Good day, and welcome to the Culp, Inc. Third Quarter Fiscal 2012 Results Conference Call. Today's call is being recorded. And at this time for opening remarks and introductions, I would like to turn the call over to Ms. Drew Anderson. Please go ahead.

Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the third quarter of fiscal 2012. As we start, let me express that some statements made in this call will be forward-looking statements. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results, or otherwise are not statements of historical fact. Actual performance of the company may differ from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission, including the Form 8-K filed yesterday, for a discussion of those factors that could affect Culp's operations and the forward-looking statements made in this call. The information being provided today is of this date only, and Culp expressly disclaims any obligation to release publicly, any updates or revisions to these forward-looking statements to reflect any changes in expectations. 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 as a schedule to the company’s 8-K filed yesterday. This information is also available on the Investor Relations section of the company’s website at www.culp.com. A slide presentation, with supporting summary financial information, is also available on the company's website as part of the webcast of today's call. I will now turn the call over to Frank Saxon, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Drew. Good morning, everyone, and thanks for joining us today. I'd like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today is Ken Bowling come, our Chief Financial Officer. I'll begin the call with some brief comments about Culp today and then Ken will review the financial results for the quarter. I'll then update you on the strategic actions and each of our business segments and then Ken will review the fourth quarter outlook and then I'll be happy to answer any questions. Now looking at the third quarter. We are very pleased with the continued momentum in our sales for the third quarter. This positive trend reflects both improved industry demand and the success of our sales and marketing initiatives. Along with the benefits of our innovative designs and lean global manufacturing platform. Both of our businesses have a strong sales performance in what is typically a slower quarterly period due to scheduled holiday shutdowns. However, our gross profit margins for the quarter have continued to be affected by higher raw material costs, selling pressures, selling price pressures and a stronger Chinese currency compared to the same quarter a year ago. The 190 basis point decrease in gross margin was partially offset by favorable SG&A expense leverage of 90 basis points for the quarter. We believe Q3 is the low point in gross profit margin and we expect gradual improvement over the next several quarters. I will discuss the reasons behind this when I talk about each segment in a moment. Culp is becoming recognized as an innovative leader in both mattress fabrics and upholstery fabrics as we have continued to deliver a wide range of exceptional products that meet the changing style demands of our customers around the world. In addition, as the bedding and furniture industries begin to recover, we have the capability to support our customers with outstanding service, reliable delivery performance and consistent quality and value. Just as importantly, we are a trusted supplier with the financial strength and flexibility to support our growth strategy in a dynamic marketplace. I'll now turn the call over to Ken who will review the financial results for the quarter.

Thanks, Frank. Total sales for this quarter was $60.5 million, up 17% from the third quarter of last year. Operating income for the quarter was $3 million compared with $3.1 million a year ago. On a pretax basis, we reported income of $2.9 million unchanged from a year ago. Net income was $1.8 million or $0.14 per share for the third quarter this fiscal year compared with net income of $2.4 million or $0.18 per share for the third quarter of last year. Net income for the third quarter of this year included an income tax expense of $1.1 million, while net income for the previous year included $483,000 income tax expense. The company's overall adjusted effective income tax rate through the first 3 quarters this fiscal year was 18.2% compared with 15.3% for the same period last year. This adjusted effective rate or ongoing estimated cash tax rate represents estimated income tax expense for Culp's non-U.S. entities divided by consolidated income before taxes. This information is important because the company currently does not pay cash taxes in the U.S., nor does it expect to in the foreseeable future, due to a $60 million in U.S. federal and state loss carryforwards. Overall return on capital was 18% for the third quarter this fiscal year compared with 23% for the same period a year ago. Here are results by operating segment. For mattress fabrics, we reported $34.7 million in sales for the third quarter, up 24% compared with sales of $28 million for the same period last year. Operating income for this segment was $3.1 million compared with $2.8 million last year. Operating income margin was 9% of sales compared with 10.1% of sales for the prior-year period. SG&A was up 11% due primarily to higher sales. On a percent of sales basis, however, SG&A was only about 5.7% compared with 6.4% a year ago. Return on capital for mattress fabrics was 25% through the third quarter this fiscal year, basically unchanged from the same period a year ago. Now turning to upholstery fabrics. Sales for the third quarter was $25.7 million, representing a 9% increase from $23.7 million in the third quarter last year. Sales of China produced fabrics, which include Culp Europe, were $22.6 million in the third quarter this fiscal year, a 9% gain over the prior-year period, while sales of U.S. produced fabrics were $3.1 million, up 5.5% from the third quarter of last year. Overall, the Upholstery Fabrics segment reported operating income of $754,000 or 2.9% of sales compared with operating income of $1.1 million or 4.8% of sales for the third quarter last year. The $754,000 in operating income this quarter is up significantly from the $19,000 reported last quarter. Return on capital for the upholstery fabrics was 17% to the third quarter this fiscal year compared with 38% for the same period a year ago. Now turning to the balance sheet. Our strong financial position continues to be an important advantage for Culp for fiscal 2012. As of the end of this quarter, our balance sheet reflected $23.6 million in cash and cash equivalents and short-term investments. Total debt at the end of this quarter was $10.1 million. Our debt-to-capitalization ratio as of this quarter was that 10.5%, compared with 13.5% at the end of last year's third quarter and 12.5% at the end of fiscal 2011. Our next scheduled major principal payment of $2.2 million is not due until August 2012. As previously announced on June 16, our Board of Directors authorized the expenditure of up to $5 million for the repurchase of shares for the company's common stock. Subsequently, on August 29, the board authorized an additional of $2 million to this program for a total of $7 million. As of February 27 of this year, we have returned approximately $5.4 million to shareholders through the repurchase of 624,000 shares representing approximately 4.7% of shares outstanding at the beginning of the share repurchase program. Our strong financial position provides us the opportunity to continue to execute our global growth strategy while also creating value for our shareholders through the share repurchase program. Looking ahead to the fourth quarter, we are encouraged by the opportunity for generating free cash flow, principally from net income plus depreciation and other non-cash expenses. With respect to uses of cash for this fiscal year, we expect CapEx spending to be in the $5.3 million range of which we have spent $3.7 million through the third quarter. In addition, we expect a modest working capital investment to support higher sales. We have already made our scheduled $2.4 million in debt payments and have spent $5.4 million through the end of the third quarter for the stock repurchase program. Frank?

