Culp, Inc. (CULP) CEO Robert Culp on Q3 2020 Results - Earnings Call Transcript

Culp, Inc. (NYSE:CULP) Q3 2020 Earnings Conference Call March 5, 2020 11:00 AM ET

Company Participants

Dru Anderson - Senior Vice President and Investor Relations

Robert Culp - President, Chief Executive Officer and Chief Operating Officer

Kenneth Bowling - Senior Vice President, Chief Financial Officer and Treasurer

Boyd Chumbley - President of Culp Upholstery Fabric Division

Conference Call Participants

Robert Griffin - Raymond James & Associates, Inc.

Paul Betz - Stifel, Nicolaus & Company, Inc.

Marco Rodriguez - Stonegate Capital Markets

Operator

Good day, and welcome to Culp's Third Quarter 2020 Earnings Conference Call. Today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the call over to Ms. Dru Anderson. Please go ahead.

Dru Anderson

Thank you. Good morning, and welcome to the Culp conference call to review the Company's results for the third quarter of fiscal 2020.

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 these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included as a schedule to the Company's 8-K filed yesterday and posted on the Company's 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 today.

With respect to certain forward-looking free cash flow information, the comparable GAAP and reconciling information is not available without unreasonable efforts, and its significance is similar to the significance of the historical free cash flow information, which is available in the 8-K filed yesterday and posted on the Company's website.

I will now turn the call over to Iv Culp, Chief Executive Officer. Please go ahead, sir.

Robert Culp

Good morning, and thank you for joining us today. I would like to welcome to the Culp quarterly conference call with analysts and investors. With me on the call today are Ken Bowling, Chief Financial Officer of Culp; and Boyd Chumbley, President of our Upholstery Fabrics Business. We also have Frank Saxon, Executive Chairman of the company, who's dialed-in remotely.

I will now bring in the call with some brief 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 then after that, Ken will read our fourth quarter fiscal 2020 business outlook. We will then be happy to take any questions.

Before I begin my comments on our third quarter results, I'd like to first address our thoughts regarding the coronavirus and any impact to our current supply chain. Currently, Culp has not seen significant impacts from the virus in any of our businesses. In our upholstery fabrics business, our Culp China location is operating at normal levels, with virtually all employees reporting to work.

We have also built a stable, long-term supply base in China, and we work with vendors who favor Culp due to our strong, trusted relationships. We have experienced minimal delays as most of our suppliers have backed nearly full output and continue to prioritize our production.

We have also relocated a considerable amount of our cut and sew production to two facilities we work with in Vietnam. Likewise, in both our mattress fabrics and home accessories business, we are not currently experiencing any delays in Asia, and we also have significant alternative locations for production as needed.

This includes production or sourcing capabilities in the U.S., Canada, Haiti, Vietnam and Turkey. While we cannot predict whether the virus will have any negative impact on consumer confidence in the U.S. consumer market, we believe our solid and stable supply chain and our global platform supports our ability to manage any disruption created by the outbreak.

Now I'll turn to the third quarter results. As previously announced, our results for the quarter reflected lower-than-expected sales, particularly in our core business segments. While several external factors affected our results for the third quarter, we believe Culp is well positioned for the medium and long-term. Our global platform is reactive and is a distinct competitive advantage for the company, providing the ability to quickly respond to changing market dynamics.

We also benefit from significant synergies across our business segments that are fostering collaboration and product development and allow us to better serve our customers in all markets. Above all, we remain focused on innovation and creative designs in all of our businesses, and we are confident in our product-driven strategy and the ability to meet the changing demands of a diverse customer base.

Throughout fiscal 2020, we have maintained our position as a trusted supplier of fabrics for a global marketplace. Importantly, we have the financial strength to support and execute our strategies and continue returning funds to our shareholders. We look forward to the opportunities ahead for the remainder of fiscal 2020 and beyond.

I'll now turn the call over to Ken, who will review financial results for the quarter.

Kenneth Bowling

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 third quarter. Net sales were $72 million, down 6.8% compared with the prior year period. On a pretax GAAP basis, the company reported a net loss of $5.1 million compared with a pretax income of $4.3 million for the third quarter of last year.

