Culp Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
June 28, 2024

There are 7 speakers on the call.

Operator

Good morning, and welcome to the Culp, Inc. 4th Quarter Fiscal 20 24 Earnings Conference Call. All participants will be in listen only mode. Please note, this event is being recorded. I would now like to turn the conference over to Drew Anderson.

Operator

Please go ahead.

Speaker 1

Good morning, and welcome to the Culp conference call to review the company's results for the Q4 fiscal 2024 year. As we start, let me state that this morning's call will contain forward looking statements about the business, financial conditions and prospects of the company. Forward looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. The actual performance of the company could differ materially from that indicated by the forward looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10 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 measurement is included in the tables to the press release, included as an exhibit to the company's 8 ks filed yesterday and posted on the company's website atculp.com.

Speaker 1

A slide presentation on the company's restructuring plan is also available on the company's website as part of the webcast of today's call. I will now turn the call over to Ive Culp, President and Chief Executive Officer of Culp. Please go ahead.

Speaker 2

Good morning, and thank you for joining us today. I would like to welcome everyone to the Culp 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. I will begin the call with some detailed comments. And as mentioned in the introduction, we have posted a slide presentation to our Investor Relations website that covers information related to our restructuring plan, which I will speak about in detail today.

Speaker 2

Ken will then review the financial results for the quarter and the full year. And after that, I'll briefly review our business outlook as we turn the page to fiscal 2025 and we will take some questions. Our sales and operating results for the Q4 were in line with our expectations announced on May 1, 2024, when we also announced our comprehensive restructuring actions. Our results for Q4 reflected weakness in industry demand in both of our businesses, driven primarily by ongoing macroeconomic headwinds. Our sales performance for 4th quarter was also affected to some degree by the timing of orders as many of our larger customers experienced extremely slow conditions beginning in January.

Speaker 2

Looking back, we posted solid year over year sales gains in both of our business segments during our fiscal Q3 and we were making progress towards our stated improvement goals. However, we faced a significant decline in order levels during our Q4 related to demand pressures our customers faced early in the calendar year. The impact on 4th quarter revenue along with the ongoing macro pressure led us to take aggressive action to bring our manufacturing costs and capacity in line with current and expected demand. We announced a wide ranging of this restructuring initiative. The announced adjustments, once fully implemented, will enable us to grow more efficiently and profitably with a lower level of fixed costs.

Speaker 2

Importantly, these strategic steps do not limit our ability to grow the business, but instead allow us to better optimize our global mix of manufacturing capabilities and long term sourcing partners. I also want to be sure and emphasize that we are extremely grateful for the support we have received from our valued customers, suppliers and employees. And we are confident that the strength of these relationships will help drive our recovery. I'll have much more to come on restructuring actions momentarily. I do want to comment that despite the mentioned headwinds and challenging macro conditions, there were some positive indicators within Culp's business during fiscal 'twenty 4, including first, a significant year over year operating improvement, albeit still a loss and below our intended targets.

Speaker 2

And second, consistent and continued operating profits in our upholstery fabrics business. The fiscal year 'twenty 4 performance for Culp Upholstery Fabrics is significantly improved over last year, even when considering the tough industry condition, thanks to a more profitable mix of sales, better inventory management, improved exchange rates and reduced fixed costs. Another highlight for Upholstery Fabrics is the sales performance of our hospitality offerings, making up 38% of total segment sales in Q4. While this percentage is skewed by a weaker residential fabric industry environment, our hospitality fabric and window treatment businesses are solid and we are expanding our roller shade capacity in production in Q1 to North Carolina. We believe there's much to be excited about within coalf upholstery fabrics.

Speaker 2

A third positive indicator is the year over year sales growth in our Mattress Fabrics segment. While we are not where we intend to be, the year over year performance in mattress fabrics is indicative of our improving market position, focusing on winning new placements with margins in line with current costs. And 4th, we have a strong product innovation and product placements in both segments at improved pricing, position us for a return to higher sales growth as macro conditions improve. We are encouraged by both of our businesses and with our restructuring actions well underway, we believe we are on track to return to profitability post restructuring even if market conditions remain at their currently depressed levels. We also maintained a solid balance sheet and a $10, 000, 000 cash position at the end of the 4th quarter with a focus on prudent financial management and we are taking proactive steps to ensure the long term success of our business.

