Earnings Call Transcript
CULP INC (CULP)
Earnings Call Transcript - CULP Q3 2025
Operator, Operator
Good day, and welcome to the Culp, Inc. Third Quarter Fiscal 2025 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.
Operator, Operator
Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the third quarter of fiscal 2025. 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. Additional risks and uncertainties that we do not presently know about or that we currently consider to be immaterial may also affect our business operations and financial results. 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 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 on the company's restructuring plan 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.
Robert Culp, CEO
Thank you, Dru, and good morning. I appreciate everyone joining us today for the Culp quarterly conference call with analysts and investors. I want to welcome you all. With me are Ken Bowling, our Chief Financial Officer; Mary Beth Hunsberger, President of our Upholstery Fabrics business; and Tommy Bruno, the President of our Mattress Fabrics business. I will start with some detailed remarks. As noted earlier, we have uploaded an updated slide presentation to our Investor Relations website, outlining our current restructuring plan focused mainly on our Mattress Fabrics segment, which I am happy to report is now largely complete. Ken will then provide a summary of our financial results for the quarter, after which I will discuss our business outlook for the fourth quarter of fiscal '25 and address some questions. Despite ongoing industry sales challenges, we achieved further sequential improvement in our operating results this quarter, primarily due to our mattress fabrics restructuring efforts. We also see growing opportunities to enhance our market share, especially through new business prospects for mattress fabrics and sewn mattress covers. We remain optimistic about the future of our two business segments, particularly given the competitive advantages emerging from our streamlined cost structure, agile manufacturing and sourcing capabilities, and market-leading design and innovation, all bolstered by an anticipated market recovery. Focusing on our Mattress Fabrics segment, we have improved our operational performance, achieving a 58.3% sequential reduction in operating loss despite lower sales this quarter. This builds upon the 70.7% sequential reduction in operating loss we reported in the second quarter. We also reached near breakeven consolidated adjusted EBITDA for the quarter, reflecting a $1.1 million sequential improvement despite experiencing $3.4 million less in sales due to industry downturns, fewer shipping days from holiday closures, and weather-related disruptions. We are pleased to announce that our restructuring initiatives in the Mattress Fabrics segment are mostly complete, having ceased production at our Canadian mattress fabrics manufacturing facility and relocated specific knitting and finishing equipment to our Stokesdale, North Carolina site near the end of the quarter. More details on the steps and timing of this restructuring plan can be found in the supplemental deck on our Investor Relations website. With this initiative completed, we now have an efficient manufacturing and sourcing model for mattress fabrics in North Carolina, alongside a rightsized cut and sew operation in Haiti near the Dominican Republic. As discussed last quarter, our nearshore platform also incorporates new quilting equipment, providing fresh product opportunities for the mattress segment and additional services for our customers. To fully understand the scope of our restructured mattress fabrics platform, it’s complemented by our robust supply chain operations in Asia, which includes an increasing base for fabrics and cut-and-sew covers in Vietnam as well as a long-term supplier partnership in Turkey for high-volume fabric supplies. Additionally, we entered into a conditional agreement to sell our Canadian facility during the quarter, pending customary due diligence, and we aim to complete this transaction soon. If finalized, we expect to receive between $6 million and $8 million in cash proceeds, which we plan to use to pay off existing borrowings and enhance our liquidity. I want to emphasize that the goal of our restructuring plan was to transform our business model and return to profitability amid the current weak home furnishings industry, while also establishing a more efficient structure to support our growth. Our team has diligently executed these restructuring plans, yielding the anticipated savings and efficiency gains, alongside improved margins for our knits, wovens, and sewn covers. As we progressed through this initiative over the past three quarters, market uncertainty and consumer sentiment have further declined. Nonetheless, we remain resolute and are encouraged by our business trending towards a positive consolidated adjusted EBITDA, excluding restructuring charges as we approach the end of fiscal '25, with a firm focus on achieving sustained profitability and growth in fiscal 2026. Illustrating the macro industry challenges, our consolidated sales for the third quarter decreased sequentially due to enduring weakness in the home furnishings and bedding sectors, compounded by specific pressure on residential upholstery fabric sales due to unique inventory adjustments from a major customer. While we maintain a strong relationship and consistent orders from this customer, the timing of their reduced purchases has distorted both year-over-year and sequential comparisons. Nonetheless, viewed annually, their fabric purchases align with current industry demand, reaffirming our solid market position. In fiscal year '24, Q3 was the peak of