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

Bobby Griffin - Raymond James Marco Rodriguez - Stonegate Capital Markets

Good day, everyone, and welcome to the Culp’s Third Quarter 2018 Earnings Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Dru 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 third 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 measurement is included as a schedule to the company's 8-K filed yesterday and posted on the company's website at culp.com. A slide presentation with supporting summary financial information and additional performance charts are also available on the website as part of the webcast of today's call. With that, I will now turn the call over to Frank Saxon, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Dru. 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’ll begin the call with some brief comments and then Ken will review the financial results for the quarter. I’ll then update everyone on the strategic actions in each of our businesses. After that, Ken will review our fourth quarter business outlook. We’ll then be happy to take questions. And third quarter was highlighted by higher than expected sales and we are pleased with the strong financial and operating performance for both of our businesses. Our mattress fabric sales showed solid year-over-year improvement in spite of a more challenging marketplace in weather-related disruptions. Sales of upholstery fabrics were exceptionally strong as many customers were ordering ahead of the Chinese New Year holiday that occurred in entirely in February this year, as oppose to January last year. For both of our businesses, we continue to drive product innovation and creativity and provide a diverse product mix that meets the changing demands of our customers. Importantly, we have continued to build upon our strong financial position with almost $56 million in cash and investments and no debt, which provides flexibility to capitalize on new growth opportunities including strategic acquisitions. I’ll 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 performance measures. We’ve also posted our capital allocation strategy. Here are the financial highlights for the third quarter. Net sales were $85.3 million, up 12% compared with the prior year. Pre-tax income for the third quarter was $7.5 million, up 7.5% compared with the prior year period. Pre-tax income margin was 8.8% compared with 9.2% a year ago. Our net loss for the quarter was $748,000 or $0.06 per diluted share, which includes a $5.9 million charge or $0.48 per diluted share associated with the 2017 Tax Cuts and Jobs Act or tax reform. Excluding this charge for tax reform, our net income was $5.2 million or $0.42 per diluted share. I will to discuss tax reform in a little more detail in a minute. Last year’s fiscal third quarter net income was $6.3 million or $0.51 per diluted share. Importantly, last year’s net income included a $2.1 million reversal of an uncertain tax position associated with a foreign jurisdiction. Trailing 12 months adjusted EBITDA was $37.7 million or 11.7% of sales compared with $40.4 million for the same period a year ago. Annualized consolidated return on capital was 26% compared with 32% a year ago. Now let’s take a look at our two businesses. The mattress fabric sales were $49 million up 6.8% compared with last year’s third quarter. Operating income was $6.8 million compared with $6.4 million a year ago with operating income margin of 13.9% which is same as a year ago. Frank will provide more color on the sales growth in a minute. Annualized return on capital for mattress fabrics was 30%, for upholstery fabrics sales for the third quarter were $36.3 million up 20% over the prior year. We estimate that the timing of the Chinese New Year was the main driver, about half of the sales gain, as many customers moved business forward in advance of the plant shutdowns. Frank will comment more on this later. Operating income was $3.5 million for the quarter, up from last year’s $3.1 million. Operating income margin was 9.7% compared with 2.2% last year. The cost absorption benefit of higher sales was partially offset by pressure coming from an unfavorable China currency exchange rate. Since beginning of our fiscal year last May, the Yuan has strengthened almost 9%. Annualized return on capital for upholstery fabrics business was 63%. Here are the balance sheet highlights. As of the end of third quarter, we reported no outstanding balance on our lines of credit and $55.7 million in total cash and investments, up from $48.9 million a year ago. For the first nine months of this fiscal year, we spent $10.4 million on CapEx, including vendor financed payments and $5.7 million on dividends. The company has not repurchased any shares so far this fiscal year leaving $5 million available under the current purchase, repurchase program. Now let me spend a few minutes on the impact of tax reform. As mentioned earlier, the result for this quarter was impacted by a provisional charge of $5.9 million or $0.48 per diluted share related to tax reform. This amount includes a provision of $4.8 million charge for the mandatory repatriation of the undistributed earnings and profits associated with the company’s foreign subsidiaries and the provisional $1.1 million net charge for the company’s U.S. deferred income taxes and reduction in the annual affected income tax rate. The deemed repatriation tax will paid over 8 years. Estimates were required based on projections for U.S. taxable income, capital expenditures, working capital among other areas to determine the $5.9 million. These estimates make change based on actual versus projected results. We vision this to the company’s estimates will be recorded during the measurement period allowed by the SEC, which is not to extend beyond one year from the enactment date. We estimate that our consolidated effective income tax for the fourth quarter of this fiscal year will be in the range of 29% to 32%. Looking ahead to next fiscal year, we estimate that our consolidated effective income tax rate will be in the range of 26% to 29%. These rates are subject to, revisions to our provisional estimates made a connection with tax reform. Importantly, as part of tax reform we elected out of use in our NOLs to offset the mandatory repatriation tax in order to fully utilize our foreign tax credits. As a result, we have approximately $7 million in NOLs to apply against fiscal 2019 U.S. taxable income. This fact coupled with lower corporate income tax rate and the ability to immediately expense all U.S. capital expenditures next fiscal year is expected to resort a minimal U.S. cash, cash taxes paid in fiscal 2019 based on the facts and circumstances we know today. With that, I’ll turn the call back over to Frank.