Speaker 2

We are diligently focused on executing our restructuring initiatives and therefore strengthening our balance sheet, optimizing our operations and cost structure and supporting our customers, while also continuing to win new placements with our innovative product portfolio. I'd now like to circle back and discuss further detail on our restructuring actions that are better aligning our business. Again, there's a new slide deck posted on our Investor Relations page to help illustrate the process. Our plan is comprehensive and involves every facet of our business within both divisions. The vast majority of actions taken are within mattress fabrics, Culp Home Fashions, but a review of everything was necessary in this challenging macro environment.

Speaker 2

The plan was announced on May 1 and commensurately communicated to employees, customers and vendors. The summary and key takeaway of the plan is we are reducing our North American footprint by closing our mattress fabric weaving, knitting and finishing facility in Canada and optimizing our production capacity and overhead into our Stokesdale, North Carolina location. As part of this, our damask weaving business will transition to a sourcing model, primarily with a long term manufacturing partner. We are also consolidating our operations in Haiti, located on the Dominican Republic and Haiti border into a smaller footprint with just 1 building. These operational changes reduce our mattress fabric employee base by approximately 240 people or 35% of the segment's total workforce.

Speaker 2

While these are very difficult decisions, they are necessary to align our costs with current demand and better position Culp for the future. We have already initiated severance and stay bonus agreements with affected employees and we are working to optimize our production facilities and sourcing strategies. Productive work is already occurring with our partners on our damask weaving transition and we are organizing floor space to prepare for knitting and finishing equipment relocation to North Carolina. Our cut and sew operations in Haiti have been consolidated and the restructuring of our upholstery fabrics finishing operation in Asia is complete. We have also chosen a broker to sell our Canadian facility and we intend to exit and sell that facility in the second half of our fiscal year and hopefully by the end of calendar year 2024, but of course the timing of that will be dependent on the market and interest for the building.

Speaker 2

More details of the actions and a general timeline can be found on Page 5 of the newly posted restructuring deck. Beyond this comprehensive restructuring, our expectation is to return to profitability on a monthly basis sometime in the second half of fiscal 20 25. Our plan estimates $10, 000, 000 to $11, 000, 000 in annualized cost and productivity savings, mostly via the Mattress Fabrics division, but we are also expecting $1, 000, 000 to $1, 500, 000 in annualized savings from reductions with unallocated corporate and shared services. We expect to incur approximately $8, 000, 000 in restructuring and related charges, but importantly only $2, 500, 000 of these charges are cash charges, most of which will be incurred in the first half fiscal 20 25. We anticipate funding these cash charges mostly from the sale of excess equipment and then we also expect $10, 000, 000 to $12, 000, 000 of after tax proceeds from the sale of our Canadian facility.

Speaker 2

A cash and liquidity update as well as a restated FY 'twenty 4 Mattress Fabrics hypothetical pro form a on operating income that assumes the restructuring was already completed are shown on the new slide deck on pages 67. The expected benefit of our restructuring actions on both profitability and liquidity is evident, and this is all assuming no lift in market demand. We are restructuring the business to return to profitability in this current environment, while also preparing coal to be much stronger as and when demand conditions normalize. Also want to again reiterate that nothing in our plan prevents us from growing the business. Through this process, we are maintaining our preferred network of manufacturing and sourcing capabilities in the United States, Turkey, China, Vietnam and Haiti.

Speaker 2

Our North American platform will be more efficient and optimized and we will complement that with strong international options. As we look ahead to fiscal 2025, we expect industry conditions will remain pressured for some time, but we believe our fiscal 2024 Q4 revenue levels represented a bottom point for Kohl. We have seen some increased sales conditions from the Memorial Day holiday and mattress fabrics and that combined with our improved market position in both businesses is driving some sequential sales growth into Q1 of FY 'twenty 5. We are fortunate at Culp to have an experienced leadership team focused on improvement and growth, and we have navigated many challenges throughout our 52 years. We have strong long term partnerships with customers and vendors and emphasis on product innovation leading to an improving market position, a strategic manufacturing and sourcing platform and most importantly, a solid balance sheet with available liquidity.

