Good day, and welcome to the Culp's fourth quarter 2019 earnings conference call. Today's call is being recorded. 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 morning, and welcome to the Culp conference call to review the company's results for the fourth quarter and fiscal 2019. 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 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 to revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included as a schedule to the company's 8-K filed yesterday and posted on the company's website at culp.com. A slide presentation with supporting summary financial information and additional performance charts are also available on the website as part of the webcast of today's call. With respect to certain forward-looking free cash flow information, the comparable GAAP and reconciling information is not available without unreasonable effort and is significant – is similar to the significance of the historical free cash flow information which is available in the company’s 8-K filed yesterday and posted on the company’s website. I will now turn the call over to Frank Saxon, Chairman and Chief Executive Officer of Culp. Please go ahead, sir.

Good morning 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 Iv Culp, our President and Chief Operating Officer; Ken Bowling, Chief Financial Officer,; and Boyd Chumbley, President of our Upholstery Fabrics business, who will be dialing in remotely. I'll begin the call with some brief comments, and Ken will then review the financial results for the quarter. I will then update you on the strategic actions in each of our segments. After that, Ken will review our first quarter fiscal 2020 outlook. We’ll then be happy to take your questions. We faced a number of significant challenges in the fourth quarter, primarily related to global trade disruption and an overall weaker retail environment. There were continuing headwinds associated with the low-priced imported mattresses from China, and the excess supply of these mattresses disrupted the market and affected many of our customers. The outcome for Culp was reduced demand for our mattress fabrics and sewn covers. Our Upholstery Fabrics business was affected by the softer retail climate for furniture, and uncertainty surrounding international tariffs and the associated geopolitical risk. However, even with the lower sales for Q4, we were pleased to have another year of overall higher annual sales for Upholstery Fabrics business. These results included the first full year contribution from Read Window Products, which we acquired late in fiscal 2018. In spite of the challenging market conditions, throughout the year we continued to execute our product-driven strategy in each of our businesses with a relentless focus on design creativity and product innovation. Our ability to deliver diverse product mix and reach new market segments has been a key differentiator for Culp in all of our marketplaces and will remain our strategic focus going forward. We will continue to diversify both our product and customer mix in mattress and Upholstery Fabrics with unique opportunities to expand in the hospitality market. We also have the ability to extend our market reach through Culp Home Accessories, our finished products business offering bedding accessories and home goods direct to both consumers and businesses. We have a flexible, global platform to support our business segments with the ability to respond to changing demand as market conditions improve, and importantly, we have a strong balance sheet and the financial flexibility to pursue our growth strategy. We look forward to the opportunities ahead for Culp in fiscal 2020. Additionally, we believe that May 29, 2019 ruling by the US Department of Commerce imposing punitive antidumping duties on Chinese made mattresses will provide relief for the domestic mattress industry in our current fiscal year and ultimately lead to improving conditions for our business. I'll now turn the call over to Ken, who will 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 that cover key performance measures. We have also posted our capital allocation strategy. Here are the financial highlights for the fourth quarter. Net sales were 71 million, down 9.2% compared to the prior year. On a pre-tax basis, the company reported income of 1.5 million compared with pre-tax income of 6.5 million for the fourth quarter of last year. The financial results for this quarter included a non-recurring charge of $500,000 for the company’s charitable contribution to the University of North Carolina at Chapel Hill, payable over a period of three years in honor of our co-founder and former Chairman, Robert G. Culp, III. Excluding this charge, pre-tax income for the fourth quarter of fiscal 2019 was $2 million. Net loss attributable to Culp, Inc. shareholders was 1.4 million, or $0.11 per diluted share, for the fourth quarter compared with net income of 12.7 million or $1 per diluted share for the prior year period. Notably, this net loss was attributable to 199.7% tax rate for the quarter. Income taxes for the fourth quarter of fiscal 2019 reflect the mix of the company’s taxable income favoring its foreign tax jurisdictions located in China and Canada that have higher income tax rates in relation to the US, and a significant decline in US taxable income which was more than anticipated. This resulted in a significant increase in the company’s Global Intangible Low Taxed Income or GILTI Tax and led to the 199.7% tax rate. However, income taxes incurred in the US on a cash basis were minimal due to the utilization of the company’s US Federal net operating loss carryforward generated in fiscal 2019. Additionally, our income taxes reflect provisional adjustment that represented…

