Dru Anderson - IR Franklin N. Saxon - President and CEO Kenneth R. Bowling - SVP, CFO, Treasurer and Corporate Secretary

John A. Baugh - Stifel Budd Bugatch - Raymond James Marco Rodriguez - Stonegate Capital Markets

Good day everyone and welcome to the Culp, Inc. Fiscal 2018 Second Quarter Conference Call. Today's conference is being recorded. At this time for opening remarks and introductions I would like to turn the conference 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 second quarter of fiscal 2018. As we start, let me state that this morning's call will contain forward-looking statements about the business, financial condition and prospects of the Company. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results, or otherwise are not statements of historical fact. The actual performance of the Company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the Company's most recent filings on Form 10-K and Form 10-Q. You are cautioned not to place undue reliance on forward-looking statements made this morning and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements. In addition, during this call the Company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included as a schedule to the Company's 8-K filed yesterday and posted on the Company's Web-site at culp.com. A slide presentation with supporting summary financial information and additional performance charts are also available on the 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 of Culp. Please go ahead, sir. Franklin N. Saxon: 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 with brief comments and Ken will then update you on the financial results for the quarter, and then I will comment on our strategic actions in each of our businesses, and after that Ken will review our third quarter business outlook, and we'll be happy to answer your questions. Overall, second quarter sales were higher than expected and we are pleased with the solid top line performance for both upholstery fabrics and mattress fabrics. Our results reflect our focus on product innovation and creativity and our ability to leverage the strength of our efficient global manufacturing platform. We have just completed a major transition period in our mattress fabrics business and we expect to realize greater operating efficiencies from these changes going forward. Our strategic initiatives focused on product and customer diversification are producing favorable results for our upholstery fabrics business. Current demand trends in both businesses are encouraging and as such we are more optimistic about our sales growth in the second half of this fiscal year. Importantly, we have the financial strength to continue to make the strategic investments to enhance our operations, including potential acquisitions that support our growth objectives. As noted in our press release, we also announced an increase in our quarterly cash dividend from $0.08 to $0.09, or $0.36 per share on an annualized basis. This is an important milestone as $0.36 per share is 3x the amount paid when we reinstated the dividend in July of 2012, just over five years ago. This action is also consistent with our capital allocation strategy and confirms our commitment to generate value for our shareholders. I'll now turn the call over to Ken, who will review the financial results for the quarter and the year. Kenneth R. Bowling: Thanks Frank. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations Web-site that cover key performance measures. We have also posted our capital allocation strategy. Here are the financial highlights for the second quarter. Net sales were $80.7 million, up 7% compared with the prior year. Pre-tax income for the second quarter was $6.2 million. The $6.2 million included approximately $400,000 of non-recurring professional and legal fees associated with the proposed acquisition of a China business that did not close. Pre-tax income margin was 7.6% compared with 9.5% a year ago. Net income was $4 million for the second quarter compared with $4.5 million a year ago. The consolidated GAAP income tax rate was 34.2% for the second quarter compared with 37.5% for the second quarter of last year. The rate decrease was primarily due to the mix of earnings between the Company's parent and foreign subsidiaries. The Company's overall consolidated adjusted income tax rate, a non-GAAP measure, for the second quarter was 14.2%, compared with 17.8% last year. As a reminder, the Company had approximately $9 million in loss carryforwards as of the end of last fiscal year. The Company now expects these loss carryforwards to be fully utilized during this fiscal year. Given current U.S. federal corporate income tax guidelines, the Company expects to pay a blended income tax rate in the range of 25% to 30% for fiscal 2019 and 30% to 35% thereafter. Of course, all of these assumptions change if tax reform is passed. Annualized consolidated return on capital was 25% compared with 34% a year ago. Now let's take a look at our two businesses. For mattress fabrics, sales were $48.6 million, up 7% compared with last year's second quarter. Operating income was $6.6 million compared with $7.5 million a year ago, with an operating income margin of 13.5%, compared with 16.4% a year ago. While we still achieved a solid operating margin of 13.5%, the decrease was due primarily to production disruptions from the extensive changes that took place across our production facilities during the first half of this fiscal year. We also incurred higher than expected expenses associated with new product rollouts. Annualized return on capital for mattress fabrics came in at a strong 30%. For upholstery fabrics, sales for the second quarter were $32.1 million, up 7.7% over the prior year. Operating income was $2.4 million for the quarter, slightly down from last year's $2.5 million. Operating income margin was 7.4% compared with 8.4% last year. Operating performance during the quarter was impacted by cost pressure associated with supply-chain disruptions in China. Frank will discuss this issue in more detail later. Annualized return on capital for upholstery fabrics business continued to be impressive, coming in at 59%. Here are the balance sheet highlights. As of the end of second quarter, we reported $49.1 million in total cash and investments with no outstanding debt. We paid off the debt during the second quarter. During the first half of this fiscal year we spent $7.5 million on capital expenditures, which includes vendor financed payments, and $4.6 million on dividend payments. Cash flow from operations for the first six months of this fiscal year was $10.2 million compared with $17 million for the same period a year