Good day, and welcome to the Culp, Inc. Second Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dru Anderson. Please go ahead.

Good morning, and welcome to the Culp conference call to review the company's results for the second quarter of fiscal 2026. 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 to revise forward-looking statements. In addition, during this call, the company will be discussing non-GAAP financial measurements. A reconciliation of these non-GAAP financial measurements to the most directly comparable GAAP financial measurements is included in the tables to the press release included as an exhibit to the company's Form 8-K filed yesterday and posted on the company's website at culp.com. An Investor Relations presentation 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.

Thank you, Dru. Good morning, and thank you to everyone for joining us today. With me on the call is Ken Bowling, our Chief Financial Officer. Before I begin my remarks, I do want to briefly pause and wish one of our longest and most loyal investors, John Baum, a happy birthday. John, we appreciate you and wish you all the best. I will now begin the call with some detailed comments. And as mentioned in the introduction, we have posted a slide presentation to our website that provides some information that is supplemental to what we will speak about today and to our results and strategies. That slide presentation is simply entitled Culp, Inc. Second Quarter Fiscal Year '26 Supplemental Information. Ken will then review the financial results for the quarter. And after that, I'll briefly review our business outlook for the remainder of fiscal '26, and we will take some questions. At a headline level, our results for the second quarter were similar to our first quarter in the sense that we continued our push to improve our operating performance and make significant progress throughout our business in the face of challenging macro conditions. It's well documented and likely familiar to all of you that the home furnishings industry has been abysmal from an actual unit sold perspective. The tide generally remains out for housing and related furniture purchases, and we are improving our business gradually and in spite of these conditions. While we are seeing some encouraging signs of demand stabilization and sales growth in our bedding business, we have still yet to see the broad market recovery across home furnishings that many in the industry think could soon be pending. The macroeconomic data remains stubbornly low with consumer confidence down based on a variety of factors…

Thanks, Iv. Here are the financial highlights for the second quarter. Consolidated net sales for the second quarter were $53.2 million, a sequential improvement from the first quarter sales of $50.7 million, which included an extra week and a decline from prior year period sales of $55.7 million. The year-over-year decline was driven primarily by the continued industry-wide softness and the tariff-related uncertainty that Iv discussed. Consolidated gross profit for the quarter was $5.8 million or 10.9% of sales compared to the prior year period gross profit of $6 million or 10.8% of sales. Excluding restructuring-related expenses, adjusted consolidated gross profit for the quarter was $6.7 million or 12.6% of sales compared to the prior year period adjusted gross profit of $6.8 million or 12.1% of sales. This gross profit improvement was driven primarily by cost and efficiency gains from the restructuring of our bedding segment completed last year. SG&A expense for the quarter was $8.7 million, an approximate 7% improvement compared with SG&A expense for the prior year period, reflecting cost savings from our restructuring initiatives. Loss from operations was $3.5 million for the quarter compared to the prior year period loss of operations of $5.4 million. Excluding restructuring and related expenses, adjusted operating loss for the quarter was $2 million compared to the prior year period adjusted operating loss of $2.6 million. EBITDA adjusted for the impacts of restructuring-related expenses, stock-based compensation and other noncash charges was a negative $1 million for the second quarter, an improvement on lower sales compared to negative $1.1 million in the prior year period. Our year-over-year operating performance improvement for the second quarter benefited primarily from continued momentum in our bedding segment, driven by the positive impacts of last year's restructuring. Operating performance also benefited from the continued profitability in the upholstery…

Thank you, Ken. Due to the market and macroeconomic uncertainty and the fluid tariff landscape we've talked about today, we are only providing limited forward guidance at this time. Despite what we anticipate to remain a challenging demand environment for home furnishings in the near term that pressure sales in both of our businesses, we currently expect steady consolidated sales performance in the third quarter and throughout the remainder of fiscal '26 with higher expectations for the bedding segment. Moreover, we expect the cost and efficiency benefits flowing from the transformation of our bedding and upholstery platforms, along with recent pricing action to drive improving gross profit and lower SG&A, resulting in continued significant improvement in operating loss and near breakeven to positive adjusted EBITDA for the third quarter. As Ken spoke to, while we intend to continue utilizing borrowings as necessary under our credit facilities during fiscal '26, to fund working capital needs as well as integration and efficiency initiatives, we will continue to aggressively manage liquidity and capital expenditures to prioritize free cash flow. On that point, we are owed approximately $4.7 million in cash in the fourth quarter on the sale of our Canada facility, and we anticipate that those funds may be received earlier, perhaps in the third quarter. Thank you again for your time listening today, and we'll now take some questions.

[Operator Instructions] Our first question comes from Doug Lane with Water Tower Research. Again, that's Doug Lane with Water Tower Research.

Operator, I'm wondering if he's dialed in on the other line.

I'm sorry, can you hear me now?

Yes, sir. We got you, Doug.

Yes. I was encouraged to see the free cash flow breakeven and the use from cash from operations -- the cash used from operations being cut in half. So all the work you're doing is starting to come through, and I'm just trying to get a feel for where we are in the realization of all these cost savings. I know in the implementation, maybe you said you're in the late innings, but of that $20 million on Slide 11, about how much of that do you think is already being realized in the P&L and how much is still to come?

