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

Kevin Tracey - Oberon Asset Management

Good day and welcome to the Culp Incorporated Fourth Quarter 2015 Conference 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 fourth quarter and 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 SEC, 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 and additional quarterly performance charts are 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.

Good morning 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 today with some brief comments and Ken will then update everyone on the financial results for the quarter and the year. I will then update you on the strategic actions in each of our businesses and after that Ken will review the first quarter business outlook. Culp delivered another solid performance in 2015. As we achieved higher sales reported to 21% increase in pretax income and earned a return on capital of 29%. Notably this is the sixth consecutive year of overall sales growth and a new record year for mattresses fabric sales. Throughout the year we have continued to execute our strategy with a focus on design creativity and product innovation supported by exceptional service for our customers. Together these efforts have driven our sales performance both with existing customers and new customers. Our ability to sustain excellence in creating innovative fabrics that meet changing customer demand is an important advantage for us. We remind ourselves every day that we compete in a fashion and product driven business. As a result of our progress over the last year we believe we have enhanced our leadership position in both businesses and we look forward to continued success in the year ahead. Importantly, we achieved excellent pre-cash flow of 15.1 million in the year just ended up from 13.8 million. As a result we were pleased to announce yesterday that our Board of Directors approved a special cash dividend of $0.40 per share which is in-line with our capital allocation strategy. Also the Board approved our regular quarterly cash dividend of $0.06 per share. This action reflects our strong financial performance and our commitment to delivering value to our shareholders. At the same time we have the financial strengthen to make strategic investments necessary to enhance and expand our production capabilities and take advantage of additional growth opportunities this coming year and in the future. 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 presentations to our investor relations website that cover key quarterly and annual performance measures. We have also posted our capital allocation strategy. Total sales for this quarter were 78.8 million up 6.5% from the fourth quarter of last year. For the year sales were 310 million up 8% over last year. It is important to note that this fiscal year had 53 weeks compared with 52 weeks the year before. On a pretax basis for the quarter we reported income of 6.7 million or 8.5% of sales compared with 4.1 million last year reflecting a 62% increase. For the year we reported pretax income of 23 million or 7.4% of sales compared with 19 million in the year earlier or 6.6% of sales last year. Adjusted net income for the quarter a non-GAAP measure was 5.6 million or $0.45 per share up 67% from the prior year period. For the year adjusted net income was 19.4 million up 23% compared with last year. Overall annualized return on capital was 29% compared with 26% last fiscal year. The company's overall adjusted effective income tax rate for fiscal 2015 was 15.7% compared with 17.6% for the same period last year. This adjusted effective income tax rate are ongoing estimated cash tax rate represents income tax expense for Culp's non-U.S. entities divided 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 $32 million in loss carry-forwards as of the end of this fiscal 2015. It is important to note that our NOL balance has been reduced by $31 million over the last four fiscal years at an average of close to $8 million per year. Here the results for our two businesses, for mattress fabrics we reported 48.2 million in sales for the fourth quarter up 10.4% as compared with the fourth quarter of last year. We experienced sales gains in all three of our key product categories including our mattress cover business. For the year mattress fabric sales were 179.7 million up 11.8% over last fiscal year setting a new sales record. Operating income for this segment was 7.1 million for the fourth quarter up 58% from the sale period last