purchases for this customer compared to this year’s Q3, which reflects what we anticipate as the tail end of this inventory adjustment. We expect the last significant effects of this realignment to appear in our fourth quarter. Despite ongoing pressure in the residential upholstery sector, we are confident that our strong market position, flexible global platform, and innovative product portfolio will enable growth in our upholstery fabrics segment when market conditions improve. Aside from customer-specific challenges, we are expanding our business sequentially and strategically targeting new opportunities by segmenting our products and sales approaches to focus on new placements in mid- to upper-price point furniture as well as the value segment. We are also pleased with product placements across our manufacturing clients, driven by positive feedback from the recent High Point furniture market and the Interwoven Fabric Show. We are developing innovative, consumer-focused product lines and are committed to providing our customers with diverse supply chain strategies. Given the uncertainty surrounding tariffs and trade regulations, it has become crucial to offer supply chain options, and we are achieving this by exploring products through our extensive Asian operations with an increased focus on Vietnam, as well as considering other regions for a preferred response. In addition to challenges in residential demand, we are witnessing stronger demand in our higher-margin hospitality contract fabric business, which recorded both year-over-year and sequential increases in sales for the third quarter. This segment accounted for 40% of our upholstery fabrics total sales this quarter, showcasing our heightened potential with a wide variety of commercial fabrics and window treatment products. Delving deeper into our hospitality contract business, we are thrilled about our new on-trend fabric collection currently being showcased to customers, which features fresh constructions and color stories well-suited for new projects that promise longer life spans and higher margins compared to residential fabric placements. We continue to enhance our capacity for drapery and roller shades, adding new hotel brand standards to our portfolio each quarter. The hospitality contract component of our upholstery fabrics segment is integral to our diversification strategy, and we believe it will drive robust long-term growth. Overall, we are pleased with the upholstery fabrics segment's continued profitability, supported by our asset-light platform. The measures we've taken in the past year to streamline our finishing operations and enhance our supply chain are reducing our manufacturing costs for upholstery fabrics, bolstering our confidence as we navigate our business through varying economic climates. Looking ahead, there are several key themes developing for Culp as we manage our operations. First, I want to reiterate our commitment to achieving profitability in the current low-demand environment. Some macro demand levels are at their lowest in years, with industry volume demand seemingly declining each quarter. Nevertheless, as highlighted on Slide 11 of the restructuring deck, we are continuing our operational adjustments, concentrating on what we can control—namely, cost and efficiency improvements—allowing us to approach near breakeven adjusted EBITDA in Q3 with further enhancements expected in Q4, positioning us for sustained profitability as we enter fiscal 2026, assuming no major deterioration in industry sales levels. In Q3, we implemented new cost-saving measures related to labor and professional fees that are projected to generate annualized savings of about $1 million. These measures are in addition to the cost-saving initiatives that form part of our restructuring plan, which is expected to yield $10 million to $11 million in annualized savings. We are also targeting further significant strategic actions to synergize and enhance cost and operational efficiencies across our businesses moving forward, impacting fiscal '26 and beyond. We are evaluating all options and will share more information once we finalize those plans. The second significant theme in our business is the disruption caused by tariffs and global trade issues. Historically, Culp has prioritized a flexible and agile supply chain to support our customers, a strategy that will continue despite the uncertainties created by changing policies and timelines. We have heard from many customers about project delays due to the volatile import landscape, leading to acute sales pressures and deferred product launches that may impact Q4 sales at a minimum. For mattress fabrics, we are well positioned with our fortified U.S. platform for fabric production, finishing, and distribution supported by supply partners in Turkey and Asia. Our nearshore production in Haiti, located on the border of the Dominican Republic and protected by the HOPE Act for tariff-free treatment, is part of our strategy for cut and sewn mattress cover products. Our strong presence in Asia is bolstered by expanding supply options in Vietnam for both fabrics and sewn kits, while we also consider alternatives in different regions. Notably, only about 30% of our China-produced fabrics are shipped to the U.S., providing some current protection against rising tariffs. For window treatments, our growing capacity in the U.S. for drapery and roller shades positions us well. There is no simple solution for balancing rapidly changing trade regulations with our aggressive cost profile. However, we believe our global production footprint offers customers preferred and valuable country of origin options and speed to market as we navigate what is expected to remain a dynamic regulatory environment. Importantly, we have minimal