Drew Anderson - Investor Relations Frank Saxon - President, Chief Executive Officer, Director Ken Bowling - Chief Financial Officer, Vice President, Treasurer, Corporate Secretary

Budd Bugatch - Raymond James Dillard Watt - Stifel Marco Rodriguez - Stonegate Capital Markets Dusty Henderson - Eagle Asset Management

Good day and welcome to the Culp, Inc. fiscal 2016 fourth quarter conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Drew Anderson. Please go ahead, ma'am.

Thank you. Good morning and welcome to the Culp conference call to review the company's results for the fourth quarter of fiscal 2016. 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 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 to 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 culp.com. A slide presentation with supporting summary financial information and additional annual 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 of Culp. 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 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 first quarter business outlook and then I will be happy to take your questions. Culp delivered another solid performance in fiscal 2016 as we reported our seventh consecutive year of overall annual sales growth. Both of our businesses achieved strong operating performance with significantly improved margins, profitability and return on capital over the prior year. Notably, our pretax income for the year was the highest in the company's history. Further, we achieved excellent pre-cash flow of $15.2 million, slightly above last year's $15.1 million after spending $11.5 million on CapEx. Throughout this fiscal year, we have continued our long-term focus on design creativity and product innovation, supported by exceptional customer service. Our ability to sustain excellence in creating innovative fabrics and offering a product mix that meets changing customer demands is a key success factor in a product driven business. As a result, we have further enhanced our competitive position in both businesses and we look forward to continued success in the year ahead. We are pleased to announce today that our Board of Directors approved a special cash dividend of $0.21 per share, in line with our capital allocation strategy, as well as approved our regular quarterly cash dividend of $0.07 per share. This action, together with our 2.4 million in share repurchases during the third quarter of this year, totaled $5 million of funds returned to shareholders related to fiscal 2016, which is consistent with the prior two years. This reflects our commitment to delivering value to our shareholders. At the same time, we have the financial strength to make the strategic investments necessary to further enhance our production capabilities and take advantage of additional growth opportunities in the coming year. I will now turn the call over to Ken who will review the financial results for the quarter.

