Earnings Call Transcript
CULP INC (CULP)
Earnings Call Transcript - CULP Q4 2021
Operator, Operator
Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the fourth quarter and fiscal 2021. 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 10-Q. You are cautioned not to place undue reliance on forward-looking statements made today, and each such statement speaks only as of today. We undertake no obligation to update or to revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included in either 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, or in the slide presentation with supporting summary financial information that is also available on the company's website as part of the webcast of today's call. I will now turn the call over to Iv Culp, President and Chief Executive Officer of Culp. Please go ahead, sir.
Iv Culp, CEO
Good morning, and thank you all 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, 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 and the full year. I will then update you on the strategic actions in each of our operating segments. And after that, Ken will review our first quarter and fiscal 2022 full year business outlook. We will then be happy to take your questions. We are pleased to have delivered a strong fourth quarter with dramatic sales growth across both our divisions and consolidated operating income in line with expectations. Despite some ongoing headwinds, we ended a tumultuous year with strength and momentum. Demand remained strong during the quarter as consumer focus on the home continued in our robust global platform, utilizing our manufacturing and sourcing capabilities across six countries and our long-term supplier relationships, which enabled us to service the surge in demand for fabric and sewn covers from both new and existing customers. For the full year, we overcame tremendous adversity to deliver strong growth in sales and operating performance compared to the prior year. Our company's solid foundation, stable supply chain, and spirit of innovation helped us to successfully weather the initial pandemic-related downturn in our business at the end of last fiscal year and capitalize on market share opportunities throughout fiscal 2021. The exceptional execution by both divisions during the challenging operating environment strengthened our customer relationships, and generated positive momentum to start fiscal 2022. In addition to our improved sales and operating performance, our cash flow for the year and our balance sheet remained strong. We ended the fiscal year with $46.9 million in total cash and investments and no outstanding debt. Our existing Haiti operations have performed very well for our mattress fabrics segment during fiscal 2021. As previously reported, we acquired the remaining 50% ownership interest in our former unconsolidated joint venture in Haiti during the fourth quarter, and we are now the sole owner with full control of this mattress cover operation. With respect to this acquisition, we reported a gain from bargain purchase totaling $819,000. We are also happy to announce an additional expansion to our Haiti operations to include a third facility. This new building will be dedicated to the production of cut and sewn upholstery kits. Construction began during the fourth quarter and is expected to be complete during the second quarter of fiscal 2022. The new facility will primarily support committed demand from an existing customer of the upholstery fabrics division. We believe this move will enhance our speed to market, provide growth opportunities and mitigate some risk for our upholstery fabrics business with near-shore capabilities that complement our already strong Asian platform. Importantly, we finished the year as a stronger company, both operationally and financially, thanks to the extraordinary efforts and resilience of our associates around the world. We are extremely proud of their hard work, adaptability and perseverance in the face of unique challenges and uncertainties. We are grateful for their unwavering dedication and tremendous accomplishment during this challenging time. Looking ahead, we are entering fiscal 2022 with a positive outlook for our business. We are proud of our ability to absorb the significant increase in demand during fiscal 2021 and we are even more pleased about the outlook that supports our continued growth during fiscal 2022. We also believe our hospitality business will begin to see improvement as conditions normalize in the travel and leisure industry. Heading into the first quarter, we are faced with some continued near-term pressures in both divisions relating to ongoing customer capacity limitations, primarily due to supply chain disruption for non-fabric components and labor shortages, as well as increasing raw material and freight costs and foreign currency fluctuations in China and Canada. We do expect that most of these headwinds are temporary and will be mitigated to some extent by recent pricing actions taken by both divisions, all of which were effective by May 1. Despite these challenges, we believe our business will continue its solid and improved performance during fiscal 2022. We will maintain our focus on innovation and we will emphasize efforts to increase our market share and make progress on ESG initiatives throughout the year. On the innovation front, we are excited to advance the tremendous synergies development between our two businesses by combining our design, innovation and sales team for both divisions into a shared space at our new innovation campus in downtown High Point, North Carolina. This design-driven space will pull our top creative talent together to support collaboration across divisions and provide an everyday space to gather, meet with customers, develop new products and showcase our technologies and innovations from fabric to sewn cover. I'm extremely proud of our company's accomplishments in fiscal 2021 and I am confident that we are well positioned to deliver value for our customers, employees and our shareholders in fiscal 2022 and beyond. I'll now turn the call over to Ken, who will review the financial results for the quarter and the full year.
