Good morning, and welcome to the Culp, Inc. First Quarter Fiscal 2024 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Thank you, Dru, and good morning, everyone, and thank you for joining us today. I would like to welcome you to the quarterly conference call with analysts and investors. With me on the call are Ken Bowling, Chief Financial Officer; Boyd Chumbley, President of our Upholstery Fabrics business; and Tommy Bruno, President of our Mattress Fabrics business. So today, I'll begin the call with some detailed comments, including a discussion of key points and topics for the quarter and for both businesses as well as priorities as we look ahead. After that, Ken will review the financial results for the quarter, and I will then briefly review our business outlook for the second quarter of fiscal '24, and we will then take your questions. Regarding the current state of our business, in the overall furniture and bedding industries. I want to review some overriding themes we discussed last quarter and detail some critical actions we are continuing to execute within both businesses. I will also expand on our comments with a few important points that illustrate where Culp is today. Number one, we are encouraged by our better-than-expected operating improvement for the quarter both sequentially and year-over-year despite the ongoing industry malaise and demand softness within the two industries we service. Number two, we remain excited about the progress of our comprehensive transformation within our CHF mattress fabrics business, and we are pleased to be gaining market position in the face of some contraction in the domestic mattress industry. Number three, although market conditions are also pressuring the residential home furnishings industry, our upholstery fabrics business has remained profitable despite these pressures, and demand remains quite solid in our growing hospitality business. And number four, we are continuing our diligent focus on prudent financial management, including maintaining a strong balance sheet and ensuring a strategic level of working capital. Going to theme #1. Our results for the first quarter reflected better-than-expected operating performance, both sequentially and year-over-year even as industry demand remains soft, especially in residential home furnishings. However, our operating performance improved despite pressure on sales due to internal improvements within both businesses. The strong sequential and year-over-year improvement in our mattress fabrics business, a 45% improvement sequentially and a 52% improvement year-over-year was supported by the rollout of new fabric and cover placements during the period. As we have commented for some time now, these new programs are priced in line with current raw material and operational costs and we expect these new programs to grow Culp Home Fashion's market position in fiscal '24. The operating improvement in the CHF business was also driven by our ongoing focus on operational efficiencies and cost reduction initiatives across our locations, and I will expand more on this shortly. I do want to emphasize that mattress fabric sales for the quarter were flat compared to the prior year period, which is a solid performance in the face of difficult industry conditions and certainly reflects our growing position in the market. For the Upholstery Fabrics segment, we saw operational improvements and fixed cost savings along with solid demand in our hospitality contract fabric business and improvement for Read Window. But as expected, sales within our residential fabrics business were lower as compared to the first quarter of last fiscal year, which notably was a strong quarter due to a lift in sales following pandemic-related shutdowns in China and the quick recovery that the upholstery furniture industry was experiencing at that time. Our sales for residential fabrics this quarter were certainly affected by the ongoing softness in the home furnishings industry and shifting consumer spending trends following the pandemic stay-at-home surge. While we do understand that the furniture and bedding environment remains challenged, we will continue to manage the aspects of our business we can control, taking necessary steps to withstand current market conditions, and position our business for renewed growth. As detailed in earlier quarters, we have made platform changes to our cut and sew profile on both mattress fabrics and upholstery and the cost benefits from these adjustments are coming to bear. We are also focused on managing our operational efficiencies across our fabric platforms and therefore lowering overall costs. Beyond Q1, we believe our continuing recovery will be led by our mattress fabrics segment, while our execution of a comprehensive transformation plan is laying the foundation for steady improvement. I'll expand much more on the mattress fabrics transformation plan momentarily, but our sequential and year-over-year operating improvement reflects some of these initiatives we have undertaken internally to manage our business. While the challenging industry environment is expected to continue for some time, our market position is strong and improving, and we believe we are poised for a considerably better second half of fiscal '24 and that's November to April by the calendar with a return to operating profitability in this fiscal year. Regardless of the current demand backdrop, we expect continued progress in improving our operating results, but we understand the speed of our recovery may be affected by overall industry trends. We would like to see some macro tailwinds to allow recovery to happen quicker. We are well prepared for the long term, and our strong leadership teams, innovative product offerings, creative designs and a resilient global manufacturing and sourcing platform will support us into the future, especially when the environment improves. The second important thing to expand on is the business transformation update within Culp Home Fashions, our Mattress Fabrics segment, under the leadership of Division President, Tommy Bruno, along with his restructured management team. Our transformation plan focuses on long-term improvement in every facet of the business, including quality, sales, marketing and operational processes, supply chain optimization, employee engagement and organizational management structure. As we said, we believe CHF improvement is our best short-term opportunity for recovery