Good day, and welcome to the Culp's third quarter 2019 earnings conference call. Today's call is being recorded. And at this time, for opening remarks and introductions, I would like to turn the call over to Ms. Dru Anderson. Please go ahead.

Thank you. Good afternoon, and welcome to the Culp conference call to review the company's results for the third quarter of fiscal '19. As we start, let me state that this morning's -- afternoon's call will contain forward-looking statements about the business, financial condition and prospects of the company. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. The actual performance of the company could differ materially from that indicated by the forward-looking statements because of various risks and uncertainties. These risks and uncertainties are described in our regular SEC filings, including the company's most recent filings on Form 10-K and Form 10-Q. You are cautioned not to place undue reliance on forward-looking statements made today, and each such statement speaks only as of today. We undertake no obligation to update or 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 as a schedule to the company's 8-K filed yesterday and posted on the company's website at culp.com. With respect to certain historical free cash flow information, a reconciliation of this non-GAAP financial measurement to the most directly comparable GAAP financial measurement is available in the investor presentation that is posted on the company's website. A slide presentation with supporting summary financial information and additional performance charts are also available on the company's website as part of the webcast of today's call. I will now turn the call over to Frank Saxon, Vice Chairman and Chief Executive Officer of Culp. Please go ahead, sir.

Good afternoon, and thank you, everyone, 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; Iv Culp, our Chief Operating Officer and President of our mattress fabrics business; and Boyd Chumbley, President of our Culp upholstery fabrics business. I will begin the call with some brief comments, and Ken will then review the financial results for the quarter. I'll then update you on the strategic actions in each of our businesses. After that, Ken will review our fourth quarter fiscal '19 business outlook and then we'll be happy to take your questions. As expected, our results for the third quarter reflect the ongoing significant challenges for the bedding industry, primarily related to the high volume of low-priced imported mattresses from China. The current supply of these products has disrupted the market and affected most of our major customers in the industry, which has continued to reduce demand for our mattress fabric and covers. We are pleased that our upholstery fabrics business had another solid performance for the third quarter supported by a meaningful contribution from Read Window Products acquired at the end of fiscal 2018. We continue to believe the bedding industry will ultimately benefit from relief sought to address the low-priced imported mattresses from China. However, delays resulting from the recent U.S. government shutdown have affected the timing of expected punitive measures against these Chinese importers, with a preliminary ruling now expected in May 2019. And although the March 1, 2019, deadline for additional tariffs has been delayed, we'll continue to monitor the ongoing tariff discussions and the potential impact, if any, they might have on our business. We remain focused on innovation and creative designs in all our businesses, and we are confident in our product-driven strategy and our ability to meet the changing demands of customers. Despite the continued headwinds facing the bedding industry, we are very pleased with our positive product showings with customers and especially pleased with the sequential improvements we are seeing in our mattress fabrics business. We also have additional opportunities to expand our market reach through Read Window Products, and our -- part of our upholstery fabrics segment, and with Culp Home Accessories, our new e-commerce business, which focuses on finished products, offering bedding accessories and home goods direct to both consumers and to businesses. I'm also pleased with our strong financial position of $40 million in cash and cash investments, no debt and free cash flow for the year, which is expected to be comparable to last year's total. We believe Culp is well positioned for the long-term with our expanded product offering, new sales channels and a highly competitive global manufacturing platform. I'll now turn the call over to Ken, who'll review the financial results for the quarter and year.

Thanks, Frank. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website to cover key performance measures. We have also posted our capital allocation strategy. Here are the financial highlights for the quarter. Net sales were $77.2 million, down 9.5% compared with prior year. On a pretax basis, the company reported income of $4.3 million compared with pretax income of $7.5 million for the third quarter of last year. The financial results for this quarter included approximately $769,000 in restructuring and related charges and credits and other non-recurring items due mostly to the closure and sale of our Anderson, South Carolina production facility. Excluding this net charge, pretax income for the third quarter was $5 million. GAAP net income attributable to Culp Inc. shareholders was $3.2 million or $0.25 per diluted share for the third quarter, compared with a net loss of $748,000 or $0.06 per diluted share for the prior year period. Adjusted net income, a non-GAAP measure, was $3.3 million or $0.20 per diluted share compared with $5.2 million or $0.42 per diluted share for the prior year period. These results exclude the $769,000 in restructuring-related charges and credits and non-recurring items I just noted. The current and prior year periods also exclude provisional adjustments associated with tax reform totaling to a $593,000 income tax benefit and a $5.9 million income tax charge, respectively. Our effective income tax rate for the third quarter was 28.7% compared to 109.9% for last year's third quarter, with both previous reflecting the impact of tax reform. For the full year, we estimate our tax rate to be in the 34% to 36% range, subject to any material change in the mix of earnings between our domestic and foreign operations. Trailing 12 months adjusted EBITDA was $27.4…

