Good day, and welcome to the Culp Incorporated Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask question. Please note this event is being recorded. I would now like to turn the conference over to 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 2022. 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 today 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 the non-GAAP financial measurements to the most directly comparable GAAP financial measurements are included in the tables to the press release, included as an exhibit 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, is also available on the Company's website as part of the webcast of today's call. I will now turn the call over to Iv Culp, President and Chief Executive Officer of Culp. Please go ahead, sir.

Good morning, and thank you for joining us today. I would like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today are Ken Bowling, our Chief Financial Officer, and Boyd Chumbley, the President of our Upholstery Fabrics business. For today, I will begin the call with some opening comments, and Ken will then review the financial results for the quarter. I will then update you on the strategic actions in each of our operating segments. And after that, Ken will review our business outlook for the third and fourth quarters of fiscal 2022. We will then be happy to take some questions. As previously announced, our results for the second quarter reflected lower-than-expected sales, primarily for our upholstery fabric segment. Several external factors affected our sales results for the quarter, particularly COVID-19 -related shutdowns in Vietnam and customer supply chain constraints for non-fabric components. Profitability also remains pressured in both of our businesses by the continued rapid rise in freight, raw material, and labor costs. Despite the challenging macroeconomic environment situations, I'm extremely proud of how our global platform and our associates have responded over the last 18 months to build a more robust supply chain that has kept pace with demand and met the delivery needs of our valued customers. Looking ahead, we are pleased that the shutdowns in Vietnam have been lifted, but the rapidly rising costs and the disruption throughout the industry supply chains do continue, and many of our customers have delayed their previously planned rollout in our new product launches. We also believe that many customers have excess inventory for fabric and cover products that were purchased to support their expanding backlogs as they wait for their supply chain issues to subside. As a result, we expect it could take some time for customers to work through their existing fabric and cover inventory levels. We also have some concern that inflationary pressures are causing some slowing in new business from the peak levels of last year, leading to some lower demand once customers fulfill their existing backlogs. Although the demand appears to remain high when comparing to pre-COVID levels. Based on these factors, we expect the current headwinds will continue to pressure results during the second half of this fiscal year, especially during the third quarter. But we expect to see a meaningful rebound in our business beginning in the fourth quarter and continuing into next fiscal year. We are positioned very well with stronger supply chains, strategic inventory reserves, and growing opportunities as a result of our innovation and strong delivery performance. We also expect some improvement in customer supply chain disruption, by the fourth quarter of this fiscal year, which is traditionally a strong seasonal period. Notably, if we meet our expectations for the third and fourth quarters, and for the full fiscal 2022 year, we will sustain significant sales gains, as compared to pre-COVID levels of fiscal 2020. We are also implementing further pricing actions during the third quarter to help offset current inflationary pressures, and we do expect to open our new Haiti facility during this third quarter, which will increase our capacity for cut and sewn upholstery kits. Our strong global platform together with our long-term supplier relationships, does continue to provide a distinct competitive advantage, allowing us to quickly respond to the evolving needs of our customers. We frequently hear positive feedback from our customers regarding the value of our supply chain and delivery record, supporting our belief that we are continuing to outperform our competitors, which will support our future growth. We also remained focused on innovation and creative designs in both of our businesses, and we are confident in our product-driven strategy. The recent opening of our new innovation campus in Downtown High Point, North Carolina has been extremely well received by our customers, providing them with a hands-on, first-class experience for viewing the scope of our products from fabric to some cover. Our balance sheet remains solid, and I'm extremely pleased that we have once again increased our annual dividend, making this the 9th consecutive year of dividend increases. Importantly, we have the financial strength to support our business in the current environment. And we look forward to the opportunities to deliver value for our customers, employees, and shareholders in fiscal 2022 and beyond. And with that, I will now turn the call over to Ken, who will review the financial results for the quarter.