As previously disclosed, a few weeks ago on February 18, the results for the third quarter of the current fiscal year include a reversal of a $6.1 million recorded contingent earn-out liability as well as non-cash impairment charges of $13.6 million related to the home accessories division, resulted in a non-cash net charge of $7.6 million. Excluding this net charge, adjusted pretax income, non-GAAP, was $2.4 million for the third quarter of this fiscal year.

The financial results for the third quarter of last fiscal year included approximately $769,000 in restructuring and related charges and credits and other non-recurring items due mostly to the closure of the company's Anderson, South Carolina production facility. Excluding this net charge, pretax income for the third quarter of last year was $5 million.

Net loss attributable to Culp, Inc. shareholders was $58,000 or $0.00 per diluted share for the third quarter compared with net income of $3.2 million or $0.25 per diluted share for the prior year period. The results for the third quarter of both fiscal years include the respective charges and restructuring-related credits I just noted.

The effective income tax rate was 19% for the third quarter and 142.8% for the year-to-date period for this fiscal year. The company's high effective income tax rate for the year-to-date period reflects a significant decline in the company's projected annual consolidated taxable income, particularly in the U.S., which includes the income tax effects of the asset impairment charges previously discussed as well as the mix of consolidated taxable income that is earned by the company's foreign operations located in China and Canada that have higher income rates in relation to the U.S.

The current mix of taxable income has led to a significant increase in the effective income tax rate that is associated with our Global Intangible Low Taxed Income, or GILTI tax, which represents a U.S. income tax on forward earnings. Importantly, income taxes incurred in the U.S. on a cash basis for fiscal 2020 are expected to be minimal due to the projected utilization of the company's U.S. federal net operating loss carryforwards and immediate expensing of U.S. capital expenditures.

Looking ahead to the rest of this fiscal year, we estimate that our consolidated effective income tax rate will remain high and be in the 120% and 130% range based on the facts we know today and as affected by the factors noted above.

Notably, the U.S. Treasury Department and Internal Revenue Service have issued newly proposed regulations that if and when enacted, and if enacted as proposed, could provide us with some relief from the GILTI Tax under the proposed GILTI high-tax exception election beginning in fiscal 2021 or later, subject to the timing of enactment and subject to any determination by the U.S. Treasury Department and IRS that the exceptions should apply retroactive.

The proposed GILTI Tax high-tax exception election is not available until the proposed regulations are finalized and effective. If the proposed GILTI Tax exception election is enacted as proposed and becomes effective for our fiscal 2021 year and assuming we do not have non-recurring charges or impairments that would reduce our pretax income, then based on our current assumptions, we would estimate our tax rate for fiscal 2021 to be in the range of 35% to 50%.

However, let me stress that there are a lot of moving parts that affect this rate, including the many factors I've discussed previously, so this estimate could change. Trailing 12-months adjusted EBITDA as of the end of the third quarter of this fiscal year was $19.6 million or 6.7% of sales. Consolidated return on capital for the trailing 12-month period was 8.7%.

Now let's take a look at our business segments. For the mattress fabrics segment, sales were $33.1 million, down 7.4% compared with last year's third quarter. Operating income for the quarter was $1.8 million compared with $3.2 million a year-ago, with an operating income margin of 5.4% compared with 9% a year-ago. The operating performance was primarily affected by lower-than-expected sales. Return on capital for the trailing 12-month period for mattress fabrics was 14.1%.

For the upholstery fabrics segment, sales for the third quarter were $35 million, down 5.7% over the prior year, which – the prior year was a very strong quarter – sales performance that was positively affected by advanced customer purchases in anticipation of additional tariffs.

Operating income for the quarter was $3 million compared with $3.8 million a year-ago, with an operating income margin of 8.7% compared with 10.2% a year-ago. We are pleased with the 8.7% margin this year, given that it was achieved during the quarter when the Chinese New Year shutdown occurred. Return on capital for the trailing 12-month period for the upholstery fabric segment continues to be impressive, coming in at 54%.

The home accessories segment, which includes our e-commerce and finished products business offering bedding accessories and home goods, reported $3.9 million sales for the third quarter compared with $4.4 million a year-ago.