Thanks, Ken. I will start with the Mattress Fabrics segment. While we saw sequential sales improvement in this business compared to the third quarter of fiscal 2019, the influx of low-priced mattresses from China has continued to affect the domestic mattress industry. The market is still dealing with a significant amount of excess inventory of late 2018 and early 2019 imports, and a slower retail environment delayed the sale of these products. As we previously announced in our May 1 press release, customer demand for mattress fabrics was lower than expected and affected our sales for the fourth quarter. However, we are pleased to note some recent positive developments in the retail demand, as well as many customers altering their supply chains away from China. We believe the punitive anti-dumping measures against Chinese-made mattresses, as recently announced by the US Department of Commerce will ultimately provide relief for the domestic mattress industry, with preliminary imposed duties ranging from 39% to as high as 1,731%. Our varied product mix of mattress fabrics and sewn covers across most price points and style trends supports our diversification strategy with favorable results. Importantly, CLASS, our mattress cover business, continues to perform well and with the support of our global sewing platform. We remain encouraged by the sales trends with our core customers, as well as our ability to reach new customers and additional market segments like the popular and expanding boxed bedding space. We are excited about the additional growth opportunities for CLASS as we broaden our customer base. While fiscal ‘19 was a challenging year for our mattress fabrics business, we are optimistic about the year ahead. We have the ability to leverage our creative designs, innovative products, and global production capabilities to enhance our leadership position and sustain our competitive advantages. We…

At this time, we expect overall sales to be slightly higher as compared with the first quarter of fiscal 2019. The first quarter of fiscal 2020 will have one more week than the first quarter of the prior year or 14 weeks compared with 13 weeks. We expect Mattress Fabrics sales to be moderately up compared with the first quarter fiscal 2019 and operating income and margins also are expected to be moderately up as compared with the previous year's first quarter. In our Upholstery Fabrics segment, we expect first quarter sales to be moderately down compared with the first quarter of last year, as we continue to operate in an environment of trade uncertainty and soft retail demand. Operating income and margins are also expected to be moderately down compared with the same period a year ago. In our home accessories segment, we expect first quarter sales to be moderately up compared with the fourth quarter of fiscal 2019, with no full period of comparison for the first quarter of fiscal 2019 based on the June 2018 investment date for eLuxury. We expect an operating loss for the first quarter that is comparable to the fourth quarter of fiscal 2019. Considering these factors, the company expects to report pre-tax income for the first fiscal quarter of 2020 in the range of 2.5 million to 3.2 million. Pre-tax income for last year’s first quarter was 1.9 million, which included 2 million in restructuring and related charges. Based on our current projection, capital expenditures for fiscal 2020 are expected to be in the 6.5 million to 7 million range, as we continue with a maintenance level of capital expenditures. We expect depreciation and amortization to be approximately 9 million for fiscal 2020. Finally, we expect another good year of free cash flow comparable to the prior year. With that, we’ll now take your questions.

[Operator Instructions] We’ll now take our first question from Bobby Griffin of Raymond James.

First, I want to talk on eLuxury. Frank, can you maybe expand some of your comments that you talked about and give us some color on what some of the drivers would be within that business segment to move towards profitability over FY20 and beyond?

Bobby, this is Iv. I’ll pinch hit for Frank on that if it's okay, and you can certainly chime in, if you want to too. Yeah, thanks for the question. I appreciate that a lot. Frank, as he talked about or touched in his overall comments, it is a new, a very new business for us, although we're learning so much about it and really coming to us because it's different, because it's e-commerce, but it's still commerce and we're finding out that we have really good opportunities, B2C, but we're also realizing that we got some terrific opportunities, B2B, which we knew, but maybe we see those opportunities giving us the chance to help drive profitability even more. So, we've really refocused the B2B strategy with those products. Now, what's special about eLuxury is we get incredible dropship service, like you would get in an e-commerce world, but we can offer that also to some of our customers. So, that is one for sure, a strategy that's going to be big in FY20 to help us drive some profitability. And then also, our legacy products, which are high-end mattress pads, really very similar to what you would call a mattress in some cases, we feel like were impacted a bit unfairly by some of the import pressure and some low-priced beds. So, with some refocus, some redesign and some just remarketing, we think there's a lot of B2C business there on legacy products. And then lastly, I'd say that there’s just some new marketplaces because of synergies between our team at Culp and the team at eLuxury, we're finding our way and we're getting placed on a lot more marketplaces, meaning, we're not just relying on the big marketplaces like Amazon as much going forward, we’ll have products placed a lot on different marketplaces online. So, I’d say those three are three major ones that are in our strategy plan.

