Good morning and welcome to Culp, Inc. Third Quarter 2022 Earnings Conference Call. Please note that this event is being recorded. I’d now like to turn the call over to Ms. Dru Anderson. Please go ahead.

Thank you. Good morning and welcome to the Culp conference call to review the company’s results for the third 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 these non-GAAP financial measurements to the most directly comparable GAAP financial measurement is 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. With that, I will now turn the call over to Iv Culp, President and Chief Executive Officer. Please go ahead, sir.

Thank you so much, Dru, and good morning. 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. I will begin the call with some opening comments and objectives, and Ken will then review the financial results for the quarter. I will then briefly update you on strategic actions specific to each of our operating segments. After that, Ken will review our fourth quarter and fiscal 2022 business outlook. We will be pleased to take your questions afterward. As expected, the third quarter was significantly challenged by a convergence of factors that affected our performance. Sales were generally in line with expectations despite being tempered somewhat in our Mattress Fabrics business, and they did reflect stable demand for our products as compared to the third quarter of last year. We also saw some impact from the pricing actions we have taken. As compared to the same pre-pandemic period two years ago, sales for the quarter were up nicely at approximately 17%. However, profitability for the quarter was pressured more than expected, particularly in our Mattress Fabrics business. Despite headwinds, the fundamentals of our business remain solid, and we have the financial strength to support our business in the current environment. In each of our segments, we continue to execute our product-driven strategy with an emphasis on design creativity, innovation, and servicing the evolving needs of our customers. Our diversified global platform and robust supply chain have enabled us to consistently meet our customer delivery commitments in the face of numerous challenges, and we are well-positioned to capitalize on planned new programs and expanding market opportunities. Notably, we opened our third Haiti facility during the third quarter, which will allow us to expand our nearshore capacity for cut and sewn upholstery kits and to complement our already strong sewn mattress cover business and also to support future growth and build supply chain resiliency. We have made considerable investments in our business over the past nine months, including this new cut and sewn facility in Haiti, a new innovation campus in High Point, North Carolina, and a higher inventory balance to protect against supply chain disruption. That inventory balance and those expenditures also support our valued customers and help us get ahead of rising raw material costs. As a result of these strategic investments, our cash position has declined during fiscal 2022, but we now expect our cash position to stabilize during the fourth quarter. Importantly, while it’s always our intent and desire to grow our revenues and profits, we understand that we are facing an uncertain demand and cost environment. We will be laser-focused on generating cash and keeping our expense structure in line with whatever revenue backdrop might arise. Looking ahead, we have several focused initiatives for the fourth quarter and continuing into fiscal 2023. Our first objective is to grow sales, specifically focusing on our Mattress Fabrics division. Our Mattress Fabrics business is seeing significant planned new placements that we have won with customers, and we are waiting for them to roll out. The timing for new product rollouts by our customers would normally have been in our third quarter or at the start of the calendar year. But we have seen some customer delays, and we now expect these launches will commence this summer. We have opportunities for sales growth in both Mattress Fabrics and sewn covers, but we especially look to rebound sales in our sewn cover business, where inventory at our customers has delayed the timing of new orders. We are also reorganizing our sales effort and our sales team within our Mattress Fabrics business to continue leveraging our re-imagined 3D rendering service to develop a more tailored and much more personal sales relationship with our customers and to offer enhanced speed-to-market. We are effectively utilizing the talent of our brand experience managers and the expertise of our service personnel and our global platform to secure new opportunities. We also have an amazing location at our new design and innovation center at Condon yards in High Point. The design teams from our various businesses are collaborating, and for the first time in years, we are presenting all of our products in the same show space. Customers across our divisions have been raving about the atmosphere and the opportunities for development, and we believe we will continue to see success from this location. We have the ISPA Trade Show next week, which is the first real mattress trade show in four years, and we will be featuring an express line of fabrics, offering a curated quick-ship option to further champion our global service capability and flexibility. We will also debut new collections focusing on sustainability and luxury in both aesthetics and technical performance, encompassing development and fabric forming processes. New innovation with excellent service is paramount for the future, and we are executing on both. In our Upholstery Fabrics business, we will continue marketing the strength of our LiveSmart portfolio of products, offering performance, ease of cleaning, durability, and sustainability. We remain very excited about our LiveSmart brands and their acceptance in the marketplace. We will also continue pushing, and we are optimistic about the recovery of our hospitality business as consumers return to the office and hotels begin to renovate for travelers. In tandem with the plan for increasing sales, we will also work to maximize our efficiency and optimize our global platforms. Proper customer service is equally as important as building