Good day, and welcome to the Culp Inc. Second Quarter Results Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to do the call over to Ms. Drew Anderson [ph]. Please go ahead.

Good morning, and welcome to the Culp conference call to review the company's results for the second quarter of fiscal 2013. As we start, let me express that some statements made in this call will be forward-looking statements. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Actual performance of the company may differ from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission, including the Form 8-K filed yesterday for a discussion of those factors that could affect Culp's operations in the forward-looking statements made in this call. The information being provided today is of this date only, and Culp expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in the expectations. 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 as a schedule to the company’s 8-K filed yesterday. This information is also available on the Investor Relations section of the company’s website at www.culp.com. A slide presentation with supporting financial information is also available on the website as part of the webcast of today's call. I will now turn the call over to Frank Saxon, President and Chief Executive Officer. Please go ahead, sir.

Good morning, everyone, and thank you for joining us today. I would like to welcome you to the Culp quarterly conference call with analysts and investors. With me on the call today is Ken Bowling, our Chief Financial Officer. I will begin the call with some brief comments about Culp today and then Ken will review the financial results for the quarter. I will then update you on the strategic actions in each of our businesses. And after that, Ken will review our third quarter outlook. And then, we will be glad to take your questions. Now looking at the second quarter. We are pleased with our results for the second quarter, which builds upon the sales momentum and product successes that we experienced during the first quarter. Demand trends have been reasonably solid in both businesses and we are encouraged by the continued favorable customer response to our exciting designs and wide range of innovative products. We have worked diligently over the last few years to drive creativity and innovation. We are also pleased to see positive gains from these efforts. We also will continue to leverage our efficient global manufacturing platform that creates the right product mix and meets the changing style demands of our customers. Importantly, for this quarter and the fiscal year-to-date, we have made solid gains in return on capital, our free cash flow generation and margins. We also announced in our press release yesterday that our Board of Directors has approved a payment of a special cash dividend of $0.50 per share. In addition, the board has approved the acceleration of payment of our scheduled January 2013 quarterly cash dividend of $0.03 per share. Both of these payments will be made on December 28 to shareholders of record as of December 19. The board's decision to approve these dividend payments reflects Culp's solid and consistent operating performance, our strong financial position and our confidence in the future. We are pleased to provide this additional and timely opportunity to reward our shareholders, many of whom have been long-term holders of Culp. We are especially grateful for their loyalty. I want to assure you also that we will continue to maintain a strong cash position that first supports the capital needs of our businesses; and secondly, keep a substantial net cash position at all times. I'll now turn the call over to Ken who will review the financial results for the quarter.

Thanks, Frank. Total sales for this quarter were $65.6 million, up 13% from the second quarter of last year. This marks the seventh consecutive quarter where we had year-over-year growth. On a pre-tax basis, we reported income of $4.5 million compared with $2.9 million for the same period last year, an increase of 58%. Pre-tax margin was 6.9% compared to 4.9% a year ago. Adjusted net income, which is a non-GAAP measure, was $3.9 million or $0.31 per diluted share compared with $2.3 million or $0.18 per diluted share for the prior-year period. The company's overall adjusted effective income tax rate through the second quarter was 15% compared with 18% for the same period last year. This adjusted effective income tax rate or ongoing estimated cash tax rate represents income tax expense for Culp's non-U.S. entities divided by consolidated income before taxes. This information is important because the company currently does not pay cash taxes in the U.S. nor does it expect to for a number of years due to its $60 million in loss carry forwards as of the beginning of this fiscal year. Return on capital was 29% for the second quarter this fiscal year, up from 19% last year. Driving this improvement was the 68% increase in operating income compared to only a 7% increase in capital employed. Cash flow from operations through the first 6 months was $7.7 million, up from $2.6 million at the same time last year. Here are the results for our 2 businesses. For mattress fabrics, we reported $39.7 million in sales for the second quarter, up 13% compared with sales of $35.2 million for the same period last year. Operating income for this segment was $5.1 million for the second quarter compared with $3.8 million last year, an increase of 34%.…