Thanks Ken. I’ll start with mattress fabrics. We had a solid third quarter, financial and operating performance in this business with higher than expected sales. These results reflect our ability to execute our strategy in spite of an uncertain marketplace, seasonal holiday plant closures and some additional weather related disruptions that occurred near the, end of the quarter. New product rollouts of mattress covers and other new fabric programs were key drivers of our strong sales performance. And we have continued to outperform reported mattress industry sales trends throughout this fiscal year. Our operations performed well following the completion of a period of major transformation across our North American manufacturing operations, which included significant capital improvement projects and supply chain enhancements in North Carolina and Quebec. With our capital improvement projects in facility and equipment relocations behind us, we have started to realize greater operating efficiencies with favorable results. We are pleased with our progress and we remain focused on continuous improvement initiatives across our global platform that will further enhance Culp’s strong value proposition. We are also pleased with the performance of CLASS, on a mattress cover operation with a solid sales and profit contribution for the third quarter. We have continued to gain market share in this business, with increased sales to both traditional customers and new customer markets, including the fast growing bed in a box base. Our new mattress cover production facility in Haiti complements our existing production capacity in North Carolina and further enhances our ability to expand our class business and remain cost competitive. We have commenced production and started to ship some products from Haiti. And we plan to gradually add more capacity to meet expected customer demand. In line with our product diversification strategy, we recently launched a new line of bedding accessory products, including mattress pads and protectors, at the recent Las Vegas markets. This new line being offered directly to bedding accessory retailers under the brand name Comfort Supply Company by Culp introduce its highly stylized, design-driven product to the bedding accessories category. We are excited about the growth potential for this innovative new area and expect to begin sales early in next fiscal year. Now I’ll turn to upholstery fabrics. We’re very pleased with the strong financial performance upholstery fabrics for the third quarter, with higher than expected sales and solid profits. We achieved the profitability despite significant pressure from unfavorable China currency exchange rates. We continue to see positive sales trends with our LiveSmart performance line of highly durable, stain-resistant fabrics. Our focused marketing efforts have produced favorable results as more manufacturers are featuring these innovative fabrics, and we are encouraged by the strong customer placements heading into the April furniture market and hypoid [ph] the spring. Additionally, upholstery fabrics shipments were stronger in January heading into the Chinese New Year holiday, which occurred entirely in February this year. Many of our customers were moving business forward in advance of the plant shutdowns in order to meet anticipated demand. While this pushed our sales higher for the third quarter, we expect this pace will slow down somewhat in the fourth quarter with the disruption of February production in China. In addition to improved sales from our residential market customers, we continue to have solid growth in sales of fabrics designed for the hospitality market. As we continue to diversify our customer base, we believe the hospitality market offers significant growth opportunities for Culp. We are actively pursuing acquisition opportunities in this area that would broaden our product capabilities and complement Culp’s core strengths of design, product innovation and a substantial global platform. Ken will now review the outlook for the fourth quarter and then we’ll take your questions.