Thanks, Iv. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website that cover key performance measures. We've also posted our capital allocation strategy. Here are the financial highlights for the second quarter. Net sales were $74.6 million down 3% compared with the prior-year period. The Company reported income from operations of $1.6 million compared with income from operations of 4.5 million for the prior-year period. I'll comment in more detail on divisional sales and operating performance in a moment. Net income for the second quarter was $851,000 or $0.07 per diluted share, compared with net income of $2.4 million or $0.19 per diluted share for the prior-year period. Our overall operating performance was affected by several headwinds, mainly lower sales, higher freight and raw material costs, unfavorable foreign exchange rate fluctuations, and inefficiencies due to labor shortage in the U.S. and Canada, among other factors. These pressures were partially offset by lower total SG&A expense for the quarter, due, primarily, to lower accrued incentive compensation expense. On a percent of sales basis, total SG&A came in at 12.2%, compared to 12.7% for the same period a year ago. Trailing 12 months ' adjusted EBITDA was $17.5 million or 5.5% of net sales compared to $11.2 million or 4.3% of net sales for the same period last year, reflecting a year-over-year improvement of 56 %. Consolidated return on capital for the trailing 12-month period was 11.8%. The effective income tax rate for the second quarter of this fiscal year was 34.3% compared with 41.4% for the same period a year ago. Our effective income tax rates are affected over the fiscal year by the mix of taxable income that is mostly earned by our foreign subsidiaries located in China and Canada, which have higher income tax rates as compared to the U.S. federal rate. Looking ahead to the rest of this fiscal year, we currently estimate that our consolidated effective income tax rate for the annual period will be in the 30% to 40% range, based on the facts we know today. The income tax rates for the third and fourth quarters could vary based on the facts and circumstances for those specific quarters. Additionally, we are currently projecting cash income tax payments of approximately $3.6 million for Fiscal 2022. Importantly, our estimated cash income tax payments for this fiscal year are management's current projections only And can be affected over the year by actual earnings from our foreign subsidiaries located in China and Canada versus annual projections, changes in the foreign exchange rates associated with our China operations, in relation to the U.S. dollar, as well as the timing of when significant capital projects will be placed in the service, which determines the deductibility of accelerated depreciation. Now, take a look at our business segments. For mattress fabric segment sales were $40.9 million, up 2.1% compared with last year's second quarter. Operating income for the quarter was $3.1 million, compared with $4.4 million a year ago, with an operating income margin of 7.7%, compared with 10.9% a year ago. Operating performance for the second quarter, as compares to the prior year period, was negatively affected primarily by higher freight, raw material, and labor costs, inefficiencies due to ongoing labor shortage in the U.S. and Canada, and unfavorable foreign currency fluctuations in China and Canada. The price increase and freight surcharge implemented during the first half of fiscal 2022 have helped us offset a portion of the current inflationary pressures we are facing. However, the lag in price stabilization as well as competitive market pressures that limit us from immediately passing on all of our cost increases, are expected to continue effect on our operating performance in the near-term. And we may need to consider further pricing actions if operating costs continue to rise. For our upholstery fabric segment, sales for the second quarter were $33.7 million down 8.5% over the prior year. Operating income for this quarter was $1 million compared with $3.3 million a year ago, with an operating income margin of 3.1% compared with 8.9% a year ago. Operating performance was primarily affected by lower sales in our residential business, as well as higher freight costs, startup costs for our new Haiti facility, unfavorable foreign currency fluctuation in China, and lower contribution from our Read Window Products business. We implemented a freight surcharge during the second quarter to help offset rising freight cost, but due to the continued rapid increase in operating material cost, we are instituting an additional price increase during the third quarter to help cover a portion of these inflationary pressures. Here the balance sheet highlights. We reported $36.6 million in total cash and investments and no outstanding borrowings at the end of the quarter, compared with $36.9 million in total cash and investments and no outstanding debt as of the end of last fiscal year. Cash flow from operations and free cash flow were negative $1.3 million and negative $5.8 million respectively for the first 6 months of the year. As we continue to invest in our business, our cash flow from operations and free cash flow during the first half of this fiscal year were affected by the following uses of cash: Increased inventory purchases to support our valued customers, to get ahead of rising material -- rising raw material costs, and to strategically improve our in-stock position ahead of the Chinese New Year holiday. $3.9 million investment in capital expenditures, including expenditures for machinery, equipment, and IT investments as well as expenditures related to our new innovation campus. $1.4 million in payments for the new building lease and startup expenses associated with our Haiti operation in upholstery cut and sew operation, and increased accounts payable payments, related to our return to normal credit terms, as opposed to the extended terms previously granted, in response to the COVID-19 pandemic. Additionally, during the first 6 months of this fiscal year, we paid $2.7 million in regular quarter dividends and spent $1.8 million on share repurchases. While we're pleased with our solid Balance Sheet going into the third quarter, it is important to note that we will continue to utilize cash for strategic investments in working capital, planned capital expenditures, and investments in our operations located in Haiti. Based on our current expected uses of cash and our business outlook for the second half of this fiscal year, we expect total cash and investments to be lower at the end of the third quarter as compared to the end of the second quarter, but to increase by the end of the fourth quarter. The Company repurchased approximately 73,000 shares of our common stock during the second quarter, leaving approximately $3.2 million available under our current share repurchase program. With that, I will turn the call back over to Iv.