Speaker 2

We believe the strategic actions we are taking will position us for profitable growth opportunities and we remain committed to delivering sustainable results and enhancing value for our shareholders over the long term. I'll now turn the call over to Ken, who will review the financial results for the quarter and then I'll review the limited outlook we are providing as we look ahead into fiscal 2025.

Speaker 3

Thanks, Iv. Here are the financial highlights for the Q4. Net sales were $49, 500, 000 down 19.4% compared with the prior year period. The company reported a loss from operations of $4, 200, 000 which included $204, 000 in restructuring expense as compared with a loss from operations of $4, 000, 000 for the prior year period, which included $70, 000 in restructuring expense. I'll comment in more detail on divisional sales and operating performance in a moment.

Speaker 3

Net loss for the Q4 was $4, 900, 000 or $0.39 per diluted share compared with a net loss of $4, 700, 000 or $0.38 per diluted share for the prior year period. Our overall operating performance for the Q4 as compared to prior year period was primarily pressured by lower sales in both divisions as well as operating inefficiencies in the mattress fabrics segment during the quarter and a 1 time customer payment received during the Q4 of last fiscal year that did not reoccur this fiscal year. Offsetting some of the operating pressure was lower SG and A expenses due primarily to lower incentive compensation. For the full fiscal year, net sales were $225, 300, 000 down 4.1% compared to the previous year. Loss from operations for the full fiscal year was $11, 300, 000 which included $676, 000 in restructuring related expense during the period compared with a loss from operations of $28, 500, 000 for the prior year, which included approximately $9, 900, 000 related to certain inventory impairment and other charges and restructuring related expenses during the period.

Speaker 3

Net loss for the full fiscal year was $13, 800, 000 or 1 $0.11 per diluted share compared with a net loss of $32, 500, 000 or $2.57 per diluted share for the prior year. Operating performance for the year as compared to the prior year period, which was pressured by inventory impairment charges and restructuring related charges, was positively affected by a favorable product mix, improved inventory management, a favorable foreign exchange rate in China and lower fixed costs. These factors were partially offset by lower sales during the year as well as production inefficiencies relating to certain new product launches in the Mattress Fabrics segment. Adjusted EBITDA for the 12 month period ending with Q4 was a negative $3, 400, 000 as compared to adjusted EBITDA of a negative $19, 000, 000 the comparable prior year period. The effective income tax rate for the Q4 of this fiscal year was a negative 19.8% compared with a negative 20.6% for the same period a year ago.

Speaker 3

The effective income tax rate for fiscal 2024 was a negative 28.3% compared with a negative 11% for the prior fiscal year. Our effective income tax rate for the 4th quarter and for the full fiscal year continues to be impacted by the company's mix of earnings between our U. S. And foreign subsidiaries with an operating loss in the U. S.

Speaker 3

While China and Canada generated income that was taxed at a higher rate as compared to the U. S. Our cash income cash income tax payments totaled $3, 300, 000 for this fiscal year. Expected cash income tax payments for fiscal 2025 will not be given at this time due to the restructuring effort. Now let's take a look at our business segments.

Speaker 3

For the Mattress Fabrics segment, sales for the Q4 were $25, 800, 000 down 16.1% compared with last year's 4th quarter. Sales were pressured during the quarter by further weakness mattress industry driven by a challenging macroeconomic environment that is affecting consumer discretionary spending. Operating loss for the quarter was $2, 900, 000 compared with an operating loss of $2, 500, 000 a year ago. Our operating performance for the quarter was primarily pressured by lower sales and operating inefficiencies. For the Upholstery Fabrics segment, sales for the 4th quarter were $23, 800, 000 down 22.6 percent over the prior year period.

Speaker 3

Sales for our residential fabric business were lower than the prior year period, driven mostly by further weakening in residential home furnishing sales as well as the timing of the Chinese New Year holiday, which this year fell primarily in the Q4 rather than the Q3. Additionally, approximately 3% of the 22.6% decline in sales was related to a onetime customer payment received during the Q4 last year that did not reoccur this year. Hospitality contract business during the Q4 accounted for approximately 38% of the Upholstery Fabrics segment's total sales. Income from operations for the quarter was $975, 000 compared with income from operations of $1, 600, 000 a year ago. Operating income margin for the quarter was 4.1% compared with 5.2% a year ago.

