Dru Anderson - IR Frank Saxon - CEO Ken Bowling - CFO

Budd Bugatch - Raymond James Dillard Watt - Stifel James Fronda - Sidoti & Company

Good day and welcome to the Culp Inc. Third Quarter Fiscal 2015 Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Dru 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 2015. 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 facts. 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 as 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 Web site at www.culp.com. A slide presentation with supporting summary financial information and additional quarterly performance charts are also available on the company's Web site 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.

Good morning, everyone, and thank you for joining us today. I would like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today is Ken Bowling, our Chief Financial Officer. I will begin the call with some brief comments, and Ken will then review the financial results for the quarter. I will then update you on the strategic actions in each of our businesses. After that, Ken will review our fourth quarter business outlook, and we will be happy to take your questions. We continue to build our sales momentum this fiscal year with the 12% increase for the third quarter compared with a year-ago. Sales for the quarter were the highest for any quarter in 11 years. These results demonstrate the benefits of our top strategic priorities to drive product innovation and creativity throughout our company. The positive response to these creative designs has resulted in higher sales to existing key customers as well as sales to new customers. We are as strong operationally and financially as we have ever been and we’re excited about the opportunities for continued success. Our progress to-date in fiscal ’15 has positioned Culp for another outstanding year of solid sales growth, improving profitability and excellent free cash flow. We are especially pleased with the implementation of our aggressive capital expenditures plan this year in our mattress fabrics business. Importantly, we also have the financial strength to continue making the capital investments necessary to support our growth strategy as well as to provide added value to shareholders through dividends and opportunistic share repurchases. I will now turn the call over to Ken who will review the financial results for the quarter.

Thank you, Frank. As mentioned earlier on the call we have posted slide presentation to our Investor Relations web site to cover key quarterly and annual performance measures as well as our capital allocation strategy. Total sales for this quarter were 81 million up 12% in the third quarter of last year. On a pretax basis we reported income of 5.9 million or 7.3% of sales compared with 4.6 million or 6.3% of sales. Adjusted net income, a non-GAAP measure was 5 million or $0.40 per diluted share up 30% than the prior year period. Overall annualized return on capital was 28%. The Company’s overall adjusted affected income tax rate through the third quarter was 15.3% compared with 15.5% for the same period last year. This adjusted effective income tax rate for ongoing estimated cash tax rate represents 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 do we expect to for a number of years due to approximately 45 million in loss carry forwards as of the end of last fiscal year. Here are the results for our two businesses. For mattress fabrics we reported 45.7 million sales for the third quarter, up almost 19% as compared with the third quarter of last year. This impressive sales gain reflects better than expected industry demand, some market share gains and some advanced sales to major customers as they prepare to launch their flagship brand. Operating income for this segment was 5.2 million for the third quarter up 58% in the same period last year. Operating income margin was 11.4% of sale compared with 8.6% a year-ago. The overall operating margin for mattress fabrics has continued to show steady sequential improvement during this fiscal year. Beginning with 10.8% in the first quarter and increasing to 11.4% this quarter. Contributing to this margin improvement has been the growth in sales along with the benefits coming from the capital investment program, also contributing to the income and the margin improvement especially for this quarter as compared to last year was the significant operational improvement coming from our Mattress covered business. Annualized return on capital for the Mattress Fabrics business was 31%. Now let's look at Upholstery Fabrics. Sales for the third quarter were $35.6 million compared with $33.8 million in the third quarter of last year, representing a 5.1% increase, which was higher than expected. The Upholstery Fabrics business reported operating income of $2.5 million, down slightly from the same period last year. Operating income margin was 7.2% of sales compared with 7.9% for the third quarter of last year which was exceptional performance. Operating income came in slightly below last year due primarily to our U.S operations. Despite this pressure we were pleased with the 7.2% margin performance. We're also very pleased with the 48% annualized return on capital. Now turning to the balance sheet, our strong financial position continues to be an important advantage for Culp. The company generate of 11.8 million of free cash flow for the first nine months of this fiscal year compared with 8 million for the same period last year. Both of our businesses have done an outstanding job of managing working capital this fiscal year especially inventories which contributed to the strong free cash flow. Overall inventory turns were 7 compared with 5.4 for the same period last year. Notably during this period we reduced our debt by 2.7 million, return 7.6 million of cash to shareholders through share repurchases and dividend and invested 8.2 million in capital expenditures for total 18.5 million in uses of cash. With respect to our overall cash position at quarter end we reported 37.2 million cash and cash equivalent in short term investments. This compares to 35.6 million totals at the end of last fiscal year. Our cash position broken down by country at quarter end is as follows. Cash located in the U.S was 5.8 million while cash located in China and Canada totaled 31.4 million. Looking ahead to year end we expect our cash position to be comparable to the 5.8 million at the end of this quarter total debt at the end of this was 2.2 million which represents the final installment on our term loan due this coming August. Our net cash position or cash minus total debt was 35 million at the end of this -- third quarter, the highest net cash level in Culp's history. With regards to our share repurchase program during that first nine months of this fiscal year the company purchase 43,000 shares of Culp common stock for $745,000 at an average price of $17.30. All of these shares were purchase in the first and second quarters. We have 4.3 million available for share repurchases under our current authorization. Importantly since June 2011 the company has returned a total of $28 million to shareholders in the form of regular quarterly and special dividend in share repurchases. Frank?