Thank you, Ken. I'll begin with the mattress fabrics business. While mattress fabric sales for the second quarter were in line with our expectations, revenue was somewhat affected by our customer supply chain constraints for non-fabric components and existing inventory levels for mattress fabrics and covers. This caused our customers to temporarily delay taking some orders and pushed some new product launches into subsequent quarters while working through those limitations. However, we expect these pressures will be alleviated over the medium-term. Despite the challenging environment during the quarter, we relied on our product-driven strategy with a focus on design creativity and innovation, supported by the utilization of our resilient manufacturing and sourcing platform to service the needs of our customers. Our onshore, nearshore, and offshore supply chain strategy, as well as our fabric-to - cover model remains a preferred platform, especially for our sewn mattress cover customers. Looking ahead, our market position remains solid, with strong new placements and product developments for fiscal 2023. Rising costs continue to pressure our profitability, but our team remains committed to ongoing efforts to control internal costs, improve efficiencies, and take reasonable pricing actions to mitigate and manage inflation. Over the long term, we are well-positioned to sustain our competitive advantage and leverage our compelling business model to further expand our market reach. Especially as our customer supply chain disruption, and inventory positions begin to normalize. Now, I make a few comments on the upholstery fabric segment. Our second quarter results were disappointing, largely driven by lower sales in our Residential business due to COVID-19 related shutdowns of our sourcing partners and our customers in Vietnam throughout most of the quarter. These shutdowns were expected to be short-term, but instead lasted significantly longer than anticipated and limited our ability to ship orders both within and outside of Asia. Residential sales were also pressured by our customers ' supply chain constraints, and labor shortages at their U.S. facilities, which significantly reduced our ability to ship prepared fabric orders. Despite the headwinds in our residential business, we were encouraged by the recovery in our Hospitality business, during the second quarter, led by our hospitality contract fabric business. We also saw a measurable improvement in our Read Window Products business during the last month of the quarter. We're pleased the shutdowns that affected our Vietnam customers and sourcing partners during the quarter are now lifted, and we have resumed shipping at normalized capacity. Additionally, we expect to begin production at our new Haiti facility during the third quarter, which will expand our capacity for cuttings and upholstery kits, and mitigate some risk, with near-shore capabilities that complement our strong Asian platform. Looking ahead, there are lingering near-term challenges, related to our customers supply chain constraints and existing levels of fabric inventory for the residential business. Also, while we believe demand trends remain favorable for the home furnishings industry, there is an expected slowdown in new business from the peak experienced, during the post-COVID stay-at-home surge. But despite these external conditions, our business is well-positioned for the long term, with our product-driven strategy and innovative product offerings, including our popular portfolio of LiveSmart Performance products, as well as our flexible Asian platform, our long-term supplier relationships, and our expanded capacity in Haiti. We're also encouraged by the recent Showtime fabric market, where our products received favorable reaction and strong support from our customers. Above all, we remain focused on meeting the changing needs of our valued customers in upholstery fabrics. Ken will now discuss the general outlook for the third and fourth quarters of this fiscal year and we'll take some questions.