Speaker 3

Our operating performance for the Q4 of this year as compared to the prior year period was primarily pressured by lower sales and the 1 time customer payment noted earlier. Excluding the 1 time payment from last year, operating income for this year's Q4 would have been higher compared to the prior year period. Now let me turn to the balance sheet. We reported $10, 000, 000 in total cash and no outstanding debt as of the end of this fiscal year. Cash flow from operations and free cash flow were negative $8, 200, 000 and a negative $10, 800, 000 respectively for this fiscal year.

Speaker 3

As expected, our cash flow from operations and free cash flow during this fiscal year were pressured by operating losses and planned strategic investments in capital expenditures mostly related to the Mattress Fabrics transformation plan. Both segments have done a solid job of managing the key components of working capital, accounts receivable, inventory and accounts payable. Capital expenditures were $3, 700, 000 for the year compared with $2, 100, 000 for last fiscal year. Based on current expectations, capital spending for fiscal 2025 is expected to be approximately $4, 500, 000 and will center mostly on maintenance CapEx and quick payback projects. Based on current expectations, depreciation for fiscal 2025 is expected to be approximately 5, 500, 000 dollars With respect to liquidity, as of the end of fiscal 2024, we had approximately 32, 500, 000 consisting of $10, 000, 000 in cash $22, 500, 000 in borrowing availability under our domestic and foreign credit facilities.

Speaker 3

We do intend to utilize some borrowings under our domestic and or foreign credit facilities during fiscal 2025 in connection with our restructuring activities and to fund working capital to grow the business. Importantly, we still expect to maintain a positive net cash position and to fund most of the cash costs associated with the restructuring effort from the eventual sale of excess equipment. Assuming the completion of all restructuring actions and the sale of associated real estate by the end of fiscal 2025, the company currently projects its cash position as of the end of fiscal 2025 to be higher than its $10, 000, 000 in cash as of the end of fiscal 2024. The company did not repurchase any shares during this fiscal year, leaving $3, 200, 000 available under our current share repurchase program. Despite the current share repurchase authorization, we do not expect any activity during the Q1 of fiscal 2025 as we remain focused on preserving liquidity and being positioned to support future growth opportunities.

Speaker 3

With that, I'll turn the call over to the general outlook for the Q1 of fiscal 2025, and then we will take your questions.

Speaker 2

Thank you, Ken. Due to the uncertainty in the macro environment as well as the significant activity underway in connection with our restructuring initiatives, we are only providing limited financial guidance at this time. While macro demand is expected to remain challenged in the Q1 of fiscal 2025, pressuring year over year sales results, we do expect our consolidated net sales for the Q1 to be moderately higher as compared sequentially to the Q4 of fiscal 2024. The sequential growth is driven by an improving market position for Culp as well as some lift in sales conditions from the Memorial Day holiday. We are not providing specific 1st quarter operating income guidance as there are many possible outcomes related to the timing of the restructuring and the charges and benefits that will occur.

Speaker 2

A significant portion of this activity will affect operating results in Q1. We will update progress in our restructuring initiatives every quarter. And post restructuring, we expect to return to a positive operating income on a monthly basis sometime in the second half of fiscal 20 25. With that, we will now take questions.

Operator

We will now begin the question and answer Our first question is from Brian Gordon with Water Tower Research. Please go ahead.

Speaker 4

Good morning, everyone. Thank you for taking my questions. It's obviously been a tough quarter, but we know that the entire team has been really laser focused on restructuring and managing costs. And it definitely shows in the results even with sales down significantly. I do have several questions though that I want to cover about the restructuring.

Speaker 4

And Iv, in your comments, I know you touched on this a bit already. But when the restructuring was first announced, you noted that the bulk of the $8, 000, 000 should be booked in the Q1 of 'twenty 5. Do you have any update on the timing, the expected timing of the cash and non cash components of these charges?

Speaker 2

Yes. Brian, good morning. Thank you for the questions. We tried to lay out a general timeline in that new restructuring deck. So we can we'll speak to it maybe generally there.