Thanks, Ken. I'll now provide you an update on both of our operating segments. And let's start with Mattress Fabrics. This business delivered an outstanding sales performance in the third quarter. In what is typically a seasonally slower period with scheduled holiday plant closures in the U.S. Demand for mattress fabrics was better than expected and the results clearly demonstrate our ability to respond to customers with our expanded production capacity and a flexible manufacturing platform. The mattress industry is evolving into a more decorative business with growing consumer demand for better bedding and a higher-quality mattress fabric. Culp has been in the forefront of meeting this demand with an innovative and diverse line of products in every major category, supported by our exceptional customer service. We have the ability to leverage our outstanding design capabilities for new products, and we are encouraged by the positive response from leading customers in the bedding industry. While we are very pleased with the increased sales, our gross margins which were off 170 basis points as compared to last year's third quarter, were affected by higher raw material costs and continued pricing pressures. We are encouraged that raw material prices have come down from their peak levels of last year. However, during the third quarter, we still experienced higher raw material cost as compared to the same quarter last year. We believe the Q3 gross profit margin is the low point. And we expect to make solid gains over the next several quarters as a result of several factors. First, the raw materials situation is improving on a year-over-year basis. Second, we are making excellent progress in achieving better margins on new business as the demand for better bedding and higher-quality mattress fabric increases. Third, we will continue to work diligently to manage our production costs and identify alternative sources of yarns as well as raw materials without compromising quality or production efficiency. We believe we are well-positioned for a strong year in mattress fabrics business and look forward to the opportunities ahead for the remainder of this year and in the next. We are an innovative leader in the marketplace with a flexible manufacturing platform that meets current demand trends and is supported by exceptional design, outstanding customer service and reliable delivery performance. Now I'll comment on Upholstery Fabrics. Again, we're encouraged by the growth in sales in our Upholstery Fabrics business in spite of the continued weakness in the U.S. housing market during the quarter and the uncertain global economic situation. We were especially pleased with the year-over-year sales improvement from our U.S. operations with increased demand for both velvets and woven texture fabrics. We also had another solid performance with increased sales of our China produced fabrics. Customer response to these products has continued to be outstanding as we are focused on offering innovative designs and new fabric categories. We have been pleased with our recent sales and marketing initiatives that have resulted in increased placement with key U.S. customers. Local China market customers and a growing list of international customers. Based on recent order trends, we believe our sales momentum will continue into the fourth quarter. While we are pleased with the sales gains, our gross margins in this business for the third quarter were off 200 basis points from the same quarter a year ago. And they continued to be effective the material cost, higher operating costs in China and the currency impact on our China produced products. We believe the Q3 gross margins is the low point and we expect to make solid gains in margin gradually over the next few quarters beginning with the fourth quarter. The key reasons for this improvement are further sales gains, higher margins on new business, stabilization in raw material prices and significantly improved results in our U.S. operations. Also, we have implemented some price increases. We implemented a significant price increase for the U.S. produced velvet product line in the fall and those prices were in effect throughout the quarter. Further, we have recently announced the price increase for our China produced fabrics to help offset some of the currency impact and higher operating costs in China. This increase will be in effect late in Q4. In addition, the steps we have taken to align our U.S. velvet capacity with expected demand have continued to improve results in our U.S. operations. We began to realize the benefits of this initiative as we had a return to profitability in our U.S. operation during the third quarter. We are also encouraged by the new placements with our U.S. woven texture fabric products. Notably, our cost to produce this particular category of fabrics in the U.S. are now comparable to the production cost in China. We are expecting further growth in sales and profitability from this operation during the fourth quarter. We continue to make progress in the development of our Culp Europe operation located in Poland. While this operation is still in the early stages of development, we are encouraged by the level of interest from several of the largest furniture manufacturers and retailers in Europe. We expect to gradually grow this business with sales contributing approximately 3% of our total upholstery fabrics sales this year and then increasing further over the next fiscal year. Given the typical startup costs associated with a new operation and entering a new market, we expect to show a small operating loss for this fiscal year and then begin to make a more meaningful contribution to profits next year. We are excited about the opportunities ahead for Culp Europe and believe we are making great progress and creating a scalable operation that will enhance our global sales and expand our market reach. Ken will now review the outlook for the fourth quarter and I'll have a few concluding remarks.