And I guess the follow up on that, and maybe some comments around -- the comment around the luxury mattress pads, are those items higher margin items, so with the impact from imports and stuff that happened this quarter that caused some gross margin headwinds as the mix of the business changed. And then secondly, within this segment, new product rollouts were called out as well as having a little bit of impact in the quarter. Did that impact SG&A of home accessories or does that impact the gross margin of home accessories or both I guess?

I’ll make sure I understand the first part of the question.

Sure. Yeah, I'll rephrase. I guess you mentioned that the legacy mattress pad products had a little bit of a negative impact from the import situation that's going on right now in the country. And I guess I was wondering, are those legacy products higher gross margin products? So with those not performing as well, it drove an overall margin headwind for the home accessories segment itself.

Yeah, I would say for sure. I mean, we were selling those products, those are for us anywhere from online to consumer, anywhere typically from $80 to $115. We're selling those at premium prices and when you had mattresses for sale as low as $99 in some cases, that obviously put a little bit of pressure on a mattress pad at that level. What we really do see though, for our pad business, it's really a topper, but a mattress pad business, because a lot of lower priced beds have been sold in the market, we actually are pretty optimistic that there will be a lot of people who want to upgrade their comfort, and that's where our product really comes into play which is why we have such a good strategy around that business. We need to merchandise new items, new offerings, new styles, new fabrics, like we would anything, but that's a pretty exciting area for us, and it's also really important, because we make it, so we make that product in our facility. So having a good run schedule and busy on that product helps us cover a lot of costs, which is why it's so important.

Okay, great. And then I guess…

[Technical Difficulty]

Yeah, the second part was around the new product introductions and just where did that cost, where did those one-time costs hit? Was it a gross margin issue or was it more that it drove a little bit of incremental SG&A as you rolled out some new products.

What we're learning about that, Bobby, and difference is in our core businesses, we sell through manufacturers, fabrics, so a lot of those startup and rollout costs that we see through our customers, we never have experienced that before because we’re selling fabric, they're buying it, and then it's getting rolled out as a finished product. When we're rolling out finished products and all the stuff that we're making through our global platform, we're having to commit to bringing products in ahead of a sale rate. So, we're actually building up inventories and purchasing items and having them stocked up in our facility before we even get them online to sell. So, there's just a lot of -- there's front loaded cash and expense that we're having to put in the system before we can start selling. And we want to go really fast and do as much as we can at one time. So, we're just battling some of that cash flow and expense trade-off.

Okay, I appreciate that color. And then I guess lastly for me, while we're talking about bedding, can you maybe give us a little update on how the Haiti operation is progressing? Looks like it might even become more important part of your business with some of the production shifting back towards the US now with anti-dumping and you guys have been able to supply at a low cost out of that operation?

Yeah, I think, well, I would say for sure, the Haiti operation is something that we are really thrilled about. We feel better and better every day about that strategy. We've got quite a bit of time under our belt now, we're making a lot of items there. Staff has been trained very well, it really has a lot more room, we can move it up. We do have additional space where we can continue to grow that as needed. And I do agree with you. I mean, it's been on both sides of the business, that's been tumultuous to say the least, and sort of figuring out how and where production and manufacturing may settle out. So Haiti seems to be one that's in favor, because it's close to the US, gives us a different speed to market, is protected by the HOPE Act, which so far, not to say that anywhere safe, doesn't seem like these days to be producing outside the country with what could happen, but with the HOPE Act that's extended for a lot more years and working to be extended further, we feel like Haiti is a place that is going to offer some reduced duty or duty free advantages for a long time. So as we get more customers accepting that, we feel like it's definitely a place where we will continue to grow and we’ll be able to attract more customers there.

[Operator Instructions] We’ll now take our next question from John Baugh of Stifel.

Let's start, we've seen a fairly significant shift, in our opinion, the [indiscernible] kind of share shift, if you will, versus what's going on at SSB and we know [indiscernible], is that something that you're seeing and still a challenge? Or you can overcome all that with the duties now out and some of the tailwind you expect there?