Operating loss for the quarter was $181,000, which reflects continued sequential improvement from the $350,000 loss experienced in the second quarter and the $535,000 loss experienced in the first quarter. We'll comment more on operating performance later on.

Here are the balance sheet highlights. We reported $34.8 million total cash and investments and outstanding borrowings of $925,000 for a net cash position of $33.9 million. For the first nine months of this fiscal year, we incurred $4.1 million of capital expenditures. We returned $4.5 million to shareholders in regular quarterly dividends and share repurchases through the third quarter of this fiscal year.

We had negative cash flow from operations and negative free cash flow of $519,000 and $4.7 million, respectively, for the first nine months of this fiscal year due primarily to the timing of payments in advance of Chinese New Year shutdowns, and higher than expected inventories, mostly in our mattress fabrics business. This compared with positive cash flow from operations and positive free cash flow of $8.1 million and $5.9 million respectively for the prior year period.

With better working capital performance, including better management of inventory, we expect cash flow from operations and free cash flow to improve significantly in the fourth quarter of this fiscal year. The company repurchased 56,000 shares of our common stock during the third quarter of this year and repurchased approximately 86,000 additional shares through March 4, leaving $3.3 million available under the previous share repurchase program.

As reported in our press release, our Board has approved an increase in our share repurchase authorization back to $5 million. Shares may be repurchased at the company's discretion from time-to-time in the open market or in privately negotiated transactions. We will continue to consider opportunities to repurchase shares at a price that reflects a discount to our calculated intrinsic value per share.

However, as highlighted in our capital allocation strategy, which is posted in the Investor Relations section of our website, we remain focused on a very disciplined approach to capital allocation, including maintaining a strong balance sheet and solid cash position, particularly given the current uncertainty in the global business environment.

With that, I'll turn the call back over to Iv.

Robert Culp

Thanks, Ken. Let me start with the mattress fabrics segment. Our mattress fabric sales were lower than anticipated for the third quarter of the year, as we were pressured by more than expected – or we got pressured more than expected from holiday shutdowns and continued industry weakness for our legacy business customers.

Mattress covers have become an increasingly important part of our business and losing multiple productive weeks for our CLASS cover operations in Haiti and also in China, caused a more significant impact when combined with softness in our legacy business. Also, the anti-dumping measures relating to low-priced mattress imports from China have not yet provided the relief expected for the domestic mattress industry.

In spite of these challenges, we continue to manage our business with a relentless focus on creative designs, innovative products and exceptional service. Our global platform supports these efforts with efficient production and distribution capabilities to provide a full complement of mattress fabrics and sewn covers, with the flexibility to adapt to evolving customer needs.

We are strengthened by our existing manufacturing operations in the U.S., Canada, Haiti, China and our sourcing platform in Turkey. We expect to add fabric production capabilities in Vietnam this calendar year, and we are also expanding our sewn cover production capabilities in Haiti with a new building and additional equipment.

We believe these expansions will enhance our abilities to serve customers. Further, while domestic disruption from low-priced mattress imports appears to be continuing as a result of many imports moving from China now to other countries, we believe our strong global platform for fabric and covers in Asia has us well positioned to capture market share with imported mattresses going forward.

Additionally, while the holiday shutdowns disrupted our CLASS operations in Haiti and China during the third quarter, we are pleased with the continued growth of our sewn mattress cover business. Demand trends for mattress covers remains favorable, especially for the growing boxed bedding space, and we continue to develop fresh products with both new and existing customers.

With sewn cover production capabilities now in the U.S., Haiti and Asia, we have a very strong platform that allows us to maximize our full supply chain potential from fabric to finished covers. We continue to invest in design and marketing capabilities with our latest technologies to improve the customer experience and speed to market with new digital tools and project management software.

We are very pleased with the initial customer response to our new 3D mapping and rendering capabilities, which is being marketed as Re.Imagine Culp Home Fashions. This reflects the spirit of innovation in our mattress fabrics business. We are also enhancing our service platform as part of our ongoing efforts to be more responsive to customer demand with shorter lead times and we are implementing a new inventory management process, which we believe will drive greater control.

I'm especially pleased with Sandy Brown, our longtime CFO in the mattress fabrics segment, is now President of the division. Having worked with Sandy for over 20 years, I am confident she has the experience, expertise and the vision to lead this business as we strive to operate our strong platform in the most efficient manner.