ago. The decrease was primarily due to lower net income and a greater use of cash associated with working capital as compared to last year. Looking ahead, we expect cash flow to be significantly stronger in the second half of this fiscal year, bringing the full year total to a level more comparable to last year's total. With that, I'll turn the call back over to Frank. Franklin N. Saxon: Thanks Ken. I'll start with mattress fabrics. We had solid growth in mattress fabrics sales for the second quarter as we again outperformed the reported mattress industry growth trends in an uncertain marketplace. Our strategic focus on design, creativity and innovation and our ability to provide a diverse product offering across all price points, including mattress fabrics and sewn covers, have been the key drivers for our sales performance. Sales for the second quarter of fiscal 2018 also reflected some aggressive marketing of some new product rollouts. We have made excellent progress in enhancing our platform and production capabilities, as we have recently completed a period of major transformation across our North American manufacturing operations. As expected, we experienced some disruptions to our production throughout the second quarter as well as higher expenses associated with the product rollouts, as Ken noted earlier. However, we expect to realize greater operating efficiencies in the second half on a going forward basis. All of our knitting and other fabric forming equipment has now been placed into service in our expanded Stokesdale, North Carolina, facility, and our U.S. mattress cover operation called CLASS is fully operational in its new location, also in North Carolina. We have also finished the installation of new equipment in our Canadian operation and are now focused on further refinement of our overall inspection and quality processes there to support our continuous improvement initiatives. We are excited about the increasing sales contribution from our CLASS segment, our mattress cover business, as we have expanded our business with traditional customers and made impressive strides in reaching new customer markets, especially the fast growing bed-in-a-box space. Additionally, our newest joint venture mattress cover production facility in Haiti will further strengthen our ability to grow our CLASS business. We have commenced production activities in Haiti and will continue to gradually add capacity in line with expected demand. We also have the ability to utilize our China fabric and cut and sew platform there to expand our business to new markets. With the transformation of our North American operations and our global production capabilities for both fabric and sewn covers, we are very well positioned to meet demand in all segments of the market. At the same time, we continue to look for supportive opportunities to add to our platform through acquisitions or other strategies that will support our growth. Looking ahead, Culp has a solid competitive position across all product categories, supported by a sustainable and efficient global platform with sufficient capacity and distribution capability. Overall, we expect to see solid improvement in our quarterly operating results as we move into the second half of this year. Now I'll turn to upholstery fabrics. We are pleased with the solid growth in our upholstery fabric sales for the second quarter, as we are benefitting from the success of our various growth initiatives. However, our operating performance was slightly affected by higher than anticipated freight costs associated with our China operation. During our second quarter, a forced Chinese government shutdown in certain textile dye mills for environmental control disrupted the supply chain and we incurred additional freight costs in order to ensure and meet customer deliveries. We also experienced some impact from an unfavorable China foreign exchange rate. Our results for the second quarter reflect the success of our product-driven strategy, highlighted by expanded sales of LiveSmart, our popular performance line of highly durable, stain-resistant fabrics. We have also seen solid growth in sales of fabrics designed for the hospitality market and we are excited about the opportunities to reach a more diverse customer base. We are exploring potential acquisitions in the hospitality market that will complement our upholstery fabrics business, which is principally in the residential market. We had an excellent showing at the recent October furniture market in High Point, North Carolina and we are especially pleased with the favorable customer response to our performance line of fabrics, as many manufacturers were featuring this fabric in their showrooms. We have recently launched a new Web-site specifically for this product line along with a more aggressive marketing campaign and we remain optimistic about the sales opportunities for Culp in the second half of this year and beyond. Looking ahead, we are encouraged by a more favorable market outlook as consumer spending for home furnishings is starting to pick up. We believe Culp is well positioned to benefit from any further improvement in demand trends and we look forward to continued growth in the second half of this fiscal year. Ken will now review the outlook for the third quarter and then we'll take your questions. Kenneth R. Bowling: We expect overall sales to be slightly higher as compared with the third quarter of last year. Mattress fabrics sales are expected to be slightly higher than the same period a year ago. Operating income and margins in this segment are expected to be somewhat higher as compared to a year ago. In our upholstery fabrics segment, we expect sales to be slightly higher than the same period a year ago. Operating income and margins in this segment are expected to be slightly lower as compared to last year, as we expect higher shipment costs out of China and an unfavorable China exchange rate. Considering these factors, the Company expects to report pre-tax income for the third fiscal quarter in the range of $6.8 million to $7.4 million. Pre-tax income for last year's third quarter was $7 million. With respect to the full fiscal year, capital expenditures, including vendor financed payments, are currently expected to be comparable to the previous year and mostly related to additional improvement projects for mattress fabrics. D&A or depreciation and amortization added to stock-based compensation is expected to be slightly higher than last year. Additionally, the Company expects another good year of cash flow, even with the expected level of capital expenditures and modest growth in working capital. With that, we'll now take your questions.