Ken Bowling, CFO
Thanks, Iv. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website that cover key performance measures. We have also posted our capital allocation strategy. As a reminder, we present our results on both a GAAP and non-GAAP basis. We believe the non-GAAP presentation better reflects performance of the business as we compare our financial results among comparable financial periods. A reconciliation of the non-GAAP adjustments to the most directly comparable GAAP measurement is included in the tables in our press release and in the tables at the back of the summary financial presentation on our website. Here are the financial highlights for the fourth quarter. Net sales were $79.1 million, up 67% compared to the prior year period. Both businesses had a strong sales performance for the quarter. Iv will go into more detail on divisional operational performance in a moment. The company reported income from continuing operations of $1.6 million compared with a loss of continuing operations of $18 million for the prior year period, which included $13.7 million in noncash asset impairment charges. Non-GAAP net income from continuing operations for the fourth quarter was $1.4 million or $0.11 per diluted share, which excludes an $819,000 gain on bargain purchase associated with our fourth quarter acquisition of the remaining 50% ownership interest in our former unconsolidated joint venture located in Haiti as well as $742,000 in certain income tax adjustments for the quarter. This compares with a non-GAAP net loss from continuing operations of $5.3 million or $0.43 per diluted share for the prior year period, which excludes $13.7 million in noncash asset impairment charges and $2.8 million in income tax expense. The current quarter was affected by operating inefficiencies incurred in connection with servicing the surge in demand in our mattress fabrics business, along with higher freight and raw material costs, unfavorable foreign exchange rate fluctuations and higher SG&A expenses due primarily to increased incentive compensation costs. On a percent of sales basis, total SG&A came in at 12.8% compared to 15.5% for the same period a year ago. For fiscal 2021, net sales were $299.7 million, up 17% as compared to the previous year. Income from continuing operations for fiscal 2021 was $12.1 million compared with a loss from continuing operations of $7.6 million for the prior year, which included $13.7 million in noncash asset impairment charges. Non-GAAP net income from continuing operations for fiscal 2021 was $7.3 million or $0.59 per diluted share, which excludes the $819,000 gain on bargain purchase I mentioned earlier, as well as $4.9 million in income tax expense for the year. This also includes $2.2 million in other expense relating primarily to foreign exchange rate fluctuations associated with our operations in China. Notably, the foreign exchange charges included in the other expense line item for this fiscal year are mostly noncash and are mostly offset by income tax deductible foreign exchange losses associated with our China operations. Non-GAAP net income from continuing operations for the prior fiscal year was $1.2 million or $0.10 per diluted share, which excludes $13.7 million in noncash asset impairment charges I mentioned earlier, as well as $1.3 million in income tax expense. It also includes $902,000 in other expense. The current year was affected by the same factors I noted earlier for the fourth quarter, particularly the unfavorable foreign exchange rate fluctuations and higher SG&A expenses due primarily to increased incentive compensation costs. On a percent of sales basis, total SG&A came in at 12.6% compared to 13.4% for the prior year. Trailing 12 months adjusted EBITDA for this fiscal year was $18.5 million or 6.2% of net sales compared to $13.8 million or 5.4% of net sales for last fiscal year. The effective income tax rate for the fourth quarter of this fiscal year was 36.6% compared with 12.2% for the same period a year ago. The increase in the company's effective income tax rate for the fourth quarter for fiscal 2021 is mostly due to the significant US pretax loss during the fourth quarter of fiscal 2020 that