Good day and welcome to the Culp, Inc. First Quarter Fiscal 2023 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like now to turn the conference over to Dru Anderson. Please go ahead.

Good morning and welcome to the Culp conference call to review the company's results for the first quarter of fiscal 2023. 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 at culp.com. A slide presentation with supporting summary financial information is also available on the company's website as part of the webcast of today's call. With that, 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, Chief Financial Officer; and Boyd Chumbley, President of our Upholstery Fabrics business. I will begin the call with some opening comments, and Ken will then review the financial results for the quarter. Following that, I will briefly update you on the strategic actions specific to each of our operating segments, and Ken will review our second quarter fiscal 2023 business outlook. We will then be pleased to take your questions. Our results for the first quarter reflected some sequential improvement compared to the fourth quarter of fiscal 2022. However, as expected, sales and operating performance remain significantly pressured by slowing consumer demand in both the domestic mattress industry and the residential home furnishings industry. The impact of this industry softness on demand for our products has been exacerbated by excess retail and manufacturer inventory that continues to delay the timing of shipments and new product rollouts. Operating performance for the quarter was also affected by continued inflationary pressures, as well as recurring labor challenges within our mattress fabrics business and our Read Window Products business that resulted in increased employee training costs and operating inefficiencies during the quarter. We also had expected ramp-up costs associated with increasing capacity at our new upholstery fabrics cut and sew facility in Haiti. Despite these ongoing headwinds, I'm pleased with our unrelenting focus on working capital management, including inventory reduction throughout the quarter. We ended Q1 with a higher cash position than expected, with $18.9 million in cash and zero outstanding borrowings. We generated cash flow from operations of $5.3 million and free cash flow of $4.5 million during the quarter. In the current period, where we recognize there is macro industry sales softness, we fully understand the importance of managing our inventory and overall working capital to protect our balance sheet and prepare us for the future. Throughout the quarter, we continued to execute our product-driven strategy in each of our businesses, with an emphasis on design creativity and innovation. Following the lifting of COVID-related restrictions in China, our facilities resumed operations at normalized capacity in June, and we utilized our global manufacturing and sourcing platform throughout the quarter to meet the evolving needs of our customers. We also continued to increase our capacity at our new upholstery fabrics cut and sew facility in Haiti during the quarter. This facility is now fully staffed with its weekly production output expanding as our associates gain more training and experience. As a company overall, we are enthusiastic about growing our near-shore capacity in Haiti, with two facilities for cut and sewn mattress covers and one facility for cut and sewn upholstery kits. We believe this platform provides our customers with the agility and value they need for their business. Haiti is an important location for Culp's future, and we believe we have an excellent platform for cut and sewn products across both businesses. We are also pleased to announce that Tommy Bruno will join the Mattress Fabrics leadership team as Executive Vice President next week on September 6th, and he is expected to assume the role of Division President at Sandy Brown's retirement at the end of this calendar year. Tommy joins us from Tempur + Sealy International, where he served as the Vice President of Business Development for Alternative Channels since 2018. Prior to that, Tommy served eight years with Tempur + Sealy as Comfort Revolution's Senior Vice President and Chief Financial Officer. Tommy brings balanced experience across several disciplines, including financial, operations, strategy, and management, and his extensive knowledge of the bedding industry will help us strengthen our business. We believe Tommy is an excellent fit for our Culp culture and also for our associates at Culp Home Fashions, and we believe he will support the execution of our future strategic plans. We are especially pleased that Tommy will have the opportunity to work with Sandy during the transition period and learn from her deep knowledge of Culp Home Fashions. Tommy will continue to benefit from Sandy's experience following the planned transition, and she will continue to support the Mattress Fabrics division as a Strategic Advisor. We are extremely grateful for Sandy's 39 years of leadership and dedicated service to Culp. We honor her many contributions, and we are thankful for the ongoing role she will play in our business. Looking ahead, we expect the current economic environment will continue to affect consumer spending trends, resulting in ongoing industry softness that will affect our business through at least the third quarter of fiscal 2023. We are working diligently to generate cash, reduce costs, improve efficiencies, and retain talent in the face of these significant challenges, while also ensuring we can maintain our competitive advantages and meet the needs of our consumers and customers when conditions normalize. Importantly, our market position remains solid, and we will continue to focus on our product creativity and innovation. We are excited about the expected new placements and product development opportunities, and we will remain optimistic about Culp's future as the macro environment improves. I'll now turn the call over to Ken, who's going to review the financial results for the quarter.