sales, and we have reestablished, through these uncertain times, that supply chain flexibility and redundancy are critical. Our multi-country platform offering production and sourcing capabilities in six countries: the USA, Canada, China, Haiti, Vietnam, and Turkey is vital to our success and allows us to meet our customers where they are and how they want to do business with us. In both businesses, we have a competitive advantage with our global presence to service our customers, and we have proven it throughout the last year with an excellent service record. As we look ahead, the heavy lifting in establishing these platforms is complete, and we are going to be more strategic to balance output from all facilities as we meet demand. A balanced product mix across our global platform is critically important to overall profitability. As I already commented, our most recent enhancement is our new Haiti operation for cut and sewn upholstery kits, which is now operational, and we are growing the capabilities of this facility every week. This is our third building in Haiti, again with two existing facilities for cut and sewn mattress covers already in operation. Another objective and a top priority is our emphasis on managing and stabilizing our solid cash position. As mentioned, we will work to achieve this regardless of the industry environment. Notably, we continue to maintain a strong balance sheet with solid liquidity. We will continue following our formalized capital allocation strategy, which is available on our website. We will utilize and strategically reduce our investment in inventory to generate sales and to protect us from macro disruptions and/or cost pressure. We will continue to control our corporate overheads and SG&A costs just as we have done this fiscal year. We have already made significant capital expenditures in recent years, and we do not anticipate major needs in the near term. We will aggressively manage costs overall in response to the industry environment. Overall, we remain diligently focused on maintaining balance sheet strength and continuing to reward our shareholders with our regular quarterly dividend. Although we do expect the current pressures to continue in the near term, we are certainly working to mitigate these challenges with the initiatives I just mentioned, as well as other actions, including additional price increases taking effect in both of our businesses during the fourth quarter to help further offset rising costs. We are seeing some improvement in labor conditions, and we are intentionally focused on retaining existing and newly trained employees. We also expect to see a more normalized product mix in our Mattress Fabrics business during the fourth quarter. I remain very optimistic about Culp’s future as we continue to demonstrate the competitive strength of our innovative product offerings and diversified global platform. We look forward to the opportunities ahead to deliver long-term profitable growth and value for our shareholders. Lastly, I want to thank our dedicated employees around the world for their resiliency and their commitment to the long-term success of Culp. Their spirit is inspiring to me, and I am proud to be part of their team. Also, I want to celebrate the completion of our first global giving initiative, aptly named 'Share the Love.' In February, all of Culp’s worldwide facilities participated to support their local communities and those in need. A special thank you to our employees for contributing in such a meaningful way. 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 to cover key performance measures. We have also posted our capital allocation strategy. Here are the financial highlights for the third quarter. Net sales were $80.3 million, up 1.2% compared with the prior year period. The company reported income from operations of $1.1 million compared with income from operations of $4 million for the prior year period. I will comment in more detail on divisional sales and operating performance in a moment. Net loss for the third quarter was $289,000 or $0.02 per diluted share compared with net income of $2.1 million or $0.17 per diluted share for the prior year period. Notably, the net loss in earnings per diluted share for the third quarter this fiscal year was significantly impacted by an abnormally high tax rate for the quarter, which I will discuss in a few minutes. Our overall operating performance was affected by several headwinds, namely operating inefficiencies within our Mattress Fabrics global platform due to an unfavorable product mix impacting our U.S. and Canadian locations, as well as the continued rapid rise in freight, raw material, and labor costs and operating inefficiencies due to labor shortages in the U.S. and Canada, among other factors. These pressures were partially offset by lower total SG&A expense for the quarter, due primarily to lower accrued incentive compensation expense. On a percent of sales basis, total SG&A came in at 10% compared to 12.4% for the same period a year ago. Trailing 12 months adjusted EBITDA was $15.3 million or 4.8% of net sales compared to $8.8 million or 3.3% of net sales for the same period last year, reflecting a year-over-year improvement of 73%. Consolidated return on capital for the trailing 12-month period was 8%. The effective income tax rate for the third quarter of this fiscal year was 129% compared with 28.8% for the same period a year ago. The significant increase in the company’s effective income tax rate for the third quarter of this fiscal year is due to the company’s mix of income between the U.S. and its foreign jurisdictions. During the third quarter of this fiscal year, we incurred higher pre-tax losses from our U.S. operations as compared with the third quarter of last fiscal year. As a result, since all of our taxable income is earned by our foreign jurisdictions located in China and Canada, the income tax expense incurred stemmed from taxable income from foreign jurisdictions that was much higher than our consolidated taxable income during the third quarter of this fiscal year as compared to the prior year period. We are currently projecting cash income tax payments of approximately $3.5 million for this fiscal year. 