exposure to tariff impacts involving Mexico or Canada, and we are prepared to take pricing actions as necessary to counter any cost pressures from our China supply chain. Overall, while tariffs can influence consumer sentiment, we are confident that our supply chain agility provides Culp with a competitive edge to swiftly adjust our platform to mitigate tariff pressures and ensure continuity for our customers. Another major theme driving our success in both businesses is our commitment to product development and innovation. Design and creativity have always been central to Culp’s identity, and we firmly believe that an excellent product offering combined with a focus on customer service is essential. Our perspective on innovation encompasses investments in new equipment, processes, product styling, and more, and our team remains dedicated to driving progress in all these areas. Over the past year, we have innovated not only by revamping our supply chain but also by adding equipment to enhance our knitting processes and manufacturing, as well as to effectively monitor and control the application of our finishing additives. We are enthusiastic about the new quilted mattress covers in our nearshore cut and sew operations, alongside our recently announced strategic collaboration with Precision Fabrics to develop patented flame retardant inlays for knitted products, enhancing both styling and functionality for mattress covers. Furthermore, we are in the early stages of launching mattress accessory products while also raising standards for our window treatments, and we are excited about the overall improvements in styling across both segments. We have a firm focus on design and sales strategies, and we are thrilled with customer responses to our new offerings in both residential and commercial fabrics, as well as mattress fabrics. Innovation in both processes and products is driving our market share growth and laying the groundwork for our future, especially as market conditions improve. A significant trend we are observing is customer consolidation taking place downstream, particularly in the mattress sector. In light of the challenging industry landscape, conditions appear more conducive to consolidation. While the future remains uncertain, we believe these trends bode well for Culp. As we've highlighted, we are a major supplier equipped with sophisticated, compliance-driven supply chain strategies and a strong emphasis on product design and innovation. These capabilities position us favorably for servicing larger customers, and we are focused on pursuing these opportunities while continuing to support all of our clients. We have strategically repositioned our sales team members across both businesses to better address today’s market and make Culp a preferred supplier through superior product offerings and customer service. In summary, despite the ongoing macroeconomic challenges, tariff uncertainties, and industry consolidation, we feel confident in our positioning within both businesses, supported by strong customer relationships and agile manufacturing and sourcing capabilities. We are optimistic that our efforts to optimize the cost structure in our mattress fabrics segment will facilitate our return to profitability post-restructuring, even in the current depressed demand environment. I want to thank our team for their dedication to controlling what we can manage and for taking the essential steps to ready our business for profitability and growth as we advance into fiscal 2026. Before I hand the call over to Ken, I want to mention the second press release issued yesterday regarding Bill Tyson joining our Culp Board of Directors. We are thrilled about Bill joining us and are confident that his wealth of knowledge and experience will greatly benefit our company and shareholders. Welcome, Bill. Now, I’ll turn the call over to Ken, who will discuss the financial results for the quarter and our outlook as we look forward to the fourth quarter of fiscal 2025.
Kenneth Bowling, CFO
Thanks, Iv. Here are the financial highlights for the third quarter. We continue to face a challenged demand environment. Net sales were $52.3 million, down 13.5% compared with the prior year period. The company reported a loss from operations of $3.9 million, which included $2.3 million in restructuring expense and related charges, of which $2 million was cash. This compares to a loss from operations of $1.7 million for the prior year period, which included $111,000 in restructuring and related credits. Adjusted loss from operations was $1.6 million compared with an adjusted loss from operations of $1.9 million for the prior year period. Notably, the $1.6 million adjusted operating loss was sequentially improved as compared to Q2's $2.6 million adjusted operating loss, even on $3.4 million less in sequential sales. I'll comment in more detail on divisional sales and operating performance in a moment. Net loss for the third quarter was $4.1 million or $0.33 per diluted share, compared with a net loss of $3.2 million or $0.26 per diluted share for the prior year period. Our overall adjusted operating performance for the third quarter was supported by improved operating efficiencies resulting from the mattress fabrics segment's restructuring initiatives, lower fixed costs and lower SG&A. Adjusted EBITDA for the last 12-month period ending Q3 was a negative $6.3 million as compared to a negative $3.3 million for the same prior year period. However, adjusted EBITDA for the third quarter was close to breakeven at a negative $123,000, which was a sequential improvement compared to adjusted EBITDA of a negative $1.3 million for the second quarter, again, despite $3.4 million in lower sales. The effective income tax rate for the third quarter of this fiscal