stemmed from the economic uncertainty and disruption caused by the COVID-19 global pandemic. The effective income tax rate for the full fiscal 2020 year was 70.7% compared with 43.7% for the prior year. Income tax expense for this fiscal year includes an $8.5 million noncash income tax charge to record a full valuation allowance against the company's US net deferred income tax assets, partially offset by a $3.6 million noncash income tax benefit that was associated with the retroactive US treasury regulations enacted during the first quarter of fiscal 2021 regarding the GILTI tax provisions of the recent Income Tax Reform Act. The prior fiscal year included $1.9 million of GILTI that did not reoccur in fiscal 2021 due to this recent change in GILTI tax regulations. As a reminder, the company's effective income tax rate is affected over the fiscal year by the mix and timing of actual earnings from our US operations and our foreign subsidiaries located in China and Canada, which have higher income tax rates as compared to the US federal income tax rate. Looking ahead to next fiscal year, we currently estimate that our consolidated effective income tax rate for the first quarter will be in the 30% to 35% range based on the facts we know today. Now let's take a look at our business segments. For the mattress fabrics segment, sales for the fourth quarter were $42.9 million, up 84% compared with last year's fourth quarter, which was impacted by the COVID-19 pandemic. Operating income for the quarter was $2.3 million compared with an operating loss of $2.8 million a year ago, with an operating income margin of 5.3% compared with a negative 11.8% a year ago. Our operating performance for the quarter, though dramatically improved as compared to prior year period, was affected by several factors. We were able to meet the extraordinary increase in customer demand during the quarter, but in doing so, we incurred considerable operating inefficiencies to satisfy the surge. We were also pressured by increased raw material prices, freight costs, and unfavorable foreign currency fluctuations in China and Canada. Notably, although we announced a price increase during the fourth quarter to help mitigate higher freight and raw material costs, this action did not take effect until the beginning of fiscal 2022, resulting in a temporary cost price lag that affected our operating performance for the quarter. For the upholstery fabrics segment, sales for the fourth quarter were $36.1 million, up 50% over the prior year, which was impacted by the COVID-19 pandemic. Operating income for the quarter was $2.6 million compared with $0.5 million a year ago, with an operating income margin of 7.2% compared with 2% a year ago. Our improved operating performance for the fourth quarter primarily reflects the significant increase in sales for our residential business, offset somewhat by unfavorable foreign exchange rate fluctuations and reduced demand in our hospitality business. Here are the balance sheet highlights. As of the end of the year, we reported $46.9 million in total cash and investments and no outstanding borrowings, up from our $38.7 million net cash position as of the end of last fiscal year. We also generated cash flow from operations of $21.5 million and free cash flow of $14.4 million for the year compared with cash flow from operations of $5 million and free cash flow of $1.5 million for the prior year. This year-over-year improvement reflects higher earnings and focused attention on working capital management throughout this fiscal year. During this fiscal year, we spent $6.7 million on capital expenditures and $892,000 in acquisition-related investments. We also returned $5.3 million to shareholders through our regular quarterly dividends. We are very pleased with our strong balance sheet going into the first quarter of fiscal 2022. On March 2nd of this year, the Board of Directors reinstated the Company's share repurchase plan, which was previously suspended last April due to the economic uncertainty related to the COVID-19 pandemic. The Company did not repurchase any shares during the fourth quarter of this fiscal year. With that, I'll turn the call back over to Iv.