Thanks, Iv. As mentioned earlier, we have made slide presentations available on our Investor Relations website that outline key performance measures and our capital allocation strategy. Here are the financial highlights for the first quarter. Net sales were $62.6 million, a decline of 24.6% compared to the same period last year, which was a strong quarter for our business. The company reported a loss from operations of $4.7 million, compared to income from operations of $3.3 million in the previous year. Sequentially, this is an improvement from a loss of $5.4 million in the fourth quarter of the last fiscal year. I will provide more details about division sales and operating performance shortly. The net loss for the first quarter was $5.7 million, or $0.47 per diluted share, compared to net income of $2.3 million, or $0.18 per diluted share for the prior period. Our overall operating performance was significantly impacted by lower sales, ongoing inflationary pressures, and persistent labor challenges in our Mattress Fabrics and Read Windows businesses, leading to higher training costs and operational inefficiencies. We also incurred additional costs to increase capacity at our new upholstery fabric cut and sew facility in Haiti. These challenges were partially mitigated by a reduction in total SG&A expenses for the quarter, primarily due to lower incentive compensation expenses. The effective income tax rate for the first quarter of this fiscal year was negative 18.7%, compared with 28.7% the same quarter last year. This quarter's tax rate was influenced by the company's earnings mix between our U.S. and foreign subsidiaries. We experienced a significant pre-tax loss in our U.S. operations, which precluded us from reporting an income tax benefit due to the valuation allowance against our U.S. net deferred income tax assets. As a result, since all our taxable income this quarter came from our foreign operations in China and Canada—where tax rates are higher than in the U.S.—we faced a negative income tax rate. Our cash income tax payments for the first quarter totaled $637,000, and we expect total cash income tax payments to be around $2.8 million for the entire fiscal year 2023. It is important to note that our estimated cash tax payments are based on management's projections and may change depending on actual earnings from our foreign subsidiaries and other factors. Now, let’s look at our business segments. For the Mattress Fabric segment, sales in the first quarter were $29.4 million, down 31.8% year-over-year and down 1.4% sequentially from last year's fourth quarter. Sales during the quarter, which included pricing adjustments that were in effect, were significantly impacted by the ongoing decline in consumer demand and the domestic mattress industry. This industry weakness was exacerbated as mattress manufacturers and retailers dealt with excess inventory, delaying shipments and new product launches. The segment saw an operating loss of $2.9 million, compared to operating income of $3.6 million from the previous year. Our performance was heavily influenced by operating inefficiencies resulting from lower sales volume, ongoing labor issues—such as inefficiencies from hiring and training new employees—and higher raw material costs. Slight relief was achieved through reduced SG&A for the quarter, mainly due to decreased incentive compensation expenses. In the Upholstery Fabric segment, first-quarter sales were $33.2 million, a 16.9% decline from the previous year—a year that had exceptionally strong results. However, sequentially, sales increased by 22.4% compared to the fourth quarter of the last fiscal year. Demand for Residential Upholstery Fabric products was under pressure this quarter due to a slowdown in new retail business within the residential home furnishings sector. Conversely, we observed a continued recovery in our hospitality business, marked by increased sales in our hospitality contract fabric sector compared to a year ago. Although sales for our Read Window business remained flat year-over-year, they were supported by pricing adjustments during the quarter compared to the prior year. Income from operations was $542,000 this quarter, compared to $2.3 million last year, reversing the $116,000 loss from the fourth quarter of the last fiscal year. The operating performance in this quarter was affected by lower sales and inflationary pressures, along with labor challenges and increased training costs and inefficiencies in our Haiti facility as it scaled operations. However, favorable foreign exchange rates linked to our operations in China had a positive effect. Now, let’s move to the balance sheet. We reported $18.9 million in cash and no outstanding debt at the end of the first quarter, compared to $14.6 million in cash and no debt at the end of the previous fiscal year. Cash flow from operations and free cash flow stood at $5.3 million and $4.5 million, respectively, for the first three months of this fiscal year, contrasting with $1.6 million in cash flow from operations and a negative $782,000 in free cash flow for the same period last fiscal year. Our first quarter cash flow performance benefitted from effective working capital management, including an increase in accounts payable related to operations in China, along with inventory reductions and lower capital expenditures. Notably, we achieved an inventory reduction of $2.8 million or 4.2% compared sequentially to the fourth quarter of last fiscal year, and a $9.4 million or 12.8% decrease compared to the peak levels at the third quarter of last fiscal year. The company did not pay any dividends in the first quarter of this fiscal year after suspending our quarterly cash dividend during the period. Additionally, we did not execute any share buybacks during this quarter, leaving approximately 3.2 million available for repurchase under our existing program. Despite the current authorization for share repurchases, we do not anticipate any activity in the second quarter of this fiscal year, as we prioritize maintaining liquidity to support potential growth opportunities in the future. With that, I will hand the call back to Iv.

