Culp(US:CULP)2024-12-06 07:53Financial Data and Key Metrics - Consolidated revenue for Q2 declined by 5% year-over-year, with net sales of $55.7 million [10][33] - The company reported an operating loss of $5.4 million, including $2.8 million in restructuring expenses, compared to a loss of $2.2 million in the prior year period [33] - Adjusted EBITDA for the 12-month period ending with Q2 was negative $1.3 million, compared to negative $240,000 in the prior year [36] - Net loss for Q2 was $5.6 million, or $0.45 per diluted share, compared to a net loss of $2.4 million, or $0.19 per diluted share, in the prior year period [35] Business Segment Performance Mattress Fabrics Segment - Sales for the mattress fabrics segment were $30.1 million, down 4.2% year-over-year but up 7.1% sequentially [38] - Operating loss for the segment was $1 million, a 70.7% sequential improvement from Q1, driven by restructuring progress [11][39] - The segment is expected to return to profitability in the second half of fiscal 2025 [11] Upholstery Fabrics Segment - Sales for the upholstery fabrics segment were $25.6 million, down 6.4% year-over-year and 10% sequentially [41] - Operating income for the segment was $615,000, down from $1.4 million in the prior year, impacted by lower sales and unfavorable foreign exchange rates [42] - Hospitality contract fabric sales remained solid, representing 35% of the segment's total sales [16] Market and Geographic Performance - The company has expanded its North American capacity with strong supply chain operations in Asia, including Vietnam and Turkey [13] - Foreign exchange rates in China negatively impacted Q2 results, but a favorable currency impact is expected in Q3 [18] - The company has fully ceased production in Canada and is transitioning to a sourcing model, improving margins [12][24] Strategic Direction and Industry Competition - The company is focused on restructuring to return to profitability, with the majority of restructuring activities expected to be completed by Q3 [12][19] - The mattress fabrics segment is a critical catalyst for recovery, with expected annualized cost savings of $10 million to $11 million [27] - The company is enhancing its product offerings, including the LiveSmart brand of performance fabrics, to meet customer demand for functionality and sustainability [15] Management Commentary on Operating Environment and Outlook - Management remains optimistic about the company's strategic approach and expects to return to positive adjusted EBITDA in the second half of fiscal 2025 [31][49] - The company anticipates continued pressure on sales in the residential upholstery fabrics segment but expects to achieve positive consolidated adjusted operating income by Q4 [49] - The restructuring process is expected to result in significant operational improvements and cost savings, positioning the company for growth as market conditions improve [32] Other Important Information - The company has $10.5 million in cash and $4.1 million in outstanding debt under its China credit line as of Q2 [45] - Capital expenditures for the first six months of fiscal 2025 were $1.6 million, with full-year projections of $3.5 million to $4 million [44] - The company expects to sell its Canadian facility in Q4, with net proceeds estimated at $6 million to $8 million [29][30] Q&A Session Summary Question: Market Share and Order Growth in Mattress Fabrics - The company is gaining market share in the mattress fabrics segment, driven by product innovation and strategic placements [54] - Positive momentum is expected to continue through Q3 and Q4, with new programs scheduled to launch [55] Question: Upholstery Fabrics Demand and Inventory Adjustments - The decline in upholstery fabrics sales is attributed to customers adjusting inventory levels due to soft industry demand, with some customers over-ordering in Q1 [59] - The company remains optimistic about the segment's potential, with strong customer interest in new products [58] Question: Contract and Hospitality Business Performance - The hospitality contract business is outperforming, driven by strong demand for hotel-related fabrics and window treatments, offsetting declines in office furniture sales [60][62] Question: Mattress Fabrics Restructuring Economics - The company expects annualized cost savings of at least $10 million from the restructuring, with significant operating leverage potential as sales grow [65][66] Question: Tariff Risks and Supply Chain Flexibility - The company is well-positioned to handle potential tariff changes, with a flexible supply chain and a strong U S manufacturing base for mattress fabrics [69][70][71] - The upholstery fabrics segment is largely insulated from tariff risks due to its asset-light model and global supplier relationships [73]