year. Operating income margin was 14.7% of sales compared with 10.3% a year ago. For the year operating income was 21.7 million compared with 17.5 million last fiscal year a 24% improvement. Operating income margin for fiscal 2015 was 12.1% compared with 10.9% last year. The overall operating margin for mattress fabric showed steady sequential improvement during fiscal 2015 beginning with 10.8% in the first quarter and increasing to 14.7% in the fourth 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 margin improvement especially for this quarter as compared to last year with the significant operational improvement coming from our mattress cover business. We’re also seeing some raw material price reductions although recently prices have become more stable. Annualized return on capital for the mattress fabric business was 34% compared to 29% for last fiscal year. Although capital employed for the mattress fabric business did increase from the previous year due in large part to sales growth operating income grew at a faster pace thus contributing to the improvement in return on capital. Now let's look at upholstery fabrics, sales for the fourth quarter were 30.7 million compared with 30.4 million in the fourth quarter of last year. For the year upholstery fabric sales were a 130.4 million up 3% over last fiscal year. The upholstery fabrics business reported operating income of 1.9 million a 53% improvement over the fourth quarter of last fiscal year. Operating income margin was 6% of sales compared with 4% in the last year's fourth quarter, a key factor in this improvement has been the higher margins achieved on new product introductions. For the year operating income was 8.1 million compared with 8 million a year ago. Operating income margin for the year 6.2% compared with 6.4% for last year. Annualized return on capital was 49% compared with 41% last fiscal year. The return on capital in this business continues to be impressive with growth in operating income while capital employed decreased compared to the previous year. Before I move on to the balance sheet let me briefly comment on SG&A, overall SG&A increased 31% over fourth quarter of last year. Although some of the increase can be attributed to revenue growth and other factors the majority of the increase was due to higher incentive compensation expense. Given the close to 50% increase in operating income over last year's fourth quarter results coupled with a significant increase in economic value add or EVA which is the metric that drives our incentive compensation program. Additional bonus expense needed to be recorded in the fourth quarter. Now I will turn it to balance sheet, we’re pleased to end the fiscal year with a strong financial position. The company generated 50.1 million of free cash flow after investing 10.5 million in CapEx, the 15.1 million is above last year's free cash flow of 13.8 million. Both of our businesses did an outstanding job in managing working capital which contributed to the strong free cash flow this fiscal year. During the year we used our free cash flow to build our net cash position by approximately 7 million and to return 8.3 million of cash to shareholders through dividend and share repurchases. Looking ahead the fiscal 2016 we expect another good year of free cash flow with capital expenditures projected to be 7.5 million to 9 million and modest growth in working capital. As of year-end we reported 39.7 million in cash and cash equivalents in short term investments. Our cash position broken down by country at year-end is as follows. Cash located in the U.S. was approximately 4 million while cash located outside of the U.S. totaled 36 million. Total debt at the end of fiscal 2015 was 2.2 million which represents the final installment on our term loan due in a couple of months. Notably our net cash position our cash minus total debt was 37.5 million at the end of the year, the highest net cash level in Culp's history. With regard to our share repurchase program during this fiscal year the company purchased 43,000 shares of Culp common stock with $745,000 at an average price of $17.30. All these shares were purchased in the first half of the year. We have 4.3 million available for share repurchases under our current authorization. Importantly since June 2011 and including the special and regular dividends to be paid next month the company will have return approximately $35 million to shareholders in the form of regular [indiscernible] and special dividends and share repurchases. Frank?