Thank you, Ken. Let me just give a few more comments about each division, beginning with the Mattress Fabric segment. Despite the headwinds in this business, Culp Home Fashions remained focused on working capital management and cash generation throughout the quarter, reducing its inventory by $2.5 million, balancing its raw materials with production needs and generating cash despite an operating loss for the quarter. This focus will remain for CHF as we move into Q2, and there are further inventory reductions possible in both finished goods and raw materials. Our dedicated team of associates executed our product-driven strategy for this business with an emphasis on innovation, design creativity, and personalized customer service. We began to see the rollout of a few new product launches in this business during the first quarter, and we expect additional rollouts to begin at the start of the 2023 calendar year as customers work through their existing inventories and as retailers plan refreshed offerings on their floors. However, the gain from these new product launches are currently being offset by industry weakness, which is affecting the demand for this segment's traditional business. Additionally, management is continuing its diligent focus on controlling costs and is implementing an additional targeted price increase on certain product lines during the second quarter to help offset the continued rise in raw material costs. We are also moving and consolidating our domestic mattress cover cut and sew operation during the second quarter from its current location in High Point, North Carolina to our existing CHF facility in Stokes Hill, North Carolina. Our CHF cut and sew platform is an important part of our strategic direction, and we have an unparalleled service model with onshore, near-shore, and offshore capabilities. This relocation of our onshore business will improve efficiency and will further complement our growing and well-received Haiti near-shore operation. We will also continue to make workforce adjustments across our fabric and cover platforms to align with demand conditions. Now, a few comments on the Upholstery Fabric segment. Although sales for the quarter were down compared to the prior year period, sales did grow about 22.4% sequentially compared to the fourth quarter of last fiscal year, aided by the lifting of COVID shutdowns that significantly affected our China operations at the end of last fiscal year. Those shutdowns have now been fully lifted, and we are currently operating at normal capacity. We also saw sequentially improved operating performance for the first quarter, reversing an operating loss from the fourth quarter of last fiscal year. We continued the growth at our new Haiti upholstery cut and sew facility during the quarter. This facility is now fully staffed and its output per week continues to rise as our employees gain more experience from training. Similar to CHF, Haiti is a critical part of our strategic direction for cut and sewn upholstery kits. Despite changing consumer spending trends affecting the Residential Home Furnishings industry, we believe our Upholstery Fabrics business remains well positioned for the long term with its scalable global platform and its sustained focus on innovative product offerings, including our popular portfolio of LiveSmart performance products. We continue to follow up on the success of LiveSmart, including a recent addition of an indoor/outdoor with UV performance line, and we are expanding our LiveSmart Evolve sustainability collection. Sustainability in the home market is now a top-of-mind consideration for a growing number of consumers, and this will continue to be a part of our ongoing innovation. We have focused on bringing performance and sustainability innovation for the home and to our product lines while also keeping them affordable for the average consumer. We continue to diversify our options for fabric development and sourcing as an enhancement to the supply chain resiliency within our global platform. We also continue to scale our flexible China platform as needed to align with demand trends while also recognizing the pivot of our manufacturing and sourcing capacities to other locations throughout our global platform. Ken will provide just the general outlook for the second quarter of fiscal 2023, and then we'll take some questions.

We continue to navigate a convergence of headwinds, including significant inflationary pressures that are affecting consumer spending, high inventory levels at manufacturers and retailers, a challenging labor market, and other macroeconomic uncertainties. Although the company remains well positioned over the long term with its product-driven strategy and flexible global platform, the current conditions are likely to continue to press results through at least the third quarter of this fiscal year. Due to the continued volatility in the macro environment, we are providing only limited sequential financial guidance for the second quarter of this fiscal year. We expect net sales for the second quarter of this fiscal year to be slightly down as compared to the first quarter of this fiscal year. We expect a consolidated operating loss for the second quarter of this fiscal year that is comparable to the first quarter of this fiscal year. We also expect our cash position as of the end of the second quarter of this fiscal year to be somewhat lower than the end of the first quarter of this fiscal year but higher than the end of last fiscal year. As we weather the current challenges, we will continue to be laser-focused on prudent financial management, with the goal of always maintaining a strong balance sheet, especially with regard to ensuring a strategic balance in our working capital. We are optimistic about Culp's future, and we know that financial stability is paramount to our success. With that, we will now take your questions.