Thank you, Ken. I will now provide you with an update on both of our operating segment. Our Mattress Fabrics business had an outstanding performance in the third quarter of this year. These results reflect higher than expected demand coupled by a generally improved business environment some market share gains and some advance sales to major customers as they prepare to launch their flagship brands ahead of major bedding event. We are pleased with our execution in meeting this demand with solid growth across our core product lines. Additionally, we have further enhanced our competitive position with our extensive design capabilities and technical expertise. Supported by a mirrored manufacturing platform and enhanced reactive capacity. Design and innovation continue to be top priorities to stay ahead of the latest fashion trends and to meet customer style preferences. We continue to expand our design team, and we have also invested in the latest technical software and website development to support and strengthen our brand. These design initiatives and new product introductions are resonating with our customers. Notably, Culp had another solid showing at the January Las Vegas bedding market, with strong placements from key customers as well as new opportunities for both mattress fabrics and covers. We continue to improve our market share with our complete array of innovative fabrics and mattress covers across all price points and style trends in the mattress industry. We have also made steady progress in our operating performance during the year, with significant improvement in the third quarter compared with the prior year period. We are on schedule with the previously announced $9.5 million expansion plan to increase our production capacity, add finishing capabilities, and improve our overall efficiency and throughput. As we near completion of this $9.5 million plan, we expect to more fully benefit from these improvements and additional equipment in the fourth quarter. These investments demonstrate Culp’s commitment to our customers, the industry and they further support our growth strategy. Additionally, our mattress cover business has continued to mature and is trending towards becoming a meaningful contributor to our overall business platform. This business further supports our diversification strategy and enhances our strong value proposition. We look forward to the opportunities ahead for another strong performance in fiscal 2015. Now I will comment on Upholstery Fabrics. We are pleased to report another solid performance in our upholstery fabrics business for the third quarter with sales up 5% over a strong third quarter of last year. Our sales performance exceeded our previously announced expectation while operating income and margin came in as expected. We have continued to see very favorable customer response to our innovative designs and diverse product offering. Our sales were exceptionally -- specially strong at the end of the third quarter, as many customers anticipated longer lead times related to the Chinese New Year holiday, which occurred in February this year. Sales of China produced products accounted for 92% of upholstery fabric sales in the third quarter. Our focused efforts on product innovation and designs that reflect current furniture style trends have clearly distinguished Culp in the marketplace. Our consistent growth in sales this year confirms this strategy is working. We have also realized the benefits of our diversification strategy to expand our customer base, including the hospitality market and the lifestyle retail category. Our flexible global platform supports these marketing efforts and allows us to quickly respond to changing market trends and consumer style preferences. As a result, we have established a strong competitive position with additional opportunities to reach new customers and expand our market presence. As previously announced, we finalized the closure of the finished goods warehouse and distribution facility located in Poznan, Poland at the end of the third quarter, with minimal cost impact. However, at this point we remain very interested in developing business in Europe, and we’re still assessing the best strategy for selling upholstery fabrics into this market as economic conditions improve. Finally, we continue to be in the very fortunate position of generating significant free cash flow above the requirements to grow our business organically and maintain a strong net cash position. We expect that positive free cash flow trend to continue for the foreseeable future. As we look ahead to the end of this fiscal year I would like to once again briefly touch on our capital allocation strategy. A key element of this strategy is to return funds to shareholders that exceed our minimum net cash threshold which we currently sat at 25 million, as measured at fiscal year-end. Importantly the amount returned to shareholders would be subject to cash availability in the U.S. meaning that the amount of any special dividend paid after year-end to shareholders could be lower than the difference between 25 million net cash threshold and the final net cash position at year-end. Culp like many other multinational corporations has a significant amount of cash located outside of the U.S. as Ken mentioned earlier. To bring this cash to the U.S. under existing federal tax guidelines in order to fund any part of a special dividend before our NOLs are fully utilized would be very costly from a tax standpoint and therefore we believe not and the company’s best interest. Other elements that could potentially impact the size of the special dividend are detailed in our capital allocation strategy posted on our Web site. As I said before our strong financial position along with our free cash flow generation helps us have a rainy day fund as well as have the draw powder to be opportunistic. We believe it also gives our customers confident that Culp would be around for many years and can and will invest in CapEx and working capital as necessary to enhance our value proposition and support our customer’s growth plan as this currently indicates in our mattress fabric business. Additionally, having a strong financial position contributes significantly to our thinking about and running our businesses for the long-term. Ken will now review the outlook for the fourth quarter and then I will have a few concluding remarks.

