Culp, Inc. (CULP) on Q2 2021 Results - Earnings Call Transcript
Operator: Please standby we are about to begin. Good day and welcome to Culp's Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introduction, I'd like to turn the call over to Ms. Dru Anderson. Please go ahead ma'am.
Dru Anderson: Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the second quarter of fiscal 2021. 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.
Iv Culp: Thank you, Dru, good morning, and thanks to 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 are Ken Bowling, Chief Financial Officer; and Boyd Chumbley, President of our Upholstery Fabrics Business. I will begin the call with some opening comments. And Ken will then review the financial results for the quarter. I'm going to update you on the strategic actions in each of our operating segments. After that, Ken will review our third and fourth quarter fiscal 2021 business outlook. We will then be happy to take some questions. We are pleased with our strong performance in second quarter fiscal 2021, which reflects the tireless efforts of our associates around the world and the strength and resilience of our global platform. As we continue to navigate our way through these uncertain times. Our top priority remains the health and safety of our employees, customers, suppliers and the communities we serve. We are incredibly proud of our team's continued drive to deliver innovative products and satisfy the evolving needs of our customers while also integrating enhanced safety practices and new ways of working virtually throughout our business. Overall, we are very pleased with the top line performance for both our mattress fabrics and the Upholstery Fabrics segment. Its faster than expected recovery indicates an increased consumer focus on the home environment, as well as our ability to service this increase in demand with our strong global platform in stable supply chain. We are also benefiting from market share gains as our innovative products are resonating well with both new and existing customers.
Ken Bowling: Thanks Iv. As mentioned earlier on the call, we have posted slide presentations to our Investor Relations website that cover key performance measures. We've also posted our capital allocation strategy. I also want to note that as a result of the sale of eLuxury during the fourth quarter of last year, the financial result for the Home Accessories segment are excluded from the reported financial performance of our continuing operations and presented as a discontinued operation in our consolidated financial statements. Here are the financial highlights for the second quarter. Net sales were $76.9 million up 10.5% compared with the prior year period. Both divisions had a strong sales performance for the quarter, Iv will go into more detail on divisional operation performance in a moment. On a pretax basis, the company reported income from continuing operations of $3.9 million, which included $680,000 other expenses related mostly to foreign exchange rate fluctuations associated with our operations in China. This compared with pretax income from continuing operations of $4.5 million for the second quarter of last year, which included only $99,000 in other expense. The current quarter was affected by the unstable foreign exchange rate fluctuations I just mentioned, as well as higher SG&A expense due primarily to higher crude incentive compensation expense, offset somewhat by lower T&E and marketing expenses. On a percent of sales basis total SG&A came in at 12.7% compared to 13.1% for the same period a year ago. Net income from continuing operations was $2.4 million or $0.19 per diluted share for the second quarter, compared with net income from continuing operations of $2.2 million, or $0.18 per diluted share for the prior year period. The effective income tax rate for the second quarter of this fiscal year was 41.4%, compared with 50.1% in the same period a year ago. The effective income tax rate is affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign subsidiaries located in China, Canada, which have higher income tax rate as compared to the U.S. Federal rate. Looking ahead to the rest of this fiscal year, we estimate that our consolidated effective income tax - rate for the third and fourth quarters of this fiscal year will be in the range of 40% to 50% based on the facts we know today. Trailing 12 months adjusted EBITDA as of the end of the second quarter of this fiscal year was $11.5 million or 4.5% of sales.
Iv Culp: Thanks Ken.