Looking ahead, there are many opportunities to advance our position as a leading provider of mattress fabrics and sewn covers. We believe we will benefit from our recent and ongoing efforts to further our design and service capabilities with advanced technologies that support our sales and marketing efforts with both legacy and new customers.

Now I'll turn to the upholstery fabrics segment. Our upholstery fabrics business was affected by a slowdown in shipments heading into the Chinese New Year holiday, resulting in lower than expected sales for the quarter. It is difficult to predict the impact of the holiday shutdown from year-to-year. And this year, we experienced a greater than expected decline in January leading up to the holiday period.

As a result, we showed a modest drop in sales compared with a very strong performance in the prior year period. In light of the uncertain business environment we faced, we are pleased with the overall performance of our upholstery fabric business, particularly given the comparison to a very strong quarter last year in fiscal 2019.

We have a very strong platform in China and stable, long-term supplier relationships with vendors that prioritize our production due to those strong relationships. This has been an important advantage for Culp, especially as we resumed operations at the end of the third quarter following an extended government-mandated shutdown in China, associated with the coronavirus outbreak.

We believe this platform supports our ability to manage the current disruptions created by this outbreak and the procedures required by the Chinese government. Also, our addition of cut and sew capabilities in Vietnam towards the end of fiscal 2019 has further augmented our Asian platform.

Throughout fiscal 2020, we have continued to execute our strategic focus on introducing new products and diversifying our customer base. We are especially pleased with the continued growth in our hospitality business, as we've extended our reach in this growing market.

Read Window Products, our window treatment and installation services business has been a key driver of our growing sales in this business, and we are excited about the continued growth opportunities as we expand our product portfolio to the hospitality market.

Product innovation is also a hallmark of our success in the marketplace, and provides a distinct competitive advantage for Culp. Our line of highly durable, stain-resistant LiveSmart fabrics continues to be very popular with both existing and new customers. We are excited about the demand trends for LiveSmart Evolve, our recently-introduced line of sustainability fabrics, featuring the use of recycled yarns, along with the same stain-resistant performance.

Looking ahead, while the business environment remains uncertain with the health issues surrounding the coronavirus in China and beyond, we believe we are well positioned to execute our strategy with favorable results. We have a unique combination of innovative products, creative design, a growing customer base across both residential and hospitality markets and a global platform to support our business and meet changing customer demand. As such, we remain confident in our ability to deliver another solid performance in our upholstery fabrics business in fiscal 2020.

Lastly, I'll comment on the results for Culp Home Accessories, which includes our e-commerce and finished products business, offering bedding accessories and home goods. We have worked hard to refine our strategy and drive improved results for our home accessories segment. While it is taking longer than we expected to reach our initial projections for this business, we are encouraged by recent opportunities with new online marketplaces and business-to-business sales channels.

We also remain dedicated to improving our performance on Amazon, which is a principal sales channel for our legacy e-commerce business. In tandem with these strategies, we are continuing to develop new products featuring Culp mattress fabrics and upholstery fabrics, and we are pleased with a very solid showing of those new products at the recent Las Vegas market. We remain optimistic about potential growth opportunities for Culp Home Accessories and the ability to leverage this new important sales channel to reach new customers for Culp.

Ken will now review the outlook for fourth quarter, and we will then take some questions.

Kenneth Bowling

Importantly, our expectations for the fourth quarter assume the coronavirus outbreak does not have a greater-than-anticipated impact on the company's operations, which may affect each of the company's divisions to varying levels. We are monitoring the situation daily and following the processes and procedures provided for in the company's global pandemic disease contingent plan to protect our workforce.

However, the potential impact of the coronavirus is difficult to estimate reasonably at this point given the fluidity and circumstances related to the disease and the actions being taken to contain its spread. Subject to those assumptions and limitations, we expect overall sales to increase slightly compared with the fourth quarter of last year.

We expect mattress fabric sales to be slightly down compared with the fourth quarter of last year due to continuing market pressure and softness in our legacy business during the fourth quarter while operating income and margins are expected to increase slightly compared with the prior year period.