Iv Culp, CEO
Thanks, Ken. I will begin with the mattress fabrics business. We were energized by significant growth and top line performance for the mattress fabrics segment during the fourth quarter. Our increase in sales of 84% year-over-year compared to the prior year period, as well as our top line growth for the full fiscal year of 20% year-over-year was driven by the ongoing consumer focus on the home environment and market share gains across a diversified group of new and existing customers, including further growth in our sewn mattress cover business. Our fabric to cover model as well as our onshore, nearshore, and offshore supply chain strategy is preferred. The strength and flexibility of our global manufacturing and sourcing operations in the US, Canada, Haiti, Asia, and Turkey enabled us to support strong demand trends and serve the needs of our mattress fabric and cover customers during the fourth quarter and throughout fiscal 2021. We also continue to benefit from our innovation focus and our virtual design capabilities, including our reimagined Culp Home Fashions 3D rendering services, which allowed us to strengthen our position with customers and capitalize on market share opportunities. In addition, we believe the domestic mattress industry, and in turn, our business continue to realize some benefits during the fourth quarter from the preliminary antidumping duties imposed in October 2020 by the US Department of Commerce on mattress imports from seven countries. We are cautiously optimistic that this tailwind will continue during fiscal 2022. As we look ahead into fiscal 2022, we are excited about the expanding depth and expertise of our team with additional engineering and innovation development experience. The importance of mattress product performance has grown exponentially in recent years, and we believe this added knowledge is an important factor in maintaining the competitive advantage. We are also excited about a recent introduction of our new mattress fabric ChillSense powered by REPREVE that combines cooling technology with a sustainability focus and reflects our commitment to developing products that are better for the environment. Although there are lingering pressures heading into fiscal 2022, we believe we are well positioned in mattress fabrics to gain market share. And we expect our solid top line performance to continue at improved profitability levels during the year. We have the ability to leverage our creative designs, innovative products, digital marketing strategies, and global production capabilities to enhance our leadership position and sustain Culp's competitive advantage. I'll now turn for a few comments on the upholstery fabrics segment. We were very pleased by the strong growth in sales during the fourth quarter, up 50% year-over-year and for the full fiscal year, up 14% year-over-year. We successfully navigated the significant headwinds we were facing going into the quarter, including customer supply chain constraints and container availability, as well as the impact of Chinese New Year to deliver better than expected results. We executed well on our product-driven strategy and benefited from the strength and flexibility of our platform in Asia, including our stable, long-term supplier relationships and our expanded cut and sew capabilities in Vietnam. Our growth for the fourth quarter and for fiscal 2021 year was driven by strong industry demand in our residential business, as well as the benefits of market share gains and product innovation. This growth was partially offset by lower sales for our hospitality business, which remained under pressure due to pandemic-related disruptions affecting the travel and leisure industries. Our highly durable stain-resistant LiveSmart performance fabrics, as well as our LiveSmart Evolve performance plus sustainability fabrics are important drivers of growth in our residential business. Looking ahead, we are confident in our strong backlog and our ability to meet the ongoing demand. We believe our recent price increase at the end of the fourth quarter will help offset the ongoing foreign exchange fluctuations. We are also excited to be expanding our capacity for cut and sewn upholstery kits with a new production facility in Haiti, which is expected to be completed during the second quarter of fiscal 2022. And while we do expect that certain near-term headwinds, including rising freight and raw material costs, may temporarily pressure our business during fiscal 2022, we are confident in our ability to navigate these headwinds and believe our business is well positioned for the long term. We are also cautiously optimistic that pent-up demand for travel and leisure activities will benefit our hospitality business, although the timing of this does remain uncertain. Above all, we remain focused on providing innovative products that meet the changing demands of our valued customers. And now Ken will discuss the general outlook for the first quarter and full fiscal year 2022, and we'll then take some questions.