Thanks, Frank. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website to cover key annual performance measures. We have also posted our capital allocation strategy. Total sales for this quarter were $77.3 million, down 2% from the fourth quarter of last year. Total sales for the fiscal year were $312.9 million, up 1% over last fiscal year. On a pretax basis for the quarter we reported income of $7.2 million compared with $6.7 million, reflecting a 7% year-over-year increase. Pretax income for fiscal 2016 was $27.9 million, up 22% compared with the previous year and the highest annual pretax income in Culp's history. Adjusted net income for the quarter, a non-GAAP measure, was $5.8 million or $0.47 per share, up 4% from the prior year period. Adjusted net income for the fiscal year was $22.7 million, up 17% over last year. Overall return on capital was 32%, the highest return in the company's history, compared with 28% last fiscal year. The company's overall adjusted effective income tax rate through the fourth quarter of fiscal 2016 was 18.6%, up from the 15.7% for the same period last year due to taxable foreign exchange gains associated with our China operation and the mix of earnings between the company's U.S. parent and foreign subsidiaries. This adjusted effective income tax rate or 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 to the three more years due to approximately $18 million in loss carryforwards or NOLs as of the end of fiscal 2016. Importantly, our NOL balance has been reduced by around $33 million over the last three fiscal years at an average of just over $10.5 million per year. Here are the results for our two businesses. For mattress fabrics we reported $48.9 million in sales, up 1.5% compared with the fourth quarter of last year. For the full year, mattress fabric sales were $186.4 million, a new record and up 3.7% over the prior year. Operating income in this segment was $7.2 million for the quarter, up 2% from the same period last year. Operating income margin was 14.8% of sales compared with 14.7% a year ago. For the year, operating income was $26.5 million, a 22% increase over the previous fiscal year and also a record performance. Operating income margin was 14.2% compared with 12.1% last year. Contributing to this margin improvement are the benefits coming from our capital investment programs. Over the last two fiscal years, we have invested approximately $20 million in capital expenditures in this business. We also benefited from lower raw material costs and lower operating expenses due to more favorable exchange rates in Canada, offset somewhat by increased customer pricing pressures. Return on capital for the mattress fabrics business was 37%, a new record compared with 34% a year ago, an impressive accomplishment given a capital-intensive business. Although capital employed for this business did increase from the previous year due primarily to higher inventory balances, operating income improved at a faster pace thereby contributing to the improvement in return on capital. Inventory balances have trended higher in this business as customers are required to hold higher inventory levels of key products. Now let's look at upholstery fabrics. Sales for the quarter were $28.4 million compared with $30.7 million in the fourth quarter of last year, representing a 7.5% decline. This reduction was primarily due to our customer mix strategy and softer retail demand for furniture. Sales for the year were $126.4 million, down 3.1% as compared to the previous fiscal year. The upholstery fabrics business reported operating income of $2.3 million, a 24% improvement over the fourth quarter of last fiscal year. Operating income margin was 8.1% of sales compared with 6% for the fourth quarter of last year. For the full year, operating income was $11.3 million, up 39% and operating income margin was 8.9% compared with 6.2% last fiscal year. An important factor in improved profitability in this business has been the higher margins achieved on new product introductions. We continue to stress the importance of innovation and the improved margins reflect the success of that strategy. We also benefited from a more stable cost environment in China with lower input cost for raw materials and the favorable currency impact more than offsetting the continued increases in labor and other operating costs. It is important to note that we are also starting to see some pricing pressures from key customers. Return on capital was 65%, a new record compared with 49% last fiscal year. Return on capital in this business continues to be impressive with significant growth in operating income while capital employed increased only moderately compared to the previous year. One final comment regarding our operating performance. As stated earlier, both divisions benefited from favorable currency rates as compared to the previous year. A key point to consider in looking at our favorable currency impact is the fact that both our Canadian and Chinese operations bill mostly in U.S. dollars, while operating expenses are paid in the local currency. Thus, as the Yuan or Canadian dollar weakens relative to the U.S. dollar, our operating costs go down. Of course, the opposite is true if the currency strengthens. Now let me turn to the balance sheet. We are pleased in fiscal 2016 with a strong financial position. As of year-end we reported $42.1 million in cash and cash equivalents and short-term investments, up from the previous year's ending balance of $39.7 million, with no debt. This year-over-year increase in cash was achieved despite spending $11.5 million in capital expenditures, $8.1 million dividends and $4.6 million on debt repayments and share repurchases, for a total of $24.2 million spent during the fiscal year. Free cash flow for the year was $15.2 million, slightly up from last year's $15.1 million after spending $11.5 million in capital expenditures. As we look to fiscal 2017, we expect another good year of free cash flow with capital expenditures projected approximately to $11.5 million spent during fiscal 2016 and modest growth in working capital. We are well positioned to make the capital investments to support our growth strategy and continue to return funds to shareholders. As of year-end, our cash position and short-term investments broken down by country is as follows. Cash located in the U.S., Canada and the Cayman Islands was approximately $34 million, while cash located in China was approximately $8 million. This is a reversal from just 16 months ago when in January 2015, we had $21 million in cash located in China, representing almost 60% of our total cash and short-term investments balance and those funds were mostly in Yuan deposits. With respect to our share repurchase program, the Board has approved an increase in the authorization for the company to acquire its own common stock from the $1.9 million currently available back to a total of $5 million. Notably, since fiscal 2012, the company has repurchased approximately 10% of its outstanding shares at an average price of $10.66. Since June 2011 and including the special and regular dividends to be paid in July, the company will have returned approximately $43 million to shareholders in the form of regular quarterly and special dividends and share repurchases. Before turning the call back to Frank, let me make a few more comments about our balance sheet. As we have reported in the past, we have been very successful in our strategy to mitigate foreign exchange or FX exposure. Through maintaining a natural hedge with respect to assets and liabilities denominated in Canadian dollars and Chinese Yuan, we have been successful in keeping FX charges very low this fiscal year, totaling just $6,000, despite significant weakening of both currencies over the past year. We have also mitigated further FX exposure in China by making the strategic decision to move significant amounts of earnings and profits in Culp China to our international holding company located in the Cayman Islands. Since April 2015 and through this month, we have moved almost $36 million from Culp China to our Cayman company. Accordingly, our cash balance in China has been reduced to approximately $5 million as of today. We believe that moving excess fund out of Culp China to our Cayman company not only mitigates our foreign exchange exposure going forward but also provides substantially increased flexibility to use those funds for various strategic purposes with minimal administrative hassle. Obviously, a major point of consideration in this strategy has been the potential impact to our U.S. NOLs. It is important to note that there is no impact to our NOLs unless we bring funds from Cayman to the U.S. As such, the plan is to hold these funds in Cayman until the NOLs are fully utilized through normal U.S. earnings, which at our recent earnings rate we estimate could take two or three years. Frank?

