Thank you, Budd. Have a good weekend.

Speaker 3

You

Operator

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

Speaker 2

Thank you, operator. And again, thank you

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Earnings Conference Call
Culp Q1 2024
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