Ken Bowling, CFO
Although subject to uncertainties, we are encouraged by the execution of our product-driven strategy and the continued strength of demand for home furnishing products, as well as our expanding market share reach. We expect sales for the first quarter of fiscal 2022 to increase approximately 20% compared to the prior year period, and we expect our consolidated operating income for the quarter to significantly improve as compared to the prior year period and as compared to the fourth quarter of fiscal 2021. For the full fiscal 2022 year, we expect net sales to continue to increase moderately and consolidated operating income to increase significantly as compared to fiscal 2021. Notably, our expectations for the first quarter and full fiscal 2022 year are based on information that is available at the time of this webcast presentation and reflects certain assumptions by management regarding our business and trends. The outlook assumes there will be no further pandemic-related shutdowns and no material changes in freight and raw material costs, foreign currency exchange rates, recent consumer trends, or other circumstances beyond the company's control. Additionally, based on current expectations, capital expenditures for fiscal 2022 are expected to be in the $9 million to $10 million range. Our capital investments will focus on our ongoing strategy of maintenance CapEx, centered in our mattress fabrics business, as well as spending in our upholstery fabrics business with investments in Read Windows and our new Haiti startup. At the corporate level, CapEx spending will include implementations in IT infrastructure and security, as well as our new innovation campus in High Point, North Carolina. Depreciation and amortization is expected to be approximately $7.5 million to $8 million for fiscal 2022. With that, we'll now take your questions.
Budd Bugatch, Analyst
Congratulations on a strong quarter and a nice rebound. I have a couple of questions. You mentioned the impressive sales growth. Can you provide some insight on how that's expected to continue in the future and what gives you that confidence?
Iv Culp, CEO
As mentioned in our release, we experienced a significant sales increase in Q4, although it's important to note that this is in comparison to a weaker quarter last year. We continue to observe that consumers view their homes as a safe haven, leading to increased spending on home upgrades, which bodes well for our business. Our customers are maintaining strong backlogs, creating positive momentum for us. Additionally, both of our key business areas are seeing strong product and process innovations. This includes new product developments and global cut and sew advancements, contributing to a favorable sales mix and enhancing our market presence in both mattress and upholstery fabrics. We anticipate a strong year ahead. However, we are projecting moderate sales growth for all of 2022, considering the significant sales growth we experienced last year. We are building on our previous growth, which fills us with optimism for the future.
Budd Bugatch, Analyst
Let's take a closer look at that. You mentioned a 20% growth in the first quarter. How is that divided between Culp home fashions and Culp upholstery fabrics? Are they growing at similar rates, or is one performing better than the other in your outlook?
Ken Bowling, CFO
I think when you look at the first quarter, I think there's a little bit more upward trend for upholstery fabrics as compared to mattress fabrics. Both of them are doing quite well, but I think as we go into the first quarter, there's a little bit more growth opportunity for upholstery fabrics as compared to mattress.
Budd Bugatch, Analyst
And then both of them relatively moderate going forward in Q2, 3 and 4?
Ken Bowling, CFO
I believe that by the end of the year, we can expect a nice moderate increase for both categories.
Budd Bugatch, Analyst
And for Reed, you talked about being more positive, and I think everybody can kind of understand that. Are you seeing any green shoots early on in hospitality that gives you some comfort there?
Boyd Chumbley, President, Upholstery Fabrics
We certainly have started seeing an improvement in the order rates and the backlogs building in the hospitality area, started seeing that in the fourth quarter, but certainly believe that we'll be progressively seeing some better business as we go forward into this year. As travel has begun to return and I think expectations would be that travel will be a driver of some more robust sales in that hospitality segment as we go through this year.
Budd Bugatch, Analyst
A couple of other things on the sales growth. ChillSense looks like an interesting innovation. Do you have an exclusive on that? How are you doing that? And that being in mattress fabrics, I don't remember a sustainability innovation in mattress fabrics. It seems to me that the first one. So that's actually pretty exciting. Have you had some early wins in that fabric amongst some of your mattress customers?