Thank you, Ken. I will now provide you with an update on both of our businesses. Let's start with mattress fabrics. Our results for the fourth quarter were in line with expectations, reflecting consistent execution of our strategy throughout the year. Notably, we delivered another record performance for the year, topping the previous year's record with the highest annual mattress fabric sales and profits in Culp's history. We are especially pleased with our steady sales growth this year, which has outperformed overall industry trends. In addition, we have continued to make the strategic investments for the future and expand our operations in line with expected demand. Our operating performance in fiscal 2016 includes the benefits of capital investments with increased capacity, enhanced finishing capabilities and overall improved efficiency and throughput and lower input cost. Importantly, we have enhanced our ability to meet our growing customer demand with excellent service and delivery performance. With our outstanding performance in the year, we have established a strong competitive position and we are excited about the opportunities to build upon our success. Looking ahead, we continue to move forward with our multiyear expansion plans. We have already commenced work on additional projects in our North Carolina facilities to add more production capacity, expand our design facilities and significantly enhance our distribution capabilities. Additionally, Phase 2 of our Canadian expansion is expected to begin early this fiscal year, including additional equipment, finishing capabilities and a new distribution platform that will allow us to improve deliveries and better serve our customers in Canada. Our focus on design and innovation continues to distinguish our products in the mattress fabric marketplace. Our product mix of mattress fabrics and sewn covers across most price points and style trends has allowed us to execute our diversification strategy and enhance our strong value proposition. We are also pleased with the recent growth in CLASS, our mattress cover business as we call it. Importantly, CLASS has allowed us to reach new customers and additional market segments, especially the growing Internet bedding space, with solid growth prospects. We look forward to the opportunities ahead for another strong performance in both mattress fabrics and sewn covers during fiscal 2017. Now let's move to upholstery fabrics. Our sales for the fourth quarter were somewhat lower than expected, reflecting our customer mix strategy and a softer retail demand environment for furniture. However, even with lower sales, we are pleased with our overall operating performance and improved profitability compared with the prior year's fourth quarter. For the full year, Culp continued to deliver a solid operating performance and further enhanced our reputation as an industry leader with exceptional products and service for our customers. Our strategic focus on three critical areas driving design and innovation, providing a diverse range of products and expanding our customer base, both to new end-user markets as well as to a broader global marketplace, was the key driver of our performance for the year. Our China platform has provided significant manufacturing flexibility and we have continued to leverage this to support our product driven strategy. Sales of China produced fabrics accounted for 91% of our upholstery fabric sales in the year and our improved operating performance reflects a more favorable mix of fabric styles and price points as well as a more favorable currency exchange rate in China. Looking ahead, in spite of current retail market conditions, we remain confident about our long-term opportunities for this business. Our recent showing at the April furniture market was very encouraging with strong placements for Culp. Customer response to our latest product offerings was very favorable, especially with the introduction of our new performance line of highly durable, stain-resistant fabrics. We will continue our relentless drive to meet the changing demands of our customers and keep pace with current style trends. As such, we believe we are well positioned for growth in upholstery fabrics, especially as a stronger economy and a more stable U.S. housing market support higher consumer spending for home furnishings. Ken will now review the outlook for the first quarter and then I will have a few concluding remarks.