Thanks, Ken. I'll now provide you with an update on both of our operating segments. I'll start with mattress fabrics. We are pleased to report another strong performance in our mattress fabrics business. The overall sales growth in the quarter reflects solid gains in all major product categories. We have continued to capitalize on the growing consumer demand for better bedding products, and therefore, a higher quality mattress fabric. The mattress industry is continuing to evolve into a more decorative business and many of our customers are upgrading their fabric choices to achieve a more fashionable look. Culp is well-positioned to meet this demand with an extensive manufacturing platform and flexible capacity that allows for a production of value products, as well as the higher end product mix. Additionally, we have the unique ability to leverage Culp's outstanding design capabilities and expertise in the upholstery fabrics business to enhance our product offerings, as more upholstery fabrics are being used in the specialty bedding arena. Our improved operating results reflect our ongoing focus to create great products and maximize the efficiencies and flexibility of our manufacturing platform. We have worked diligently to take advantage of the newest technologies available and have continued to modernize our equipment. We are pleased with the progress we are making at Culp-Lava, which is our mattress cut-saw operation to design, produce and market mattress covers. This new operation further enhances our strategy to leverage our design and manufacturing capabilities and produce a diverse product category that keeps pace with the changing industry trends. We have established Culp-Lava's new manufacturing facility in Stokesdale, North Carolina directly adjacent to Culp's mattress fabric headquarters and primary plant operation. During the second quarter, we completed most of the initial equipment installation and conducted training for the startup associates in this…

We expect overall sales to be 4% to 9% higher as compared to third quarter of last year. We expect sales in our mattress fabrics segment to be 3% to 7% higher compared to the same period a year ago. Operating income and margin in this segment are expected to be higher than the same period a year ago. In our upholstery fabrics segment, we expect sales to be 7% to 11% higher than the previous year's third quarter results. We believe the upholstery fabrics segment's operating income and margins will be significantly higher than the same quarter of last year. Considering these factors, we expect to report pretax income to the third fiscal quarter of 2013 in the range of $4 million to $4.5 million. Pretax income for last year's third quarter was $2.9 million. Frank?

Our success to date in this fiscal year reflects our ability to execute our strategy in a dynamic marketplace and an uncertain global economy. Our outstanding design capabilities and strong value proposition are distinct competitive advantages for us in both businesses. We have the unique ability to leverage our scalable and global manufacturing platforms, and offer the innovative fabrics that meet the changing demands of our customers. Importantly, we also have the financial strength and depth of management to support our growth initiatives and enhance our competitive position, as well as return significant funds to shareholders through share repurchases and dividends. The depressed conditions that have prevailed in the U.S. housing industry and with the consumer for the last few years are finally improving. In spite of these headwinds, Culp has performed well during this period. We are excited about the opportunities ahead for Culp, and we believe we are well-positioned to capitalize on a gradually improving economy as both the housing market and consumer confidence strengthen. Above all, we are committed to outstanding performance for our customers as a financially-stable and trusted source for innovative fabrics. With that, we'll now take your questions.

[Operator Instructions] And we do have a question from Chad Bolen from Raymond James.

Frank, both segments had sales and operating profit ahead of our model. I think the upside in upholstery was a bit more pronounced, at least relative to your guidance. Can you give us a little color on what drove the upside in upholstery versus what you had thought going into the quarter?

Yes, Chad, good morning, again. Certainly, the second half of that second quarter, the September and October, were better than we had expected. And we had reasonably good demand, as you saw throughout the quarter. And in mattress area, it was better than we had expected as well. It's seasonally slower during the late September, October period, but we held up better than we expected. So it was later during the quarter that we performed better.

And can you give us any indication on how things trended through November?

Well, I think you can see from the guidance. We're still looking at nice sales gains for the second quarter as well. Although we've had very good strong double-digit gains in the first 6 months, I'm not sure we see quite as strong in the third quarter and looking ahead because the industry last year was a lot -- started having a lot of -- gathering a lot of steam in the second, from really December through April of last year.

Sure. And in upholstery, you talked about winning new placements. Is there any way for you to parse or give us a sense for how much of the growth you're seeing as coming from market share gains versus just overall industry demand?

Certainly both, but a large part is the gains with our key customers, and which we're very excited about, and so it's both. We're gaining market share every month. And the key factor driving that is the innovation that we focused so hard on the last few years.

And also in that regard, on the mattress side of the business, you talked about mix as folks use more decorative, more expensive fabrics. Can you parse for us sort of the units or yardage versus the benefit from pricing or mix on your sales?

Sure, sure. We're doing various things now so it's not as easy as it used to be like we're slitting [ph] fabrics before shipping them to customers. But to give you an estimate, it's probably at least 50% of average selling price increase and 50% unit, and it could be a little more 50% to 60% sales price improvement, average selling price as the product mix moves up.