[Operator Instructions] The first question comes from John Baugh with Stifel. John A. Baugh: The first question I had for you is, you've had a fair bit going on the capital spend side, Haiti, Canada, things you're doing in China. Is there a way for us to think about what's the current capacity that you have brought online recently or will bring up shortly, what that could produce in terms of incremental revenue, and how we think about capital spending needs going forward, all in the context of accelerating revenue growth here? Franklin N. Saxon: I'll take the latter part of your question first. In terms of ongoing CapEx, we are ending this fiscal year of three-year record of some significant capital expenditures which have expanded and transformed our mattress fabric platform, as we have talked about. The range of capital spending in the last three years has been $10 million to $12 million each year, significantly higher than prior years as you may recall. As we go forward, we do see significantly less capital spending, and at this point I would say for next year $6 million to $8 million range, with maintenance CapEx being in the probably $4 million range. We'll be able to firm that up on our next call, but we see a significant decline in CapEx for the next year or two as we continue to absorb all the capacity and things we've done. So, to the first part of your question as to thinking about capacity in terms of revenue opportunity, and I'll take them separately, in Haiti we have plenty of capacity with what we are building there and can grow at. I mean we could easily double what we are doing today with Haiti operation. And to refresh your memory there too, Haiti, we are thinking of that in terms of the larger simpler programs, and our North Carolina operation would be more items with smaller volumes and quicker delivery. In terms of our North American operations, U.S. and Canada, we see no capacity constraints at all with the woven fabric area. In the knitted fabric area, that does appear to be more where the demand is. Part of our capital expenditure program next year will likely be more knit machine. But with the expansion that we have done in our Stokesdale, North Carolina operation and Canada, we have ample room to add knit machines, and that would be part of our capital spending on an ongoing basis I believe to support the knit growth. Knitted fabrics are used mostly for the bed-in-a-box products. So, we are positioned well to grow that. John A. Baugh: Okay. So, Frank, not to put words in your mouth or hold you to something, but if we thought about CapEx of $6 million to $10 million per year for the next couple of years, that wouldn't be a bad number, even if revenues stay up in this high single-digit range, and I know you're not necessarily predicting that, but that would or would not cause a need for a ramp in CapEx above say $6 million to $10 million for the next two years? Franklin N. Saxon: John, that's exactly what I would say. I would even say $6 million to $8 million. We have done so much last few years in each of our facilities. John A. Baugh: Okay. Could you quantify FX China in Q2 in the end, I guess help us with where they are right now? It sounds like it will be a drag in Q3 as well, and I don't know what the Q4 comparison looks like, but if you know that off the top of your head assuming FX stays where it is? Franklin N. Saxon: Okay. The China exchange rate during the second quarter of last year was in the range of 6.8 to 6.9 to the U.S. dollar. In this year it's been in the range of 6.55 to 6.6. It has been strengthening over the last six months, as you may know, after two years of weakening from about 6.0 to 6.9. So the effect in the second quarter on the upholstery fabrics side was about $100,000 to $150,000, not a lot but different from what we had been experiencing. John A. Baugh: Okay. And similar kind of magnitude maybe for Q3? Franklin N. Saxon: Yes. Of course we have been expecting once the 19th Party Congress was over in October in China, that there would be some weakening of the currency. A lot of the experts felt like the currency was held steady and even strengthened ahead of that conference and that we would see some weakening in the currency, and we have not seen it. It's been right around 6.6 over the last few weeks. John A. Baugh: Okay. On bedding, I guess my question is, from your seat do you see online and bed-in-a-box, and maybe I'll throw even imported mattresses in that bucket, do you see that growth, clearly it's exceeding the overall growth of the let's call it traditional bedding market, has that pace lessened, strengthened, similar, is the first question, and then the second would be, how does Culp in terms of mix benefit or get hurt from that shift? I know they are fairly at high-end price points generally speaking, but just curious whether it's mix neutral or helpful or hurtful? Thank you. Franklin N. Saxon: Okay. Let me answer the first part of the question. We are seeing and certainly believe that the trend is going to be more sales of bed-in-a-box product. Some people are calling it boxed bedding these days. That can be from the Internet folks. It can be from traditional people as well. But there definitely seems to be an increasing trend that we think has several years to run and there is going to be more mattresses delivered in a box. And when you do that, most of the time it needs a mattress cover for that. So, we believe our global cut and sew platform now, China, Haiti, U.S., is perfectly suited for this trend, and we are getting requests from a variety of sources, not just as I said the bed-in-a-box people, the Internet folks. Also, these products are mostly memory foam product, as you may know. Hybrids are starting to gain traction as well. But all of them usually require a knitted fabric, which is where we have expanded the most in our Canadian and U.S. operations. So, as we see the trends, we seem to be perfectly positioned to be able to handle whatever comes our way in that development. So the question is, how fast does this bed-in-a-box grow? And I not know if we are able to answer that. It's definitely growing, but the rate at which it will grow is anybody's guess. Does that help? John A. Baugh: And margin impact from all of this, is it helpful, hurtful? Franklin N. Saxon: No, margin impact is positive for us, but remember when we do the cut and sew of the mattress covers, we obviously like to use our fabric. That isn't always the case. Sometimes we will do a mattress cover for a customer and he uses someone else's fabric. That's not as good a margin obviously because we are only capturing the cut and sew margin, which is less than the fabric margin. So, we are constantly – our marketing efforts are constantly pushing for that our fabrics in our cut and sew programs, and most of them are, but we will probably never get 100% Culp fabric in mattress covers. I think that margins are at minimum neutral. The cover gives us an added margin to the fabric margin, and you can look historically at Culp before we've had the mattress cover expansion four years ago, we were in the 18% to 22% gross profit range on fabric. So, cut and sew margins are not as high, just the cut and sew margin. It's a lower margin business. John A. Baugh: Got it. Great. Thanks for that color and good luck.