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 concerning the U.S. dollar, as well as the timing of when significant capital projects will be placed into service. Now, let’s take a look at our business segments. For the Mattress Fabrics segment, sales were $38.4 million, down 0.4% compared to last year’s third quarter. Sales for the quarter, which included pricing and surcharge actions that were in effect during the period, were relatively stable as compared to the third quarter of last fiscal year. However, top line performance was tempered by significant weakness in mattress cover sales, as well as customer delays in launching new products. Sales were also affected by traditional seasonal slowdowns, the widespread resurgence of COVID, and the impact of inflationary pressures on consumer spending, as well as weather disruptions at some of our facilities. Operating income for the quarter was $0.4 million compared with $3.3 million a year ago, with an operating income margin of 0.9% compared with 8.5% a year ago. Our operating performance for the third quarter of this fiscal year was significantly pressured by operating inefficiencies within our global platform due to an unfavorable product mix impact in our U.S. and Canadian locations. An unfavorable product mix mainly infers not maximizing production across all of our onshore, nearshore, and offshore locations. In the third quarter, as we serviced committed demand, we were unbalanced with higher amounts of offshore production, which impacted efficiency and our ability to cover fixed costs in our North American locations. Our operating performance for the quarter was also affected by higher freight, raw material labor costs, ongoing labor challenges, including inefficiencies due to hiring and training new employees in the U.S. and Canada, and record levels of COVID absenteeism in January, and inefficiencies due to normal holiday shutdowns at certain of our locations. We did take selective pricing action during the third quarter to help offset these rising costs, and we are implementing additional targeted price increases during the fourth quarter to further mitigate inflationary pressures. For the Upholstery Fabrics segment, sales for the third quarter were $41.9 million, up 2.7% over the prior year. This growth in sales was driven by solid demand for our products, even when compared to an especially strong sales performance during the prior year period. Demand remained well above pre-pandemic levels, and we continue to benefit from our robust platform in Asia, our stable long-term supplier relationships, and the success of our product innovation strategy, including the continued popularity of our LiveSmart portfolio performance products. Our sales results were also supplemented by the pricing and surcharge actions that were effective during the quarter. Additionally, top line performance in our Hospitality business continued to recover from pre-pandemic-related impacts during the third quarter, with higher sales in both our hospitality contract business and our Read Window Products business. Operating income for the quarter was $2.4 million compared with $3.9 million a year ago, with an operating income margin of 5.8% compared with 9.5% a year ago. Our operating performance was affected by higher freight and raw material costs, start-up costs for our new Haiti facility, unfavorable foreign currency fluctuations in China, and a lower contribution from our Read Window Products business. We took additional pricing actions during the third quarter to help cover a portion of the continued rise in operating costs, and this action began to favorably impact our results in the latter part of the quarter. Although the temporary cost-price lag affected operating performance for the third quarter, we will benefit during the fourth quarter from the full impact of this additional pricing action. Notably, we have done a better job in our Upholstery Fabrics business in keeping up with the cost price pressures, although it’s been with a temporary lag. For the fourth quarter, we do expect to see more normalized cost pressure for this segment, assuming there are no more changes or inflation for our raw materials. Now I’ll turn to the balance sheet. We reported $22.2 million in total cash and investments and no outstanding debt under our $30 million unsecured revolving credit facility as of the end of the third quarter. This compares with $46.9 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 $12.4 million and negative $18.5 million, respectively, for the first nine months of this fiscal year. As we continue to invest in our business, our cash flow from operations and free cash flow during the first nine months of this fiscal year were affected by the following uses of cash: an investment of $17.1 million in higher inventory levels to protect against supply chain disruption and 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. Importantly, approximately 25% of this increase was a result of higher raw material costs through the revaluation of our inventory. Another point, $5.3 million investment in capital expenditures, including expenditures for machinery, equipment, and IT investments, as well as expenditures will add to our new innovation campus. $1.9 million in payments for our new building lease and start-up expenses associated with our Haiti upholstery cut and sew operations, 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 nine months of this fiscal year, we paid $4.1 million in regular quarterly dividends and spent $1.8 million on share repurchases. The company did not repurchase any shares during the third quarter of this fiscal year, leaving approximately $3.2 million available under our current share repurchase program. Finally, as Iv discussed, we remain focused on maintaining a strong financial position and disciplined execution of our capital allocation strategy during these uncertain times. Over the course of this fiscal year, we have strategically committed significant funds for organic investment in our business to positively position the company for future growth as external conditions normalize. Based on our current and expected uses of cash in our business outlook for the remainder of this fiscal year, we expect total cash and investments to stabilize during the fourth quarter. With that, I’ll turn the call over to Iv.