year was a negative 12.1%, compared with a negative 47.5% for the same period a year ago. Our effective income tax rate for the quarter continues to be impacted by the company's mix of earnings between our U.S. and foreign subsidiaries with an operating loss in the U.S., a significant operating loss in Canada due to the restructuring effort and taxable income mostly from China, which has a higher income tax rate compared to the U.S. Expected cash income tax payments for this fiscal year will not be given at this time due to the restructuring effort. Notably, we do not expect to incur any income taxes in the U.S. on a cash basis for the foreseeable future due to our existing U.S. federal net operating loss carryforwards totaling almost $70 million as of the last fiscal year-end. Now let's take a look at the business segments. For the mattress fabrics segment, sales for the third quarter were $28.6 million, down 4.6% compared with last year's third quarter. Sequentially, sales were down 4.8% compared with the prior quarter. While year-over-year sales were affected by ongoing weakness in the domestic mattress industry, we believe CHF is outperforming the industry average and is growing its market position through investments in manufacturing platform flexibility, product diversification and design innovation. Sequentially, sales were negatively affected by fewer billing days due to holiday closures and weather events during the quarter that did not affect the prior quarter. Operating loss for the quarter was $433,000 compared with an operating loss of $1.6 million a year ago and compared to an operating loss of $1 million for the prior quarter. The improvement in operating performance was driven by the impacts of CHS restructuring initiatives, including improved operating efficiencies and lower fixed costs. For the upholstery fabrics segment, sales for the third quarter were $23.6 million, down 22.3% compared to the prior year period. Sequentially, sales were down 7.8% compared with the prior quarter. Sales for CUF residential fabric business were lower than prior year period and lower sequentially. As expected, year-over-year and sequential sales were pressured by lower orders from a significant customer to adjust its inventory to align with soft industry demand. Year-over-year sales were also pressured by demand weakness in the home furnishings industry and weather-related disruptions. Sales for our hospitality contract business, including read windows, were significantly higher compared to the prior year period and slightly higher sequentially. Income from operations for the quarter was $679,000 compared with income from operations of $2.1 million a year ago and compared with income from operations of $615,000 for the prior quarter. Operating performance for the quarter was affected by lower sales, partially offset by lower fixed costs, lower SG&A and a more favorable China foreign currency exchange rate. Now I'll turn to the balance sheet. We reported $5.3 million in total cash and $5.4 million outstanding debt under our China credit lines as of the end of the third quarter, giving us a net debt position of $105,000. The outstanding debt was primarily used in connection with restructuring activities, the timing of payables in connection with the Chinese New Year holiday, and to fund worldwide working capital. Cash flow from operations and free cash flow were a negative $9.4 million and a negative $10.1 million, respectively, for the first 9 months of this fiscal year. Our year-to-date cash flow from operations was primarily affected by operating losses, including $4.2 million in nonrecurring cash charges related to the restructuring plan that is now largely complete, partially offset by a source of cash from lower working capital. Our free cash flow was also primarily impacted by operating losses as well as planned strategic investments in capital expenditures, mostly related to the mattress fabrics segment, partially offset by a source of cash from lower working capital, proceeds from a note receivable and sale of equipment. Capital expenditures for the first 9 months of this fiscal year were $2.4 million, down from $3.2 million for the first 9 months of last fiscal year. Based on current expectations, capital spending for this fiscal year is projected to be approximately $3 million to $3.5 million and will center mostly on maintenance CapEx and quick payback projects that will increase efficiency and improve quality, especially for the mattress fabrics segment. Based on current expectations, depreciation for this fiscal year is expected to be approximately $5.5 million. With respect to liquidity, as of the end of the third quarter, we had approximately $28.5 million, consisting of $5.3 million in cash and $23.2 million in borrowing availability under our domestic credit facility. The company's existing and future borrowings under our domestic and foreign credit facilities during this fiscal year relate to our restructuring activities, the timing of payments to vendors ahead of the Chinese New Year holiday, and to fund worldwide working capital to grow the business. Importantly, given these objectives, our outstanding borrowings could again exceed our available cash at the end of the fourth quarter, resulting in a net debt position as we await the sale of our Canadian facility. However, when the sale of our Canadian facility is complete, we intend to use the expected $6 million to $8 million in cash proceeds to retire outstanding borrowings and further strengthen our liquidity position. We did not repurchase any shares during the first 9 months 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 fourth quarter as we remain focused on preserving liquidity and being positioned to support future growth opportunities.