Thank you, Ken. I will start with the mattress fabrics segment. Our mattress fabrics sales for the third quarter were affected by the significant ongoing disruption surrounding the mattress industry. With the high volume of the low-priced imported mattresses, the industry has been dealing with a significant amount of excess inventory, which affected demand for mattress fabric and sewn covers from our customers during the quarter. In spite of the challenges we faced, our operating performance showed sequential improvement in the third quarter, and we are expecting the trend to continue into Q4 and into the next fiscal year. With the substantial investments in our platform, we have efficient production and distribution capabilities that provide a full complement of mattress fabrics and sewn covers with the flexibility to adapt to evolving customer needs. We're especially pleased with the continued progress for CLASS, our mattress cover business, which has production capabilities in North Carolina, Haiti and our Culp China platform. Demand trends for mattress covers had been favorable, and we continue to develop new products with both new and existing customers and reached growing market segments, especially the popular boxed bedding space. We remain energized and optimistic about the future growth opportunities for CLASS, as we maximize our full potential from fabric design and production to finished mattress cover. Culp also had a very favorable showing at the recent Las Vegas market in late January, and we're excited about the positive response from customers. We are well positioned to meet the changing demand trends, and we're focused on the opportunities ahead to expand our market reach with complementary products and new sales channels, especially as the mattress industry begins to stabilize. Looking ahead, we believe the antidumping measures against Chinese importers will ultimately benefit our customers and our business. Import activity…

We expect overall sale to be slightly down compared with the fourth quarter of last year. We expect sales, operating income and margins in our mattress fabrics segment to show sequential improvement over the third quarter, but to be moderately lower compared with the same period a year ago due to the continuing headwinds associated with Chinese imported mattresses. In our upholstery fabrics segment, we expect sales to be slightly up compared with the fourth quarter of last year. Operating income and margins are also expected to be slightly up compared with the same period a year ago. In our Culp Home Accessories segment, we expect sales to be slightly up compared with this year's third quarter. We expect an operating loss for the fourth quarter as we continue to work through new product rollout issues with sequential improvement compared with this year's third quarter results. Considering these factors, pretax income for the fourth fiscal quarter is expected to be in the range of $4.2 million to $4.9 million. Pretax income for last year's fourth quarter was $6.5 million. Based on our current projection, capital expenditures for this fiscal year are now expected to be in the $6 million to $6.5 million range as we have moved to a more maintenance level of capital expenditures. And we expect depreciation and amortization to be approximately $9 million for this fiscal year with stock compensation expense expected to be approximately $500,000 for the year. Additionally, given the current outlook, free cash flow for this fiscal year is expected to be comparable to last year's $13.3 million even with significant headwinds we're facing in our mattress fabrics segment. As a reminder, cash flow from operations last year was $27.5 million and free cash flow for the year, as I said before, was $13.3 million. With that, we will now take your questions.

[Operator Instructions] And we will take our first question from Dillard Watt with Stifel. Please go ahead.

Great. Good morning gentlemen. Frank, maybe could you talk a little bit about what you're seeing from the e-commerce channel? Customers on the mattress side, obviously, pretty well publicized impacts of all of the imports on the traditional industry manufacturers. But are you seeing a slowdown from your e-commerce customers? Or is it tough to sort that out as they just generally grow market share?