and growth from our current levels. Tommy and the CHF management team remain focused on operational excellence as well as balancing our product mix to proper volumes and steady run schedules. Even after our previous cost-saving adjustment to our domestic North Carolina cut and sew capabilities, we continue with a robust global platform, featuring manufacturing and sourcing capabilities in six countries: The U.S., Canada, Turkey, Haiti, China and Vietnam. Our combination of onshore, nearshore and offshore options provides our mattress fabric and sewn cover customers with the agility and value they need for their business. Combining this platform with our expertise in design and product innovation, we are making excellent progress for sustainable improvement in fiscal '24. Overall, as we've mentioned, the domestic mattress industry is experiencing significant contraction with industry reports showing aggregate reductions of 10% in dollars and 20% in units through the first six months of calendar '23. But notably, again, CHF revenue over the same general period has remained flat, indicating that CHF has made gains with customers in a difficult market environment. While the mattress industry slowness may remain for some period, we still expect to improve our performance through new programs and improved operations. Our recovery in CHF is not fully dependent on the industry environment, and assuming our sales volumes in fiscal '24 do not materially fall below the prior year, we expect to see significant progress with steady sustainable improvement in CHF this year and beyond. The third important theme is the continued profitability of Culp Upholstery Fabrics. I've detailed just now a lot of excitement about CHF, but it is equally important to note the steady performance of CUF. Division President Boyd Chumbley and a strong leadership team have managed effectively amidst abnormal tumultuous times. CUF has maintained profitability with a focus on improving operational efficiencies and proactively taking strategic actions to reduce our cost structure to align with demand levels while also always supporting our customers with our flexible global platform. I believe CUF has best-in-class service in our customers in our design and product excellence, combined with an effective global platform that has led the way. Our improved operating cost within CUF began with the restructuring of our cut and sew upholstery kit platform in China during the second quarter of last fiscal year and then continued with the rationalization of our upholstery cut and sew platform in Haiti near the end of last fiscal year. We took further action in Haiti this quarter to discontinue production of cut and sew upholstery kits at this location based on demand softness. This step further reduces CUF cost structure and avoids losses that would have otherwise been incurred while allowing this business to continue to support customers through its strong Asian supply chain. Notably through these actions and other improvements in operational efficiencies, CUF has been effective in lowering its overall cost levels to remain profitable in the face of reduced demand. Just one quick aside. I do want to again reiterate that while we have discontinued production of upholstery cut and sew kits in Haiti, our Haiti cut and sew platform for mattress covers remains an integral part of our strategic plan. Now turning back to CUF, we are also adjusting our global platform for the fabric portion of our upholstery fabrics business as we look to provide options within our supply chain in China, Vietnam and multiple other new countries. Customer service is a hallmark for Culp, and a diversified platform provides improved risk management and a more stable supply base. Of note, our hospitality contract business accounted for 33% of segment sales for the first quarter. While this percentage is higher than normal due to lower residential sales, it does reflect the ongoing solid performance of our hospitality contract business as well as its importance to our overall strategy of product diversification for this segment. While the tough demand environment may continue for some time, upholstery fabrics remains well positioned for the long term with a scalable global platform and innovative product offerings, including our popular portfolio of LiveSmart performance products and our new product technologies. We are also beginning to see increases in newly written fabric orders, and we believe we will see the benefit from this in the second half of fiscal '24. Similar to the first quarter, we also expect the upholstery fabric segment will continue to benefit Culp through the remainder of fiscal '24 with improved inventory management, a solid hospitality contract fabric business, improvement in our Read Window business and a rationalized cut and sew platform. And lastly, I'll shift to the fourth theme, which is constant focus on prudent financial management including maintaining a strong balance sheet and ensuring a strategic level of working capital. I am very pleased with the management team for its continued effort in maintaining our cash and total liquidity position. We ended the quarter with $16.8 million in cash and no outstanding borrowings, and we had total liquidity of $42.3 million, consisting of cash and borrowing availability under our domestic credit facility. We are continuing to carefully manage inventory against current demand levels, and we are strategically investing in our business. I have repeatedly, through my remarks, mentioned the softness within our industries, and that has been most evident to us by several recent closures within the furniture industry. And remember, this is on the heels of several bankruptcies we witnessed in the last year as well. We are seeing some suppliers, competitors, and customers endure financial difficulty, and it gives us more appreciation for our financial stability and its importance to our future. We are managing accounts receivable effectively, and we do not have any material exposure with respect to the recent closures. I am grateful to our credit teams and divisional management for how we conduct Culp's business with a lens toward the future and careful partner selection. We fully recognize that the management of Culp's strong balance sheet is a critical initiative, and we believe we are well positioned to focus on investing and optimizing our global manufacturing platform and growing profitable sales.