In our upholstery fabrics segment, we expect fourth quarter sales and operating income and margin to be slightly higher than the prior year period. In our Home Accessories segment, we expect fourth quarter sales to be comparable to the fourth quarter of last fiscal year. We expect an operating loss for the fourth quarter, but with significant improvement compared to the prior year period and continued quarter-over-quarter sequential improvement for this fiscal year.

Considering these factors, the company expects to report pretax income for the fourth quarter in the range of $1.9 million to $2.4 million, excluding restructuring and related charges or credits, other non-recurring charges and impairment charges, if any. Pretax income for last year's fourth quarter was $1.5 million, which included a non-recurring charge of $500,000. Excluding this charge, pretax income for the fourth quarter of last year was $2 million.

Based on our current projection, capital expenditures for this fiscal year are now expected to be in the $6 million to $6.5 million range. Depreciation and amortization is expected to be approximately $8.6 million. Additionally, free cash flow for this fiscal year is expected to be moderately down as compared to last year's results.

With that, we will now take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Bobby Griffin with Raymond James. Please go ahead.

Robert Griffin

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

Robert Culp

Good morning, Bobby.

Robert Griffin

So I guess the first thing I wanted to talk about is kind of maybe adding some fabric production capabilities in Vietnam. And maybe can we expand on what those capabilities would give you guys? And what's the strategy to participate more? And what, I guess, we can call the Asia import market for mattresses back into the U.S.?

Robert Culp

Right. Thank you, Bobby. This is Iv. I'll take that question. You have to go back a little bit. As we think about both antidumping and tariffs, which it feels like – now we're not even talking about that anymore, but that was a pretty significant disruption over the last year, of Section 301 tariffs. The rules for upholstery and mattress fabrics are quite different. So the reason we're looking primarily to establish fabric manufacturing in Vietnam is because today, mattress fabrics have a fairly significant extra 301 tariff coming from China as do mattress covers.

Unlike furniture or upholstery fabric where we can ship fabric from China to Vietnam to avoid a tariff, unless you make the full sewn cover, the fabric all the way to cover in Vietnam, you could still pay the extra tariff. So for us, establishing in Vietnam is a risk management play, a cost-saving play and certainly, gives us the ability to make covers that we can fulfill through Vietnam that we can then sell into other countries that are making beds and up in the U.S. or bring fabric and covers of our own back to us in the U.S. We hope that answers it.

Robert Griffin

Yes. That’s very helpful. I'm just curious from a competitive standpoint. Once you get this operation set up, will those corresponding covers that you can now make in Vietnam be competitively priced to some of the covers that are already going on the imports – imported beds into the U.S. today?

Robert Culp

Yes, sure, Bobby. We expect to – we've been very competitive with covers already. Mattress covers that we're making through our Culp China platform has been very competitive. And there are already opportunities materializing there. But to be more advantageous and to deal with U.S. tariff rules and costs, Vietnam could be potentially more advantageous in certain cases.

Robert Griffin

Okay. And then secondly for me, on the home accessories business, you talked about maybe improvement, some of the performance on the Amazon channel. So can you maybe expand a little bit on those strategies? And then secondly, is there a bigger opportunity to sell some of those finished products in retail locations?

Robert Culp

Yes, sir, Bobby. Those are really good questions, too. First, I'll touch on the Amazon part. When we first invested in home accessories, Amazon was the sole or really, the primary part of the business, up to 80% of the sales. And we're really focused on that. Since the time we've invested has become more costly to do business and to rank higher to Google Adwords to just find yourself higher in the rankings, so they ended up costing us more money than we might have expected.

So we've dialed back our offerings on Amazon to really what we consider our core, most stable, most cost-effective products. And we're trying to do what we consider to be an appropriate level of advertising. So what we have placed on Amazon today, we believe, we can service well. It's a good-quality product that should rank well and then we don't have to over advertise it and spend too much money to make it work. So we're anticipating Amazon being a significant, but more like a 50% share of our business and not such a heavy piece.

For certain, we have great opportunities in all of our accessory products on the B2B side. We have a lot of customers, roll-packed bedding customers that are looking for products to attack on and have additional sales accessories. We also had a chance to sell some of our products into some retail direct distribution, and that is working. Sometimes, it's never as fast as we want it to be because it takes time to get in the retail cycle, but we are very optimistic about that opportunity also.