We expect the overall sales to be comparable with the fourth quarter of last fiscal year. We expect fourth quarter sales in our mattress fabrics business to be comparable with the same period a year ago, although we are seeing some softness in demand for mattress covers. Operating income and margins are expected to show modest improvement over last fiscal year, as we continue to realize more efficiencies from our strategic capital investments. In our upholstery fabrics business, we expect fourth quarter sales to be slightly higher compared with the previous year’s fourth quarter results, even with the expected impact from the Chinese New Year holiday. We believe the upholstery fabrics segment’s operating income and margins will be down slightly over last year, primarily due to continuing unfavorable currency, China currency exchange rate trends. Considering these factors, we expect to report pre-tax income for the fourth quarter in the range of $7 million to $7.6 million. Pre-tax income for last year’s fourth quarter was $7 million. Looking at the full fiscal year, capital expenditures for the fiscal 2018, including vendor-financed payments, are expected to be comparable to the $12.9 million spend last fiscal year and mostly related to additional improvement projects for mattress fabrics. Full year projection for depreciation and amortization is around $8 million plus $3 million for stock-based compensation. With regard to cash flow, we expect another good year, even with the anticipated level of capital expenditures and modest growth in working capital. Looking ahead to next fiscal year, we expect capital expenditures to be in the range of $7 million to $8 million. With that, we will now take your questions.

[Operator Instructions]. We’ll go first to Bobby Griffin with Raymond James.

Hi, good morning guys, thank you for taking my questions and congrats on a good quarter.

Thank you, Bobby.

Thanks Bob.

I just want to first talk about hospitality; it’s been a nice growth area in the upholstery segment for the last couple of quarters. Frank, can you maybe just give us an overview of what areas of the hospitality business you are in now? And then if you do target an acquisition, kind of what areas would you look at and how those would relate to each other?

Sure, currently we are in the, think of the hospitality is hotel, motel and when you think of the hotel, we are currently only participating in the chairs, the upholstery fabrics for chairs and benches in the hotel room and in the fabric in the main lobby. That could be sofas, chairs, et cetera. The biggest area of fabric utilization in the hotel area is the window treatments; that’s the area we’re targeting. Our next big area is also bed skirts and bed wraps and used in every hotel room. So, the areas we’re targeting for acquisition expand our product capabilities from just upholstery fabrics for chairs and the main lobbies to the window treatments and of course there are some draperies in the main lobbies. But the bigger volume is in the individual hotel room for window treatments. And, this is an area that fits perfectly with Culp’s core strength, design, creativity, global forcing platform in China; we have almost around 350 employees with our China operations near Shanghai. So, we are perfectly suited to pursue this area of the hospitality market.

Okay, I appreciate that detail. And then just touching there on China as well, is there any estimate you could share with us about at the cost, what amount of the cost in the upholstery segment is dominated in foreign currency there to help us from a modeling standpoint?

There is not, most of our sales in the upholstery fabric area are denominated in U.S. dollars, there is -- you know we do have sum in local currency in China; I’m going to say maybe little, get back to $20 million to $25 million of the $125 million total, upholstery fabrics.

That’s top-line right, you’re referring to. I was, I’ll think more of just along the cost perspective, where we can try to model in some of these raw, some of the currency drags that have been hitting operating income?

Well you would say, we disclosed over 90% of our sales are produced in China. 90% of our upholstery fabrics sales as we consistently disclosed our produce in China and about little less than 10% of our sales are produced in our one U.S. plant.