Yes. Doug, thank you for that question. It's a lot. I tried to regurgitate all the stuff we've done over the last couple of fiscal years. And it's really -- when you think about it and write it down and script it the way we have, it's a considerable amount of effort. So it's coming in, in different phases. We had -- obviously, the big work we did with our Canada facility is really helping us this year. That's in. The additional savings that we did and the price adjustments to deal with baseline tariffs, that all started to impact us maybe in late Q2. And then the new things we've announced or the plans with consolidating warehouses and moving our read window production and further adjustments are really a late Q3 impact. So by the time we get to Q4, we would expect to have majority of everything done, and we would have as clean of pictures we have -- we could have from a cost standpoint. Now unfortunately, what that's doing is just we're continuing to reoptimize the platform to deal with very challenged conditions. So we're not banking on any kind of improvement. We hope and have feelings that it could start to come, but we're just doing all we can do to restructure the platform so that Q4 quarter is clean quarter and all gears turn towards being profitable in this cycle. And then when the business turns, we don't have to have capacity to really start showing more fruitful results on top of that. So I hope that helps.

No, that does help. It sounds like heading into fiscal '27, you'll have a pretty clean run rate here. And then it's just a question of the benefit of the next up cycle, whenever that happens. It's going to happen and we just don't know when.

Yes. And I guess I would say I just -- 100% yes. We are very -- fiscal '27 will be a very clean position heading into the market. What we don't know is if it continues to lag or for some reason, it were to get worse. We don't believe that's the case. But if it did, we'd take more action. I just think I want investors to be clear that we are positioning ourselves to do whatever it takes to adjust to the demand cycle. And unfortunately, we've had things that have been lagging more than we expected, so we make more changes. But optimistically, we're clean in '27 and maybe even in fourth quarter and hope to see some demand that's moving the right way, at least a little bit.

Is there any way -- have you done any math on what the incremental margin would be on the next point of sales growth? So as sales start to move up, what would be the contribution margin from that incremental point of sales?

Yes, Doug, this is Ken. And we've said this before. I mean, we've got so much buildup leverage in our ability to capitalize on any increase in sales. And as Iv said, I mean, we've got all the cost reductions to be implemented in the fourth quarter. And so we're going to be able to gain a lot of those sales dollars as far as the contribution margin is concerned. I mean we're set on SG&A. We've got fixed costs in place. So we're going to be able to keep a significant amount of those incremental dollars as we grow the business based on the platform we have today.

Got it. That makes sense. And I know you mentioned new tariffs in Turkey and Haiti. Can you give us a feel for when were those implemented? And when do you think you'll be able to benefit from whatever mitigation efforts you put in place for them?

Certainly. And I think I'm trying so hard to have, Doug, you and other investors understand tariffs have been a real -- I mean, it's just been a real pit to the business. I mean it's been so disruptive the way they've come in. But optimistically, we feel like we can handle it. We've gotten better at this. And we believe because of our platform, it's actually an advantage. So it's like any kind of -- when you think about strength and weaknesses, they can sometimes be both. And I think tariffs have been a challenge on the industry and are impacting sales. But I do think for us, they can become a strength because we have ways to navigate it. So to answer your question directly, it's -- what's happening -- what happened in Turkey and Haiti, we had a baseline of tariffs. And then Turkey, for example, went from a 10% to a 15%. It just got changed on the reciprocal part of the ending of Liberation Day. So we had to deal with that extra 5% that wasn't planned. And that comes in immediately. We are built on that day 1, and it could take us 60 days with a customer or with a strategy to adjust that. So that's a lag for us. Haiti, we had 8 years of tariff-free treatment from regulation in Haiti. And all of a sudden, that because of government, I'll call it, dysfunction or delay, there has been a lag on renewing that agreement. We think it will get renewed. But in the short term, we've gone from 0 tariff to 15% overnight. So we have to adjust that. And we will adjust it and believe it's -- we can easily adjust it, but not as quick as the pain. So that's why it's at least a 60-day lag for us with the change in tariff to then change the strategy or pass that price. And that's what we've been working on really for the last -- ever since the announcement of tariffs, we've been working on that. And we do feel close to the end, but it's knock on wood what tomorrow might bring.

And the tariff situation on a week-to-week basis, is it still somewhat volatile? Or do you think it settled a little bit?

I believe, and I want to believe it's starting to settle. I think that we have seen a slight reduction in some Asian tariffs. So there are things that are starting to neutralize. And again, we've become very proficient. I don't wish we were proficient, but we've become very proficient on managing tariff change, and we have ways to mitigate it. So nothing -- I'm not scared or worried about that. It's just the timing sometimes that it takes to get it fixed.

Well, clearly, you've been working hard in a very difficult environment. So we stay tuned.

This concludes our question-and-answer session. I would like to turn the conference back over to Iv Culp for any closing remarks.

Thank you, operator. And again, thank you to everyone for your participation and your interest in Culp, and we certainly look forward to updating you our progress next quarter. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.