Culp, Inc. F4Q08 (Qtr End 04/27/2008) Earnings Call Transcript

| About: Culp, Inc. (CFI)

Culp, Inc. (NYSE:CFI)

F4Q08 Earnings Call

June 19, 2008 11:00 am ET

Executives

Drew Anderson - Investor Relations

Franklin N. Saxon - Chief Executive Officer and Director

Kenneth R. Bowling - Chief Financial Officer, Corporate Secretary and Treasurer

Analysts

Analyst for Laura Champine – Morgan Keegan & Co.

Operator

Welcome to the Culp fourth quarter 2008 results conference call. (Operator Instructions) At this time, for opening remarks and introductions, I’d like to turn the conference over to Drew Anderson.

Drew Anderson

Welcome to the Culp conference call to review the company’s results for the fourth quarter of fiscal 2008. As we start, let me express that some statements made in this call will be forward-looking statements. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. Actual performance of the company may differ from that projected in such statements.

Investors should refer to statements filed by the company with the Securities and Exchange Commission for a discussion of those factors that could affect Culp’s operations in the forward-looking statements made in this call. The information being provided today is of this date only, and Culp expressly disclaims any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations.

In addition, during this call, the company will be discussing non-GAAP financial measurements that exclude restructuring and restructuring-related charges. 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 press release and 8-K filed yesterday. This information is also available on the Investor Relations section of the company’s website at www.culpinc.com.

I’ll now turn the call over to Frank Saxon, President and Chief Executive Officer.

Franklin N. Saxon

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 about Culp today, 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. After that, Ken will review our first quarter 2009 business outlook. We’ll then be happy to take your questions.

We are pleased with our performance for the fourth quarter and year, considering the current challenges we are facing. The uncertain economy, housing crisis and high energy costs have continued to influence consumer demand for furniture and to a lesser extent, bedding products. In spite of this environment, fiscal 2008 for us was an outstanding year, both in terms of our financial performance and the improvement in our competitive position. For the year, overall sales, profitability and cash flow were up from fiscal 2007, and we are pleased with the progress we have made in our operations.

Today, Culp is a much stronger company than a year ago with respect to our value proposition to customers and our ability, both operationally and financially, to take advantage of opportunities in the current competitive landscape. We believe the business models in our businesses, mattress fabrics and upholstery fabrics, along with our improved financial position, are providing increasing value and stability to our customers, especially in light of the challenges facing many industry participants and the highly uncertain outlook.

With that, I will now turn the call over to Ken.

Kenneth R. Bowling

Total sales for the quarter were $64 million, down 12.6% from the fourth quarter of last year. Operating income for the fourth quarter was $2.7 million, compared with operating income of $3.6 million last year, a decrease of 25%, excluding restructuring and related charges for both periods. Including restructuring related charges, operating income for the fourth quarter was $2.1 million, compared with operating income of $861,000 a year ago, an increase of 141%.

Sales for fiscal 2008 were $254 million, compared with $250.5 million last year, an increase of almost 2%. For the year, operating income was $11.5 million, compared with $9 million last year, an increase of 27%, excluding restructuring and related charges for both periods. We reported net income of $2.1 million, or $0.16 per share for the fourth quarter of fiscal 2008.

The financial results for the fourth quarter of fiscal 2008 included $186,000 or $0.01 per share in restructuring and related charges after taxes. Excluding these charges, net income for the fourth quarter was $2.3 million, or $0.18 per share.

The fourth quarter of fiscal 2008 results reflect a significantly lower tax rate, due primarily to a higher than expected taxable income in China, tax at lower income tax rates and lower than expected US taxable income tax at higher income tax rates. The lower US taxable income was primarily due to restructuring and related charges incurred in the US. These rates are based on actual results for the full year.

It is important to note that, with respect to the US, we have a net operating loss carryforward of approximately $75 million. Therefore, we will not incur cash income taxes in the US for the foreseeable future. These results for the fourth quarter compare with a net loss of $40,000, or $0.00 cents per share for the fourth quarter of fiscal 2007.

The financial results for the fourth quarter of fiscal 2007 included $1.8 million, or $0.14 per share in restructuring and related charges after taxes. Excluding these charges, net income for the fourth quarter of fiscal 2007 was $1.8 million, or $0.14 per share.