Thank you, Ken. I will now provide you an update on both of our operating segments. It will start with mattress fabrics. Our mattress fabrics business had another strong performance in the fourth quarter pushing our annual sales to a new record level in fiscal 2015. These results reflect solid execution of the strategic plan that we laid out at the beginning of the year with consistent growth and progress throughout the year. The fourth quarter results clearly demonstrate that the success of this plan as we more fully realized the benefits of the 9.5 million capital investment program. We were very pleased with our sales growth this year which has outpaced the overall industry growth. Our focus on design and innovation sets us apart in the mattress fabric marketplace and we continue to have favorable placements with new product roll-outs to our customers. Our product mix of mattress fabrics and sown mattress covers across all price points and style trends has allowed us to execute our vision to deliver a full design package from fabric to finished covers. Our design team has done an excellent job and we have continued to support this efforts with investments in the latest technologies and software including an enhanced new website to leverage our talents and our Culp home fashion's brand. We also made notable progress in our operating performance during fiscal 2015 with the most significant improvement evident in the fourth quarter as we neared completion of our expansion projects. In addition to the greater operating efficiencies we were able to benefit from some lower input cost and fewer weather disruptions than we experienced during the fourth quarter of the previous year. While we still have some work to do to complete with a new equipment, our capital investment have already met our expectations with added capacity, enhanced finishing capabilities and better overall efficiency and throughput. Importantly, we have also created a longer term strategic infrastructure that will support our future growth initiatives and we will continue to make sound investments to improve our competitive advantage. We’re especially pleased with the year-over-year evolution of our mattress sown cover business which further supports our diversification strategy and enhances our strong value proposition. We look forward to opportunities ahead for another strong performance in both of these areas during the coming year. Now I will comment on upholstery fabrics, overall we’re also pleased with the steady growth in sales and improved profitability in this business for the past year. Notably this marks the sixth straight year of annual sales improvement. These results reflect a continued success of our product driven strategy with a focus on design and innovation. This strategy has allowed us to diversify our customer base and target additional end user markets including the hospitality market and the lifestyle retail category. Additional we experienced higher demand for our cut and sown kits in the last year which further supported our sales for the year. Our global platform provide significant manufacturing flexibility and we have continued to leverage this capability to meet changing customer demand. Sales of China produced fabrics accounted for approximately 92% of upholstery fabric sales in fiscal '15 providing a diverse product mix of fabric styles and price points with outstanding service and quality. Culp has a proven reputation as an industry leader known for innovative products and creative fabric designs. Our ability to keep pace with current style trends is a critical advantage for our customers and we’re encouraged by the favorable showing at the recent April furniture market with significant new placements. We believe Culp is well-positioned for sustained growth in upholstery fabrics especially as the overall economic improves with a more stable U.S. housing market and higher consumer spending for home furnishings. I would now like to review again with you our capital allocation strategy. We have been and 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, therefore I would like to review how we prioritize our use of capital and what you can expect from us. The first priority for us is investing in our existing businesses with working capital and capital expenditures to grow organically. We strongly believe that building our business internally with existing and new customers and new customer segments offers to highest return with the least risk. Secondly, we initiated a regular quarterly dividend three years ago at an annualized rate of $0.12 per share and we have increased it three times to it's current level of $0.24 per share on an annual basis. Our goal is to grow the regular dividend annually on a moderate basis over the years ahead based on our performance. Third, we’re open to strategic acquisitions in our mattress fabrics business. As you may remember we have invested 22 million and three great acquisitions in this segment in fiscal '07, fiscal '09 and fiscal '14 all of which added significant value to our business. We will continue to be disciplined and patient however with any acquisition in this area that we consider. Fourth, with respect to share repurchases, because we do not want to decrease our available float we’re only interested if the market is valuing Culp at what we would consider an opportunistic price. Fifth, we want to maintain a net cash position at a level that reflects 10% of annual sales or currently that’s 31 million. Importantly this cash level helps Rob and me sleep very well at night and always have the [indiscernible] to be opportunistic. It also gives our customers confidence that Culp will be around for many years and can and will invest as necessary to provide more value to our customers and support their growth. Also having a strong financial position is contributing significantly to our thinking about and running our businesses for the long term. After the above mentioned priorities and assuming an acquisition does not materialize we expect to continue generating free cash flow that exceeds our net cash target level, therefore the Board will consider returning funds above our net cash target level as measured at fiscal year-end by way of special dividend. Importantly considerations for such distribution would include cash availability in the U.S., the economic and business outlook at the time as well as the possibility of funds being required for an acquisition in the near or medium term. Now I would like to link our capital allocation strategy to what we accomplished in fiscal 2015. First with respect to investing in organic growth we built working capital in less than 2 million for the year which supported the growth of both of our businesses. Additionally we spent 10.5 million in CapEx most of which are in our mattress fabric area. Second, as implemented this past November we increased our quarterly dividend by 20% to the current level of $0.24 a share on an annual basis. Third, we repurchased 43,000 shares. Fourth, we built our net cash position to 37.5 million at year-end well above the $31 million target level and therefore as announced yesterday the Board approved a $0.40 per share special dividend to be paid next month. Looking ahead to the coming fiscal year here are our thoughts as to how we see things, we expect another year of strong gross cash flow which we define as net income plus depreciation and amortization and other non-cash items. With respect to free cash flow which includes investments in working capital and CapEx we expect the amount will generate to approximate the previous two year's level. Therefore, as outlined in our capital allocation strategy and assuming no acquisitions we’re optimistic that the company will again be in a position to return funds to shareholders. Ken will now review the outlook for the first quarter and then I will have a few concluding comments.