Thank you, Ken. I’ll just give a few more comments about each division, beginning with the Mattress Fabrics segment. Despite the headwinds in this business, Culp Home Fashions has remained focused on product innovation, creative designs, and personalized customer attention. We had a very favorable show in the recent Las Vegas market, and we are excited about the positive response from customers. The strength and flexibility of our global manufacturing and sourcing operations have enabled us to support the evolving needs of our customers throughout the quarter. This platform continues to provide us with a competitive advantage for opportunities to expand our market reach across new and existing customers with preferred model offerings onshore, nearshore, and offshore capabilities. Looking ahead, we are enthusiastic about our strong new placements and product development opportunities for next fiscal year. However, there is some weakening in the domestic mattress industry, and it may impact demand and lead to additional temporary delays in new product rollouts. Rising costs also continue to pressure our profitability, but we are implementing additional targeted price increases during the fourth quarter to further mitigate these higher costs. We also expect a more normalized product mix during the fourth quarter, and we remain committed to controlling costs, managing and reducing our inventory, retaining talent, and improving our operating efficiencies. Now a few comments on the Upholstery Fabrics segment. We were pleased by the better-than-expected growth in sales for the third quarter. Notably, the $41.9 million in third quarter sales is the highest quarterly level since our 2006 fiscal year. We were excited to open our new Haiti facility during the quarter. We finally began shipping products from the facility in January and look forward to increasing production and reducing startup costs over the upcoming months. Looking ahead, we expect some of the current near-term headwinds may continue to pressure our results during the fourth quarter. We also expect a slowdown in new business for the residential home furnishings industry compared to the peak experienced during the post-COVID stay-at-home surge, which may temper the growth level in sales for our residential fabric products. Additionally, our sales and operating performance for the fourth quarter compared sequentially to the third quarter will be affected by the timing of the Chinese New Year holiday, which falls substantially within the fourth quarter. Despite these external conditions, we remain encouraged by the generally favorable demand trends. We are confident in our ability to navigate these pressures as we leverage our product-driven strategy and innovative products, along with our flexible Asian platform, stable supply chain partners, and expanded capacity in Haiti to sustain our competitive advantage and expand our market reach. We are well positioned for the long-term, and we look forward to the opportunities ahead as we continue to support our valued customers. Now Ken is going to discuss the general outlook for the fourth quarter of this fiscal year, and then we will take some questions.