Given our sales momentum, we expect sales for the fourth quarter this fiscal year to be up approximately 8% to 13% from the fourth quarter of last year. We expect sales on our Mattress Fabrics segment to be approximately 8% to 13% higher compared with the same period a year ago. Operating income in this segment is expected to be flat to slightly lower than the operating income for the same period a year ago. In our Upholstery Fabrics segment, we expect sales for the fourth quarter to be 7% to 12% higher compared with the same period last year. We believe the Upholstery Fabrics segment operating income will be significantly higher than the previous year's fourth quarter. Considering these factors, we expect to report pretax income for the fourth fiscal quarter in the range of $4.5 million to $5.4 million. This is management's best estimate at present, recognizing that future financial results are difficult to predict because of overall economic uncertainties. Frank?

Our ability to lead in product innovation along with our lean manufacturing platforms is driving Culp's performance this year. We've continued to grow our business by meeting the changing product and style demands of our customers in a dynamic marketplace. We have a strong competitive position in both mattress fabrics and upholstery fabrics and we have significant opportunities to capitalize on a sustained improvement in consumer demand for bedding and furniture. Our financial strength continues to be a key advantage that supports our ability to execute the strategy and make the right investments going forward. We are pleased with the trends in our business and look forward to completing this fiscal year with a strong fourth quarter. With that, we'll now take your questions.

[Operator Instructions] And our first question will come from Budd Bugatch.

Let's kind of talk a little bit about Mattress first. If you could, Can you comment, is there any quantification you can give us on some of the cost increases and the impact it had on gross margin and what your comfort level is? We're talking about it being a low-water point right now.

The first raw material prices. We are seeing, as we said, prices are down from peak levels and as we head into the fourth quarter, we are going to -- we are having equal to lower prices in the fourth quarter. And it's really the first quarter we've been able to really see year-over-year improvement. But raw materials did not go down back to the levels of the 1.5 years ago during the recession, but they are down and as we look into the future with future orders, which we are placing now for delivery 2 to 3 months out. We're also seeing slightly decreasing raw material prices. That's -- we don't really have a way to quantify that for you, but it will be a positive factor. The selling prices in the fourth quarter are...

The gross margin in mattress was about 21.7%, I think that might've been 1 of the highest gross margins ever in that segment. Well, 22.2% in the fourth quarter of '10, April of '10. Do you see a year-over-year gain? Or how long will it be before you get year-over-year? I know you have quarter-over-quarter but what about year-over-year?

I think, Budd, we see making solid gains over the next few quarters. And you know, some point next year, we would expect to see year-over-year gains. But fourth quarter, we're still going to have a great quarter, but the gross margins had a couple -- last year was a very strong gross margin and had a couple of nonrecurring items if you will, that we do not have this year. 19% was the gross margin fourth quarter of last year.

I'm sorry. Say again?