Net income for fiscal 2008 was $5.4 million, or $0.42 per share, compared with a net loss of $1.3 million, or $0.11 per share for fiscal 2007. Excluding restructuring and related charges of $1.9 million after taxes, net income for fiscal 2008 was $7.3 million, or $0.57 per share. Excluding restructuring and related charges, net income for fiscal 2007 was $3.8 million, or $0.32 per share.

We estimate that our effective income tax rate for fiscal 2009 will be approximately 25%, half of which we are estimating will be non-cash. This estimated rate is based on facts and circumstances that we know today, and will be updated again for our fiscal Q1 results.

I’d like to now review our results by operating segment. With respect to mattress fabrics, also known as mattress ticking, we reported $34.6 million in sales for the quarter, a 9% decline compared with $38.1 million for the same period last year. These results reflect softer consumer demand and the planned discontinuation of certain ITG products that did not fit Culp’s business model. Unit volume and average selling price was disclosed in the press release, so I will not go into detail here.

Operating income for this segment was $3.9 million, comparable to the same period last year. However, operating income margin improved to 11% of sales, compared with 10.3% of sales for the prior year period. Frank will comment more specifically on operating results in a moment.

Now, turning to the results of our other operating segment, upholstery fabrics. Sales were $29.4 million, which include both fabric and cut-and-sewn kits, representing a 16% decline from $35.1 million in the fourth quarter of last year. Again, unit volume and average selling price for upholstery fabrics can be found in the press release.

Upholstery fabric sales reflect continued soft demand industry-wide, as well as continued very weak demand for US-produced fabrics, driven by consumer preference for leather and suede furniture and other imported furniture and fabrics. Sales of non-US produced fabrics were $19.9 million in the fourth quarter, down 4.5% over the prior year period.

Sales of US-produced fabrics were $9.5 million, down 34% from the fourth quarter of fiscal 2007. Overall, the upholstery fabric segment reported operating income of $134,000 for the fourth quarter, compared with operating income of $863,000 for the same period last year.

Now, let me turn to the balance sheet. Keeping our financial position and cash flow strong has been a top priority for fiscal 2008. We were especially pleased with our strong cash flow from operations for the year totaling $16.4 million for fiscal 2008, compared with $11.5 million for fiscal 2007. This performance is due to increased profitability in mattress fabrics, and significant improvement in working capital management.

Most importantly, this level of cash flow enabled us to substantially reduce our long-term debt during this fiscal year. Total debt was $21.4 million at the end of fiscal 2008, compared with $40.8 million a year earlier, an almost $20 million, or 48% reduction. Our debt to capital ratio has improved substantially, and was 20% at the end of the year, compared with 34% a year earlier. Working capital turns increased to 5.8 this quarter, compared with 5.3 last year, due primarily to lower inventory balances.

The company expects cash capital expenditures to be around $4.5 million for fiscal 2009, including approximately $2 million for deferred payments on equipment, and depreciation expected to be approximately $6 million.

During the fourth quarter, the company’s contract to sell its corporate headquarters was terminated by the buyer. The company continues to actively market the building for sale. The carrying value of the company’s headquarter is approximately $4.8 million and is recorded in assets held for sale on the balance sheet. Once sold, the company expects to receive proceeds in excess of the carrying value, and such proceeds will be used to repay the $6.3 million outstanding mortgage balance on the building.

I will now turn the call back over to Frank.

Franklin N. Saxon

I will now provide an update on both of our operating segments. And I will start with mattress fabrics. We had a great year in this business. The key highlight was the successful integration of our acquisition of ITG’s mattress fabric business, which we made in January 2007. This purchase added approximately $35 million in sales, with minimal additions to staffing and fixed assets. We worked diligently to maintain our outstanding delivery performance to customers throughout this process, which we were able to do.

Another key highlight is the fact that even with significantly higher level of business we were able to reduce the capital invested in mattress fabrics to $39 million at year-end, from $44 million at the beginning of the year. This was primarily due to excellent working capital management. One of our most important operational goals is to continually improve our inventory management, which is essential in a just-in-time delivery business, like we are in.

For the year, sales increased 28% to $138 million from $108 million, and operating income improved to $14.1 million, or 10.2% of sales, up from $10.8 million or 10% of sales a year ago. The increases were primarily as a result of the acquisition. Our fourth quarter was the first quarter that had the ITG-acquired business in the same quarter of the prior year.