Ken Bowling: At this time, due to the continued economic impact of the COVID-19 pandemic and the lack of visibility as to this duration or ultimate impact, we are providing only limited financial guidance for fiscal 2021. Although subject to unforeseen changes that may arise in connection with the pandemic. We are encouraged by the ongoing execution of our product-driven strategy and continued strength in demand for home furnishing products, as well as our opportunities for market share growth. Considering each factors we expects sales and operating income for the third quarter of this fiscal year to be comparable to the prior-year period, with the Mattress Fabrics segment continuing its strong year-over-year rebound and the Upholstery Fabrics segment facing ongoing headwinds relating to foreign exchange rate fluctuations associated with its operations located in China, customer supply chain constraints, and sales mix. We also expects sales and operating income for the fourth quarter of this fiscal year to be dramatically improved for both segments as compared to the fourth quarter of last fiscal year. Based on current expectations, including the $4 million investment in additional knit machines for our Mattress Fabrics segment that we mentioned last quarter, capital expenditures for this fiscal year are now expected to be in the $8.5 million to $9 million range. Depreciation and amortization is expected to be approximately $7 million for this fiscal year. With that, we will now take your questions.
Operator: And our first question is Bobby Griffin with Raymond James. Please go ahead.
Bobby Griffin: So, I guess first I want to talk about just before commentary here. So good momentum here in mattress you referenced and I think in the prepared remarks and a very good backlog and a pull through record level backlog. So maybe just help me connect the dots between when that type of momentum and then maybe in the sales commentary have been roughly comparable year-over-year? So is there a timing issue or is the currency hurting the top-line or is there anything else there that might be driving that or just general conservative - or just some conservatism in the guidance?
Iv Culp: Yes, thank you Bobby good question. And thanks for asking that and I'll give you a commentary. I'll break it down by division, if that's okay, and then Ken you certainly can chime in to. On the mattress fabrics side, you just have to remember there is some seasonality in our Q3, being and generally a normally weaker quarter, with our holiday shutdowns really across all locations. We have that in U.S., Canada and also in Haiti. And what I yes I would point you to for Q3 as in the mattress fabrics side is significantly improved year-over-year, which we're very happy with. On the upholstery side, the residential backlog, the rise does remain historically high. There are some headwinds for that business like currently, and really more so maybe for the sales on our customers supply chains, which I would say for that business, if your materials and capacity for our customers improve, then there's certainly some upside for that business. Generally for both businesses, a little bit of capacity and raw material cleaning up for both sides of the business to get a little better at our customer side, we could ship them more fabric that we have prepared. So that is an upside to the Q3 that could be there. Ken feel free to add to that if0 you'd like.
Ken Bowling: No, I think you covered it all, I think the key there is the year-over-year improvement that we're looking at and the seasonality part of it and of course on the upholstery side, the headwinds that we'll continue to have to face - those are factors.
Iv Culp: And it's generally a story Bobby of third quarter mattress fabrics, is continuing to rebound very well in upholstery we are just being a bit cautious in some of the headwinds uncertainty.
Bobby Griffin: Okay, okay, that's helpful. And then when we look at, you look at the business and how you guys have ramped back up production stuff. I mean where is efficiency verse historical levels within mattresses is throughput getting back close to normal from your side, taking the other industry supply chains out. But it seems like the supply chains, more non-fabric related issues, and then on your products.
Iv Culp: Yes, if you think back on the mattress side, really over the last couple of years, we did some significant capital expenditure work, to really build a world-class platform, both in the U.S. and in Canada that gets complemented by our really strategic global options Haiti, Asia, and Turkey. So, we're really pleased with that platform. And the more volume we run through it, the better that will perform. We have built a platform that will thrive efficiently with volume. And so - to see the sales start to rebound. And our expectation is that we’ll keep going that does help us quite a bit with our efficiency in the mattress fabrics side.
Bobby Griffin: Okay. And has anything been done. Have you guys passed any price yet related to the currency changes happening in China or is that still? Maybe going forward you'd have to make some adjustments?
Iv Culp: Yes, I'll let Boyd speak to that. And I'll just tee it up a little bit. Over time we have shown as these currency impacts, in this case primarily related to the China foreign exchange rates. For sure we do our best to adjust our costs and things within China to offset some of that. But if there are continued pressures, then we do have to adjust our prices and we always have business to do that. And Boyd you may speak to your timeline how are you thinking about that?