Okay. And a little more technical question. SG&A, the unallocated corporate was a bit higher than we were modeling this quarter. Can you give us a sense of what drove that, and I guess how we should think about that for the balance of the year?

Sure. Through the first 6 months, we've obviously had a very good performance for the first 6 months, and therefore, we have accrued accordingly a fair amount of our annual bonus incentive payments. We accrue that as earned. So when you look at the first 6 months of this year, particularly second quarter versus last year, we have accrued a lot -- earned a lot more of it at this point in the year than the prior year, which therefore means in the second half of the year, we won't have as much to accrue as we did in the first half.

Okay. And you said that you've now started production at Culp-Lava. I guess what's a reasonable expectation for what the revenue contribution there could be over the first year? And I would imagine there's a drag on profitability now because of the startup costs associated with that. Any stab at when you can get that to break even?

Well, that business, we've got the demand, it's a matter of just scaling it up, training associates, and I believe certainly by first quarter, we will be at a breakeven and it's possible fourth quarter. I do not see a long period of time where we -- until we reach breakeven. It will be -- the sales will be driven by what our output and we have minimal small loss is coming from there in Q2 and a small in Q3, but not meaningful by any means. We don't have that many people yet, less than 20 people for now. And as we train them, we'll add more and; as we can get them trained, we'll bring them on and produce more mattress covers.

And what do you think the revenue opportunity is there?

Well, that's -- we obviously believe the trend as we've seen in the last number of years and specialty bedding in almost every specialty bed uses a mattress cover, and specialty bedding sales have been growing north of 20% for 5 or 6, 7 years. We see that trend continuing, and we want to be in a position to gain part of that business. We've had a lot than that obviously, but we would like to also capture the mattress cover part of that business. Chad, I don't know that I'll venture, but it's significant. Certainly, it could be significant over time.

[Operator Instructions] And our next question comes from Ethan Steinberg from Friess Investors.

Just a couple of questions, I'm sorry if I've missed it. I wasn't on for the entire call. But the expenses in the first 2 quarters, particularly the quarter that we just got through, can you talk about how much of that bonus accrual pulled down the operating income? And then I'm also curious were there any other expenses that -- extra expenses that hurt earnings or hurt the operating profit more than you might see going forward like that plant start up, if you can quantify that stuff a little bit more.

Bonus expense in the first 6 months, around $1.5 million, to give you an idea. And of course, we did not have any minimal bonus expense accrued in the first half of last year because we earned more of the last year's bonus in the second half of the year. So that did affect the SG&A for the first 6 months in the quarter. However, that will level out over the full year and will actually benefit us in the second half of this year.

How much do you think that was in the second half of last year?

We're excited. I mean it was a big, big number.

Like a couple of million or?

Yes, yes, yes.

Yes.

And that could potentially be sort of closer to 0 this year because you're front-end loaded.

No, not 0. I think I'd put it at -- we'd probably accrued 60% to 65% of the annual bonus through the first 6 months, 65%.

Right, okay. So I guess I'm just looking at it could be $1 million plus or minus decrease in expense year-over-year?

In the second half.

Yes.

Yes, that's fair, sure.

Okay. And then, any other sort of one-time or not necessarily one time, but like nonrecurring expenses that won't repeat or will start to go down like that plant ramp you mentioned?

The only other areas the startup of our Culp-Lava operation, which is really -- I don't want to qualify it because it's not a lot of money. It's just not. In the fourth quarter, we will be at or close to breakeven. And our Culp Europe operation is still operating at a small loss, but we only have 5 people. We only have $2 million of capital, so we -- but we're still very optimistic about the longer-term for Culp Europe. We believe we should be in Europe and it's important to Culp as a whole for the long-term to be an important player in Europe. So that is a small drag on the overall results, but again, we've got it down to not a lot of -- I think, we're down to $25,000, $30,000 a month of SG&A expense in our European operations. So it's not much. So I see a lot of other of these other one-time things affecting us.

There were not a lot of other things?

There were not a lot. No, this is from the business.

Okay. And so a couple of things just on that same vein. The incremental margin if -- and I just eyeballed this, but looked like it was around 26% in Q1 and dropped to 23.5% or so in this quarter, which is still -- you guys did a good job of dropping the revenue upside to the bottom-line, but I'm just curious why did that, if I'm doing that right, why did the incremental go down? Was that the -- did you reduce or increase that comp accrual even more or something else?