19% was the gross margin fourth quarter of last year.

Without those nonrecurring items?

With those items.

With those items, okay.

So we'll see significant improvement, of course, over Q3.

Okay. Same kind of question for Upholstery Fabrics. Although it looks like, do you think you can get year-over-year gross margin gain in the fourth quarter of this year?

We do. That looks good because earlier in this year, we really had weaker demand in the housing market when you look back at our fiscal first and second quarters, we had a much tougher climate in terms of the housing market and the political, geopolitical stuff going on, et cetera. And we're seeing a much improved climate today. And the health of price increases and the significant improvement in our U.S. operations.

Okay, and you see that continuing for the rest of next year as well?

We do. And we see the sales momentum in the introduction of a variety of new products with placements with the right and best customers an as in mattress fabrics, the new business we've been getting is all being placed higher margins. So that will help us as we go through next year as well.

Just 2 other areas of question. One, talk a little bit about the operating results in Europe and what the outlook is for that? Is that the same as it was? Or is it ...

I think, same as it was. I don't have a lot of tolerance for not making money. But I understand, we've probably need to have some patience in the new market and the new geographic area with new customers and we're learning as we go here. But we're still very excited about the outlook there. There is too many positive things happening with key large retailers and customers. That gives me that confidence in the outlook for there.

Okay. And my last area question has to do with the usage of cash and balance sheet. I think you've exhausted your share repurchase, what's your appetite now for that? And what's kind of a priority for cash going forward?

Okay, good question, Budd. First, I guess, if Ken mentioned, we're very pleased to have repurchased almost 5% of our outstanding shares at what we consider attractive prices. The average price paid for the shares repurchased was $8.62. We have less appetite for share repurchases at higher prices. We've seen too many examples of many companies paying too high-a-price for repurchase of their shares. We've got the authorization totaled $7 million, we've purchased $5.4 million, there is $1.6 million open on that authorization. And secondly, as far as the dividend considerations, our Board of Directors continues to have discussions regarding this topic. We will and are continuing to carefully evaluate our options, our available cash, our projected free cash flow and how best to return funds to shareholders over the foreseeable future. Budd, let me mention one other, let me go back on one of your other questions on the gross margin. I think, it's important. During the last couple of years, with the recessionary climate an uncertain economic environment, we were focused on maintaining market share and being sure we had the key placements as we come out of recession. So it's probably fair we could be guilty of not trying to get the highest margin. We were focused on market share and making sure we had key placements during the last couple of years. I believe that now it's going to pay very good dividends as we see the sales momentum we've got now coming into a recovering situation. So I just wanted to add that point as well.

[Operator Instructions] Moving on, we'll go to Barry Vogel, Barry Vogel & Associates.

I want to follow up on Budd's talking about margins. The first question I have since these are fabrics, would you say that the major raw material cost driver would be petroleum prices?

The major is petroleum prices to the synthetic fibers which we use which polyester is the most prevalent fiber in our fabrics.

Having said that, obviously, petroleum prices have -- other than the collapse of the world economies was about to happen, have been relatively high for over the last couple of years. How could you prevent additional squeezes on your margin [Audio Gap] petroleum prices go higher?

Barry, another good question. Petroleum prices are a factor, and an important factor. But they are not the only factor in determining fiber prices. Another very key factor is plant utilization and of the fiber producers, which is down. Over the last couple of years, polyester producers in particular, last maybe more than 2 years them have added significant capacity. Also, demand in China is not so good right now. And there is significant but ample available capacity, so that is offsetting whatever impact might come from petroleum.

But long-term, these conditions are still there, am I correct? It's embedded in your margins, you have the oil -- petroleum prices, t he utilization of the fiber producers which will go up and down depending upon capacity and demand. So this is something you have to constantly cope with.

It is something we've been dealing with for the last 20 years in this business and we'll have it 20 years from now. That's true.

That's why it's a more difficult business than maybe some other businesses. Now as far as uses of cash, what growth initiatives do you have on the table for the, let's say, the next year to grow the company besides the use of cash, the share repurchases and dividends?