Thanks, Iv. Here are the financial highlights for the first quarter. Starting with consolidated results, net sales were $56.7 million, down 9.5% compared with the prior year period, driven almost entirely by a decline in upholstery fabrics sales. The company reported a loss of operations of $3.1 million, which included $517,000 in mostly noncash restructuring-related charges associated with the discontinued production of cut and sewn upholstery kits in Haiti during the quarter, as I have discussed earlier. Excluding this $517,000, adjusted loss from operations for the quarter was $2.6 million, a better-than-expected improvement as compared with a loss of operations of $4.7 million for the prior year period and a loss from operations of $4 million for the fourth quarter of last fiscal year. Net loss for the first quarter was $3.3 million or $0.27 per diluted share compared with a net loss of $5.7 million or $0.47 per diluted share for the prior year period. Net loss for the quarter included the $517,000 restructuring-related charges I just mentioned. Our overall operating performance for the first quarter as compared to the prior year period was positively affected by improved margins on new products, improvement in operating efficiencies and lower overhead costs in both segments, a higher contribution from hospitality fabrics in the Read Window business and a more favorable foreign exchange rate associated with China. This year-over-year improvement in operating performance was partially offset by margin pressures due to lower sales and higher SG&A expense. SG&A expense was higher than last year due to increased compensation expenses mostly related to wage inflation and higher incentive compensation pools, higher professional fees, and increased sampling expense driven by new product rollouts in both businesses. Importantly, with regard to SG&A expense, as business conditions improve and demand for new products rise, we believe that we'll get significant leverage from the increased sales. Adjusted EBITDA for the period was close to breakeven at negative $416,000 as compared to adjusted EBITDA of negative $2.7 million for the prior year period. The effective income tax rate for the first quarter of this fiscal year was a negative 26.5% compared with a negative 18.7% for the same period a year ago. Our effective income tax rate for the quarter was impacted by the company's mix of earnings between our U.S. and foreign subsidiaries with an operating loss in the U.S. while China and Canada generated income that was taxed at a higher rate as compared to the U.S. Our cash income tax payments totaled $1.1 million for the first quarter of this fiscal year. And based on current expectations, we currently plan for cash income tax payments of approximately $3.2 million for the entire fiscal '24 year. Importantly, our estimated cash income tax payments for fiscal '24 are management's current projections only and can be affected by a variety of factors over the course of the year. Now let's take a look at our business segments. For the Mattress Fabrics segment, sales for the first quarter were $29.2 million, down 0.5% compared to last year's first quarter, outperforming overall industry trends. Operating loss for the quarter was $1.4 million, a 52% improvement compared to an operating loss of $2.9 million a year ago. This operating improvement was driven by new placements, price in line with current cost improvements in operating efficiencies and lower costs resulting from the restructuring and rationalization of this segment's mattress cover platform initiated last fiscal year, offset somewhat by higher SG&A expense. For the Upholstery Fabrics segment, sales for this first quarter were $27.4 million, down 17.4% over the prior year period, which was a strong quarter due to a lift in sales following pandemic-related shutdowns in China. Sales for our residential fabric business for the quarter were affected by ongoing softness in the residential home furnishings industry. However, demand remains solid in our upholstery contract business during the first quarter with sales for this business accounting for approximately 33% of the upholstery fabric segment's total sales. Operating income and operating margin for the quarter were $1.3 million and 4.8%, a 145% and 320 basis point improvement, respectively, compared with the prior year period. This operating performance was positively affected by a higher contribution from hospitality fabrics and the Read Window business, lower costs resulting from the restructuring of this segment's cut and sew platforms during earlier periods, and a more favorable foreign exchange rate associated with the segment's operations in China, as well as other operational improvements. These factors were partially offset by lower residential fabric sales and higher SG&A during the period. Now I'll turn to the balance sheet. We reported $16.8 million in total cash and no outstanding debt as of the end of the first quarter. Cash flow from operations and free cash flow were negative $4.4 million and negative $4.2 million, respectively, for the first three months of this fiscal year. Our cash flow from operations and free cash flow during the period were affected by an operating loss and investments in working capital and capital expenditures mostly related to the mattress fabrics transformation plan. Capital expenditures for the first three months of this fiscal year were $513,000. Based on current expectations, capital spending for this fiscal year is projected to be in the range of $5 million to $6 million and will center mostly on maintenance CapEx and quick payback projects focused on improving quality and efficiency in our mattress fabrics business. Based on current expectations, depreciation for this fiscal year is expected to be approximately $7 million. With respect to liquidity, as of the end of the first quarter, we had $42.3 million consisting of $16.8 million in total cash and $25.5 million in borrowing availability under our asset-based domestic credit facility. Borrowing availability under this facility is based on a calculation using certain of the company's accounts receivable inventory determined on a monthly basis. The company did not repurchase any shares during the first quarter of this fiscal year, leaving $3.2 million available under our current share repurchase program. Despite the current share repurchase authorization, we do not expect any activity during the second quarter of this fiscal year as we remain focused on preserving liquidity and being positioned to support future growth opportunities.