At this time, we expect overall sales to be comparable to slightly lower than the first quarter of fiscal 2016 due to a softer retail environment. We expect first quarter sales in our mattress fabrics business to be comparable to the first quarter of fiscal 2016, which was a record first quarter performance in both sales and profitability. Operating income and margins in this segment are expected to be comparable to the same period a year ago. In our upholstery fabrics business, we expect first quarter sales to be down slightly compared with the first quarter of last fiscal year. We believe the upholstery fabric segment's operating income margin will be comparable with the same quarter of last year. Considering these factors, we expect to report pretax income for the first quarter fiscal 2017 in the range of $7 million to $7.5 million. Pretax income for last year's first quarter was $7.4 million. With respect to capital expenditures, based on our current budget, capital expenditures for fiscal 2017 are expected to approximate to $11.5 million spent in fiscal 2016, primarily related to our mattress fabrics business. Depreciation and amortization and stock compensation expense is expected to be approximately $10 million. Additionally, the company expects another good year of free cash flow, even after another year of higher than normal capital expenditures and modest growth in working capital. Frank?

We are pleased with our performance in the year and our ability to execute our strategies. Our success in the marketplace 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 are well positioned to support our continued growth with our flexible and scalable global manufacturing platform, backed by exceptional customer service. We have continued to make the right investments to enhance our design and production capabilities in order to strengthen our competitive advantage. At the same time, we have followed a disciplined capital allocation strategy, allowing us to reward our shareholders with significant dividend payments and share repurchases. Above all, we are committed to outstanding performance for our customers as a financially stable and trusted source for innovative fabrics. As Rob and I look ahead to the years to come, we are even more excited and bullish than we have ever been. We are fortunate to be surrounded by an extraordinary group of seasoned associates around the globe who continue to outperform our expectations. They inspire us every day by their dedication, their talent and their can-do attitude in serving our customers. With that, we will now take your questions.

[Operator Instructions]. Our first question comes from Budd Bugatch with Raymond James. Please go ahead.

Good morning, Frank. Good morning, Ken. Congratulations on the year.

Good morning.

Good morning, Budd.

I guess I would like you to hopefully help us and give us some quantification of the character and the growth in the mattress segment. You brought up CLASS or mattress cover business versus the yardage business that has been your legacy business. You have now been growing CLASS for the last four or five years. Can you give us a look inside of the segment to give us the character and the growth of yardage and maybe in terms of units and CLASS in terms of our covers of how that's been growing and what it is year-over-year?

Budd, we don't break that out as of today, but let me give you this. Of our mattress fabric sales, in the 10% range and growing.

What is 10%?

10% of our mattress fabrics covers. Yes. Mattress fabric covers is 10% of our annual sales. So it's still a relatively small portion of that overall business.

10% of the total Culp or 10% of the segment?

Of the segment.

And last year this time, what would have represented last year?

Let's just say a nice increase.

Okay.

That will work in your calculator, won't it?

It still comes up with error, but nice is not quantifiable, unless you want to give us a range of nice.

We were growing. We expect solid growth in that area.

Okay. And solid also has the results. You are talking about lapping the customer and product shift. Can you give us a feel of when you do lap that shift of our customers? And I think it that this has been a conscious initiative of Culp?

Are you referring to upholstery fabric business?

In upholstery, sorry.

I would say third quarter of this coming year.

Okay. And can you quantify for us maybe what that drag was in the quarter?

I would say, the decline in business over the quarter was a mixture of that trend and the softer environment.

How about parsing that in quantification? Any way to do that?

More in the customer mix side.

Okay. So had you not had the customer mix side, would you had upsales?

I don't know, would not have.

Okay. All right. That's helpful. And lastly the capacity for us in mattress fabrics. You talked about the Canadian side. Are you still going to be under pressure? And how much capacity are you adding?

We are not under any pressure from a capacity point of view. This is, you may remember, our mix is 80% internal. Our target mix is 80% internally produced, 20% external. So we have got ample capacity, but this just does give us more capacity in the knit area as the business mix shifts between wovens to knits, we are positioned well for that. I don't see any capacity limitations.

Now as I recall, you were pretty much out of room in knit machines in North Carolina. Is that correct?

Out of room in North Carolina and we have expanded into Canada, that's correct, to allow us the area for expansion.

So how many knit machines are you adding in Canada?

Budd, that's not something we give out, but we have ample capacity in Canada to handle our current and expected needs and we can add more in Canada. We have the space and the people to do that, as necessary.

So you added great performance in FX obviously between Canada and China. But as you add more capacity in Canada and the Canadian dollar if it strengthens versus the U.S., does that present an operational or a financial challenge that we should be aware of?