Our next question comes from Budd Bugatch with Raymond James.

Let me just try and get into some areas of growth. Your growth this quarter was a reversal of some of the things that we have seen over the last several quarters. You pointed to in upholstery fabrics the LiveSmart product line. Is that where the growth came from, is all the growth coming in LiveSmart? Franklin N. Saxon: The growth is coming from three areas, Budd. Number one, the LiveSmart/ iClean performance fabric, coming from our hospitality area, and third which we haven't mentioned a lot of is the stationary fabric, stationary customer market in residential. And I would say the LiveSmart is the largest impact, hospitality second, stationary third, but all meaningful growth opportunities for us.

And by stationary, does that mean new customers in stationary, because you have been in stationary for a long time? Franklin N. Saxon: That's correct, that's correct. A good question. It means new customers as well as expanded penetration with existing customers. Take a Flexsteel, take a Bassett, take a La-Z-Boy new line, those stationary products, all the folks at Hickory, North Carolina.

Okay. And in order of magnitude, you said LiveSmart the most at 40% of the growth and the other two 30% each? Franklin N. Saxon: Yes, LiveSmart, and when we say performance, when we say LiveSmart, I would throw iClean in there too which is the performance brand that we licensed to La-Z-Boy.

I understand. Franklin N. Saxon: So, yes, those are increasingly popular with us and other fabric competitors as well.

Okay. And are placements rising on that product? Franklin N. Saxon: Placements are absolutely rising, absolutely.

So I was asking you to quantify the growth of relationship between the three areas. You said LiveSmart was the most, the majority of it, 40% of the growth? Franklin N. Saxon: Again, let's say, I mean 40% is a good guess of that, a good estimate.

Okay, all right. And in mattress fabrics, the growth there, is that all coming from CLASS, is all the growth out of CLASS? Franklin N. Saxon: Most of its growth is coming from CLASS, but you have to remember that a lot of the CLASS growth in product has Culp fabric in it. So, is it really fabric, is it really CLASS?