Dillard, this is Iv. Thanks a lot for the question. We're still pretty excited about the e-commerce more of the -- more known bed-in-the-box space. Although it's really important to note that the traditional players are also doing a lot more work in that space, so it is in general boxed bedding and roll pack, and obviously, the use for mattress covers is critically important to us going forward and growing quite a bit. I don't see a big slowdown on the e-commerce guys. The difference is, there's just less players maybe. I mean, there aren't as many new ones rolling out, but the ones that have maintained a stable footing are actually growing, and we're pretty excited about the kind of products we're innovating for them and where that's going to go. That's a really important part of our future.

Okay, great. Thanks for the color. And Frank or Ken, what are you seeing from raw materials and any other sort of inflationary pressures? And how should we expect that to unfold over the next 6, 12 months?

This is Iv. Dillard, I'll take some of that too. I mean, really from the -- from business operations, what we see, we feel pretty optimistic that there is not a lot of increased pressure for us in materials. We feel stable. It's never something that we're confident that we're going to drop things down a lot. And certainly in the bedding side, I think, materials will be a fine process, not something I'm worried about, but not something I'm banking on to get a lot better either.

And Dillard, this is Boyd. And just to add to that, from the upholstery fabrics side, we also are seeing really stability right now in raw materials. So it appears like we've entered a time period here where it should be relatively stable.

All right, great. And then 1 more and this sort of applies to each business, each of the 2 main businesses. You've done a lot of work on different restructurings, putting to work some capital and closing some plants and whatnot. Obviously, now we've also got this volume issue on the mattress side and less so on the upholstery side. But how should I think, maybe a couple years out, of the margin potential of each of those businesses? I know the mattress space at one time was in the mid-teens, before you had those disruptions on the top line. Upholstery has kind of hung in there, it -- kind of the low-teens levels. Is that -- I assume it's probably quite a higher potential today than it had been in the past, but correct me if I'm wrong?

Okay. I think what we've always said for long-term margin run rate, target, whatever you may call it, and the mattress fabrics area has been in the 12% to 13.5% range. In some years, when things are really good, we've actually exceeded that. Some years when it's not so good, a little bit below that. But long term, I would still expect those same sort of target range, 12% to 13.5% as we get back and get some relief under the antidumping ruling. On the upholstery fabrics side, what we've always said there is really 8% to 9% high single-digit range. And I would say, right now, that's the same target, third quarter was a really good quarter, best of the year and that's a little higher than that at 10.2%, but on an annual basis, 8% to 9%. What we've also said is we're seeing Read window in that same in line with those kind of margins. So that would be our long-term margin part.

I appreciate and I misspoke there on the upholstery. Not that you don't deserve the credit Boyd. But the wrong numbers there. But okay, thank you guys. I'll let somebody else jump in.

Okay, thank you. Dillard, thanks.

And we will take our next question from Bobby Griffin with Raymond James. Please go ahead.

Good afternoon everybody. Appreciate taking my questions.

Good afternoon Bobby.

So I guess, I first want to talk on the home accessories business, and maybe just get a little color to help us out from a modeling standpoint. How does the fixed variable nature of that business compare to kind of some of your other segments?

Well, Bobby, the eLuxury home accessories business, it's important note, when we talk about that business, while, today, it's definitely primarily our only eLuxury. We have so many plans for that business. It really is -- and we shouldn't understate just as I'm watching this business grow, it's connecting all of our businesses. So, it really touches everything. And it's fun for me in the new role that I'm recently in place to watch it operate across everything. It's connecting so many dots. And we're selling products into that platform really from everywhere in the business, from home fashions to upholstery fabrics, to even hospitality. So it gets a little bit blurred when we do that. But marketing pure e-commerce and some of that is really more for the B2B side, we have a lot of opportunity for B2B with home accessories, which is why primarily we're breaking out because I think that's just exciting potential for us is may be even the pure e-commerce side. But the pure e-commerce side is a higher cost business for us because there are so many marketing expenses to getting something launched, placed, Amazon fees or whatever fees there is going to be in that market. So we're learning a lot about that. That's somewhat is dragging us a little bit right now is because it's taken so much -- so many new products return to launch at once is incurring some fees. So we'll get that stable. Really excited about that being a profitable business for us, but it is definitely a higher cost model than our traditional businesses.

Okay. I guess

Bobby, I'd add to that...