It does help us with the currency weakening in Canada versus the USD the past year. But remember, all raw material costs are denominated in U.S. dollars. So the currency impact is only on the conversion cost in that facility. So it's helped us this year and could hurt if the currency were to strengthen more. But it's not significant because the majority of cost of goods sold in mattress fabrics is in the raw materials side.

So the conversion costs are probably just barely double-digits, right? Or is it a little more than that?

Well, we would say two-thirds, one-third in rough numbers, raw material and overhead cost.

Overhead, as you come up with the overhead side of the overhead and laborers, the conversion cost.

Correct.

Okay. All right. Frank, thank you very much. Good luck on the current periods and the year.

Thank you, Budd.

[Operator Instructions]. And we will move next to Dillard Watt with Stifel. Please go ahead, sir.

Thanks. Good morning, everybody. I believe you discussed maybe in the past somewhere around the 11% or 12% EBIT margin goal, I guess you could call it, for the mattress business. Obviously, we are sitting here in the end of fiscal 2016 at much better number than that. How should expect margins to progress moving forward? Will you maybe be a little bit more aggressive on the sales front? Or maybe does that margin target simply move? Or maybe there is some other aspects like the FX or raw material issues that we have been discussing?

It's a good question, Dillard. I think I would say that we would move up our margin target long-term some, but we have benefited from the lower input cost throughout the year and we are prepared if they would move some, raw material costs. We are not seeing that today and we have visibility throughout our second quarter and slightly into our third quarter. But we are certainly enjoying historically low raw material inputs at the present time, which should mean we are above long-term target margins.

Got it. Any change on your comments for the mattress business for the first quarter? Basically I think you are guiding to flat sales. Is that more of a factor of, where you kind of get one percentage point more difficult year-over-year comparison between the fourth quarter and in the first quarter? Or did you see maybe a little bit of slowdown in the marketplace?

Well, I would answer that two ways. First, we are comparing against a record quarter, in the first quarter last year, sales and profit in that segment. And at the retail level, currently, it's just okay. I don't know if I would call it weak in the bedding sector, but it is certainly not strong, just okay.

Okay. That is helpful. And then, I know we talked about strong free cash flow for 2017, but you still have an elevated CapEx situation this year. What are the primary sources of cash next year? Is that going to be from earnings growth? Or maybe there is some working capital improvements there? And then second part of that would be, would we expect to see 2018 then at a more normalized level and what would that number be?

Okay. First part of your question, the free cash flow for the year ahead, we would expect that to come predominantly from earnings. Second part of your question, fiscal 2018 CapEx, while somewhat above historical levels, it will be lower than the last two years, current year and prior year. So high single $7 million to $9 million range would be a rough estimate for 2018.

Perfect. And that's something I can put into calculator there. So thank you guys so much and congrats.

Thank you.

[Operator Instructions]. And we will move next to Marco Rodriguez with Stonegate Capital Markets. Please go ahead.

Good morning guys. Thank you for taking my questions.

Good morning.

I had a couple of quick follow-ups here. Most of my questions have been asked, but in terms of the upholstery side, you had mentioned last quarter that you had some issues on the revenue side due to weather and some customer push-outs. Did those push-outs close in Q4 as you had expected?

That was mostly on the mattress side. That was more on the mattress side. Yes.

So I would say, okay.

The revenue and production, we have one plant in the U.S., that was the weather related to our Stokesdale plant area this year. That was on the mattress side.

Okay. Got you, my fault. Then keeping on the upholstery side, you mentioned the retail environment there, I guess, is even in some ways weak for the upholstery side and for furniture. I am just trying to better understand here, what are some of the dynamics that are out there that either you guys are seeing or your customers are saying they are seeing?

I guess we are hearing just, I don't know if anything specific comes to mind, just weaker retail environment, we are hearing from our customers.

Marco, I will share something I read a couple of days ago when they came out with the retail sales. It did show that furniture was way down, but other categories like restaurants were up. So I guess the point was, people are spending more on eating out and maybe postponing buying furniture. I don't know but that was an interesting tidbit that I saw.

Got you. Ad so those sort of discussions perhaps or any kind of information you are getting from your customers on the somewhat soft retail environment on the upholstery side, the mattress guys aren't that?