Culp’s mattress fabric sales for the fourth quarter were affected by softer consumer bedding demand, as well as the discontinuation of certain ITG products that did not fit our business model. The results for the quarter also reflect higher raw material costs and increased Canadian operating costs due to the strengthening of the Canadian currency, as compared with the same period a year ago.

As previously announced, we implemented a small price increase on selected products during the quarter to help offset these costs. We have also continued to improve our operating efficiencies with respect to the integration of the ITG operations and we’re pleased with the improvement in our operating margins over the prior year quarter.

During the fourth quarter, we began implementing a $5 million capital project to enhance our manufacturing platform and provide additional reactive capacity in mattress fabrics. This project, which involves the expansion of our weaving and finishing operations in our Stokesdale, North Carolina facility, is expected to be completed by the end of July 2008.

The new state-of-the-art equipment and additional capacity will allow us to provide even faster response times and improve productivity. Our primary focus is on maintaining a very high level of service for our customers. At the same time, we have enhanced our ability to pursue additional growth opportunities as they present themselves and extend our leadership position in mattress fabrics.

For fiscal 2009, we are focused on improving the value we deliver to customers in terms of product innovation and outstanding service and quality. As we have been doing, we will continue to drive operational and working capital improvements. We will also be prepared to take advantage of opportunities that may arise given the difficult economic environment we are operating in.

I’ll now turn to our upholstery fabrics segment. The key highlight for this business for the year is that we remain profitable and generated significant free cash flow in the fate of the most challenging furniture industry conditions in many years. In fact, over the last five fiscal years, our upholstery fabric business has generated approximately $41 million in free cash flow. These funds have contributed importantly to our substantial debt reduction over this timeframe.

Additionally, we have successfully executed a multi-year restructuring of our upholstery fabrics business, which began in fiscal 2001, and included the aggressive development of our China operations, and the substantial down-sizing of our US manufacturing operations to just one facility, down from 14, in 2001.

Our upholstery fabrics sales for the fourth quarter reflect the challenging operating environment across the retail furniture industry. As consumer spending for furniture has reached very low levels, the overall demand for upholstery fabrics has also continued to decline. However, in spite of the lower sales, we were pleased to report another profitable quarter in upholstery fabrics.

While sales produced from our China operations accounted for 68% of all upholstery fabric sales, those sales have also been affected by the weaker demand. Our China platform, which marked its full-year anniversary during fiscal 2008, remains the cornerstone of Culp’s upholstery fabric business, and we are pleased with the performance of this operation.

Our strategy to more aggressively pursue the cut and sew business is going well, and we are attracting sizable new customers to Culp in this product area. Additionally, we are expanding our marketing efforts to sell our products to other countries, including the local Chinese market.

We have continued to face significant challenges with respect to the underperformance and lower sales volumes of our remaining US manufacturing operation, which produces primarily velvet fabrics, and some decorative fabrics. In response, we have implemented a revised marketing strategy that provides customers with very quick delivery on targeted products at key price points.

This strategy allows us to drive more business on fewer products. These products are constructed primarily with China-sourced yarns. We are encouraged with the customer placements and response to-date of this new approach, which is expected to result in improved manufacturing performance and lower unit cost.

We also implemented a meaningful price increase on our US-produced products during the fourth quarter. We believe it is strategically important to find a way to keep our one remaining US upholstery fabrics facility open, especially considering Culp is now the sole manufacturer of velvet upholstery fabrics.

Overall, we have lowered our cost structure with SG&A expenses for the fourth quarter, down approximately $1.1 million, or 28% from the same period a year ago. For the full year, SG&A expenses were down $3.4 million or 23% compared to last year. As difficult as it is to achieve, we must continue to keep costs and inventories in line with demand.

Even though the demand environment is as tough as it’s been in many years or even decades and will likely remain difficult for the foreseeable future, we are cautiously optimistic. We believe we have significantly improved our competitive position in the industry during these times, as we are delivering more value to customers in terms of product innovation, service and stability. And as a number of our competitors have gone out of business, it would not be surprising to see more competitors, either in the US or China, to exit the business over the next year.

For fiscal 2009, we are focused on increasing market share with our key customers, growing business in non-US markets, building our cut-and-sew business, offering more products with faster delivery times and improving the profitability of our US operations. We believe we are very well positioned to benefit considerably with any uptick in consumer demand.

Ken will now review the outlook for the first quarter, and then I’ll have a few concluding comments.