Speaker 2

We do expect the bulk of the charges both non cash and cash to be impacted in the first half. Ken, you may want to add something more towards how it lays out Q1 or first half or maybe it's we just got it to first half at this point?

Speaker 3

Yes. It's just based on expectations of how the restructuring effort will continue, but it's mostly related to the first half. Mean, we're going

Speaker 2

to push it quick, Brian. We're trying to go as rapid speed as we can, balancing servicing our customers very well, transition equipment at the right time and the right pace. I mean, it's a significant portion in Q1, but there will be some drift into Q2 for sure.

Speaker 4

Okay. Thank you. On a similar note, do you have any update on expected magnitude and timing of the cost savings over second half? When we're thinking about how to model the savings, should we be expecting something like a $2, 000, 000 to $3, 000, 000 improvement by Q4? And maybe how much should we expect for Q3?

Speaker 3

Yes, Brian, this is Ken. I think the way we've laid it out, we've talked about annualized savings and the second half of the year will definitely be improved with operating results. It just depends on the timing of all the different aspects of the project. But the definite the benefits will start coming into play in the second half.

Speaker 4

Okay. Thank you. Kind of following on and maybe looking out a little bit longer term, you've said for Mattress Fabrics that your long term goal is an operating income targeted something like 9% to 10% in 2 to 3 years. When we think about the restructuring, how much of that longer term target do you reach through this current restructuring activity? And how much do you think is going to depend on anticipated revenue growth?

Speaker 2

Good question, Brian. And yes, you're picking up on the points very well. We do in our investor communications point to a normalized margin operating income margin of 9% to 10%. That's historically where we had wanted to be, at a minimum. And what we're doing in the restructuring process is recognizing the current depressed volume in the macro industry.

Speaker 2

So the restructuring actions are generally getting us back to breakeven to small profitability without any change in demand. And the growth past that is based on revenue. So we feel really good about our product placements. We feel encouraged about our sales team. We're encouraged by our products and design innovation process.

Speaker 2

So we're we know we're going to grow the business. I think we can grow the business without industry getting better, but we also know at some point it will. So we're really trying to guide to returning to profitability with these actions and then banking on our product placement and macro tailwind to drive us back to normalization.

Speaker 4

Okay. Thank you. Understood. Obviously, a big part of the restructuring is moving to a more agile sourcing model for mattress fabrics. And part of that is consolidating production in the Dokesdale facility and creating a center of excellence there.

Speaker 4

But when we think about what you're doing in terms of closing Quebec and moving some of that equipment to North Carolina, How should we think about it? Like what percentage of the equipment in North Carolina is going to or in Quebec is going to be moved to North Carolina versus how much is going to be sold? And where are you guys in that process?

Speaker 2

I can pivot some of this to Tommy because he's managing this process for us daily, if not hourly. He's working on it really hard. We have an advantage in the process, Brian, as we've had kind of had 2, what I would consider super plants, that can do most of our production. We had North Carolina and Canada. We have generally very good equipment in both.

Speaker 2

But this process allows us to optimize the best equipment into 1 location. And generally just having economies of scale across 1 location, 1 set of overhead and just being very diligently focused, a strong North American business with very strategic flexible sourcing options. So Tommy, as to where you are in the process, you might be able to give some guidance. It's going to be a sprint over the quarter, but maybe guide into where we are so far.

Speaker 5

Yes, absolutely. So we'll be selling 100% of our damask weaving assets from Quebec as a part of this process and we'll be moving roughly half of our knitting and knit finishing assets to Stokesdale. As where we are in that process, we have to retain that equipment as we service our customers as a part of the restructuring until such time that we cease operations. But we would expect that all the equipment would move to Stokesdale over the end of the third into the 4th quarter calendar quarter and we'll start selling equipment. We're already in the process of selling some.

Speaker 5

We expect the rest to be sold by the end of the calendar year based on how the market is.

Speaker 4

Okay. Thank you. That's all very helpful. I certainly want to be respectful to other callers who might have questions. Do I have time though to ask maybe a few questions about demand in the current environment?

