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 questions. 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. 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, 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 of 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 compared 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 continues 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 remain 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 cover. Our balance sheet remains solid, and I'm extremely pleased that we have once again increased our annual dividend, marking 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 shortages in the U.S. and Canada, among other factors. These pressures were partially offset by lower total SG&A expenses 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 month 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 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 service, which determines the deductibility of accelerated depreciation. Now, take a look at our business segments. For the 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 compared to the prior year period, was negatively affected primarily by higher freight, raw material, and labor costs, inefficiencies due to ongoing labor shortages 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 affecting our operating performance in the near term. 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 fluctuations in China, and lower contributions from our Read Window Products business. We implemented a freight surcharge during the second quarter to help offset rising freight costs, but due to the continued rapid increase in operating material costs, we are instituting an additional price increase during the third quarter to help cover a portion of these inflationary pressures. Here are 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 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 quarterly 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 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 reactions 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 fluctuations 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 to 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 customer supply chain disruptions and uncertainty related to the impact of the new Omicron variant 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, recognition of our customer placements, and the scheduled timing for their release in a traditionally strong seasonal 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.

Thank you, Ken. 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 the questions. I know you provided a good overview of the two different segments. I wanted to gain a clearer understanding of the timing shifts related to shipments. It seems there are some issues with new product launches, and some of it appears to be customers requesting to delay shipments. Could you please clarify these two aspects and provide us with a better understanding of the timing issues affecting the outlook for the second half?

Thank you for the question, and good morning. This is Iv. I'll begin and let Boyd add to this as well. There are some nuances between the two businesses, so your question is very good. In the upholstery fabrics sector, we have strategically built up some product ahead of the Chinese New Year and also increased inventory in anticipation of our customers expanding capacity to meet rising demand. We have noticed that our supply chain has been performing better and keeping pace with market demand, and our lead times are back to normal. Therefore, we are ready to deliver at what would typically be higher capacity levels, which in some cases our customers haven’t fully aligned with yet. Boyd, feel free to elaborate on why there might be some delays in shipping.

No. I believe that summarizes the developments in the fabric segment of our business. Additionally, as we've mentioned, the cut and sew operations in Vietnam faced disruptions in the second quarter. However, with Vietnam's capacity now fully restored and our Haiti operation coming online, we expect to see a more typical shipping pattern for the second half of the year in our cut-and-sew business as well.

To address your question, Anthony, we anticipate some improvement in upholstery fabric from the second quarter to the third quarter. When we discuss mattress fabrics, particularly mattress covers, we typically see a strong increase in new product rollouts by the end of our third quarter, usually targeting January of the following year. Due to current demand and supply chain challenges, many of the rollouts we would expect for mattress fabrics in the third quarter are now being deferred to the fourth quarter or later. This situation makes it a bit different than usual. Both segments are functioning, but our customers are unable to manage all the products we’ve prepared. Upholstery is showing some improvement in the third quarter, while mattress fabrics may not experience that improvement until the fourth quarter.

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 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 quickly, and we were stay-at-home responses 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 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 a positive long-term trend in the order level, which continues 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. Looking at Q2, the combined effect of all the increases we've implemented so far is around 3% of total income or sales. As we consider the remainder of the year, we have more increases planned, which will accumulate over time. This means the impact will be higher than what we currently see, but the timing will be staggered. By the end of the third quarter, I believe all of these will be in place.

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 would like to know if you could quantify the time it will take for your customers to resolve the additional issues before you can access your fabric inventory. I understand this may vary by segment, so could you provide an estimate of what that time frame looks like?

Yes, that's a good question. We're being a bit cautious when discussing the timing, but we believe that with the strong rebound expected in Q4, it will begin soon. This isn't a long-term issue in our view; we anticipate improvements starting in Q4 and continuing into next year.

Okay.

In both businesses.

I'm sorry?

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

Got you. And let me ask, if Haiti had been operational throughout the entire second quarter, what impact would that have had on your Vietnam operation? What kind of effect would you have experienced?

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 onstream. 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.

Budd's analysis highlights that your decision to shift production back to China was a significant move for your supply chain, but it incurred costs due to tariffs and various impacts, which was the reason for originally moving to Vietnam.

That is correct. Right.

Okay, that makes sense. One term that the chairman has now seemingly retired is transitory in reference to inflation, and I don’t think anyone in the business community has believed in a transitory nature for a while. What is your current perspective on inflation? Are you experiencing any new price increases in the last few weeks, or are we seeing any signs of a slowdown in the rate of these increases?