Robert Culp, CEO
Thank you, Ken. Due to the ongoing macroeconomic and increasing tariff uncertainty, we expect continued industry sales pressure and are only providing limited financial guidance at this time. We expect our consolidated net sales for the fourth quarter to show some growth year-over-year and to remain relatively flat sequentially. The year-over-year growth is driven by an expected increase in the mattress fabrics segment, offset by ongoing pressure on residential upholstery fabric sales due to weak industry demand and impact from the timing of the Chinese New Year holiday, which this year falls entirely in our fourth quarter. We currently expect continued sequential improvement in adjusted EBITDA, which excludes restructuring and related charges, with further improvement in mattress fabrics profitability in the fourth quarter, providing a foundation for a return to consolidated operating income in fiscal 2026. These expectations reflect certain assumptions regarding our business and trends, the projected impact of the restructuring actions and ongoing market headwinds. Importantly, our expectations also assume no further meaningful impacts from tariffs and trade negotiations. So with all that, we'll now take your questions.
Operator, Operator
First question comes from Brian Gordon with Water Tower Research.
Brian Gordon, Analyst
So, my first question would be sort of about the change in guidance. And so my understanding from what you said this morning and from the press release would be that at current demand levels, you're now kind of expecting early first quarter, maybe first half at the latest for a return to profitability. Just want to clarify this.
Robert Culp, CEO
Yes, that's correct, Brian. That's how we're viewing it. As I mentioned earlier, we are dedicated to returning to profitability regardless of the demand levels we encounter. This means we need to take additional steps to achieve that. The current levels have declined somewhat, and we hope this is only temporary given the uncertainty we are facing. However, we will make the necessary adjustments to lay the groundwork for a profitable and sustainable year ahead. That's our objective.
Brian Gordon, Analyst
Great. It sounds like you are definitely gaining market share in both the mattress business and the hospitality and contract sector. Could you discuss that a bit more, as well as what you are observing regarding market share in general for upholstery?
Robert Culp, CEO
Yes, Brian, thank you for your question. Mary Beth and Tommy are here with me, and I'll let them address some of that directly. It's important to note that our restructuring project in mattress fabrics is indeed reducing capacity in targeted areas, but our intention has always been to grow the business. We're confident that we're gaining share in our Mattress segment, and specifically, the restructuring is helping us become more streamlined and efficient, which is a very positive development. We're optimistic about the outcomes this will bring. Now, let me turn it over to Tommy, who can provide his insights on the industry, followed by Mary Beth’s perspective on both residential and contract upholstery.
Tommy Bruno, President of Mattress Fabrics
From my perspective, we are seeing continued market share growth in both our fabric and cover businesses. Despite the challenges in the mattress industry, we are experiencing growth with existing customers and are actively working on projects with new customers, which will add to our market share. The transition between programs that are ending and new ones from the January Las Vegas furniture market is reflected in our Q4 numbers, but we believe the new programs are strong, and our showing at the Vegas market was excellent. We are optimistic about the new programs launching, and the key factor for us will be how well those mattresses sell once they are launched with our customers.
Brian Gordon, Analyst
So just to follow up there. So it's not just with existing customers. It sounds like there are potentially some new wins in there as well.
Tommy Bruno, President of Mattress Fabrics
Yes, sir. That's correct. Iv had mentioned we had some new capabilities that we talked about with our quilting in Haiti and we've won some new share there, some of which is launching now and then some new share that's launching in Q4 going into Q1. And then additionally, just some new opportunities based on some of the tariff uncertainty where folks like our preferred platform and are leaning in, and we're quickly getting to market with some of those opportunities as well.