Yeah, John, I don't want to talk too much about specific customer, we would be really careful about that. Because I don't know strategies they have, but for sure, I mean, those companies, [indiscernible] make up a big share of the market. Very important customer stuff and ones that we focus on first. I mean, these are ones that we have to do a good job with. But the market is certainly more fragmented. And we're looking at other places where we can grow our sales as well, because we just need to. It's just not as, it's not as dominated by a few manufacturers, it doesn't seem to me as it was before, how that market share has traded between them, I'm not fully clear on that, we just do our best to try to be important to both.

And then I know you don't want to speak customer specifics and this is just more, just an example. But the [indiscernible] kind of bedding manufacturers domestically, are you seeing any improvement with those types of customers. You mentioned that you are finally seeing the light at the end of the tunnel, or is that just a sort of an elsewhere comment?

No. I think when we say we see improvement, we really see it across the whole chain. And we try to make it clear in the comments. For us, one of the biggest growth potential is within our cut and sew business, because we see more beds going opaque. But that's happening both with new customers that you know of and it's also happening with traditional customers. So really from high to low, we're seeing improvement across the whole chain. It’s not distinguished to one or the other and we're seeing some lift at all areas of the market.

And then, you talked a little bit about CLASS, it sounds like it’s still growing. Just kind of curious what you're seeing there in terms of – are you attracting new customers, is it mostly you’re growing with existing customers, give us an update on Haiti and sort of where that facility is in terms of ramp up, et cetera.

Yeah, it really -- the growth really is for bed and the box and for our cut and sew business, really across both channels. We are having really good success. Our customers, traditional customers are really smart and some of the things they're doing to react to new market demand is impressive. And we're having some good wins there. And I feel like if we collaborate with them, we can do pretty special things from fabric to finished cover that really helps them drive their strategies also, which is great. And that's really from low to mid to even high end in some cases. Haiti is definitely a place that we want to continue driving customers to, because we think it's a safe place for the long term from a duty rate. We're already, we don’t want to get too much, that facility is doing well, we're upwards of 10,000 covers a week there and with potential do a lot more. So we're really excited about that platform. I would tell you, today, we're also still currently really excited oddly enough about our cut and sew business in China. We're having great success there with cut and sew covers. Those, so far, have not been affected by section 301 tariff, they're on a pending list for. So today, that's a really good platform for us, one that's well seasoned and high volume, but something that we could also be prepared to move towards Haiti if we ever had to.

Okay. And my last question, quickly as I think you mentioned bed and the box as still, you’re seeing nice growth there. One of the leading manufacturer’s CEO seemed to think that growth currently was non-existent, although he admitted he couldn't prove it statistically. Do you see any slowing with those customers there or is that still a significant tailwind for you or you’re just gaining share with those customers?

Well, you're speaking to the traditional bed and the box disruptors I guess and I don't know about that. I do think from a Culp standpoint, were likely gaining some share as we talk about supply chains being altered in some of the big cases, they're looking for different opportunities other than fully Chinese made mattresses. So that has been something we may be picking up, somewhat greater rate than the markets picking up. I also think we may have some coverage there because the traditional mattress companies are also doing more bed and the box types products. So, we're seeing growth in that segment of business really across the whole chain.

We do have another caller with questions. We have Marco Rodriguez from Stonegate.

Good morning. Thank you for taking my questions. So wondering if you could talk a little bit more on the mattress fabrics side, just kind of based on your discussions with your customers, your clients, how are you guys thinking about the excess inventory that’s in the channel, are we talking weeks, months, any sort of color around that?

Yeah, that's a really good question and something we've talked a lot about, Marco internally. [indiscernible] measure, we track every month like a lot of people do, sort of the imports monthly and they've come down from a high of over 650,000 mattresses in a month to the, two months ago, it was 242 to last month, that was 125,000 mattresses. So, a lot of inventory is -- a lot less was coming in. We don't -- what we don't know, I don't think our customers have a lot of inventory like we actually feel some pushed and a little bit of preparation for building back some inventory, but I don't know what's on the major marketplaces, how many containers the mattresses might be on 3pl warehouses, and somewhere, they’re just sold online. So it's hard for us to get a gauge on that. I don't think it's months, in terms of several months, but it could be a couple of months more, but that's purely conjecture on my side.