We will now begin the question-and-answer session. Our first question is coming from Rex Henderson from Water Tower. Please go ahead.

First of all, thank you for taking my call. And I want to offer congratulations to you for doing an admirable job of defending your cash position and protecting the balance sheet in really very difficult circumstances. You deserve a lot of credit for that.

Thank you, Rex. Good morning to you.

Good morning to you. My first question is about the downstream inventory issues. You mentioned that some of your customers—manufacturers, retailers—are over-inventoried. I'm wondering what you're seeing in trends there? Through the quarters, did you see that issue getting worse, getting better? And what's your expectations for how long it takes to clear?

Hey Rex, thank you for that question. This is Iv. I'll start with this, and I'm happy to let Boyd comment maybe more specifically on what he's seen in the upholstery part of our business. The true answer to that, Rex, is we're not 100% sure. All I can tell you is that we continue to hear as we place new products that retail is very excited about some of these new launches, but they're not prepared to launch them until they flush through some inventory they have in their system. They want to get that out of the way before they put the new product on the floor. So, I think we know without much question that we're gaining some market share in some really nice areas. It's just hard for us to recognize that until those things hit the floor. So, my gut would tell me it's probably getting better. I mean, there's only so much limit of inventory. Hopefully, a strong Labor Day, if that bears out, will help move some things through the channel. I think on the mattress side, it's probably a bigger inventory position on bed-in-a-box products than traditional retail products, but again, we don't have actual data on it. We just continue to hear from our customers that they can't pull through new launches until the retail areas flush out inventory that's already prepared. Boyd, any more comments from you related to Upholstery?

Yes, I would just say I agree with Iv. The indications are that it is starting to improve and that some of the inventories at the retail and manufacturing levels are starting to come down. Of course, how that's going to play out is dependent on the pace of retail purchases by the consumer, which has been slowing on the furniture side. So, it's still a little difficult to say exactly when and at what pace that inventory will be normalized again, but I think indications are that progress is being made and some lowering of that is now taking place.

Turning your attention to your working capital and your own inventory, you say you're continuing to work to lower inventory in the mattress business. Can you give us a little color on where you think you're still a little over-inventoried? Are there areas where you're under-inventoried, for instance, in raw materials in China as you ramp that up? Do you have any areas where you need to build inventory?

Let me take a first stab at that Rex, good question. I'll let Ken comment on it as well. The reason we think there's some inventory adjustment for us still to go through is on the Mattress Fabrics side, that's probably where we have some low-hanging fruit we can work on. We have further finished goods work to do for sure. Having some inventory is always part of the Mattress Fabrics business because it's generally a make-to-stock model. We're over-inventoried in some areas that we can move. We don't think anything there is obsolete, although we recognize that we have to do some price discounting to move things in certain situations. We also have a strong position of raw material inventory that we strategically purchased during a time of supply chain challenges, and we would have expected to move that through production and into a customer by now. But with the slower conditions, it's prevented us from moving it through as quickly as we wanted to. So, there will still be some tailwind both in finished goods and raw materials on the mattress side of the business. I don't think today we're in a bad inventory position at all in our Upholstery Fabrics business, and we always have to manage that as we move toward Q3 where the Chinese New Year period would come into play. But we're already planning for that and already watching it in advance. Ken, any more comments?

I think you've covered it well. We've obviously focused on all aspects of inventory, both raw materials, finished goods, and looking at current needs versus expected demand. So, yes, I think you've covered it well, and we're looking at all opportunities to get our inventory down further without affecting our performance.

Thank you for that. And then just one other question. Your payables were a significant source of cash in this quarter, and I assume that as cash comes down in the coming quarter that paying off some of those payables is going to give you an idea of how much cash consumption will come out of payables over the next couple of quarters?

Rex, we jumbled up a minute there. I know you were asking about payables. But can you state that question one more time?

Sure, sorry if there was a little static. Payables were a big source of cash in this quarter, and I assume that over the next couple of quarters that cash will come down, and I'm wondering for modeling purposes if you could give me an idea of how much cash consumption is going to be coming out of payables over the next couple of quarters.