Iv Culp, CEO
We definitely believe company-wide we think post pandemic, there will be a continued focus on sustainability offerings. So we're working really hard on that. We've had tremendous success with LiveSmart Evolve on the upholstery fabric side of the business. And I think jointly, we had our press release recently, we've already with our offerings, we've already saved like 63 million bottles, water bottles. So we're thrilled with that. There is some mattress development already in there. We are using some generic, I say generics, some recyclable products in our mattress fabric offerings, but ChillSense is another step, adding sustainability and cooling. And obviously, cooling has been a story in the mattress business for some time. And to be able to provide both of those things, the performance product plus sustainability, we think, is a real win for the business. It's a partnership, just like Evolve, we use Unifi REPREVE. ChillSense also uses Unifi REPREVE which is a great partner of ours. And we do have an exclusive lead on ChillSense for a period of time to get that launched to the market. So with their marketing efforts and ours, we think ChillSense will be a strong candidate for the top of mattress. We're quite excited about that.
Budd Bugatch, Analyst
I know that I'm going to attract clients. The main concern that I focus on is mattress margins. With an 84% growth in revenues, I can see how active you had to be during the quarter, especially with all the challenges in the home furnishing sector, including disruptions with foam and others. I'm sure that affected you. Can you provide insight into where margins are headed and what reassures you about that?
Iv Culp, CEO
Let me elaborate a bit on what we covered in the release. We experienced an extraordinary sales increase in mattress fabric, reaching 84%, and we are proud to have managed that growth, even though we recognized some inefficiencies in our processes. We have gained market share, and our priority was to serve that demand. To capture this business, we needed to act swiftly, which sometimes meant not optimizing our manufacturing locations. Additionally, we faced challenges from currency fluctuations, freight costs, and material pricing, which affected the timing of our price increases. Our price increase is now in effect for the entire fiscal year, starting May 1, and we have projected significant margin improvements for the full fiscal year. Ken, feel free to add any additional insights.
Ken Bowling, CFO
No, that's exactly right. I mean we did get pressure in the fourth quarter and we've got the price increase in effect. And so we are seeing or expecting some significant improvement as we go in the first quarter and beyond, especially in the mattress fabric side.
Iv Culp, CEO
And we've always said our mattress fabric business, our expectation is to be a double digit operating income margin business. So our expectation for 2022 is to start approaching that. We're not going to commit to getting there in Q1 or immediately, but that's our target.
Budd Bugatch, Analyst
I have a few modeling questions. You mentioned a tax rate of 30% to 35% for Q1, Ken. How should we consider the entire year? Can you give us any insight into what we might see in specific quarters?
Ken Bowling, CFO
Budd, I'd say that's good for Q1 and the rest of the year based on the facts we know today. As I said in the prepared remarks, our tax rate can be affected by the mix of income between the US and China and Canada. But based on what we see today, we feel good about that. Of course, what comes out of Washington will depend on the future. We don't think that will affect our fiscal year. We don't think so, but we'll wait and see. But right now, I think 30% to 35% would be good for Q1 and the rest of the year.
Budd Bugatch, Analyst
And as we look at currency, the fourth quarter, you had the $819,000 gain, the other part of that bucket was $150-some thousand. Was that all currency? Was that an all currency impact or what was the currency impact in the fourth quarter and what does that look like going forward? I know that's a tough one to call.
Ken Bowling, CFO
You mean in other expense for the quarter? If you recall, we faced significant challenges throughout the year. As I mentioned in Q3, we were experiencing around $1.5 million in noncash expenses. However, in the fourth quarter, February and March showed some improvement, which continued into April, ultimately offsetting those losses. Therefore, when analyzing Q4, our other expenses appeared more normalized compared to previous quarters. Looking ahead, since our fiscal year started, the rate has strengthened slightly, though it might have softened a bit again. It really hinges on external factors like interest rate discussions and fluctuations with the dollar. Currently, we are relying on inconsistent reports from various banks, but we hope conditions will remain stable so we can plan effectively. We just need to wait and see.
Budd Bugatch, Analyst
And last for me, capital expenditures of $9 million to $10 million, how does that break out quarter-by-quarter?