Boyd Chumbley: Yes no, that's exactly right Iv and you know always currency is a consideration in our business. And when we see periods where there is a more significant and more rapid movement, and yes, we always monitor that and take necessary actions when appropriate. So, we're evaluating all that right now. And price considerations and adjustments were one of the things that we will be considering.
Operator: Our next question is Marco Rodriguez with Stonegate Capital Markets. Please go ahead.
Marco Rodriguez: I want to do a follow-up on one of the prior question there in regard to I guess, the guidance as it relates to mattress fabrics, specifically here first, and the seasonality. Just kind of want to get your guys thoughts on, if you can, what sort of or perhaps demand you saw perhaps pull forward from quarters that come or was this maybe kind of the pent-up demand that nobody was shopping during the shutdowns and how that impacted kind of the above expectation, revenue growth you saw in Q2? And then if you can kind of layer in, historically, the Q3/Q2 seasonality has been down about two or 3%. But what kind of all of the names as working already for me you can provide a little more color on how you guys are thinking about that, and how we should think about that?
Iv Culp: Okay - let me start my presence here. And I'll let Ken finish it off with a little bit of thought towards how we think about look forward. But just think about the mattress fabrics segment and we do have, we have significant tailwinds in that business. Some that you are touching on that have already happened, and some that we see might be coming. And so for certain, the faster than expected recovery, for the business at the sales level is no doubt impacted by a strong home focus that was generated by COVID-19. So that gives us just a focus on home environment, updating - upgrading your comfort values, whether it will be furniture or mattresses. There's certainly a focus on health. People want a healthier more well night sleep. But on top of that, there's a lot in anti-dumping is a tailwind that could come we're optimistic that will come and make a difference. But on top of that, there's going forward headwinds throughout that we're excited about through our innovation, some of the things we've done there that are really unique in the product side of our fabric and sewn cover. And we are getting market share. We're winning market share gains protected for calendar year 2021. And we have new capacity in both fabric formation and in Haiti, for fabric and sewn covers that we think will make a difference. So there is tailwinds that have lifted kind of a rising tide has lifted all boats with the pandemic. So we're really confident in our market share gains in our product driven strategy to carry this forward past Q3 fall into next year. Ken, so if you want to give any context to how you're thinking about guidance for Q3 Marco you may want more details around that, but that's - so I'm thinking about the general lift of market share and general tailwind trends.
Ken Bowling: Yes Marco, this is Ken. I think when you look at - as we look at the past couple quarters, we've had that sequential improvement from the lows back in the first quarter to now I mean as we pivot toward the second half the year, it's more of a year-over-year. And so, when we look at of course, the seasonality for mattress fabrics is an issue. But when we look at the seasonality part of, that's the reason why that sequential growth just doesn't keep going. But that said the year-over-year impact that we're looking at is going to be significant. And so, we're very encouraged about that. And then of course for both businesses, as we look to the fourth quarter, we're excited to see that continued business level, going into the fourth quarter. And of course, compared to a very rough quarter last year, we see dramatic improvements on both sides. So it's a - it's definitely a year-over-year pivot situation. But obviously to continue performance as we take what we've got, and we continue to have performances in second half of the year.
Marco Rodriguez: And then in terms of your market share gains, you can talk about mattress fabrics here for a minute. Can you maybe talk a little bit about what sort of feedback or color you're getting from the customer that to why your - why you are increasing that market share versus competitors and what sort of the main drivers behind that?
Iv Culp: Yes sure, Marco thank you, good question. There is two things I see first, we have for some time and we're working on this well before any COVID-19 pandemic issues a dedicated product driven strategy and we put a lot of emphasis into innovation, from fabric to finish cover. So we really believe we have a preferred model of designing innovative fabrics and then, now being able to take them into the growing bed in the box space to finish cover that's an advantage. And if you layer that product focus on top of a very robust global supply chain, and especially in mattress covers with North American platform, capital of Haiti, and then backed up really strong with Culp China, just as a winning strategy. So I think its design and service really are two factors driving us into new places. And I guess what we're excited about market share it's really across the board. So it's new exciting that in the box space that everyone is intrigued by. But we're also having some games with our legacy business we call it for new product lines that will roll out in calendar year 2021.