Not as much.

Okay. Got you. And then in terms of the gross margins in the upholstery side, you mentioned a couple of items here that are rally helping you out. One in particular was new product introductions. Can you maybe rank in addition to lower raw material cost, et cetera, where is all this acceleration in the gross margin coming from, when you still have your revenues for fiscal 2016 for upholstery were down year-over-year?

Well, Marco, when you look at the past year, I mean, it's undeniable that the currency impact has been very, very strong. I mean you have seen the weakness in the currency and as Frank talked about earlier, on the China side we pay all expenses in the local currency. So that has truly, truly helped. But that said, I don't want to take away from the innovation and creativity that's come through new products. So I think currency is very, very important, raw material cost are important, but innovation has to be ranked up there as well.

Got you. And can you or do you know how much of your revenue on the upholstery side or from new product introductions as far the percentage is concerned?

Yes, we do. And that's not something we disclose, but I would say, over the last several years, as we have really ramped up our efforts in the innovative fabric area, it is a growing percentage.

Got you. Okay.

Because that's a thing we are clearly focused on.

Got you. Okay. And then switching gears here, the strategy in China, which you guys alluded to a little bit earlier, removing the cash there to avoid some of the FX risk, perhaps I am not remembering correctly, but I though that there was going to be some debt raised to make that transaction transpire. Was that done? Or not done? Or was there a change there?

No. Marco, that's a great question. The strategy is still in place. We just had higher cash flow during the fourth quarter and we were able to absorb that. Now looking ahead, as I said in the prepared remarks, we transferred additional money this past month. So looking ahead, we will have debt on the balance sheet at the end of the first quarter. So that strategy will come into play. For the fourth quarter, we just had stronger cash flow. Now of course, if that pans out in the first quarter, we will pay the debt off as quickly as we can.

Got you. That's helpful. And last question, I will jump back in the queue, on your free cash flow guidance, obviously expecting solid numbers there. Just wondering, are you expecting growth year-over-year? And then also how should we think about the progression of the CapEx spend trough fiscal 2016 versus fiscal 2017?

Yes. I think on the free cash flow, we guide that it's going to be another good year. So you look at the past two years, we have been at $15 million with the high level of CapEx. So I would say that's good guidance. It's going to approximate the same type, the same level with respect to CapEx. Again, we are saying that we are going to be in the same range for fiscal 2017.

Right. But is it going to be top heavy, first half, second half? Or is it going to be even throughout the year, the spend?

Pretty even. I don't see any gigantic quarters that would pressure us. I think there might be up a quarter blip here and there, but nothing dramatic, I don't think.

Got you. Thanks a lot, guys. I appreciate it.

And we will move next to Dusty Henderson with Eagle Asset Management. Please go ahead.

Hi guys. Thanks for taking my call. Just one quick one. You last 10-K indicates major customers for the mattress fabrics business include Serta-Simmons, Tempur+Sealy and Corsicana. It seems like your division is growing faster than the customers. So are you selling to the online mattress guys, Tuft & Needle, Casper, Yogabed, like those people?

Yes, we are. In my remarks, I mentioned that our cut and sew operation, which we call CLASS, which we started three years ago, is now aggressively in that segment. And yes, we are selling to most of those people.

Okay. Super.

And that represents an excellent opportunity for us.

Do they buy the mattress covers that we were talking about earlier?

Yes, they do. Because most of that segment buys memory foam mattresses, some limited hybrids, but it's mostly memory foam. The memory foam mattresses take the mattress covers is what they buy. So we are ideally suited in the U.S. to service those customers. And as you may know already, they are very aggressive on the front-end of their business. So having a reliable fully integrated source like us, that has fabric as well as those covers in North Carolina and Canada is a real competitive edge for us and highly desirable for them, for that new segment.

I agree. It sounds like you could be an arms dealer to the whole world.

We are excited about that category. There's differing opinions on the growth prospects there but wherever it is, we are ideally suited to serve that area.

Interesting. Thanks for filling me in. That's all that I have.

And it appears we have no further telephone questions at this time.

Okay. Thank you, operator and thanks everyone for joining us and we will look forward to updating you on our first quarter results in August. Have a good day.

And this does conclude our conference. Thank you for your participation and you may now disconnect.