And in your prepared remarks, on the mattress fabrics side, you talked about rationalizing manufacturing operations, just wondering if you could maybe provide a little more detail in terms of what are the specific actions you've done here recently for that.

Yeah, a lot of things. I mean, when that rationalization comment covers a lot of work we've done in the last really two years. Part of it is, we did and we’ve talked a lot, almost too much in a lot of press releases going back about all the capital investment we did in our mattress fabric facilities, right sizing, and then also expanding and moving and shifting. So we spent $15 million, give or take, to build that platform better in the face of looking back, it wasn't really the ideal time to do that financially. But we're so proud to have got that behind us and it will provide a lot of benefits, as we move ahead. Also, rationalization characterizes one thing we did was relocate certain parts of our manufacturing into more advantageous locations. One example of that is, we consolidated our weaving location into our Canada platform, which may seem minor. But when you factor in the advantages we have in Canada, bringing in raw materials and yarns, duty free into Canada, and then allowing those to come into the US as finished woven products under a TPL or a tariff preference level type of thing, we have a significant cost advantage in Canada for weaving as opposed to what we had in the US. So, that's the kind of thing we talk about in rationalization and we're doing that across all product categories to get the right things in the right places, balancing speed to market, which is very critical along with price, which is equally or more critical trying to figure those things out. And then without being said again, Haiti is a big part of that rationalization too, thinking about where we’ll put cut and sew. So, we're just constantly trying to stay, you’d hear for, it’s an upholstery question or mattress, but we're just trying to stay nimble, where we can move, try to adjust our production to be quick service and advantageous from a price standpoint, because that's what we think our customers demand us to do.

And then kind of shifting gears here to Upholstery. Can you talk a little bit more about Read Windows? I believe I heard you guys had about $11 million in revenues here in fiscal ‘19. If I'm not mistaken when you guys acquired it, I thought you had disclosed that they had done prior to about 11 million or so in revenues? Can you just kind of give us an update as far as how that business is kind of moving and your expectations going forward?

Yes, Marco, and this is Boyd. Good morning. Yes, we are very pleased with how the Read Window acquisition has gone for us. We, you're correct that [indiscernible] and this really was somewhat of a transition year, as we absorb this business into Culp and the Upholstery Fabrics business, but we are pleased with the positive contribution that we’ve made for our Upholstery Fabrics business at year ‘19. And we certainly remain very optimistic with the enhanced platform or product portfolio that we now have by bringing window treatments into our offering in the hospitality segment. So we're very pleased with the results thus far, we do think there's a lot of opportunity remaining and yet to come, as we continue to focus in this area, but very pleased with the performance and the acquisition of that product category to date.

And then last quick question, just talk a little bit more about your capital allocation priorities going into fiscal ‘20. And if you can also talk maybe and update us on the M&A landscape?

Yeah, Marco, this is Ken. We really value the, in our capital allocation strategy, that's what we put on the website. I mean, we've committed this year to continue to invest in CapEx, although at a lower rate. We did -- it was a really perfect timing in that, we had significant lower CapEx spending this year, but it was more -- pretty much planned that way. So that certainly helped in our free cash flow position. I think if we look ahead, the same thing, we're going to continue to invest in the business through capital expenditures, which we said, about 6.5 million, 7 million. We're also going to continue to be on the look for the strategic acquisitions and to evaluate that and look at the timing and such that it fits with the other two acquisitions. So that's still in our strategy. Of course, what we've tried to do along this whole time is to maintain a strong balance sheet, so that we could take advantage of those opportunities, and we feel that we are there. So that won’t change. We’ll continue to review the landscape and look for opportunities. And then of course, if that doesn't, if we need to -- if we don't have an opportunity, we’ll continue to generate free cash flow and maybe from time to time, look at our share repurchase program and look at that opportunity. And then depending on the economy and all the uncertainty, just continue to maintain the warchest of cash for basically making sure that we can sustain or withstand any pressure. So really no change in our strategy, just continue to look for opportunities and most of all, keep the company strong and keep -- just keep prepared for the opportunities as they come along.

[Operator Instructions] It does not appear we have any further questions at this time. So I would like to turn the conference back over to the speakers. Thank you.

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

This concludes today's call. Thank you for your participation. You may now disconnect.