Although we are well positioned over the long-term with our product-driven strategy and flexible global platform, we continue to navigate near-term uncertainty in the macroeconomic environment, including significant inflationary pressures, a challenging labor market, fluctuations in foreign currency exchange rates, and customer supply chain disruption. We expect net sales for the fourth quarter of this fiscal year to be slightly lower compared to the fourth quarter of last fiscal year, and we expect consolidated operating income for the fourth quarter of this fiscal year to be comparable to the fourth quarter of last fiscal year. Notably, our expectations for the fourth quarter of this fiscal year are based on information available at the time of this call and reflect certain assumptions by management regarding the company’s business and trends and 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 range of $6.8 million to $7 million. Depreciation and amortization is expected to be approximately $7.4 million to $7.6 million for this fiscal year. Finally, as Iv has already mentioned, as a top priority, we will be aggressively focused on generating free cash flow in our fiscal 2023. With that, we will now take your questions.

The first question comes from Budd Bugatch at Water Tower Research. Please proceed.

Good morning, Ken, Iv, and Boyd. Iv, just maybe you can give us a little bit of a high level. You said there are a lot of opportunities in Mattress Fabrics and you’ve had great placements. Maybe you could add a little color. Are you seeing new customers enter it? And what are the trends that you are observing that give you some optimism about the longer-term future of that?

Yes. Thank you, Budd. Yes, we recognize and understand that we’ve been discussing some of this business that we see on the horizon; we thought it would be materializing in Q3. Now we have some expectations that it might materialize in Q4. There may be some things at the back of the quarter, but now it just looks like some of that coming in the summertime. To give you a little color on it, we have built a really solid service platform. We have the ability to meet our customers in any location where they want to be serviced. We also have an outstanding opportunity the way we’re marketing our products today, both fabrics and sewn covers with some highly skilled 3D rendering services, and some excellent personnel talent to develop new items. We are just seeing whether it be new customers or existing customers, if it’s traditional retail or bed-in-a-box; we see placements that we’ve won. Without giving specific names of people or customers or retailers that it might be, we just know they are there. The optimism for us is really strong for the business. We’ve done the heavy lifting to get the platform in place, and now we’re kind of waiting for these to materialize. Existing business is okay, but resetting new business at current costs is a big help to us as we get those things in the marketplace.

And has it just been the supply chain disruptions that have caused them to delay their programs? What’s – and do you see that dissipating? You said you’re seeing some improvement in labor. So it looks like maybe we’re coming to the backside of those problems.

Yes, I hope so. But I’m going to speculate to some degree on this; I can’t speak that it’s – this issue is across every customer; there could be different situations. There was such a surge of just general business post-COVID, and at the same time, there were some significant material shortages—not of our product, but of other items that our customers needed to make mattresses. As that was going on, the industry started to catch up now; I think customers and retailers have slowed down changing out lines on the normal cadence because they want to get caught up. I’m not sure if there is any one thing, but it feels a lot more like the industry has taken a breath now, and people are catching up, and it’s starting to get back to some normalized conditions that we think will be very favorable for Culp.

Got it. And you’ve had to take pricing. We’ve seen that throughout the economy. Are you getting much resistance to it? Nobody ever likes price increases, but as long as it’s endemic, that’s not a good word; but are we seeing any much resistance to it? Or is it just the understanding that those are things that just have to be passed through?

Yes. I would say—and I’m happy to let Boyd comment too because he’s been more front line on the upholstery side—no one likes it. You said that very well. So, we’ve done a couple of combinations of some price increases that are more permanent and some surcharges to deal with freight and other things. Up until now, we’ve had fairly good success, and customers have understood the need there. I don’t think to date we have depressed consumer spending with what’s been passed through. But I would tell you if we have to continue going up, there will be pressure to receive those. We need to now get some normalized conditions, settle our product mix, pull these lag of price increases that we now have come into fruition for our fourth quarter and operate efficiently for our customers and try to deliver with the value they expect. So, Boyd, do you want to comment at all on whether that’s been a challenge?