So that was my next question, is it the value-added portion of CLASS or is it just CLASS as a sub-segment and you're not going to tell us that? Franklin N. Saxon: It's both, Budd, I mean definitely both. CLASS is up significantly with what's going on in the industry and our various platforms and certainly looks good to us now, and will continue to be.

So, with those two growth areas continuing and LiveSmart getting new placements, and you are excited about hospitality, and stationary is showing some life, and then CLASS growing, and I take it that you didn't have all the new capacity in place during the second quarter, is that right, all the new CLASS capacity? Franklin N. Saxon: That is correct. Haiti is coming online as we speak. First production was October. We'll have a little more in third quarter as we ramp up, train people, little more in fourth quarter, but probably not until next fiscal year to really benefit a lot more capacity out of Haiti.

So, with each of those sub-segments up around 7%, how do we square that with the guidance that says just modestly better revenue? Why is that? Was there something going on in the third quarter last year where the revenue comparison is that much harder? Franklin N. Saxon: Budd, that's a good question again. As you know, we have typically been on the conservative side, and I will tell you that it feels pretty good right now. Our current trends are good and I think there is a reasonable chance to do better, but we like to be conservative in those outlooks.

Okay. I think John pretty much explored the margin side of the question, so I think I will let somebody else have the floor. Thank you, Frank. Franklin N. Saxon: You're not going to ask a capital expenditure question?

Frank, you have already said you're going to have lower capital expenditures, so I suspect that that excludes the opportunity to find an acquisition, right? Franklin N. Saxon: That is correct, that's correct, yes.

So, I guess I will only ask this question on margin that I usually ask is, and growth is, the U.S. in upholstery, Anderson versus China, how is that doing and what do we look like on the U.S. side versus the Chinese side? Franklin N. Saxon: Anderson is still our – it's only about 10% of our upholstery fabric revenues and we are still struggling at Anderson. The three areas of growth are China-based and we still want to hold on to the Anderson platform as a hedge or as we are trying new products down there with all the emphasis on U.S. manufacturing from the current administration. We want Anderson to work. We really do. But it's still struggling and our gains are out of the China operation and the China products. But I'm still hopeful.

Got you. So, your tolerance, being as small as it is, are you less tolerant today than you were this time last year? Franklin N. Saxon: Maybe some, but what holds us, it would be great, it would really be terrific if we could get some products going down there, and we are trying some different things product-wise in out of Anderson that we have some hope we will gain traction. It would really be nice to have a U.S. supply chain part of one in upholstery fabrics. It's a whole lot easier I promise you. So, we are not near any decisions but we are watching it more carefully these days, but the gains and the results are from our China produced platform. Kenneth R. Bowling: Budd, I think as we keep pointing, we are actively looking for opportunities for Anderson too. Franklin N. Saxon: Yes, actively looking. I want it to work. I really do.

Okay. Thank you very much.

Our next question comes from Marco Rodriguez with Stonegate Capital Markets.

I was wondering if we could maybe circle back around here on the fabric side, the upholstery fabrics side. You guys, I don't know if I missed this or not, but you guys called out the increase in freight charges that you had to incur in China due to the stoppage there for work for shutdown. Can you quantify that? Franklin N. Saxon: Yes, I would say for the second quarter approximately $300,000 of extra freight, air freight. And of course, Marco, you know from Culp, we are absolutely committed to on-time delivery of our fabrics to customers and to keeping up the strong delivery reputation that we have. So, with the supply challenges we had in China in the second quarter, and it is some carrying in third, we were air-freighting a lot more product than we normally would have ocean-freighted, to the tune of about $300,000.

Got it. Kenneth R. Bowling: Marco, another point in the upholstery fabrics margin is the fact we've been – and Frank, you can chime in – we've been more aggressive at growing the business, and so we were able to maybe offer more promotions to get higher business from certain customers. Franklin N. Saxon: Some targeted pricing we have done to key customers, or volume programs.

Okay. And that was also an impact there on your gross margin in Q2 in the upholstery fabrics? Franklin N. Saxon: Yes, but the bigger issues were the freight issue, which we hope we'll work through over the next quarter and we can get back to more ocean freight rather than air freight, and you may have heard or read of late FedEx and UPS and all the air freight from China, demand has really increased and rates are going up as well. But I hope that – I think it's going to be a temporary measure as we work through it. And the second thing is the currency. Kenneth R. Bowling: Yes, both of those we have guided in the third quarter to have an impact. Franklin N. Saxon: So we did really given those two factors pretty good for the second quarter. It was down slightly, our absolute level of gross profit dollars. Margins were down of course. But that were really the two factors, two main factors.