Okay. Go ahead, Frank. I'm sorry.

Bobby, I'd add to that. I think there is a lot of operating leverage in that business. With the fixed overhead and distribution and just general overhead, they can drive a lot more business on the -- generally the same fixed overhead we've got.

Okay. Yes, that's helpful. So I guess, another way maybe -- probably a better way to ask the question might have been, when you look out a couple years in that business and you look to improve the operating margin of that business, do you expect it to come from gross margin in SG&A or mostly just SG&A leverage? How do I think about that?

Hey, Bobby, this is Ken. I think, as we've -- as Iv said, we're learning a lot about the business. I think when you look at from a gross point standpoint there is obviously things we can do on the raw material side, synergies as far as the connection between -- with our China platform looking for opportunities there. Also, on the SG&A side, continuing to work with the Amazon platform and coming up with ways to make that more efficient and save some costs there. So I think there's opportunities on both sides as we continue to learn more about the business.

Okay. I appreciate that. That's very helpful. And then I guess, also I wanted to touch on the mattress segment, it's been pretty impressive with the big double-digit plus 20% volume declines, the type of profitability it's maintained. Frank, I mean, anything structurally, when the volume does return that would prevent it from -- I mean, the margin's growing at the same type of high-30s type contribution margin.

Yes. Bobby, this is Iv. Frank's pointing to me one this point. And I think it is driving me crazy to talk about the 27% decrease because it's just -- we're saying it too much, and it is some real macro things that we're facing. It does give us a lot of comfort, and we're certainly really thrilled to have the process that we are maintaining through that kind of decrease. And Bobby what's driving that, as we talked about it in all these press releases for the last 2 years, we've done so much capital improvement, spent so much money in the business to get more efficient, invested in our design processes, streamlined things to the whole platform, multi-location or repetitive manufacturing that we knew it's going to payoff. We thought it was going to payoff more in really good times, but it's paid off really well in these more lean times. And as it turns and when it turns, to me the upside is fantastic because of the work we've put behind the business.

Thank you. That's very helpful. And lastly from me, I guess, you touched on a little bit in our first -- on my first question, but just maybe some type of update on the cross-selling effort there going on at eLuxury? How many kind of cross-selling SKUs we have on the site now? And is there any type of goals you can share in terms of getting some new Culp branded products on there? And anything to help us understand some of that progress.

Yes. We don't have any rules with home accessories or with eLuxury that they have to use only Culp products. We want them obviously to utilize the best potential, best profit products they can find. But there are just really, really solid synergies. Fabrics that we can supply for mattress pad and bedding accessories and then through upholstery, a lot of new products are being made, primary a lot with the LiveSmart brand that we're pushing. I don't think you'll see a lot of Culp branded items, but we'll certainly see LiveSmart items, and we'll see a lot of eLuxury will be the brand we push, both B2C and B2B. We like that brand, and we think it has a lot of importance in the market. And Culp China, in general, is helping us a lot with some finished product items that we'll launch. So in my wish, it would be majority of items to launch be the Culp products, but there will be some that aren't if we find some synergies or things that just make sense. But we have a lot of good ideas and things are coming now. It's hard to launch a lot at once, so we're kind of doing somewhat of a sequence, but most of the new products you see will be Culp developed and generally speaking, have some Culp fabrics in them.

Thank you.And I guess, just 1 more modeling question from me. Ken, as we get to look to kind of get our models tuned up for next fiscal year, what should we expect out of the tax rate? Will it start to come down a little? Or should we still kind of use this 34%, 35% tax rate?

Bobby, that's probably the best we got. Again, keep in mind that that rate can be impacted by the mix of earnings between our foreign operations and the U.S. So that's what's driving the rate up from the 21% federal rate. So -- but right now, and the way we look at things, the 34% to 36% range is kind of where we are right today. Of course, I'll update that each quarter, but right now that's a good range.

Thank you Ken. I appreciate you guys answered all my questions. Best of luck going forward.

Thank you Bob.

And we will take our next question from Marco Rodriguez with Stonegate Capital Markets. Please go ahead.