Sure. I’d say, Budd, generally, there certainly is a common understanding in the industry about the rising costs that have taken place. So, I think there is acceptance that there is a degree of this that’s just necessary and is having to be passed along. I do feel that we have approached this in a fair and appropriate way generally with new orders placed. So, again, nobody ever likes increases, but I think there is an understanding in the market that they are necessary, and we’ve approached it in a proper way.

Just to add, Budd, you probably know this; you’re savvy in the business for a long time, but it will help as we get to new product introductions. At least it gives us the chance and our customers the opportunity to reset all these new items and where costs really are versus having to catch up something that was placed years ago. So that will be a positive when new products start to come through.

Okay. Just a couple more for me. Hospitality, you continue to like what you’re seeing in there. What can you talk about the new programs or what gives you that feeling of good optimism in Hospitality?

Yes. I’ll let Boyd speak to this in more detail, Budd. Hospitality for us has been, through COVID, a difficult product line because people weren’t going to their offices. They weren’t traveling and staying in hotels. Some of the remodeling or development work was put on hold. We’re now starting to see that come back pretty strong, especially on the fabric side. Boyd, can you share how you're managing cost and price in that business, and what you see for that plus Read Windows?

Yes. From a general perspective, we are certainly seeing accelerated demand in the Hospitality segment as it appears the consumer is beginning to devote more spending to travel. We started seeing a nice lift in that segment of our business in Q3, and it seems to be continuing. I do think we are seeing a more full rebound occurring in the hospitality market. As Iv said, we have also implemented some pricing actions that were necessitated through cost increases, which will benefit us as we go forward into the next quarter as we get those pricing actions more realized. So yes, very favorable on the hospitality business; seeing a nice shift in the trends of that business as demand starts to accelerate considerably now above where it had gone during the throes of the pandemic.

Okay. And finally for me, talk a little bit about if there is anything new coming in LiveSmart. You have made some great innovations there. What’s next on the horizon there?

Yes. Thank you, Budd. The LiveSmart category performance products continue to be a key driver of our business. We are very pleased with the acceptance of all of the products under that umbrella. We are continuing to see particular growth with the Evolve, which is the product in the sustainability area. That seems to be just gathering more and more momentum and acceptance in the marketplace. We have a new flooring-free product that has just been launched as well. We just continue to innovate in that area and add on to the portfolio of products that we have there and have additional new introductions in the wings as well.

Okay. Well, my last comment is just—I’ve followed Culp for an awfully long time, and I have seen these kinds of challenging times before, and I don’t remember a time in Culp’s history when it’s been this tough. I know it hasn’t been fun for you all, but in past times, I would have been more worried about the company. I am not this time because your financial condition has remained solid during these challenging times. So, congratulations to all of you for leading the company through these times, and certainly, good luck going forward; hopefully, we all get to easier times. I’m not sure that’s all going to be possible, but I hope so.

Thank you, Budd. Yes, we appreciate your comments there. It’s something that our Board is certainly very keenly aware of, and we have lived through highs and lows in this business. We certainly understand the importance of being strong financially to weather whatever may come our way. So, thanks for recognizing that.

Yes. Good morning, and thank you for taking the questions. When you look at your products in both segments, can you just talk about what portion of your business is ultimately sold to the lower-end consumers versus higher-income consumers? One of the major mattress retailers talked about weakness in their low-end consumer line, so I’m curious if you could parse out what you’re seeing in terms of products sold to end-users.

It’s a good question, Anthony. It will be hard to do it by actual percentages. Historically speaking, if we look at our upholstery fabric business, we have generally been in the middle to upper range. Primarily, we aim for the sweet spot in the middle of the market. On the mattress side, we have catered more broadly, from high to low. Still, many of the units that differentiate to cover fixed costs at a facility help us in our domestic North American platforms and mattress fabrics. It does make sense to have more units running through the facility. It’s fair to say that the lower end of the market is under more pressure today due to things like delayed tax returns, curtailed stimulus, or just general economic pressures. More business exists at the middle to high end than at the low. This doesn’t mean we can’t be very successful, as our mattress cover expansion allows us to serve almost any price point. While our sales have remained relatively stable, we need to ensure that our product mix is tailored to run our assets more effectively.