That's really not much of a change in our numbers. I mean incremental -- you're talking about the incremental operating margin?

Yes, the year-over-year drop to operating profit, the year-over-year revenue growth that drops down to the operating profit line.

I mean it could be partly that the incentive comp accrual.

Yes.

Okay. And then I mean, thinking about the second half, that's a big swing from having $1.5 million headwind from comp accrual to $1 million benefit. That should have pretty nice implications for that incremental margin. Am I...

No question, that's a positive factor in the second half, particularly though in the fourth quarter because we will be in a position to accrue a lot more of the annual incentive in the third quarter. So we're not going to see much benefit of that in Q3, but certainly, Q4.

Sure. But certainly less drag in Q3?

Certainly, well, not necessarily, not necessarily, because we're still -- I've said 65% approximately of annual incentive accrued to the first half. We'll accrue some more based on the guidance we've given. We're going to accrue probably up to maybe 90%. So we'll have a -- some bonus expense in the third quarter.

Yes. Okay. But not quite as much as last year maybe, but okay, that's helpful to think about it. It will be Q4 where we see the year-over-year difference.

Correct, correct, yes.

Yes.

Okay. Are there any other variables that you can help us think about that might help or hurt the incremental margins in the second half versus the first half?

Well, I think as you look at the second half of the year, we've got to remember that both industries started picking up in the December, January timeframe, so we are coming up against stronger quarter comparisons in the second half versus the first half. So that's why our sales guidance is still very good, but down somewhat from where the gains in the first half of the year. But we're up against tougher quarterly comparisons, sales and otherwise, certainly sales-wise in the second half of the year.

Okay. And I think Chad sort of asked this -- did ask this, but in hindsight, you handicapped the October sales a lot more than the world ended up playing out or you did a lot better. Was that mostly just conservatism? Or did the run rate really accelerate or something through as you got through the quarter?

The run rate was better. We don't have a lot visibility in our business. I mean we've got in mattress fabrics, it's a just-in-time business. And upholstery, we've got 2, 3 months forward visibility. But we are encouraged. I have to -- all of the -- you look at every housing piece of housing data that comes out, it's better than people expect. You look at consumer confidence, was the highest in 5 years, last week announced or this week. We are encouraged by the -- and we certainly believe we're going to be in a better environment, gradually improving, as I said, over the next few quarters in spite of all the noise we hear about on the news. The underlying economy is getting better, and it's been getting better particularly in the sectors that matter to us.

But then is it just conservatism -- why -- the guidance implies you think is going to be down sequentially by -- flat to down $1 million sequentially, which doesn't...

Remember, we had a better, we're comparing against tougher comparisons as well.

But I'm saying sequentially, the guidance implies you're flat to down from Q2?

And we are -- if you followed us for a while, we are on the conservative side. That is...

Okay. I'll just wanted to make sure it was that and not something you saw that...

That's certainly been our nature over the years, over many years.

Okay, great and I just -- and the approach that the special dividends create, is there -- how are you or how is the board or what you'd recommend to the board thinking about the ongoing dividend? Is there -- I mean you've obviously still got a lot of cash even after this distribution. Why not return, I guess, a slightly greater degree of that on an ongoing basis?

Well, as we've said in earlier communications and calls, when we introduced the dividend, it is the board's intention to increase the recurring quarterly dividend based on our performance. And we introduced the dividend in June of this year and we would review it in the June after our year-end timeframe. And based on our performance, it's certainly the intent to increase the recurring quarterly dividend.

Got you. Yes, that payout ratio just dropped quite a bit given this quarter.

It did.

Okay. And does I guess does pulling in the Q1 dividend preclude you from increasing the dividend before Q2 next -- I mean, yes, of next -- of calendar Q2?

I'm sorry.

By pulling in the calendar Q1 dividend of $0.03 into December, does that preclude you from raising it before you would distribute the Q2 calendar dividend?

I think what we've said over time is we'll review it annually in the June -- sort of our annual board meeting after the full year is over and we look at the results for the year. And that would be an appropriate and normal time to consider increasing the dividend.

[Operator Instructions] And at this time, we have no further questions in the queue.

Okay. Well, thank you, everyone, for your participation and your interest in Culp, and we look forward to updating you in our progress next quarter. Have a great day.

That does complete our conference for today. Thank you for your participation. You may now disconnect.