Thank you and thank you for taking my questions. I wanted to kind of circle back around on mattress fabrics. Just you got -- you've mentioned some weather impacts. I was wondering if you might be able to kind of quantify the volume shortages you saw maybe in Q3 because of the weather?

Marco, thanks. This is Iv, again. We have that in there really, I mean -- certainly, as of late, which is not so much reflected on the third quarter are weather disruptions that impact retail performance trends. But when we're talking about that really for Q3, we had 2.5 days, almost 3 full days, where we were closed on a Friday because of ice or snow in our area, which we just don't handle well. So for us to lose 2.5 Fridays of shipping, you just never really make that up. And so that, I don't know if Ken, if I can quantify what that would be on a few Fridays, but that impacts us significant to miss shipping days at the end of the week, where we do so much prepping for the next Monday. That was a bit of a problem.

Got you. I understand. Then in terms of the volume issues that obviously the entire industry has been impacted with the Chinese imports. Just kind of want to get a little bit more clarification from some of your comments. I know the last quarter we talked about a lot of orders kind of perhaps have been pulled forward in anticipation of the lodging of the complaint. But it sounds like, at least implied through some of your press release, prepared remarks that additional inventory has got even higher. Can you kind of just go through that and provide any sort of color there?

Yes. I guess, what we're trying to get at there Marco, and it's really important -- this is a really important point that we want to emphasize, is we're starting to talk about Q4 even though it's still down for us the way we're forecasting that for home fashions, it's half of the decrease than we've been performing over the year. So really before antidumping even has any impact on us, we are seeing sound, strategic improvement in our business and placements that we're gaining before any of that happens. So we're chipping away at this like antidumping is not even coming, and we're seeing the business start to turn back around. We're really excited about that. It will take a little while if the antidumping legislation comes through and has a meaningful impact, which we have every expectation that it will, that will just be gravy and will drive the business even better for us, but we do unfortunately -- don't think it's going to happen much in Q4 because of the delayed ruling. And the longer the ruling delayed, we do get the sense that people are gambling and bringing in more inventory that's delaying supply chain changes. So people are talking about it and we're working with a lot of new customers and current customers to alter supply chains, but it hasn't really -- it hasn't pulled the trigger in all the cases yet. So that's why we're not really showing much of the change for Q4. We just think the inventories are getting built back up a little bit.

Got you. Then shifting gears here to the home accessories side, just kind of wondering with what you're learning thus far with that business, is there any sort of seasonality differences there from your part of typical e-commerce companies that you're noticing?

For sure because we have some -- it's a little bit different than our core businesses because we have some products that are more apt to holiday sales or gift-giving kind of things. It's also a heavily promotion driven business. So we're driving it with lots of discounts around certain times. So I don't find as much seasonal, this is more promotional driven. And we do have propensity to get a lot of, an Amazon deal of the day, or things of that nature that we can push to push the business higher, almost -- you can almost pull levers on it more than it will be a seasonal adjustment thing.

Got you. As then as you kind of -- we kind of look into fiscal '20 or the next calendar year here, you guys have talked about rolling out a bunch of new products for that particular segment. I was wondering if you could kind of give us some color as far as what might be in store or timing wise as far as any large launches or promotional activity to kind of give us a little bit better a sense as far as how the revenue cadence will move through in fiscal '20?

Yes. I think one thing what we're working on first is replacing a lot of current items with better products that would utilize Culp materials and that can be anything from fabrics By The Yard, which we're doing, all the way to full-finished products or in the case of eLuxury, we do produce and manufacture our own mattress pads. So a lot of the beginning phases kind of the one for where we're taking something down and putting something up. So for a minute, we're just kind of focused on keeping the sales stable and growing steady, while focusing on profitability. And then we'll come in like behind that and continue to add more products to keep driving the sales. Ken will want me to talk about the optimism I have for where that business can be at a sales level, but we'll need a little time to just get some things down and some things up and then start adding to that mix. So it takes a little while. It's not something that next year necessarily has a rocket leap growth, but we should start to have some growth in that business next fiscal year.

[Operator Instructions] And it appears there are no further questions at this time.

Okay. Thank you, everyone, for joining us, and we'll look forward to updating you next quarter. Have a great day.

And this concludes today's conference. Thank you for your participation.And you may now disconnect.