Ken Bowling, CFO
It's pretty consistent when you look at, it may be a little bit front-loaded as we look at the year, whereas last year it was more back-loaded. But I would say a little bit front-loaded as compared to kind of a spread evenly over the year.
Budd Bugatch, Analyst
Because I didn't know if Haiti would get us more of the capital expended there or if a new design center would change the cadence of that?
Ken Bowling, CFO
Yes, I mean that's definitely projects that would cause the first half to be higher.
Budd Bugatch, Analyst
Well, thank you very much for the guidance for the quarter, and it was good to see a little bit more of an outlook for the full year. I think that's somewhat new for you all and I hope you all continue to do that and continue to update us on that as the quarters and the year progresses. But nice performance, and thank you very much.
Anthony Lebiedzinski, Analyst
Actually, first, let me just follow up about the new facility in Haiti. Do you guys have an expected as far as the cost of the new facility and how much of your upholstery business you think will come out of that facility this fiscal year?
Iv Culp, CEO
We are very enthusiastic about the potential for upholstery kits in Haiti. It's important to highlight that our Asian platform remains very strong and Haiti is meant to complement it, not replace it. I would like to shift the conversation to Boyd so he can provide more details on this initiative, but I want to emphasize that the goal is to enhance our offshore and nearshore strategy.
Boyd Chumbley, President, Upholstery Fabrics
We believe that setting up a cut and sew facility in Haiti will enhance our global platform for cut and sewn upholstery and provide a nearshore option to strengthen our existing operations in Asia. This also helps mitigate risk and allows us to meet the rising demand for cut and sew in the upholstery fabrics market. Regarding your question about our business for this fiscal year, the operation will not commence until late in the second quarter, and there will be a gradual scale-up, meaning it won’t represent a significant part of our business this year. However, we expect to see some output, and part of that will be growth coming from the Haiti facility during the fiscal year.
Anthony Lebiedzinski, Analyst
And as far as cost, I mean, is there any way you guys could quantify that or is that anything significant to think of as far as the cost of getting that facility up and running?
Ken Bowling, CFO
Yes, it's really two components. It's the cost of the lease of the facility, and then you've got some CapEx, which is part of the CapEx plan that I described earlier. So we don't disclose that but it's not significant, but it's an investment that we feel is, over time, certainly be a nice payback and one that we can put behind us in the first year and get rolling.
Anthony Lebiedzinski, Analyst
And then could you quantify the extent of the price increases that you've in place for May 1st and then how that will impact margins in the first quarter?
Ken Bowling, CFO
We don't really disclose that. I think that what we've strived to do is by forecasting a significant improvement in Q1, obviously, those price increases are in effect on both sides. And so that's certainly helping our performance in the first quarter and beyond. But it's the price increases that were strategically done to overcome currency, freight, and raw material changes that we knew as of the time of the price increase.
Anthony Lebiedzinski, Analyst
And a couple of more questions for me, as far as labor availability and costs. I mean, what are you guys seeing there with respect to ongoing operation and with respect to your customers as well?
Iv Culp, CEO
I think the cost that we think about that we're seeing the most impact today is probably freight. I believe that we've, at least for now, offset most of our material increases with our price increases. We're watching currency closely. Freight is one that we're experiencing some rising costs with. And then to your point, labor in the US is definitely a challenge for us, too. And we do have some jobs we're trying to fill, which is why though that we're so bullish on our global platform, because we have options in each business where we're not in any shortage of supply of our products. So we can meet the demand. And we talk about meeting the demand with strength and that's how we look at it, but it does mean we need to flex our muscles globally more and just be able to offset any labor challenges we may have here. We are doing enormous efforts to our human resources department to engage our employees more to look at tweaks to jobs where we need to adjust pay rates and everything we can to make sure we're staffed well. I wouldn't call it any major concern but we do want to keep our eyes on that labor ball at least in the short term.
Anthony Lebiedzinski, Analyst
And then last question for me here. So you talked about the effect of research just in hospitality. Can you talk about the margins that you have in hospitality versus the residential piece of that business?