Well, the #1 target for us is to the grow organically. And you are seeing us do that with outstanding sales momentum. That is our #1 priority, we believe growing organically offers the best return on capital least risks and building the business with the customers we have plus new customers like China, internationally and Europe. Organic growth. Secondly, we continue to look for any acquisitions in the mattress fabric area. As you know, we've had over the last 4 years, 2 very successful acquisitions with that business. There are none we've been able to see that can work for us. I've said in earlier quarters, we will be very disciplined in such an acquisition as we have been in the past on prices paid. But nothing is there as of now, but we're always open to that use of cash. Third, we've said our use of cash is capital expenditures in our Mattress Fabrics business. As Ken mentioned, even though margins are off, it's a great business. 25% return on capital, same as last year generating lots of free cash flow, so we will continue having maintenance CapEx, which is probably $2 million -- $2.5 million a year. And then we'll have some expansion CapEx in that business as the business grows, as we're seeing it grow now. And then after satisfying those, of course, is the return to shareholders alternatives.

Now as far as Europe is concerned, can you give us some idea of the total sales and operating losses this year? And what might you expect at a minimum next year?

What we said in the release is that sales this year are expected to be approximately 3% of total sales this year in Upholstery Fabrics. Not bad from really start up the year before. In a new market, new area and a small operating loss. We expect improvement next year and really that improvement if I were to give an estimate, it's a wide range. There are such the customers in Europe, landing 1 or 2 of them could significantly impact the sales and profitability. And we're in discussions with many, not that many, but several of the large retailers and manufacturers. So that's why we're excited about the opportunity. And when something comes through, it could significantly impact that achieving 3% of sales, of our sales, and go north from there and build that profitability.

I have 1 more question for Ken. A minor question. What does the word significantly mean when you talk about upholstery profits for the fourth quarter?

Well, when you look at the results, we had significant improvement from Q2 and Q3. And when you look at Q4 last year, we've got, as Frank said, we've got the momentum. I don't really want to quantify that, but I would just say that, it's going to be up. And it's going to be higher than Q3 and we're making continued improvement in that area. That's what you're trying to do. We hit the low point Q2, more progress in Q3, even more progress in Q4.

And Barry, I'll add 1 point to that, I think it's important to remember in the Upholstery Fabrics business, we've had a miserable end-use market environment or 4 years. Housing has been at 30, 40-year lows. This appears to be turning around. And we have made outstanding progress with the best customers in the U.S. in terms of placements and being on their floors. And we are terrifically positioned to grow nicely as the furniture industry has more demand, which I believe is coming.

And next, we'll go to Steve Shaw with Sidoti & Company.

Most of my questions were covered. Just 2 quick ones. I thought the guidance for the fourth quarter sales is a little low after the second and third, is that just you, guys, being conservative? Or is there something else behind that?

Steve, good question. Obviously, we've beaten the sales guidance handily the last 2 quarters. You're correct. Our business does not have a lot of forward visibility. It just doesn't. But as of now, we're heading into a strong fourth quarter. We see strong business in both segments and I have to say you're right, there's more of a chance were going to beat that guidance the not beat it. So I hope that answers the question.

Okay. And then lastly, you mentioned the demand for the velvet has increased a little bit, that's something we've talked about in the past, customers generally switching to the imitation. Just some color on what's going on with the velvet market.

It's a crazy business when you raise prices, expect less demand and we end up having more demand. And we are as -- I'm as encouraged about the U.S. operation as I've been in 4 years. We've held onto that facility, really from a strategic standpoint, so all our eggs were not in the China basket even though we're obviously pleased with China. And we haven't made any money and in some quarters we lost money down there. So it's really taken a lot of patience. We are seeing a resurgence in that business. We're seeing a lot more interest from customers in a U.S. facility and particularly in velvet. And not sure, we're pleased with it, but can we explain it? I don't know. Maybe just better consumer demand here. And it's possible that in the furniture side, they're just going to have the better positioned companies, they're going to have more demand than they think is coming. And we're going to be a beneficiary of that and I believe the U.S. operation in particularly is going to have a bigger contribution to the upholstery fabrics results in the years ahead here. Now importantly, remember that only makes velvet and chenille type fabrics. There are many categories that are on the retail floor today. That's only 2 of this relatively smaller category. So it's not all movement from China, they're still going to be 80-plus percent of upholstery fabrics used on furniture purchased out of China. But what we bring is a global platform to a customer. They really can't have the best of both worlds. And there still is a market we're seeing and of consumers that for this traditional velvet. Which is great. We're the only velvet, real velvet producer in the market. So when we increased prices significantly, that told us that -- that is a -- that product category has life and has legs to it.

And gentlemen, there are no further questions in the queue. I'd like to turn the call back to Mr. Saxon for any closing comments.

Okay. Thank you, operator. And again, thanks to all of you for your participation and specially your interest in Culp. We really look forward to update you about our Q4 results in June. Thanks and have a good day.

And that does conclude today's conference, we'd like to thank everyone for their participation.