At this time we expect overall sales to be up 4% to 8% as compared with the fourth quarter of last year. For the year we expect overall sales to exceed last year’s annual sales by approximately 8%. We expect fourth quarter sales on our mattress fabrics business to be up 6% to 11% as compared with the same period a year ago. Operating income in March in this segment are expected to be substantially higher than same period year-ago due primarily to higher sales and deposit contributions from the completed capital investment projects. For the full fiscal year we expect mattress fabric sales to be approximately 11% higher than fiscal 2014 and operating income and margins are expected to be substantially higher than last fiscal year. In our Upholstery Fabrics we expect fourth quarter sales to be slightly higher as compared with the previous year fourth quarter result. Because the Chinese New Year holiday falls entirely in the fourth quarter of fiscal 2015, our sales and production schedules will be affected by the extended break. We believe the upholstery fabric segments operating income and margins will be slightly higher than the same quarter of last year. For the full fiscal year, we expect upholstery fabric sales to be approximately 3% higher than last fiscal year. Our operating income and margins in this segment are expected to be slightly lower than last fiscal year. Considering these factors, the company expects to report pre-tax income for the fourth quarter in the range of 5.7 million to 6.4 million. Pre-tax income last year's fourth quarter was 4.1 million. For fiscal 2015 as a whole, we expect pre-tax income in the range of 22 million to 22.7 million, compared with 19.0 million last fiscal year. Capital expenditures for this fiscal year expected to be approximately 11 million primarily related to the expansion projects for Mattress fabrics. And depreciation and amortization together with stock-based compensation is expected to be approximately $7 million this fiscal year. Additionally, the company expects free cash flow for this fiscal year to be comparable to the 13.8 million achieved last fiscal year. Looking ahead at next fiscal year, our preliminary estimate for capital expenditures is in the range of $6 million to $8 million mostly related to our Mattress Fabrics business. Now I'll turn it back over to Frank.

We are pleased with our solid performance to date in fiscal 2015 and our ability to drive organic growth in both businesses. Our creative designs and innovative fabric styles are contributing significantly to these sales gains as we continue to meet changing customer style preferences. We have a strong competitive position with a flexible and scalable global manufacturing platform to deliver these products, supported by outstanding customer service. We are very excited about our future growth prospects and our ability to continue generating solid results in fiscal 2015. Above all, we are committed to outstanding performance for our customers as a financially stable and trusted source for innovative fabrics. With that, we'll now take your questions.

[Operator Instructions] Our first question today will come from Budd Bugatch with Raymond James.

Congratulations to the Culp team on a good quarter and good year so far. My first question really relates to the problems that are caused by success, you've had to increase capacity which you're putting in Mattress Fabrics we had a little bit of dislocation earlier this year that you're seeming to work through now. What's the prognosis as you get down the road here, what's the philosophy of productions so that you don’t disappoint your customer and yet you're also able to keep a steady operating performance?

We will continue investing in the Mattress Fabrics business as we have for a number of years in our manufacturing platform both in the knitted and hand woven areas. This past year as you we've invested on those $10 million in price side billable to do exactly what you've talked about and that is been a major help to us. As we look at next year we will continue investing in Mattress Fabrics but not to this degree. As Ken mentioned we're looking 6 million to 8 million and preliminary estimated CapEx. So I think we'll keep doing that, we've also got some excellent partners that we work with to supply some of the capacity we need but of course the majority is in our own facilities.