We continue to navigate uncertainty in the macroeconomic environment related to customer supply chain disruptions for non-fabric components, significant inflationary pressures, a challenging labor market, and fluctuation in foreign currency exchange rates. Although we are well-positioned over the long term with our product-driven strategy and flexible global platform, the current headwinds are expected to continue pressure results throughout the second half of this fiscal year especially during the third quarter. As a reminder, the third and fourth quarters will also be affected by the timing of the Chinese New Year holiday, which begins at the end of the third quarter and continues into the beginning of the fourth quarter. Due to the uncertain and rapidly changing inflationary environment, the lack of visibility relating to the duration and magnitude of customers supply chain disruptions and uncertainly related to the impact of the new Omicron environment of the coronavirus, we have withdrawn our previously issued annual guidance for this fiscal year and have only provided a limited outlook for the third and fourth quarters until the current volatility stabilizes. We expect our net sales and consolidated operating income for the third quarter this fiscal year to be sequentially comparable to the second quarter of this fiscal year, we expect a strong improvement in net sales and operating income for the fourth quarter of this fiscal year, as compared to both the sequential third quarter this fiscal year, and as compared to the fourth quarter of last fiscal year. Our confidence in this anticipated fourth quarter rebound comes from expected improvement in our customer supply chains, and recognition of our customer placements, and the scheduled timing for their release in a traditionally seasonal strong quarter, as well as positioning with our solid supply chains, strategic inventory levels, and pricing actions that, will cover us more adequately in the fourth quarter. Notably, our expectations for the third and fourth quarters of this fiscal year are based on information available at the time of this call and reflects certain assumptions by management regarding the Company's business and trends in the projected impact of the ongoing headwinds. Additionally, based on current expectations, capital expenditures for this fiscal year are now expected to be in the $10.3 million to $10.7 million range. Our capital investments will focus

on ongoing strategy of maintenance CapEx centered in our mattress fabrics business, as well as spending in our upholstery fabrics business with investments in Read Windows and our new Haiti startup. At the corporate level, CapEx spending will include investments in IT infrastructure and security, as well as our new innovation campus in High Point, North Carolina. Depreciation and amortization are expected to be approximately $7.4 million to $7.6 million for this fiscal year. With that, we will now take your questions.

We will now begin the question-and-answer session. The first question comes from Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

Yes. Good morning and thank you for taking the questions. So, I know you guys did a pretty good overview of the 2 different segments. Just wanted to see if we can get a better understanding of the timing shifts that basically of shipments. It sounds like, something's going on with new product launches, some of it is just your customers are asking to hold off on shipments. So just wanted to -- if you could just separate the 2, just give us a better understanding of the -- of just -- the timing issues that are surrounding the back half outlook.

Yeah, it's -- Anthony, thank you for the question and good morning. This is Iv. I'll start ad certainly let Boyd chime in too. It is -- there are some nuances between the two businesses. So, your question is excellent. In the upholstery fabrics business, we've built up strategically some product in advance of Chinese New Year. But we also built up some inventory in preparation as our customers had planned to expand capacity to meet surge levels of demand. So, what we've seen in some cases, our supply chain has been fulfilling better and keeping up with market demand. And our lead times are more normal today. So, we're prepared to deliver at what would normally be increased levels of capacity that in some cases of the customers haven't caught up to. And Boyd, you may want to add to that to some degree, is why we're seeing a little delay in some of the shipping there.

No. I think, that very well covers what's happened on the fabric side of business here. And then additionally to that, as we've discussed, we had the disruption on the cut and sew portion of our business from Vietnam in the second quarter. But with that now -- Vietnam now being back fully restored with capacity there. And with the Haiti operation now coming on the stream, we certainly see more normalized shipping pattern for the second half of the year on our Cut-and-Sew business as well.

To try to I think, Anthony, and then just to keep tacking onto that, and spend in the mattress fabric some, you should expect -- we would expect some sequential improvement in upholstery fabric from Q2 to Q3. And where -- when we talk about mattress fabrics, especially mattress covers. Normally in the end of our Q3, we will see strong ramp up of new product rollouts, we often target around calendar year January. Because of some of the demand in the business and just dealing with supply chains and making sure current orders can be delivered, a lot of those rollouts that we would expect normally for mattress fabrics in Q3 are being pushed into Q4 or later. So that's why it's a slightly different. In both businesses, we're able to deliver. And in this case, I guess it's because our customers can't pull it all through that we've prepared. But it is a little different quarter-to-quarter. Upholstery is to start to improve some in Q3, while mattress fabrics may not feel that improvements till Q4.

Got it. Okay. Thanks for that explanation. And then, I guess, just from an overall demand perspective, it sounds like you expect maybe a little bit of a moderation versus a year ago at peak levels. But is it safe to assume that you guys are still seeing demand above pre -pandemic levels?

Yes, Anthony. This is Iv, again. That's an excellent question too, and it is an important nuance to think about when we speak about sales slowing. When we say that, we mean they're slowing, as you pointed out from a very high peak that we were seeing last year at this time, because everything we had was shipping quick, and we were stay-in-home response had boosted, really, the entire industry. The business in our customers now, we believe, is still at a high level compared to pre-COVID levels, and they're working through really strong backlogs. It's just that the level has subsided somewhat on new orders as compared to that peak of last year. We feel that's a little more acutely as in some cases, our customers have ordered more fabric as we talked about to support increased production levels to work the backlog, but the capacity is not fully in place. So, it's really a timing issue. And again, our supply chain has been solid and most of our backlogs are now at normal lead times. So again, it's just timing on when we can start to deliver it. So generally, we do see positive long-term trend in the order level, which does continue supporting our business.