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 to answer your question, we are continuing to see additional inflationary cost pressures.

Okay. It seems that if you're discussing energy, that's part of the production factors. If freight has peaked, we're probably nearing a peak in that area as well. Those aspects tend to have an impact on our supply chain and the economy over time. So, would that be a correct way to view it, or am I being overly optimistic?

I think we're currently in an uncertain environment, experiencing a lot of volatility from month to month and week to week. Therefore, I'm not certain how to approach this yet, except that as we encounter these cost pressures, we are taking the necessary actions and will continue to respond as needed.

Yeah, I think we're thinking about it like you are, Budd. We do hope we've reached a peak on some of those costs. Raw materials are probably the one that I worry about the most that might see 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 are in much better shape as we get to the middle of Q3 with a much stronger labor position. So even at somewhat higher rates, having an efficient labor force will be a big help to us there, that starts to limit some of the pressures in leasing that part of the business.

We've received feedback from many individuals regarding a shortage in securing appropriate associates. Can you provide some quantification? Are you at the desired level for your labor force? How does the current shortage compare to where it stood two weeks ago, four weeks ago, or six weeks ago?

Yeah, I mean, it is significantly and drastically improved from where it was six weeks ago. So, for whatever reason, we just had a nice, have done a great job recruiting, and we have 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 a 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.

Yes, to clarify, I will start, and Iv can add at the end. Regarding the inventory buildup, I noted that part of it is customer-related, with customers adjusting for the Chinese New Year. All of this involves finished goods. We have also increased our raw materials for mattress fabric in anticipation of price increases, so it’s a matter of both aspects. These increases are recent and aimed at preparing for these periods, so I don’t foresee any exposure there.

Yeah.

We don't believe there's any exposure in the upholstery side of the business, that is more finished goods prepared ahead of the 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.

Many companies are currently focusing on maintaining higher inventory levels due to uncertainty in the market. We feel confident about this approach and anticipate positive outcomes in the fourth quarter.

Do you think inventory levels will increase or decrease? There's a lot of discussion around the need for more inventory rather than less, as the era of just-in-time inventory seems to be fading. Companies are looking to maintain extra supply due to concerns stemming from the supply chain issues we've faced over the past two quarters. With approximately $16 million, how much do you anticipate that will reduce?

Yes, I think again, this is Ken. And I think for the fourth quarter, of course, we think we can take a sizable chunk out of that. And then from there, you look at over the past year, I think it was in the 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 the number of years past, we certainly see it as a strategic advantage to be able to offer exceptional service continually to our customer base.

I believe I understand that this reflects Culp's reputation. With the stronger balance sheet you have, that gives you a competitive edge. Best of luck in the third and fourth quarters, and I look forward to speaking with you again soon.

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, everyone. I wanted to ask about the outlook you mentioned in the prepared remarks. You've identified several challenges affecting the second half of the year, such as inflation, low demand, high customer inventory levels, and supply-chain issues at your customers. I understand the Q3 guidance given these factors. However, could you discuss your expectations for Q4, particularly regarding a stronger improvement if inflationary pressures are only temporary and supply chain issues persist? What gives you confidence for a strong improvement in Q4?

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, customers, or suppliers, is not really a question of if it's going to come back strong, it's when. So, we've 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, really boosting and ramping up that supply chain even more. We'll be much more covered for inflationary costs in our business in Q4. With the price increases and the surcharges 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 expectations 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 the 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.

Thank you, that was very helpful. I wanted to follow up on a previous question regarding your comments about the potential decrease in demand due to pricing pressures, and I recognize the challenging year-over-year comparisons. Could you elaborate on demand? Is it showing signs of being slightly better than pre-COVID levels? I'm trying to understand if inflation and price hikes are genuinely affecting consumers' ability or willingness to purchase new items.

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 share your curiosity. While the price increases we're implementing aren't expected to disrupt the market significantly, we are aware that one of our customers has experienced increases in the mid to high teens. However, we have not observed any reduction in demand.

Got it. 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 it's a good question, Marco. We've tried to approach it thoughtfully. The competitive pressures don't mainly relate to us. The key issue is the timing of when we can implement price increases. We will get there, but we've been lagging. There are always competitive pressures when we engage with customers in China. Looking at the long-term goal of building substantial business with our most trusted partners, sometimes we can't pass on costs as quickly as we would like, so we implement changes in stages and gradually align with the full situation, though not instantly. Boyd, do you have anything to add regarding 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.