Got you. And you are expecting some additional headwind from the freight cost in Q3, is that correct? Franklin N. Saxon: We are. Kenneth R. Bowling: Yes. Franklin N. Saxon: We are.

Okay. And then so coming back here to the volume discounts that you provided here on the upholstery fabrics, is that what you were referring to as far as the aggressive marketing or is that something different? Franklin N. Saxon: I think the aggressive marketing in upholstery side was more targeted to our performance line of fabrics, where during the quarter we have introduced social media, we have introduced ad campaigns, Web-sites, variety of marketing initiatives, which historically we haven't done, but we have done a lot more in Q2 to market our performance line of fabrics.

Got you. And is that expected to drop here sequentially or do you anticipate maintaining that sort of level of marketing expense through fiscal 2018? Franklin N. Saxon: Really the only level of expense going forward will be any ads. Not a lot of expense in the social media area or Web-site, but we have also dedicated a person to this to really do more and make that more prevalent. I don't think we are going to see that forward much.

Got you. Then shifting gears a little bit to the mattress fabrics, obviously you called out that you had obviously some disruptions in the quarter just given all the shifts that you have made here and you have completed. Can you quantify what sort of impact that had on the quarterly results for mattress fabrics? Franklin N. Saxon: What we have said, when you look at the quarter, let's take operating margin, 16.4% last year, 13.5% this year, 290 basis point decrease, the majority of that is related to the production disruptions. Also, I think you have to factor in second quarter of last year, 16.4% was a fabulous quarter, little higher than we normally do. So, most is production related disruptions. And I think the other point, Marco, is we were off in the margin from last year, but what's encouraging to us is the off margin is 13.5%, still a pretty darn good level of margin.

Sure. Kenneth R. Bowling: Also two, Marco, we called out some marketing costs or some aggressive costs associated with new product rollouts. I mean that is where we had some higher shipping costs to get new products to our customers on time. And so that had some pressure too.

Sure. Okay. And as a justification, if I'm to understand you guys correctly, that seeing that now you have all the expansion complete, obviously Haiti is still kind of ramping up, but we shouldn't see that sort of a negative impact from efficiency aspects in the next quarter and we should start to see margin expansion there? Franklin N. Saxon: That is correct. Yes, we are already seeing it in our November results and the week to week stuff we look at, we have come a long way in every facility. As you are right to point out, Haiti is still coming up, but North Carolina and Canada, we are very pleased with what we're seeing there in efficiency. I do want to point out though one thing that nobody has asked about that we should point out, we are beginning to see some increase in polyester prices. We have had a long run, probably a two-year run of very favorable low prices. Now we are hedged out pretty well for four to six months, but it's starting to feel like we might see some uptick in raw material prices. I don't see that affecting us the next two quarters, but it's something we are going to watch.

Got you. And last quick question, I just was wondering if you might be able to talk a little bit more just kind of high-level, you have mentioned some real positive trends that you guys are looking at and that sort of changed your optimism level here for the second half of 2018 vis-a-vis your guidance, can you maybe talk about are there any specific economic metrics you are looking at, is it conversations with your end clients that is kind of giving you this increased optimism? Franklin N. Saxon: I think from a macro basis, we've had two quarters of 3% GDP growth. We have always heard, now whether it holds true now, that the best correlation to mattress sales has been GDP growth. That's been the highest correlating macro metric. So, it seems like that's pretty good. Unemployment is low, consumer discretionary income up a little bit, housing starts better… Kenneth R. Bowling: Consumer confidence up. Franklin N. Saxon: Consumer confidence, these are all traditional favorable indicators for our business. Now we are seeing certainly that's on a macro basis. On a micro basis, it certainly seems like we're getting some more broad-based demand on both sides of our business of late too. So, that's why we are more optimistic but maybe cautiously optimistic because we know how fast it could turn, but it certainly seems and feels better as we head into the second half of our year. And our growth initiatives are finally taking place. We are seeing they are bearing fruit, which is good to see.

Got it. Thanks a lot, guys. Appreciate your time.

It appears we have no other questions in the queue at this time. Franklin N. Saxon: Okay. Everyone, thank you for joining us today and we look forward to updating you on the Q3 call in a few months. Have a great day.

That does conclude today's conference. Thank you for your participation.