With that, I'll turn the call over to Iv to discuss the general outlook for the second quarter of this fiscal year, and then we'll take your questions. Thank you, Ken. Due to the continued volatility in the macro environment, we are providing only limited financial guidance for the second quarter of fiscal '24. We expect consolidated net sales for the second quarter to be comparable to the second quarter of fiscal '23 driven by further improvement in the Mattress Fabrics segment, but offset by lower residential upholstery fabrics sales. We expect consolidated operating loss for the second quarter of fiscal '24, that is in the range of $2.2 million to $2.6 million, a significant improvement compared to the $11.9 million operating loss for the prior year period, which did include approximately $6 million relating to certain inventory impairment charges, losses on inventory closeout sales and greater-than-normal inventory markdowns. Again, I will comment that we believe we are poised for a considerably better second half performance with a return to operating profitability this fiscal year. Finally, 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. So with that, we will now take questions.

Our first question comes from Anthony Lebiedzinski with Sidoti & Company.

So first, just a quick comment. Overall, a perfect job of maintaining a strong balance sheet and certainly nice to see solid gross profit gains here in the quarter. So it's first question here for CHF, so you mentioned that new placements are in line with current costs and that's great to hear. So I guess for the quarter, can you give us just kind of a rough breakdown between pricing and unit volumes? I would love to hear your thoughts on that.

Ken, can you?

Yes. Yes. Anthony, I mean, I think we've mentioned this before. I mean we price new products to capture the cost, and that pricing flows throughout the year. I mean, obviously, we were right in line with sales and units were close as well. So really, it wasn't a big difference at all, pretty consistent on both.

We were building in the mattress fabrics business, Anthony, and you hopefully hear our excitement as we talk about the business. It's such a strong turnaround that's underway, and we're growing dollars in units. I mean we're a unit-driven company. So we're not going to have success without also growing the units. So we're doing both.

Before COVID, the gross margin at CHF was in the mid-teens and even higher in previous years. Considering the transformation that's happening, do you believe it's reasonable to expect that you could achieve at least a double-digit segment margin sometime this fiscal year?

Well, Anthony, we'll let Tommy make some comments about what he's seeing. The problem won't be as bold to tell you exactly when that's going to happen. But in all the investor information that we're putting out through our new deck, sort of a minimum standard for our expectation in the CHF business is double-digit operating income percent. And we certainly have every intention of being at that in our intermediate future. Now whether we can get all the way to double-digit profitability in this fiscal year, TBD, but we are expecting to return to profitability both in the division and consolidated in this year. Tommy, anything you would add as you're just going through the process?

No, I think that's a good representation of the improvement. I think, Anthony, we expect it to be sequentially higher quarter-over-quarter with the objective of getting back to historical profitability rates.

Okay. That sounds good. For CUF, the residential segment is indeed softer, but are you noticing any significant customers moving away from Culp? Or is it just that customers are ordering less overall now?

I'll let Boyd speak to that question, Anthony.

Yes, Anthony. We're not seeing any significant changes in our customer base. This is more related to an overall industry demand situation that is affecting us. Additionally, we need to consider that this quarter’s results are compared to a particularly high first quarter from last year due to the pandemic. The drastic demand fluctuations caused by the pandemic over the past few years have made year-over-year comparisons challenging. To answer your question, we don't observe any substantial shifts in our customer mix. It's more of an industry-wide demand decline at this time.