Speaker 2

Certainly, Brian. And I was just going to maybe add 1 more thing on Tommy's. And I've stretched this a couple of times in the place and I think it's important for investors to hear. He has a really good plan and his team has a really good plan to optimize the equipment in the right places. But when we talk about selling some equipment and downsizing, None of that prevents us from growing the business.

Speaker 2

We have really solid partners. We have a really good plan to service our customers. And we expect to be able to grow the business on a lower asset base, which will be fantastic when that starts to occur. So I just want to be sure it's always very clear that we aren't we may be scaling our internal capacity in our North American facility, but we aren't in any way losing our ability to grow the business, Important point.

Speaker 4

Yes, no, definitely. When you talk about the guidance in terms of like some modest sequential improvement, Is that low single digits? Is that how we should be thinking about that?

Speaker 3

Yes, that's right, Brian. We've got the year over year parts pressure, but we do see some sequential growth there from Q4 to Q1.

Speaker 4

Right. Okay. Thank you. 1 of the things that you both noted in your comments and release is that hospitality and contract is up to 38% of sales for upholstery. How much of that is winning new business versus maybe weakness in the residential side?

Speaker 2

I'll let I'll pivot that to Boyd. He's managing that business for us really well. So Boyd, why don't you take that question?

Speaker 3

Sure. I'd be happy to. Yes, Brian, we are really encouraged by this segment of our business as it's really remained solid throughout FY 2024 and backlogs are currently increasing. As you noted and we've noted in our comments, the segment did grow to 38% of total CUS sales in 4th quarter. Now granted that is somewhat due to residential weakness, but we have been seeing a solid business here throughout our fiscal year.

Speaker 3

And with the increasing demand, we have recently initiated a capacity expansion for the roller shade category of our window treatments business, and we are establishing that output in our North Carolina, 1 of our North Carolina operations and that's expected to come on stream, in Q2 of this year. So we remain very excited about the prospects of this part of our business as the consumer is continuing to prioritize spending on travel and experiences and do see a good outlook for that business.

Speaker 4

Great, great. Thank you. And anecdotally, there was some evidence that Memorial Day weekend was a positive for mattress sales even though May as a whole may have been flat. What have you been hearing from your customers on the demand side?

Speaker 2

I think, Brian, good call out. We are saying that. We have we're hearing more and more from our customers that it's sales are getting very promotional holiday driven. So it's not atypical for us to see boost of business around holidays and promotions and that's a lot of those are in the summer. So we've been seeing some of that as well.

Speaker 2

I think for us, we're trying to distinguish the excitement we have from a promo period, but also balancing that with our intensive focus on placing and winning new business. And that's happening at a very good rate in both businesses. And we listen, we understand the fruits in the pudding. And those seeds are being planted and there will be days as the better market condition, we'll see improvements in both. So I think we have a lift from the holiday and I think we have a lift from the efforts we're doing on both sides to place more products at retail.

Speaker 4

Thank you. Obviously, new product introductions have been really important from a margin perspective, especially given the compression, the inflation and higher costs have had in recent quarters. As investors are kind of thinking about the business, first of all, where are you in terms of like pricing of the new products versus your targets? And when we're thinking about like fiscal year 2025 revenues and beyond, what percentage of sales are going to come from these kind of new placements and new invader products?

Speaker 2

It's a good question. Let's break that down by business. We did a better job through cost pressure when we had raw material and freight and other pressures. We did a better job passing those prices on in upholstery fabrics. This was before Tommy's joining Culp.

Speaker 2

He had a transformation process underway to in the mattress side to move our underperforming products to better margins either through a SKU rationalization or just price adjustment. And he's in the middle of that now. He can I'll let him tell you how far he is in that. We still need to exit or change margin on older SKUs, making great progress and the strategy is underway in a big way. So Tommy, I don't know how you feel where you are in it.

Speaker 2

I know it's moving every day. Maybe some advice for Brian there.

Speaker 5

Yes, absolutely. So Brian, 1 other element of the business restructuring that we've announced is that in moving our business to a sourcing model, it's allowing us to rationalize our SKUs and move to a better degree of profitability as a result of lowering our fixed expense. So the business restructuring is pushing a portion of our portfolio to be fully rationalized by the end of calendar Q3. And then I think we're about halfway to our objective on the other portion of the business that will be manufactured in North America on a continuing basis.