Got it. Okay. And the last question for me, as far as the planned price increases, is it both for the third and fourth quarter? Or are they just for the third quarter that you're planning? And can you give us the magnitude of price increase that you're planning to do?

Yeah, Anthony. This is Ken. If you look at Q2, the impact -- the cumulative impact of all the increases we've done so far, I'd say that's around 3% or so of total income now or total sales. And so, when you look at the rest of the year, we do have more coming in, but those are going to accumulate over the period of time. So, it's going to be higher of course, than we are today. But they come in at different times, so they are going to be staggered. But I think by the time the end of the third quarter, guys, that they will all be in place at that point.

Yes.

Okay. Got it. All right. Well, thank you very much and best of luck going forward.

Thank you, Anthony. Have a good day.

The next question comes from Budd Bugatch with Water Tower Research. Please go ahead.

Good morning, Iv, Ken, and Boyd. I guess, I'd like -- if you could, you said that it would take -- I think -- Iv, I think your quote was some time for your customers to work through the additional problems that they had before they could get -- you get through to the -- your fabric inventory. Can you quantify that the -- maybe it's different by segment, it probably is, and maybe give us an idea of what you think that time is?

Yes. I mean but we tried -- for sure, a good question. We're just trying to be a little hesitant when we talk about some time, but we really, obviously, when we're seeing the strong rebound for Q4, we think it starts spend. So, it's not a long-term thing, it's we think could be Q4 and then heading into next year.

Okay.

In both businesses.

I'm sorry?

In both businesses, although the rebound for Q4, will be first and mattress fabrics. And then continuing strong for both through the rest of the year.

Got you. And let me put a -- maybe -- I don't mean it to be unfair, but it's probably a difficult question. If Haiti had been online during the second quarter -- for all of the second quarter, what would that have done for your Vietnam operation? Would you have -- how -- what kind of impact would you have had?

Yes, Budd. This is Boyd. Certainly and of course, the Haiti operation is coming online as we had planned. There really has been no delay in that facility coming on stream. But if that facility had been in place earlier, certainly we would have had an opportunity to shift some of the Vietnam production that, was being disrupted by COVID. We could have shipped some of that potentially to the Haiti operation, which would have helped in regards to the disruption that we saw in Q2. We were able to shift some of the Vietnam production back to China for a period of time. So, we weren't fully without capability of supplying, cutting some kits during that time period. But yes, if Haiti had been available sooner, we certainly could have taken advantage of that situation as well.

And for -- just for Budd's analysis here, Boyd, with the -- what you shifted back to China was an amazing statement to your supply chain, but that came at a cost because of the tariffs and some of the impacts that have been -- it's why we moved to Vietnam in the 1st place.

That is correct. Right. That was in the costs.

Okay, that makes good sense. One of the words that now been apparently retired by the chairman of the was transitory and talking about inflation, and I don't think anybody in the business orders has believed transitory for some time, but what is the status of what you're seeing in terms of inflation now? Are you seeing additional price increases in the last couple of weeks that are going on? Or is it -- are we seeing any moderation in the rate of increases or where we're coming from?

Budd, this is Boyd again, I'll first speak in regards to the upholstery fabrics business. And we certainly have continued to see additional increases from an inflationary environment. We've seen additional increases in the recent weeks. So, there are inflationary pressures that are continuing to emerge. Most recently related to energy costs and raw material costs. So, there are ongoing inflationary pressures. Other costs, such as freight, I think we've seen those costs likely have peaked, but, yeah, to answer your question, we are continuing to see additional inflationary cost pressures.

Okay. But they seem -- sounds like that -- if you're talking about energy, that's in the factors of production. So, if you've seen freight peak, that's probably peaks and we're probably not too far away from a peak on that as well. I would suspect. I mean, those things, they have a way of factoring through our supply chain and the economy over a period of time. So, would that be the way -- right way to think about it or am I being too optimistic?