Thanks for the color; it’s definitely very helpful. In terms of the price increases taken and the ones that you plan for Q4, can you just go over that? I know it’s not across the board; it’s more strategic, but can you give us some additional color on that?

Hi, Anthony, this is Ken. Are you asking about the financial impact of those price increases?

Yes.

If you look at the upholstery, I mean, the gain there was pretty much all price. That difference was pretty much all price. For CHF, in the mattress fabrics business, about 6% of the total sales amount for the quarter was attributed to price. You had a bit of a fallback there without the price, but you had a nice impact from price in that business as well.

Got it. Thanks for that. As you said, looking to the fourth quarter, is that what we should expect as well as far as the impact of pricing?

Yes. I think for CUF, you should expect the full effect of the prior price increases for CHF, probably about 6.5 to 7%.

Great, thanks for that, Ken. It’s good to hear about the financial commitment. Looking at your capital allocation, is it safe to say that you are committed to raising the dividend longer term? And any thoughts about share repurchases after you build up some cash?

Yes, Anthony, that’s a good question. We are very disciplined with our capital allocation strategy, and we always publish it. Recently, we’ve prioritized investing in the business with CapEx and in organic inventory management to prepare for observed pressures. We are a conservative company; we like having a solid cash balance without debt. It is indeed a priority for us to continue with regular quarterly dividends and to increase those dividends. We have a nine-year record of increasing the annual dividend, and we maintained that through the COVID period. So, that’s definitely a strategy we will pursue. In terms of buying back stock, we consider it one of the tools we can use. In this current quarter, we felt we had utilized cash for positive reasons, including dividends; we wanted to remain conservative to ensure we maintain a strong cash balance with no debt. So we weigh those decisions carefully.

Good morning, everyone. Thank you for taking my question.

Good morning, Marco.

I was wondering if you could talk about reorganizing the sales force. Can you discuss how long that might take? Are there any meaningful costs associated with that? What were the drivers behind this change?

Thank you, Marco; good question. It’s not going to take much time. We are making strong moves here just ahead of our ISPA Trade Show next week. These aren’t fundamentally sweeping changes, but we are reallocating accounts, moving talented salespeople and brand managers to where they need to be for the customers' needs. We’ve gotten ahead with our 3D rendering service and have engaged personnel who embrace that, meeting customers how they want to be serviced. We want to reward our salespeople for growing the business based on commission and margin. This reallocation will positively take advantage of strong technical capabilities. We are excited about this.

Got it. I understand. You mentioned maximizing efficiencies; can you talk about your capacity utilization levels and how that factors into efficiency, given your recent capacity additions?

Yes, we’re focused on maximizing efficiency across all our plants to enhance profitability. We feel we’ve done well maintaining stable sales levels. Customers are stabilizing, and we’ll maximize our profitability in mattress fabrics. A stable mix across the entire platform is necessary to maximize profitability. North American platforms haven’t run as full as desired; demand currently dictates that, but it is critical for us to cover our fixed costs. But we have some high fixed costs that we need to cover by running those plants effectively.

And the labor aspects?

Labor challenges have improved significantly. We had significant hiring and retraining challenges during Q3, which have improved considerably. We’ve managed to stabilize our labor force now. While we maintain higher wages than pre-pandemic, labor costs aren't a major factor in our cost per yard. We can absorb that with our pricing actions, and the situation is more stable for operating effectively.

Got it. Toward pricing—other mattress retailers have raised prices due to raw material inflation, and there seems to be pressure on consumer demand now. What are you observing from your customers regarding these dynamics?

Good question. We're always mindful of pricing impacts on consumer behavior. We are keen on assessing if there’s a point at which consumers may defer their spending. New products will play a vital role in this; launching exciting new products can encourage consumer interest and renew demand. Although we are experiencing some challenges, our focus remains on driving innovative products to provide options in the marketplace.

Very helpful. Thank you for your time; I appreciate it.

Thank you, Marco.

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

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

The conference has concluded. Thank you for attending today’s presentation. You may now disconnect.