Okay, we think that…

So, maybe that gives you some perspective of the, so it’s significant, in fact the currency.

All those operating expenses are in RMD too.

Yes. All the cost of sales is in RMB, local currency.

Okay that would be helpful, that’s very helpful, I appreciate that. And then lastly just want to switch to mattress real quick. As we continue to see kind of this trend of a more box bedding on, one of the opportunities I guess from a margin standpoint where you guys do the, or you guys use your fabric and you also do the cut-and-sew aspect of the cover as well. Can you maybe update us or give us a little color on what portion of the covering business right now does the whole process through you or and then what portion, I guess what you are just doing in the cut-and-sew aspect and using somebody else’s fabric?

Okay sure, currently we have opted most of our cover, most of our cover production today utilizes Culp’s fabric. When we started that was not the case, but it really is a great solution for the customers, be it a bed and a box customer, be it a traditional customer for the fabric supplier and the cut-and-sew company to be one in the same. In the covers and Culp’s case we’ve got solutions out of China for covers at the Haiti or at by North Carolina for customers they want a quicker delivery time, but a little higher cost. So, I mean that’s certainly the goal Bobby, we will do it without the people’s fabric, but you’re exactly right, we want to use Culp fabric and of course all of our sales presentations emphasize that and it seems the customers increasingly realize that. That it is a lot better in their supplier chain to have one vendor doing the fabric and the cut-and-sew.

I appreciate the detail and congrats again on the quarter. And I’ll jump back in the queue. Thank you.

Okay.

Thanks Bobby.

[Operator Instructions]. We’ll move next to Marco Rodriguez with Stonegate Capital Markets.

Good morning guys, thank you for taking my questions.

Good morning.

Good morning Marco.

Hey guys, I wanted to follow-up on one of the prior questions down the hospitality business. Can you kind of remind us the margin profiles for that type of business, the hospitality business versus your other upholstery fabrics?

Yes, one of the reasons we also really like this area is the gross margins in hospitality are double our residential margins. So, it is a by far the highest margin opportunity that we have in all toady. Now the volume is not a big pocket obviously is the residential fabric, but it’s in plenty of growth opportunity for in that marketplace for fabrics, be it upholstery fabrics, the fabrics for window treatments, be it bed skirts, bed wraps things of very high margin market profile. Hence a lot of focus on that part, the other thing I want to follow up on the earlier question, another reason we really do like this is all literally all of the customers are U.S- based for the U.S. market. It’s while it may use fabric from overseas, obviously from our China platform, all of the fabrication and installation is done in the United States. And it is on the quick delivery cycle, is very much desired by these customers. So, I don’t think we -- we're going to see that, that industry trend change.

Understood that’s very helpful. So, is that a function of just the end market customer there or is that function of, I’m assuming the most hotels and motels there specific bed skirts, window treatments are all going to be somewhat customized more so than just kind of a general product if you will?

That’s right Macro. And there are really two reasons; first, they are customized even though there maybe brand standards from the major change each is customized. And secondly, all the window treatments and bed skirts, et cetera always tend to be the last part of a new hotel or a renovation project. And the owner is screaming to get, get his hotel back generating revenue. So, they just do not, one of the issues in the industry today were, one of the reason Culp is being successful is our lead times. In our upholstery fabrics we ship everything next day. So, it’s a very desirable feature to doing business with Culp. While, I don’t believe we’re going to be able to do that, well that quicker lead time on window treatment, it is something that is an industry issue today; it takes too long to source and produce the window treatments. So, I think one of our focus is will certainly be shortening those lead times. And with our total control of the supply chain from design to China to the U.S, we believe we will be able to help do that and offer better customer service like we do in each of our other businesses today.