Kenneth R. Bowling

Looking ahead in the first quarter of fiscal 2009, we believe our mattress fabrics segment will continue to perform well, even though bedding industry demand is softening. Industry conditions for upholstery fabrics have been extremely difficult all year, reflecting very weak consumer demand and we expect this trend to continue for the foreseeable future.

Overall, we expect our first quarter fiscal 2009 sales to be down approximately 10% to 15% from the first quarter of last year. We expect sales in our mattress fabric segment to be down approximately 3% to 7% for the first quarter, primarily due to the planned discontinuation of certain ITG products, and softening overall demand. Operating income in this segment is expected to approximate the prior year period, although we expect margins to improve.

In our upholstery fabrics segment, we expect sales to be down approximately 20% to 25% for the first quarter, due mostly to lower sales of US-produced fabrics. We believe the upholstery fabric segment’s operating results will reflect a moderate operating loss due primarily to weak gross profits in our US operations. However, we still expect continued solid gross profit margins in our non-US produced business and substantially lower SG&A expenses, as compared to the first quarter of the prior year.

Considering these factors, we expect to report net income in the first quarter in the range of $0.08 to $0.12 per share, excluding restructuring and related charges for previously announced restructuring initiatives. This is management’s best estimate at present recognizing that future financial results are difficult to predict, because the upholstery fabrics industry is continuing to undergo a dramatic transition and foreign currency fluctuation may continue.

The actual results will depend primarily upon the level of demand throughout the quarter. We estimate that restructuring and related charges of approximately $100,000 or $75,000 net of taxes, or $0.01 per share from previously announced restructuring initiatives will be incurred during the first fiscal quarter. Including the restructuring and related charges, net income for the first quarter of fiscal 2009 will be in the range of $0.07 to $0.11 per share.

I’ll now turn the call back over to Frank for concluding comments.

Franklin N. Saxon

We are pleased with our solid execution over the past year, and are confident that we have the business models and management teams in place that will allow us to be solidly profitable in this challenging environment, and be well positioned to benefit from any upturn in consumer demand. We are a significantly stronger company today with a keen focus on driving improvement in the value we provide to our customers.

Looking ahead, our mattress fabrics business will continue to be the key contributor to our profitability in fiscal 2009. With the capital improvements underway to enhance manufacturing capabilities and improve our customer service, we believe we have additional opportunities to grow this business.

While challenging conditions in the retail furniture industry are affecting our upholstery fabric business, we believe we are strengthening our competitive position. Our China platform is maturing and continues to provide a sustainable business model for Culp to compete effectively in today’s upholstery fabrics global marketplace. Overall, we are optimistic about our opportunities for the coming year, and remain focused on achieving profitable growth over the long-term.

With that, we will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Analyst for Laura Champine – Morgan Keegan & Co.

Analyst for Laura Champine – Morgan Keegan & Co.

You had mentioned that the raw material costs you saw in Q4, and I wanted to ask you what you’re seeing so far in Q1 in terms of your total raw material cost inflation.

Franklin N. Saxon

Just a little bit up from Q4, not much, the overall demand is holding the price down some as well.

Analyst for Laura Champine – Morgan Keegan & Co.

Can you give what raw materials as a percentage of your total COGS are?

Franklin N. Saxon

That would be difficult.

Analyst for Laura Champine – Morgan Keegan & Co.

In terms of the trends in the mattress ticking segment, did you see any pick-up in May relative to the demand you saw in Q4?

Franklin N. Saxon

So far this quarter, probably about the same, maybe a little better because we are heading into the seasonally stronger period for mattresses, the summer season, always the best season for mattresses.

Analyst for Laura Champine – Morgan Keegan & Co.

Did you say that sales in the mattress ticking segment were going to be down 3% to 7% in the quarter, and is some of that attributable to exiting some of the products from ITG?

Franklin N. Saxon

Yes. And a good estimate, maybe half and half of the 3% to 7% estimated decline, half from softening demand, half from discontinued products.

Analyst for Laura Champine – Morgan Keegan & Co.

So, if you ex out the discontinued products do you get a stronger top-line assumption in terms of a percentage.

Franklin N. Saxon

Yes.

Operator

There appear to be no further questions at this time.

Franklin N. Saxon

Thank you for joining us today, and we will look forward to updating you on our first quarter results. Thanks, and have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!