I think we're just in an uncertain environment right now, but there's been a lot of volatility that we've seen from month-to-month and week-to-week. So, I'm not sure there's a -- how to think about that just yet, other than as we are seeing these cost pressures, we are taking the necessary actions at the time and we'll continue to respond accordingly with whatever occurs.

Yeah, I think we're thinking about it like you are Budd. We do hope we've -- we're at a peak of some of those costs. Raw materials are probably the one that I worry about the most that might have more inflation on it. Hopefully, you're right about freight. And I know Boyd, we're not totally sure. In the mattress side I'll just add in one more thing that's an impact is labor costs. Because of our strong North American production level in mattress fabrics, we've had an impact from labor. And certainly, we have higher labor rates. But what's impacted us more in the past, has been so much labor shortage and the inefficiency of being able to train and get new associates to operate efficiently. The good news is, we have significant improvement there and in a much better shape as we get to middle of Q3 with a much stronger labor position. So even at somewhat higher rate, having an efficient labor rate will be -- an efficient labor force will be a big help to us there, that starts to limit some of the pressures and leasing that part of the business.

Yes. We've heard from a lot of people that they've been shortage in terms of being able to get appropriate associates. Are -- can you quantify? Are you -- are you -- where you want to be in terms of your labor force? Or what's the shortage now versus maybe where it was two weeks ago, four weeks ago, six weeks ago.?

Yeah, I mean, it is significantly drastically improved from where it was six weeks ago. So, for whatever reason we just had a nice, have done a great job recruiting, a great job of engagement. We've found a lot of success replacing or refilling jobs that were open, especially on our night and off shifts. That was where the biggest problem area was. We're not all the way filled, but we're in a place now where we can operate our equipment, which makes the big difference to our efficiency.

Great. I can understand that. I guess last for me, I noted that inventories are up like $16 million year-over-year, kind of the highest level that I've seen since I guess, the late 1990s, when the Company was being run with a different discipline, not as an asset-light Company that you've been over now for the last decade or more. So, is any of that inventory at risk? And is it finished goods, is it whipped, raw material. I worry about that, and I guess other investors might, too.

Yeah. I -- but this can't -- I'll begin, and Iv, you can jump in at the end. I think, as far as the buildup, is I -- I think I pointed this out. I mean part of it has been customer-related -- customers pushing back, getting ready for Chinese New Year. All that's finished good. We have increased our raw materials on the mattress fabric side to get ahead of the price increases so it is both sides of it, but those have all been recent increases in preparation for these periods, so, Iv, I don't see any exposure there as far as -- Yeah, we don't believe there's any exposure in the upholstery side of business that is more finished goods.

Yep.

-- prepared ahead of Chinese New Year and ready for the expanded capacity levels our customers expect to get to. And on the mattress side, yes. It's a lot of raw materials that have been purchased in advance of pricing pressure that we can knit or weave, or make a cover out of in any direction we get pulled. So, it feels like a positive position that's poised for an upturn in the market.

Yeah. And we've -- a lot of companies these days are really focusing on higher inventories just because of the uncertainty. So, we feel good from that standpoint and are expecting that to turn in the fourth quarter.

Okay. And do you think inventories go back or -- I mean, everybody's talking today about having more inventory than less inventory, but the era of "just in time " seems to be something now, moving to the past. Because people are talking about having pockets of additional supply because they are worried about things which we've experienced now for the last two quarters, supply chain. So about $16 million, how much would you think that would draw down?

Yes, I think again, this is Ken and I think for the fourth quarter, of course, we think we can take a big, sizeable chunk out of that. And then from there, you looked at over the past year, I think it was in mid-fifties. At one time, I think, last year the 40, I think that $47 million was low. I think going forward, it obviously depends on the uncertainty that we're looking at as far as what our customers are doing, but I don't know, Boyd, I think it would stay a little bit higher than normal?

Yeah. I think certainly. And we feel strongly that our service reputation and our reliability for service throughout this volatile time period has certainly been an advantage for us. So yeah, I think as we look at our inventories strategically now versus what we did in number of years past, we certainly see it as a strategic advantage to be able to offer exceptional service continually to our customer base. So --

I think I understand that, because I think that is the reputation of Culp. And with the stronger balance sheet and you have -- I think you've got that piece of advantage. So good luck on the third and the fourth quarter, and I look forward to talking to you again shortly.

Thank you, Budd.

The next question comes from Marco Rodriguez with Stone Capital Markets. Please go ahead.

Good morning, guys. Thank you for taking my questions.