Boyd Chumbley, President, Upholstery Fabrics
Typically, in that segment of our business that does carry somewhat higher margins, so that will be an assist to us as we see the hospitality business start to come back from the impacts of the pandemic. But yes, just in general, that business does carry somewhat higher margins than our other business.
Marco Rodriguez, Analyst
Most of the big topics have been discussed already and answered. So just a couple of quick follow-ups. Wondering if you guys can maybe talk a little bit more about the new product line with the prefabric. Can you just maybe discuss the fact or the genesis of that? I understand that you work with that supplier for some time. But just kind of how do product launch come about and what are sort of the expectations you're thinking about in terms of that line?
Iv Culp, CEO
We have seen great success with LiveSmart Evolve in the upholstery category. As we emerged from the pandemic and participated in the recent Showtime and furniture market, interest in this product line remained strong. It felt natural for us to consider how to enhance our sustainability message in the mattress category as well. Regarding LiveSmart Evolve and upholstery, its appeal lies in its performance, which guarantees improved cleanability alongside sustainability. For the mattress segment, we aimed to achieve similar performance, providing both cooling features and sustainability. Cooling is a critical aspect in our mattress business as we extensively use advanced cooling fabrics, which include specialized high-tech cooling yarns and phase change materials. Partnering with Unifi REPREVE offers a cost-effective solution for incorporating cooling since it's already integrated into the yarn, requiring no additional treatment, and it further contributes to our sustainability narrative. We believe this aligns well with what consumers are currently focused on. We are also working to enhance our branding in the mattress category and view this initiative as a promising opportunity. We are just starting to roll this out and are in the initial phases of introducing it to the market, but with our exclusive lead, we anticipate having a successful launch later this year.
Marco Rodriguez, Analyst
And then in terms of the supply chain disruptions that are non-fabric related. I know we've discussed this for a few quarters here now and there's obviously the expectation that it continues here in the near term as far as a potential headwind. Can you maybe kind of give us a sense as far as your best estimate or best read as far as when that sort of normalize, if you will?
Iv Culp, CEO
I think I'm going to speak for a minute on the mattress side, and I'll let Boyd make some comments on the upholstery side to be sure he gives you the full expert opinion. I think what I hear mostly for the mattress side of the business, it gets better every week and every month. So I think our biggest challenge there has been some thumb allocation that our customers have been wrestling with and we hear it gets better every month. So I think within late this quarter or our second quarter, I think our expectation is to be more normal there with supply will be good for that side of the business. Boyd, you may speak to what you're seeing from upholstery side?
Boyd Chumbley, President, Upholstery Fabrics
I think it's very similar, Iv, on the upholstery side of the business. Also here that there is steady improvement in terms of availability that's occurring. So I think the expectations there are as well that by the end of the quarter, there will be considerable improvement there, maybe not completely resolved but certainly a lot of improvement throughout the quarter.
Marco Rodriguez, Analyst
And then in terms of your expectations for cash flow from operations for the fiscal year. Can you kind of give us a sense as far as how that's going to ramp, and is there an expectation that you're going to build cash this year?
Iv Culp, CEO
We have seen a significant increase in earnings, which will benefit our working capital, particularly regarding inventory levels. It’s crucial for us to maintain sufficient inventory to satisfy customer demand, so that will be a priority. Regarding capital expenditures, we are planning to increase our CapEx this year compared to last year. Based on our current projections, we expect our cash position to remain fairly steady this time next year compared to now. Therefore, with the higher CapEx, our financial outlook appears stable year-over-year and we will continue to pay dividends as well.
Operator, Operator
Thank you. So that is all the questions that we have at the moment. So I would like to turn the call back over to the speakers for any additional or closing remarks.
Iv Culp, CEO
Thanks, 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. Have a good day.
Operator, Operator
This concludes today's call. Thank you for your participation. You may now disconnect.