Mary Beth Hunsberger, President of Upholstery Fabrics
Brian, it's Mary Beth. I'll talk to you a little bit about upholstery. Let's start with residential. There are so many things going on in that space. If we think prior to the election, we had some bankruptcies and financial disruptions with major players like Big Lots and Conn's and Badcock that were really focused at the low end. And then earlier in this year, of course, we started to see tariffs and thinking about the impact that, that's going to have. At the same time, interest rates haven't moved a lot, certainly not enough to trigger any big move in housing turnover, which is the biggest predictor of furniture sales. So what that leaves us with is a really soft industry where we feel like going forward, the high cost of living is going to really pressure the low end and the popularity of remodeling is going to fall more in the slightly more affluent customer base. So in light of all of this, we've really segmented our approach to the upholstery industry, where we do have a very targeted strategy to that value customer where we're looking at very price-sensitive, very specific constructions and how do we meet the needs of those customers, along with some realignment of our sales force to put some good experience with those customers. And then on the more affluent side, we have so much to offer. That's where we can really showcase our broad variety of products that we're able to produce. That's where we rely on our U.S.-based design staff, which has over 100 years of collective experience. And we just really can innovate and provide on-trend, really interesting products for our customers that are design focused. There, we also benefit from our innovation center at Congdon Yards here in High Point and our new branding assets that we unveiled in 2024. So in those ways, we can really target those affordable luxury type customers that we have. We've also seen a lot of success with introductions to customers we have not historically sold. So we're really excited about new opportunities there. I will now move on to discussing contract hospitality, which is often the opposite of residential. We continue to observe that consumer interest in travel persists, similar to post-COVID trends. We don’t anticipate this changing, though the tariffs have impacted some projects. We are noticing that some customers are taking a pause to understand how the tariffs will affect them. However, we are excited about new partnerships we’ve established. For instance, with major hotel groups like Hilton, IHG, and Choice, we have achieved brand standards for several of their properties, many of which are newly formed relationships from the last six months. There is significant opportunity ahead, although we are not unaffected by the industry challenges related to tariffs.
Brian Gordon, Analyst
Yes. No, thank you for that update. It's particularly exciting to see the growth on the hospitality side. It's something like 40% of the business now you noted in the press release. Kind of looking forward, do you see that level continuing as growth returns to the industry kind of more generally?
Mary Beth Hunsberger, President of Upholstery Fabrics
I do. I mean we obviously are planning and working towards a regrowth of the residential side, but our focus is largely on the contract hospitality space, and we do expect that to continue to be a growing portion of our business.
Robert Culp, CEO
Brian, I think, I just maybe cap off their comments a little bit. I would add what's neat about it, they're really executing in a very difficult market. And they are winning Tommy and Mary Beth both and their businesses are winning opportunity in a tough pressured environment. And if you combine that with the innovation they have by innovating their supply chain to be tariff preferred and innovating with style and function, there is a lot of opportunity. It's sometimes hard to see it in the face of the pressure. But where I sit, I can clearly see it, and there's so much opportunity. I'm just proud of the way their businesses are executing. It will be a day it really shows through, and we're excited about that.
Brian Gordon, Analyst
Yes, it's definitely challenging with the macro headwinds. However, what is exciting is the share gains that you have been able to generate in both the hospitality and residential segments, as well as in upholstery.
Robert Culp, CEO
Yes, sir.
Brian Gordon, Analyst
So I want to pivot though a little bit to some of the restructuring. So if we look back at the first wave of the restructuring that you guys announced, that's mostly completed. But you've mentioned two things on the call this morning and on the press release that I kind of want to dig into a little bit. First is that incremental $1 million that you guys announced. I was hoping that you could talk a little bit more about what that involves and when those impacts might start hitting the results?
Robert Culp, CEO
Thank you for your question. We aimed to clarify this in our discussion. The initial restructuring, which saves $10 million to $11 million, is mainly centered around mattress fabrics and is now complete, with the only remaining task being the sale of the facility. As noted in our release, we are under contract for that sale and are working diligently to finalize it in the coming months. Completing this sale will be the final touch on our restructuring project, as the operational part has already concluded. The additional $1 million mentioned in the press release refers to further savings related to personnel and professional fees. These savings will begin to be realized in Q4 and will extend into next year. We are also exploring other streamlined opportunities that will add to these savings. I hope this addresses your questions at a high level.
Brian Gordon, Analyst
Okay. So the $1 million, we'll start seeing that kicking in, in the fourth quarter?
Robert Culp, CEO
Yes, sir.
Brian Gordon, Analyst
And so I know you're saying it's a little bit early, but could you talk about what this additional restructuring might entail both in terms of like what are you guys looking at across the business and timing and magnitude, if any of that's available at this point?