Marco Rodriguez: And then in terms of the gross margin pickup that you saw here in Q2, obviously the volumes helped quite a bit the efficiency that you've also put into the system is also great. I'm just wondering if you can maybe comment on those capital investments you have made the additional capacity you have, and the potential new volumes that should come through that business in the next - in the next year. Have you bought share to reset the operating margin performance to where maybe you're above that low 20% gross margin that you saw before all the anti-dumping issues were around in 2019 and 2020?
Ken Bowling: Yes Marco, let me I’ll start and Iv you can jump in. I think Iv touched on this a little bit ago, given the - all the improvements that we've made over the years. I mean, that's really set us up for being able to take advantage of this increase in sales. I mean, the structural changes that we made moving certain products to different locations, and getting to be able to take maximum, it’s been able to maximize that move. I mean, that has certainly helped. So I think as we - obviously as we look forward, that was definitely a factor in the second quarter. But as we look forward, those are going to be - contribute to the improvement in the third and fourth quarter beyond. Now, as far as I don't remember the second part of that question as far as where is the gross margin, but I mean that, to me what I've just described is really - where we are at today and all the improvements we've made. So Iv I don't know, you want to add anything to that or?
Iv Culp: Yes, we did that we said last quarter we announced a $4 million additional capital expenditure on fabric forming equipment fixed for North America. That's an addition to our Haiti expansion that we had done and got completed in second quarter. So and then we're making a nod in our capital allocation strategies it is making sure to keep our opportunities available for further organic expansion. Because we just do see some opportunities come on. And I guess so for sure, the more volume we put to our platform, there is margin opportunity to improve it. Ken, I definitely want to talk about what that is and….
Ken Bowling: Yes.
Iv Culp: There is opportunity to improve.
Ken Bowling: Yes, I think to one other point related to our - the $4 million investment that we talked about, I mean, that certainly will give us the increased capacity, but that also gives us the flexibility to trade out old equipment for new, more efficient equipment. It gives us the flexibility to ramp production up and down. And so, all that is a part of our strategic effort to be more nimble, more B2B, be ready for anything that customer can provide or give us as far as demand. So all those come into play, and again - all the efficiency movements that we've made, the investment that we're going to make, all those will contribute in the future.
Marco Rodriguez: Understood, and if I can squeeze one more question in just real quick on the upholstery fabrics side the supply constraints outside of the fabrics. When speaking to your customers, do you have any sort of sense as far as what they're thinking timeframe lines, where they will kind of be past that those supply constraints, and back to a more normalized environment, if you will?
Boyd Chumbley: Yes, Macro and this is Boyd. There is progress being made, I think throughout the industry. There are just wins to capacity that are taking place to meet this significantly higher level of demand. And there's a lot of that underway, and I think progress is being made, is probably going to take another quarter or so to fully see the impacts of new capacity coming on stream. I think part of the difficult things, are both the constraints and staffing and hiring and training. But also, there has been some constraints on the component supply side, such as phone. So that's another issue that's kind of held back some of the throughput. And that probably is going to carry forward a bit during this current quarter. So I think we're going to see some steady improvement in that regard. We certainly hear that from our customers that capacity, more capacity is coming on stream. So it's just going to take a little more time. But I think, we'll look at another quarter, and then probably see, certainly in fourth quarter, much more improvement in that regard.
Operator: And there are no further questions at this time.
Iv Culp: Thank you, Operator. And again thanks to everyone for your participation and your interest in Culp. We look forward to updating you in our progress next quarter. Have a great day.
Operator: And this concludes today's call. Thank you for your participation. You may now disconnect.