Yes, Rex, this is Ken. That's difficult to quantify, but you are correct in that we had a nice normal build during Q1 as China came back online, which normally happens in Q4 during normal years. But with the shutdown, it happened in Q1. So, that was as expected. And as you pointed out, we are expecting to have some payable impacts as we pay those bills in the second quarter. Beyond that, we are watching the situation with Chinese New Year in the third quarter, which can always have an impact on payables going forward. We will manage that carefully. As we said, when given the opportunity, we're going to extend payables where we can and strategically pay them where we can as well.

Thanks so much. We are focused on your working capital management, and that's why we're asking all these detailed questions in that area. But again, congratulations on doing a really good job of managing that in the last couple of quarters. Thanks, and I'll pass it on to some other questioners.

Thank you, Rex. Have a good day.

Our next question is coming from Anthony Lebiedzinski from Sidoti & Company. Please go ahead.

Good morning, gentlemen, and thank you for taking the questions. Let me echo the positive comments about the balance sheet strength; that's a nice job there. Firstly, just a quick question on China. There have been headlines today about yet another lockdown in China, this coming from the Chinese region. Will that have any impact?

Yes, Anthony, this is Boyd, and no, those recently announced shutdowns that have occurred are in areas that are not affecting any of our operations or our supply base. So, there is no expected impact from that recent lockdown.

And Anthony, good morning, this is Iv. Boyd is definitely our resident China expert with his long-tenured success of our platform in that country. It remains an important part of our platform. We've watched it very closely. Boyd is right; we don't anticipate problems. We also understand there are challenges everywhere in the world, specifically in China. That's why we are continuing to make pivots to our platform to be prepared for things that we may not see. Thankfully, today, we feel like our channel platform is operating pretty well and is in a good place, coming from a tough place where we were up until June. But today, we're in a good spot.

That's great to hear! So I wanted to clarify that. It obviously makes a lot of headlines out there. So I wanted you guys to publicly clear that up. Glad to hear that that's not an issue for you now. Okay. We talked about some expected efficiency gains from consolidating the High Point facility to Stokes Hill. How should we think about the opportunities there for cost savings through the balance of the year?

Anthony, its Iv and thanks for asking that question. Our domestic cut and sew onshore business is very important for sustaining our cut and sew platform. The relocation is positive because we have some space in our current facility in Stokes Hill, where we've been able to relocate our cut and sew operation. We'll be able to exit some leases we have in High Point, moving into a building that we own in Stokes Hill, which will limit some freight and improve efficiency as we'll be much closer to fabric production. This will also allow for cross-training of associates and will provide built-in speed-to-market advantages. I think Ken can provide further guidance on numbers related to this, but the impact will probably not materialize until Q3. We plan to execute the move in Q2 as quickly as possible. Employees have been notified, and I think there's a lot of excitement within our business about this strategic move.

I would say we're very early in the process, and like Iv said, it's going to be probably Q3. So, as we get closer, we'll add more color to that, but it will likely result in material savings for sure. We just need to continue planning and executing the move.

That sounds great. Looking forward to further commentary about that at next quarter. Then in terms of the labor challenges, it was an issue during the quarter. Do you think the worst is behind you in terms of those challenges?

Anthony, this is Iv. It's an excellent question. The labor challenges have been very bumpy for us over the last year, specifically in our domestic operations affecting our Mattress Fabric and Read Window Products business in Knoxville. It's been difficult; it got better; it got difficult again in Q1; and now it's better again. I'd like to think the worst is behind us, but it's been quite unpredictable. I believe most of our employees are happy and are seeing the growth opportunities we are providing, but we've been surprised by these labor challenges. I hope the worst is behind us but we'll monitor that closely. Today we are in a good staffing position, which helps as we look forward.

Got it! You talked about the popularity of the LiveSmart performance products. Can you give us a better sense of how big that piece of business is and whether you expect that to perform better than the rest?

Yes, Anthony, I think I understood your question as far as the strength of the LiveSmart business and how that's driving our overall business. That performance category of products has been our main driver of growth over the past couple of years. We've added several product offerings and innovations within that umbrella. Recently, we've come out with an indoor/outdoor line with UV protection. As for the sustainability demand in the marketplace, our sustainability products under the Evolve category continue to gain traction and be very well-received. We expect this trend to continue to drive our growth going forward due to the success we're already seeing.

Got it. Thank you very much, and best of luck.

Thank you, Anthony.

Thanks, Anthony.

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

Thank you very much, operator. And again, thanks to all of you for your participation and your interest in Culp. We look forward to updating you on our progress next quarter. Hope everyone has a nice day and a long Labor Day weekend.

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

Thank you.