Good morning, Marco.

Hey, guys. I was wondering if you can maybe -- we can talk a little about the outlook that you had in the prepared remarks. Obviously, you've pulled out a few headwinds that are impacting the second half of the year, inflation low and demand, high customer inventory levels, supply-chain issues at your customers. So, I understand the Q3 guidance in light of that. But maybe if you can talk a little bit above Q4, your expectations there for a stronger improvement, if inflation ary pressures are less than temporary and supply chain issues don't seem to be rectified anytime soon. What sort of giving you the confidence for Q4 for that strong improvement?

Thank you, Marco, a good question. And it's something we've talked a lot about and we've touched on throughout. It comes down to a timing question. And then Q4 also being traditionally a strong seasonal period historically. And as we've been saying internally, and to anyone, we've spoken to, investors, or customers or suppliers, is not really a question of if it's going to come back strong, it's when. So, we've got built a solid supply chain, terrific production locations, and as Boyd mentioned a few times, we're outperforming our competitors in delivery. And we hear this all the time and we do think that's driving new opportunity. So, in Q4, I will think about some of the good things. We'll be fully operational in Haiti for upholstery kits, and we have both businesses then operating with some combination of onshore, near-shore, and offshore capabilities, so really boosting and ramping up that supply chain even more. We'll be much more covered to inflationary costs in our business in Q4. With the price increases and the surcharges are being in place, and our labor situation, as I touched on, is stabilizing nicely now, which helps quite a bit on the mattress fabric side. We strategically built some good inventory levels that we've touched on in both finished goods and raw materials. And we're positioned well as our customers start to increase their capacity levels. And we think it'll just be a strong pull-through of that. And we also are hearing about new, strong placement conditions for both businesses. And we just see expectation for when those customers are now scheduling through all those new items. And that all seems to be pointing much more towards Q4. And then, just a couple quicker things. Our new innovation campus has been a home run. We had Showtime there a couple of weeks ago and just great momentum coming from that Showtime market. And then we just think we're in a strong position with our market reach for medium to long term. And just very much looking forward to what we think, with our price actions finally, to catch a little hold to some more normalized conditions in Q4. So, hope that helps.

Very helpful. Thanks. I appreciate that. I also wanted to kind of follow up on a prior question as it relates to -- in your prepared remarks you discussed the potential dampening of demand due to prices and I understand the difficult year-over-year comps. But is there -- and I heard your response to that demand, is a little bit better than pre-COVID levels. I just want to make sure that, the -- I guess what I'm trying to get at is, was whether or not inflation and price increases are really starting to impact the consumer's ability or willingness rather to buy new stuff.

I mean, it's a great question, Marco. When we talked about a lot and we spoke about it, and Boyd sitting here beside me, shaking his head. We asked every customer we saw during our Showtime market about that exact question, and we just aren't hearing that concern yet. Fair, Boyd?

That's fair, yeah. That's the feedback we've received.

We wonder the same. I know the increases we're passing on aren't going to be the kind of thing that will disrupt the market, but we do know there's one of our customers have done. Increases has had a mid to higher teens, I guess, but we just -- we have not heard of a dampening of the demand.

Got it. And --

I mean, I spoke out not from the peak, so we're not here. It's still at a high level. So, we really starting to see -- we're not -- we're here not yet.

Got it. Got it. Okay. And last question for me. You guys in your prepared remarks also called out some competitive pressures potentially impacting your ability to push through cost increases or raise your prices in the mattress fabric segment. Can you maybe expand a little bit more on that and what you're seeing?

I think, Marco, when it's -- it's good question too. And we tried to be smart when we talked about it. The competitive pressures are not asit's the much about us., ultimately being able to pass it through, timing of when we can do it. So, we will get there, we just lag on it. So, there's just always competitive pressure when we're dealing with customers in China. Think of long-term for developing big business with our most trusted partners. Sometimes, we just can't pass it as quick as we want, so we do it in chunks and do it over stage periods where, ultimately, we catch up to the full facts but just not immediately. Boyd did you want to add anything to that? How you think about it from pricing?

Yes. I mean, I would just agree with what you said there, that there's typically a lag that will take place, but I don't see any other significant impacts from that.

Yes, it's not much about passing it through, Marco, it's just how quickly you can get it through.

Got it. Understood. I appreciate your time, guys.

Yes, sir. Thank you.

Thank you, Marco.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Culp for any closing remarks.

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

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.