Anthony, Boyd has been with Culp for 40 years, and we've experienced various ups and downs in the residential furniture business. Historically, we've found that we tend to gain market share during challenging times. Typically, as these periods pass, we emerge in a stronger position, and this situation is no exception. We believe we are currently gaining market position, primarily due to the slowdown in the industry. With supply chains adjusting and new products being introduced, it's important to remember that we missed almost a year of new product launches when there was no need for retail relaunches. As that starts to change, we feel optimistic about the direction we're heading. Additionally, we've noticed that new written orders are beginning to increase gradually, which gives us hope as we look beyond probably the second quarter; we do see sales levels gradually picking up.

That's great to hear. And then last question before I turn the call over to others. I guess probably a question for Ken. So inventory management that has certainly been a nice source of cash, so a nice job with that. So do you think you can further reduce inventories? How about cash flow? So how should we think about that?

Yes, Anthony, as we aim to grow the business on both sides, both teams have done an impressive job over the last six quarters of reducing inventory and meeting demand. Moving forward into the next quarters, our focus will be on expanding the business while balancing inventory with sales, which we emphasize daily. There may be some opportunities to enhance inventory efficiencies, but currently, we need to ensure we have the appropriate level of inventory to support growth. That being said, we will be cautious about balancing both aspects as we grow the business.

Our next question comes from Budd Bugatch with Water Tower Research.

First, I want to acknowledge that it's been a challenging time for everyone. Congratulations on maintaining Culp's financial strength during this period. My first question is about the improvements in CHF. I would appreciate any insights you could share, perhaps some anecdotal examples of what you've implemented, especially concerning the operational cost efficiencies. Can you provide some specific examples or details about those?

Yes. And I'll let Tommy speak to that, Budd, because he's living it. He's living it. We're happy to have him here with us in the office and not on the plant floor. We got him. We had to pry him out from that. But Tommy, why don't you touch on anything from your standpoint?

Yes, sure. Budd, it's really, for us, improving our gross profit is really a combination of working on our mix and improving previous programs that weren't costed in line with the market conditions through COVID. As it related to operational efficiencies, we continue to really push our supply chain for best cost position on raw materials as well as continuous improvement quality and manufacturing efficiency initiatives in Stokesdale and in Canada. Other initiatives we're doing is making sure that we're really leveraging our global platform for efficiency and profitability and balancing those together with our manufacturing assets.

Tommy, can you explain the significance of that? Was pricing more crucial than the operational efficiencies? What is the relative balance between the two?

I believe both aspects are equally important. We had some programs that were not profitable, so we needed to pivot away from those. At the same time, the challenging COVID environment has given us the chance to engage and drive operational improvements, especially as we navigate the evolving macro environment and opportunities with raw materials. Therefore, we are giving equal focus to both areas.

So do we think about them as 50-50 kind of improvement? You get 50% of the improved gross margin from pricing and 50% from pricing that you can finally get a hold of or get either through new programs or realigning previously unprofitably priced programs and 50% through operational efficiencies?

Yes, sir. I would characterize it as 50-50.

What excites me about what Tommy is working on is that it's a mix of better pricing and improved costs. The business is gradually picking up, and we are strengthening our market position internally. We've been in the mattress business for a while, and we have a solid position. There will be times when demand spikes, and we hope that shift starts moving in our favor. The operational improvements we have are going to yield even greater benefits when that happens. It's crucial to leverage our strong global capabilities. If we can get the right products priced and manufactured in the appropriate locations—what's right for the U.S., Canada, Asia, and Haiti—that’s when we can significantly boost profits once everything aligns. Great work is being done in preparation for the turnaround.

Okay. Turning to CUF, Read is part of CUF and you mentioned that Read's revenue for this quarter is about a third of the total, which is roughly $9 million. How does that compare to Read's revenue in the first quarter of last year? What was that comparison like?

Yes, Budd, this is Boyd. Last year in the first quarter, the total hospitality business accounted for around 25% of our total sales. This year, that figure has increased to 33%, and this segment was gaining throughout last fiscal year.

I see. And so then on that basis and Read's gross margin, how would you characterize that versus the fleet margin, the average margin in CUF?