At this time we expect overall sales to be up 1% to 4% as compared with the first quarter of fiscal 2015. It is important to note that the first quarter of fiscal 2016 will have one less week than the first quarter of the previous year or 13 weeks compared with 14 weeks. We expect first quarter sales on our mattress fabrics business to be up 4% to 8% as compared with the same period a year ago. Operating income and margins in this segment are expected to be moderately higher compared with the same period a year ago. In our upholstery fabrics business we expect first quarter sales to be slightly lower compared with the first quarter of last year. We believe the upholstery fabric segments operating income and margins will be flat when compared with the same quarter of last year. Considering these factors we expect to report pretax income for the first quarter of fiscal 2016 in the range of 5.2 million to 5.7 million. Pretax income for last year's first quarter was 5.5 million. In addition based on our current budget capital expenditures for fiscal 2016 are expected to be approximately 7.5 million to 9 million primarily related to our mattress fabrics business. Depreciation and amortization including stock based compensation is expected to be approximately 7 million. Finally the company expects as Frank indicated earlier another good year of free cash flow even after a higher than normal level of capital expenditures and modest growth and working capital. Frank?

We’re pleased with Culp's performance in fiscal 2015 and our ability to execute our strategy and enhance our leadership position in a global marketplace. Our consistent top line growth reflects our ability to leverage our outstanding design capabilities and deliver a wide-range of innovative fabrics that keep pace with customer demand and style trends. We’re well-positioned to support this continued growth in both businesses with our flexible and scalable global manufacturing platform backed by exceptional customer service. At the same time we have maintained a solid financial position in generating strong free cash flow allowing us to reward our shareholders with significant dividend payments and share repurchases. Above all we’re committed to outstanding performance for our customers as a financially stable and trusted source for innovative fabrics. We’re very excited about the opportunities before us as we look ahead to fiscal 2016 and beyond. With that we will now take your questions.

[Operator Instructions]. We will take our first question from Kevin Tracey of Oberon Asset Management.

First could you help me breakdown the growth in your mattress fabric segment for the year, maybe first between growth in terms of unit sales versus pricing and then secondly how many points of growth do you think are being added from your mattress covers business?

Kevin, it's a very good question. Unfortunately none of that do we breakout. Let me give you, Ken and I both will give you some overall comments. Most of the growth in the year is with unit growth rather than ASPs. And then we did have the growth in the mattress cover business was up marginally for the year so not a lot for the year certainly for the fourth quarter but not for the year.

And then can you just help us understand what we should expect going forward? It would seem like you’re growing like it's well above market growth rates and you’ve kind of pointed us towards GDP growth in the past as a good metric attracting the market growth and the growth was just very strong this year and the forecast for the first quarter for more good growth. So how should we think about the -- like it's a growth over the next 3 to 5 years in this business?

What we have indicated before to all of the investment community is that we with the share that we already have in the industry, we believe we would grow at certainly at, at least industry growth plus some market share. Obviously you point out correctly we seem to be growing faster than that and while I certainly hope that will continue I think I would stick with the comments we have made that we plan and hope to grow at somewhat more than the industry growth. I think the factors that are contributing to us performing above those that longer term guidance we have given is the success from our innovative fabrics. We just simply getting better at that than maybe -- as a result we’re gaining more placements with more customers and then when you couple that with the exceptional service we’re providing you know the customers come to trust us and as the industry players are getting bigger and consolidating more amongst fewer larger people they need large suppliers that they can't trust and rely on and the demand is also from the larger customers are getting more. They are not going to be less and so it takes a larger well-capitalized company with modern equipment and the resources we have to take care of them. So maybe Kevin, the strategy of focusing on innovation and modernizing our equipment appears to be working pretty well and at a level higher than our expectations.

And what do you reckon your market share is at today?

That’s not a number we publish and there is no market, there is no really private or public data on that so I will just say that it's a significant piece of that market. I would tell you we believe we are equal to our size, it's equal to the combined size of number two and number three competitor.

And then just last quick question on the margin, is it a reasonable expectation for the mattress business 11.5% to 12.5%, still are you slightly kind of raw material prices have improved and you certainly did a lot better than that in the fourth quarter, just wanted to check in on that.

Yes. I think I would still stay with the 11.5% to 12.5% over the long haul, last year 12.1% margin as you note and this year certainly looks like growth in margin with the CapEx program we’re doing with the benefit of the lower input cost but we do have to remember we’re benefitting from these lower oil prices right now and we have been in this business a long-time and we have seen a lot of volatility in oil over the years. Maybe we’re now in a period where the trading range of oil isn't going to be so volatility, maybe it's $45 to $75 a barrel instead of $40 to $150. And so I hesitate to up that target range because we’re certainly now benefiting from the lower input cost that the lower energy prices are bringing to us.

The other thing too is when you look at how we have been performing I mean the 11.5% to 12% margin I mean that -- we have to remember we got to stay competitive and also 35% or so percent return on capital I mean those together is really outstanding performance. So we have to measure all that plus we have to from time to time we will get pressure from our customers on pricing pressure, so all those kind of mix into to our pricing and our projected margin as we look out in the future.

Yes, I think Kevin we definitely -- there is a lot of advantages to our key customers getting larger but as they get larger they demand more and that does include price. Nevertheless, I mean I think there is an opportunity while oil prices are favorable to exceed that long term margin target range.

[Operator Instructions]. We have no further phone questions at this time.

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

And that concludes today's call. Thank you for your participation. You may now disconnect.