Speaker 4

Okay, okay. Thank you. 1 final question, if I may. There's also been reports about both freight surcharges and potentially anticipated delays with shipping, especially coming out of Asia. Any comments on how this potentially is going to affect you guys in fiscal 2025?

Speaker 3

Yes, Brian, this is Boyd. And thanks for the question. We certainly have been experienced some of this with the global route changes that took place to avoid the Suez Canal. I'd say that generally has increased transit times by probably 2 weeks. And we have been seeing some delays both of our own and certainly with some of our customers that we ship direct to, some delays in getting equipment and vessel space.

Speaker 3

But I'll say it really hasn't had any significant impact to us at this point. We've been successfully managing through this by adjusting our supply chain and logistics planning and it really had no real significant disruption to deliveries anywhere. As you noted, certainly, costs have been escalating since earlier this calendar year because of all these factors. But they're still below the peaks that we saw in 2021 2022. So at this point, we're just continuing to monitor and we'll of course take any appropriate steps as required depending on how that plays out from here.

Speaker 4

Thank you. And thank you everyone for the very generous time that you've allocated to my question. I'll let anyone else ask questions at this point. Thank you.

Speaker 2

Thank you, Brian. Appreciate you.

Operator

The next question is from John Bayshore with Pinnacle. Please go ahead.

Speaker 6

Hi, good morning. Thanks for taking my question. Most of my questions have been answered. I guess the 1 remaining is the $10, 000, 000 to $12, 000, 000 from proceeds of real estate and equipment. How does that break down in terms of mix?

Speaker 6

What percentage would be real estate and what percentage would be equipment roughly?

Speaker 3

Yes, John, this is Ken. It's 10% to 12% relating to the real estate and we said 2.5% from the equipment.

Speaker 6

I understand. Okay. So 10 to 12 for real estate plus 2.5 for equipment?

Speaker 3

Correct. Correct.

Speaker 6

All right. Okay. And the 10 to 12 for the real estate, how did you get to that number? I mean, appraisals, how did you get to the number? And at what point do you actually sell the real estate?

Speaker 6

Obviously, you market it in advance, but at what point can you actually sell it once the equipment is out?

Speaker 3

Yes, John, this is Ken again. We've looked at several different ranges as far as the sales opportunity up there. We've worked with our broker on that. We worked with our tax partners on determining our tax liability. There's different aspects of unwinding the business up there.

Speaker 3

So that 10% to 12% is an estimated range of potential scenarios and that's kind of where it failed. We again, we've already engaged a broker and we started that process. Obviously,

Speaker 6

there are

Speaker 3

some things to get the plant and obviously get our restructuring completed, get the plant in shape, not much to do there, but there's some things we need to do to get everything ready. So all that's in motion right now. And as we said in the prepared remarks, we hope to get it sold before the end of the year. Okay.

Speaker 6

Good. So the broker is actually marketing it now?

Speaker 3

He is in the process of getting materials ready and reaching out to contacts.

Speaker 6

Okay. Okay. It's a little

Speaker 2

John, it's a little tricky for us. This is Iv. It's a little timing is a little tricky only because we're still winding down the facility and servicing our customers for products that we have placed there, just getting things structured. So that takes a little time. Every indication we have is there's a lot of interest in the building.

Speaker 2

So we just need to get we need to phase down, wind down, exit and then just get it marketed. And then Ken's range is just an all after tax kind of net. So it feels like a good range. We hopefully move as quickly as we can and all indications seem positive.

Speaker 6

Okay. Just to be clear, I mean, you've had appraisals done on the property?

Speaker 2

Yes. Oh, yes, sir. Yes.

Speaker 6

Okay. Okay. All right. Good. All right.

Speaker 6

Great. I appreciate it. Good luck.

Speaker 2

Thank you. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Iv Culp for any closing remarks.

Speaker 2

Thank you, operator. And again, thank you for your participation and your interest in Culp. We look forward to updating everyone on our progress next quarter. Have a great day.

Operator

The conference is now concluded. Thank you for attending today's

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Culp Q4 2024
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