Robert Griffin

I appreciate [indiscernible]. That’s very helpful. Best of luck.

Robert Culp

Yes, sir. Thank you.

Operator

[Operator Instructions] We’ll take our next question from Paul Betz with Stifel.

Paul Betz

Good morning, everyone. Continuing with Amazon. You mentioned some new sellers are violating terms. Can you explain what's going on there? And maybe if that gets rectified, you may lose some – see less competition?

Robert Culp

Yes, sir. Well, Paul, thank you for the question. It's Iv. I'll take that, too. Basically, what's happened since we first started with Amazon, and there's been a lot of stories in the press about this. There have been times where, primarily, Chinese sellers have flooded the marketplace on commodity items, mattress protectors and mattress pads and things that we specialized in. And Amazon has pretty specific terms of service, the way you acquire 5-star reviews.

We have a lot of reviews that we've earned through steady, normal processes, selling items and getting reviews. It's not really in terms of service to be doing a lot of free giveaways and fabricating reviews and also to be downgrading competitors with pay per views, which we have found instances of all those things.

And we have reported them to really high levels in Amazon and made some headway. So Amazon is working really hard to change their method, the way they rank suppliers. And I think in time that will get better. But it's a pretty long sight for someone like us to make a big impact really quick. But that's what we mean by terms of service violations. It's really fabricated and falsified reviews, primarily.

Paul Betz

Okay. Thanks. And the CapEx was reduced. Is that just to conserve cash? Or what areas did you – might lower that some?

Kenneth Bowling

Yes, Paul. This is Ken. Yes. We looked at the year and given our cash position, we started prioritizing projects. And so we have a certain amount of what we call maintenance CapEx, which is in that $6 million or so range.

So when you look at where we're ending up, projected to end up and then looking forward, I mean, we are going to – in this time of uncertainty, we are going to prioritize projects and as we said, keep a very close eye on our cash. But we will continue to invest in the business as we always have, and we'll just have to, just mark the things closely and prioritize projects as they come along.

Paul Betz

Okay, thanks. And lastly, the gross margins in the mattress segment, below our expectations, down year-over-year. Is that just the disruption from the holiday shutdown? Or is there anything else going on there?

Kenneth Bowling

No, that's a good insight there. Obviously, the lower sales had an impact, but there are a lot of moving parts with the shutdowns and all that in the quarter. And so that was the primary reason for the margin being down. You have the lower sales and the other disruptions as well.

Paul Betz

Okay. Thank you very much.

Kenneth Bowling

Thank you.

Robert Culp

Thank you.

Operator

We'll take our next question from Marco Rodriguez with Stonegate Capital Markets. Please go ahead.

Marco Rodriguez

Good morning, guys. Thank you for taking my questions. Good morning. I was wondering if maybe you could talk a little bit more about the expansion activities that you're doing here in Vietnam and Haiti. If you could just maybe place, a time line as far as when these capabilities will be there and then the costs associated with those?

Robert Culp

Yes, sir. Thanks for that question, Marco, and expansions in Vietnam and Haiti are both really targeted for the mattress fabrics business in terms of the expansion standpoint. We're already operating pretty significantly in Vietnam for our upholstery cut and sew kits and that's performing well.

Haiti, we started at a two-pronged strategy – really, a three-pronged strategy for mattress covers. We have our U.S. business that is prototyping and quick rollout and emergency recovery platform that works well for us.

Haiti is a very low-cost opportunity that we see, often a near sourcing potential. So we're able to drive significantly faster lead times in Haiti. It's been a really resounding success for so far, and we're just expanding the building. So it's not a significant expense.

We're just building some extra space and add some more sewing machines. Getting into cut and sew is not a heavy CapEx venture. So we would anticipate being in that plan and having additional capacity this summer. It's a pretty fast uprise in there, and we're excited about Haiti.

The good part of that is we can bring fabrics from anywhere in the world today, and if it's sewn in Haiti, it comes back to the U.S. There's no duty on any of the products in or out. So very advantageous platform that should provide us with, faster lead times if we forecast in-store inventories at the right places.