Got you, that’s helpful. And just to confirm, I thought I heard you guys on your prepared remarks, upholstery, the $6 million increase year-over-year from a revenue standpoint, I think I heard you say that about half of that was because of the Chinese New Year happening when it happened and you had advance orders, so I’m assuming that means $3 million of that $6 million pull forward if you will?

In third, well what we’re talking about is, in the third quarter. Third quarter sales were up almost 20%, $6 million gap about half was due to orders being pulled up, in the time of Chinese New Year. But Macro, the key there too is, when you look at the guidance we’re saying sales are going to be slightly up. So, it’s not like we totally took all of the sales at fourth occurred, it’s when you combine the two it’s a good growth story. And on that point too, we are very pleased with the performance of this business on an operating profitability standpoint given the drastic improved strengthening of the China currency in this fiscal year from 6.9 exchange rate to 6.3. We just don’t believe we’re going to see that kind of movement going forward. And if anything we could see it reverse.

Got you. And then switching gears here to mattress fabrics, maybe if you could talk a little bit more as far as your expectations seeing that we’re entering here a new calendar year and you guys have three different types of product lines if you will, you’ve got your mattress fabrics here, mattress covers and now you’re going to be entering the mattress pads, what are some of the overwriting drivers you’re kind of see for those markets and then if may be you could also discuss if there are any sort of nuance to different drivers that affect the mattress pads and protectors versus the mattress fabrics could be helpful?

Okay, I think, well first of all historically the mattress business has been closely correlated to GDP growth. There have been a number of, regression analysis people do that seems to be a one of may be the highest correlation factor. So that obviously bodes well for us as we look with the growing GDP in the U.S. and Canada this year. So, we feel good about that, that we feel good about the consumer discretionary income on the rise with rising wages et cetera and so feel pretty good about the economic backdrop. Now having said that, it is now started that well all for the calendar year, as you probably heard in the industry. We believe that’s going to pick up as tax refund start being distributed, very shortly they’ve been delayed somewhat. I think when you also look at the CLASS business, our mattress cover that’s also being driven by the growth in the bed in a box, as well as a lot of the hybrid mattresses which is the new trend, many of those require covers. There does seems to be a market share shift going on two more foam mattresses and hybrids from innerspring, which bodes well for mattress covers. So, we think that’s also a positive trend as we look forward and it’s also the key reason why we’ve expanded and put in enough capacity for our cut-and-sew mattress cover business. As far as mattress pads and protectors, we’re really very, very early in that process, it’s a new area for us. So, I wouldn’t expect a lot of contribution next fiscal year. We’re learning the market talking with retailers and we will grow as we can gain business and learn that market. But, probably not a lot of the impact the first half of next year, but it’s certainly related all of our capabilities fit well with that marketplace. Most of those products are produced in China, they are produced and packaged in China and with our platform there, there is just no reason why we shouldn’t be a player in that segment of the market. It also uses similar products that we make already knitted fabrics. So, it seems to fit really well with our core mattress fabric business for mattresses, kind of like the hospitality fit well as an additional area to supplement our residential market area.

Got you, and maybe if you kind of help us size the opportunity you might be looking at the pads and protectors and if they, if there is a different growth rate as far as expectations are concerned there?

I think probably right now too early on that, we just putting our toe in the water, and certainly there is a lot of business being done there. As you may know with some of, most of the players are all privately held, but there is plenty of opportunity there, but certainly not the size of the mattress fabric market. Again like the hospitality a smaller segment, but a lot of synergies for us to be in that area. And we’ll, as next year develops we’ll certainly add more color to that market to our efforts in that industry. But another really good over time, over several years another excellent growth opportunity for us.

Got you, that’s very helpful. Thank you guys for most of your time.

Okay, thank you.

[Operator Instructions]. And there are no further questions at this time. I’ll turn the conference back to you all for any closing remarks.

Okay, thank you operator and thank you guys for your participation today and the interest in Culp. We look forward to update you on our progress next quarter. Have a good day.

And again that will conclude today’s conference. Thank you all for joining us.