Yes, Budd, this is Ken. The critical point we made was that Read has seen significant improvement year-over-year compared to last year. In fact, we experienced a loss last year, but now we're profitable. The margin is similar to the overall margin for CUF right now. Obviously, we aim to continue growing as we progress in the upcoming quarters. We're excited that this business has truly improved and is making a strong contribution this year.

Okay. That’s great. Now, looking ahead, I understand that providing guidance for the second quarter in this uncertain macro environment has been challenging, and we appreciate the information you've shared. However, you also mentioned aiming for operational profitability in the second half of the year. I want to clarify whether you anticipate being operationally profitable for the entire second half or just for the full year, considering the improvements expected in the latter half. How should we evaluate that?

Thank you for your question, Budd. We're not forecasting operating profitability for the entire year since we're coming from the first couple of quarters. However, we do believe that in the latter half of the year, there will be months and a quarter where we achieve consolidated operating profitability. We are uncertain whether that will occur at the end of the third or in the fourth quarter, but we expect it to be in the second half. Our progress will not solely depend on an improvement in macro demand, but if demand increases sooner, our turnaround will be quicker. Even at current demand levels, we anticipate having a profitable quarter in the second half, likely towards the end of the year.

And so even if it does not sufficiently to make the second half overall profitable, but just in the particular quarter in which you reach operating profitability? Is that what you're saying?

Yes, we hope your first statement is correct. What we are communicating today is that we plan to return to profitability in the second half, but we are not making a prediction for the entire second half.

In the second half. Okay. And looking further down the road, so now going from the near term, intermediate term to a little bit longer term, you continue to exude confidence and comfort longer term. And I think that if I got your message even stronger now than it might have been even in some of the past calls, can you kind of give us a framing of what that looks like? Tell us what we should think about success when you get to success in the longer term.

Yes, thank you for highlighting that. We recognize that we are currently in a challenging phase, recovering from a more difficult period. However, there is a strong sense of confidence among our executive management regarding a more promising future for the business. We understand our market position, showcase our innovative products, and have the necessary platform to serve our customers effectively. Historically, our industry has been stable and has shown gradual growth, and we are not accustomed to the volatility we have experienced over the past couple of years, which has impacted our results. As we move towards stability, our teams in both divisions are truly inspiring confidence. Looking ahead to 2025 and 2026, we anticipate returning to double-digit operating incomes in mattress fabrics and high single-digit operating income percentages in upholstery fabrics. That is our initial recovery target, and we are optimistic about achieving this in the medium term.

Okay. So that gets us to the margin side of that. And then in terms of the top line, you think you can match the industry's slow growing low to mid-single-digit kind of growth over time top line?

Yes, sir. Yes, sir. I mean, ideally in our best days, and we hope we can grow faster than the industry grows. That's always our goal. And I don't see why we can't, but we certainly will stay with industry pace and see that steady growth.

All right. The other thing I noticed in the quarter was that SG&A was a bit higher than we anticipated, and operating expenses were also slightly elevated. Could you provide some insight into why that might be the case and what we should expect moving forward?

Yes, Budd, this is Ken. We outlined several reasons for the increase. Wage inflation was certainly one factor. We also had higher incentive compensation accruals. It's worth noting that we are coming off a very challenging year, and we view this year as a significant improvement, presenting some opportunities. Additionally, we encountered various professional fees, and both divisions had to manage increased sampling expenses, which is often overlooked. Last year at this time, we had very few new programs, but now both teams are handling new exciting opportunities and rollouts, leading to higher sampling costs. All these factors affected our corporate accounts, corporate expenses, and divisions. What excites us is that as we mentioned in our prepared remarks, we believe our current SG&A is well-aligned with our business strategies. As our sales grow, we anticipate substantial opportunities to leverage profitability, particularly regarding both SG&A and fixed costs. We are prepared; we just need a boost in sales to achieve that leverage.

Is there an estimate on the sampling cost that you can share? Doesn't that impact gross margin? I mean, will sampling costs be included in the fabric you produce? Or do you separate those sample costs, ensuring they are categorized under SG&A and operating expenses?

Hey, Budd. The way that we characterize our sampling cost is really as a part of our launches, so it's really a part of our commercial process of sampling, creating, doing all the development and design work relative to new programs.

And that winds up in operating expense. Is that right?

Yes, sir.

Okay. Again, congratulations on navigating through a challenging period. There are some in the industry that are no longer present to do that.

Thank you, Bud. Have a good weekend.

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

Thank you, operator. And again, thank you to everyone for your participation and your interest in Culp. We look forward to updating you on our progress next quarter.

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