Vietnam is really an important ability for us to dabble with mattress fabrics in a small way. We'll start small, mainly focused on serving Asian customers. And that's our attempt to get after some of the beds that are being made in Asia, and we can do that with both fabric or with the sewn mattress cover. If we need to, we also have the ability to bring some of that back to the U.S. Not preferred on a lead time basis, but it could be good for cost, and we'll just do that on an as-needed basis and we would avoid a Section 301 tariff.

Marco Rodriguez

Got it. Understood. And then in terms of the service platform additions or enhancements that you're taking a look at in the new inventory management, can you maybe expand a little bit more on what sort of impact, if any, you might see on the P&L and/or the balance sheet with those?

Robert Culp

Well, I'll let Ken comment on the impact. But I'll tell you, the way – the reason we're thinking about it is the mattress industry always for a long time was a pretty quick speed-to-market business, where we pretty much inventory and shift everything same day and we still do that for a big part of the market.

But as things have gotten more diverse with imported mattresses and imported components, lead times have gotten a little longer. So we've tried to then match our platform with all the multi-countries that we're in: U.S., Canada, China, Haiti, Vietnam and then our sourcing business in Turkey. We want to bring lead times back down, even with that global strategy. So our anticipation would not be to get out of the longer lead times that we've had recently, shorten those lead times down so we're not caught with so much exposure on the water as market conditions change.

So we're just – our intention is to bring a better, efficient management of our scheduling, faster lead time to customers, which will make them happy and then reduce our exposure for extra inventory.

Kenneth Bowling

Yes, Marco. This is Ken. The extra inventory, we were expecting, obviously, a better quarter than we had. And so we built up inventory that – those sales didn't materialize. But now with this new focus, we should be able to get inventory down and keep it in line more consistently, which will obviously help improve the cash flow in the fourth quarter. But we're excited about the new process, and hopefully don't get back in a situation where we build up inventory in anticipation of sales that don't materialize. So this is an exciting move and one that's – that we're anxious to get started.

Marco Rodriguez

Got it. And last quick question. It's kind of a difficult one here on guidance. You've built in some sort of an impact for coronavirus. But just kind of curious if maybe you can put a little bit more color around what does worsening conditions mean for you or look like. Are we talking additional shutdowns in China as far as the risk is concerned? And I know that you also brought the fact that obviously, consumer confidence in the U.S. is a big unknown as it stands right now.

Kenneth Bowling

Yes. Marco, I'll answer and then if Boyd wants to jump in. Yes, it's forecasting in this environment and is extremely difficult. We put a lot of language around the uncertainty. As you know, everybody reads what happens daily. The news comes out. And so right now, things are operating well in China. Things are recovering. So we've got that news there. But things change daily.

So given where we are, we expect a good quarter in the fourth quarter. But as I've said, things can change quickly, and we'll just have to wait and see. Now we've got processes and systems that we can react to and make changes and be flexible in our flexible platforms, but it's just a very, very uncertain time right now. And so we're just being very cautious in how we forecast. Boyd, I don't know if you want to…

Boyd Chumbley

Yes, I'll add to that, Ken. Thank you. And Marco, just in relation to the current situation for the upholstery side in China, as we've relayed, we've really seen a return now to mostly normal situations, very quickly getting back to normal situations there. We had a one-week delay in our China operation government mandated one week delay before we were able to get back to operating. And then we've seen some delays from our supply base.

But currently, nearly all of our suppliers are now back to almost full output again. So the current situation has been very positive. We've experienced minimal delays and disruptions to supply to our customer base as a result. And so while it may – remains a dynamic situation for sure, and uncertainty the current picture is China has recovered quite nicely and our supply base is back to near full output, and so at the moment, there appears to be minimal delays coming from it.

Marco Rodriguez

Thanks a lot guys. I appreciate your time.

Robert Culp

Thank you, Marco.

Kenneth Bowling

Thank you, Marco.

Operator

It appears there are no further questions at this time. Mr. Iv Culp, I'd like to turn the conference back to you for any additional or closing remarks.

Robert Culp

Okay. Thank you, operator. And again, thanks to everyone for your participation and your interest in Culp. We look forward to updating you on our progress next quarter. Have a great day.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.