Most of that CapEx is for the Mattress segment, is a much for the Upholstery segment needed?

Very small but of course because of Upholstery Fabrics is not -- has minimal fix assets. So the 90%, 95% of the capital budget is for Mattress Fabrics.

Okay.

I think you got probably another couple of years looking at the growth that we're seeing and the progress we're making with key customers, unfortunately because we've the financial position, we will continue adding capacity as needed. We have the facilities and the space already with what we've done this year. This past year we've put some infrastructure in place and additional building space, finishing capacity that will allow us to add fabric forming capacity much quicker and easier in the next couple of years.

And the last question I have relates to your facility in U.S. for upholstery fabrics. What’s your plan there? I think you have indicated you may have some different strategies though up to make Anderson a more productive facility. Is there anything you can share at this time?

From a high-level standpoint we -- most of our business as we’ve disclosed is China produced, 92% and it averages about that for the quarters. Strategically, we would really like to grow the U.S. operation. We have one plant in South Carolina that makes mostly fabric [promotion] furniture. We are on a -- we’ve adopted an initiative to try to increase our penetration in the stationary furniture area. But this will take time and the operation is not as profitable as our China operation but nevertheless it’s considerably above breakeven so it makes sense to keep it and develop it. Our real challenge is to come up with innovative product for the stationary market so that we can grow that business. Fortunately, it’s not a large facility. We have not a lot of capital invested there. You know our fixed assets, building and equipment are fully depreciated, and so it’s a very low cost well run operation. It’s just up to us to get some products in the stationary area that can retail. And we are working on it.

Our next question today will come from Dillard Watt from Stifel.

I wondered if maybe we could talk a little bit about just quickly on this quarter and then out into -- and then I have a couple of questions on next year. What was going on -- I know you mentioned some U.S. operation pulling back margins in upholstery. Is that something that is kind of a one-time or should that continue? Maybe a little color on what was happening here in the U.S.?

I think I would say Dillard, it’s a very small impact. So when we look at the year as whole the upholstery fabric business is doing quite well, earning this year 48% return on capital. So all those margins and income are down slightly year-over-year the return on capital is up because of how well they’ve managed our receivables working capital, et cetera. And as we look ahead, we believe we’re going to be successful in that operation and grow sales and profit. But it still is a small piece of our overall upholstery fabric business, 8% of a $130 million. So I would not over in any way think it’s a major factor in our results to date or in the future, but we would like it to see some gains in other market segment.

Next year obviously this year kind of -- tale to half of the year with margins embedding with some of the headache in the first half of the year and then reaping some benefits in the second half of the year. I am assuming we’ll see margins expand a little bit in fiscal ’16 versus fiscal ’15? Any color on that?

That’s a great way to characterize it Dillard, it’s a tale or two add. We are obviously going to perform our and we’ll perform terrifically in the second half, specifically mattress fibers over the prior year. But when you look at next year we do see margins growing. And as we have said long-term margin target for us for mattress fabric operating income are 11.5 to 12.5. And this year if you do the math we are going to have a margin gain year-over-year and we see some growth in margins next year as well. Our upholstery fabric long-term margin targets as we’ve consistently said for the year are 6 to 7, with return on capital in the mid-40. So I would -- in an upholstery fabrics we would expect to see that operating margin gradually move up on an annual basis also.

(Operator Instructions). Our next question will come from James Fronda with Sidoti & Company.

Good morning, my questions were pretty much were answered I guess the only thing I had was on potentially rising U.S mortgage interest rate. So are you fearful that that could have a negative effect on your business?

Not really mortgage rates are still a very low level, we hear this week the 30 year is 375/385 will they go up some, yes. But that doesn’t worry us at all -- all that. I think the long term certainly looks good for the housing industry to continue growing gradually.

Okay sounds good thanks guys.

At this time there are no questions in the queue. [Operator Instruction] And currently we have no questions in the queue. I'll turn the call over to our host for any additional comments.

Thanks operator and again thank you everyone for your participation on the call and your interest in Culp. We'll look forward to updating you on our progress after the fourth quarter. Have a great day.

And that does conclude today's conference call. Thank you for your participation.