Robert Culp, CEO
Yes, Brian, thank you for the question. We're in the process of formalizing our plans regarding this. What excites me is that Tommy and Mary Beth are doing well in their respective businesses and collaborating effectively. We're discovering opportunities for synergy and resource sharing across Culp, which allows us to reduce costs. I wouldn't classify our upcoming steps as restructuring initiatives; instead, they are projects aimed at improving efficiency through collaboration. They are identifying these opportunities as they work together. Brian, I estimate we'll see up to $2 million in additional annual savings starting in fiscal '26.
Brian Gordon, Analyst
Okay. That is exciting and definitely looking forward to hearing more as you kind of announce that. My apologies. So is this kind of more like something that you're expecting to see in the first half?
Robert Culp, CEO
We will definitely start those projects in the first half. These are not restructuring projects that involve significant cash costs; rather, they are initiatives we believe will greatly benefit our businesses. The sooner we can execute these projects, the quicker we can realize some savings. We expect to have them fully implemented by the second half of the year, with possibly some benefits early on, amounting to an annualized savings of up to $2 million.
Brian Gordon, Analyst
I would like to ask about the tariffs and the potential opportunities they may present for you. Specifically, what percentage of production is currently affected by tariffs? There is considerable volatility in the policy area. How does this situation position Culp to potentially gain market share?
Robert Culp, CEO
Yes, that's a good question. Tariffs are definitely a concern for everyone at the moment. As I've mentioned, there isn't a perfect solution to this challenge. I don't want to suggest that I have a guaranteed fix. However, we strongly believe in maintaining supply flexibility as part of our core values. Our goal is to ensure we provide our customers with consistent supply and be present in the markets where they want to operate. This commitment to flexibility allows us to adapt our production methods. Currently, about 30% of our upholstery fabrics business is affected by tariffs due to imports from China, and we are actively working to relocate that production, particularly in Southeast Asia. We are exploring new opportunities and designing our strategies around these shifts. While adjustments take some time, we are managing the process actively. For any costs that we can't absorb, we will pass those along. Therefore, we do not expect tariffs to significantly impact Culp. Regarding the mattress side of the business… go ahead, I'm sorry.
Brian Gordon, Analyst
So I was going to follow up on that. Is that going to be more of like a surcharge? Or how are you actually thinking about handling any of these tariffs?
Mary Beth Hunsberger, President of Upholstery Fabrics
Brian, we'll do that on the upholstery side through price. So it will be a price increase.
Robert Culp, CEO
Brian, regarding the mattress segment of the business, Tommy and I have discussed how we can accelerate our operations. Much of it involves cut and sew, which we can manage in various locations worldwide. Our facility in Haiti operates under a tariff-free strategy, so our main task is to position materials effectively to fulfill customer demand. There might be some short-term pressure if shipments are subject to tariffs, which can cause disruptions. However, with a lead time of about a month or six weeks, we can relocate and source materials elsewhere. This could affect delivery times and when we bill for our products, but we are capable of assisting our customers in navigating these tariff challenges. As of now, with the tariffs currently in place, we can adapt to them and provide our customers with improved options due to our cost structure. While tariffs themselves are not beneficial, our ability to respond to them is a positive aspect.
Brian Gordon, Analyst
Got it. One final question, I think, for this morning. When you're looking at consolidation, especially on the mattress side, do you see it more in terms of like risk to the business or more in terms of opportunities for the business?
Robert Culp, CEO
Yes, Brian, to ensure I understand your question: There is significant consolidation happening, with several major changes over the past six months. Are you asking whether we view this as a challenge or an opportunity for Culp?
Tommy Bruno, President of Mattress Fabrics
Okay. Brian, it's Tommy. Yes, the consolidation for us, we believe is a net positive. As Iv mentioned in the script, we are a large provider of fabrics and mattress covers in the industry. And our design and innovation capabilities and our flexible platform fare well with the larger suppliers in the mattress industry. So for us, we think it's a net positive. We obviously have to work through those dynamics in order to reap that benefit but that is a focal point for us.
Brian Gordon, Analyst
Great. And that's all that I have for this morning. So good luck with the quarter.
Robert Culp, CEO
Thank you, Brian. We appreciate it. Thanks for all your support.
Operator, Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Iv Culp for any closing remarks.
Robert Culp, CEO
Thank you, sir. And again, thank you to everyone for your participation and your interest in Culp, and we certainly look forward to updating you on our progress in the next quarter. Have a great day.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.