Good morning, everyone. Thank you for joining us for this session of the WTR Insights Conference featuring Culp, ticker symbol CULP. I'm Linda Bolton Weiser, Managing Director of Consumer Research here at Water Tower Research, and I'll be your host today. We're pleased to be joined by CEO, Iv Culp , and CFO, Mary Beth Hunsberger . Welcome to you both, and thank you for being here.
Thank you.
Hi, Linda.
We so appreciate it.
Thanks.
Before we begin, please note that Culp's safe harbor statements can be found in the Investor section of the company's website. We will aim to address investor questions submitted during today's conversation, or in the management series report that will follow. Please enter your questions in the chat. Investors interested in scheduling a meeting with Culp can indicate that interest within the conference portal. With that housekeeping covered, let's jump right in. To start, Iv, could you give us just a brief summary of Culp and what you all do? Then can you comment on bedding and upholstery industry conditions and how you are able to grow against that backdrop. You guys had 6.5% year-over-year sales growth in your most recent quarter, which is great.
Yeah. Thank you, Linda. I appreciate the opportunity to be here, and that's a good opening question. It is helpful maybe to give a short, little bit about Culp just so anyone that doesn't know us will have a better feeling. We are a 55-year-old company serving the bedding and furniture industries. While we are best known for mattress and upholstery fabrics, we have kind of evolved lately into a much broader solutions provider, with some mattress covers, performance fabric technologies, and a very flexible global sourcing platform. What's important today is over the last two years, we focused on strengthening the business through innovation, operational improvements, and balance sheet improvement. So we really have an experienced leadership team, including Mary Beth Hunsberger , who's our newly appointed CFO, and as you mentioned, she's on the call today.
We are now seeing those investments we made translate into market share gains and improved performance despite a challenging backdrop. So we have been through a significant restructuring, and the point I'd like to make is we are now a re-energized company poised for a solid future. I guess back to your question, commenting about our sales growth, I think you asked me, in the quarter, which we just released. I think the best way to describe the market today is that it's still challenging, but probably a little more stable than it was 12- 18 months ago. If you look at the bedding industry, shipment levels remain below historical norms after several years of pressure from inflation, lower housing activity, and cautious consumer spending. Upholstery, likewise, has faced many of the same headwinds. So we are certainly not operating in what anyone would call a strong demand environment.
What's encouraging, though, to us is that despite that, as you mentioned, we delivered 6.5% consolidated sales growth in the quarter, but that includes more than 13% growth in bedding. As I quote these numbers for our Q1, remember also, Linda, that this quarter had one less week than last year. I have already mentioned it to you, our growth is not driven by market recovery, it's being driven by our own execution, and that gives us a lot of confidence. When I step back and look at what's working, a few things stand out to me. First, we have built a manufacturing and sourcing platform that gives customers flexibility. Whether they need domestic, nearshore, offshore production, we are able to provide options at a time when supply chain decisions are becoming much more complicated. Secondly, innovation continues to make a difference.
Our Sonno mattress cover business is performing very well, and we are introducing differentiated products across bedding and upholstery that help our customers stand out in the marketplace. Lastly, our commercial team, led by Tommy Bruno , has done an outstanding job deepening customer relationships and turning opportunities into product wins. I will close this. While we would certainly welcome a stronger environment, no doubt, we are focused on controlling what we can control. What gives me confidence is that we are seeing the benefits of stronger customer partnerships, differentiated capabilities, and disciplined execution, and that is all before the market fully recovers.
That sounds good, Iv. Just also stepping back and thinking about the industry again, how have the dynamics within your industry changed over the years? I am sure there has been many evolutions. What can you pinpoint that has changed, and then how has your company adapted to those changes in the industry?
Yeah, sure. It is funny, Linda, I have now been in this business a long time, and one of the biggest changes I have seen is that customers today are really valuing flexibility almost as much as they value price. Historically, suppliers like us competed primarily on cost, quality, and of course, service. Those are still important today, but customers now are focused on supply chain resilience, speed to market, innovation, and then how we are managing risk. Maybe th e best example is in sourcing. Years ago, many companies were comfortable relying heavily on a single manufacturing region. Today, our customers are looking for options. They want the ability to react quickly when tariffs change, or their supply chains get disrupted, or just general market conditions shift, which seems to be happening regularly.
We saw that, I guess I am really proud of the fact we saw that trend developing years ago and intentionally positioned ourselves for it. Today, w e offer customers a manufacturing footprint that spans across the U.S., and then we have nearshore and also offshore operations, which allow us to tailor solutions around what our customers need, rather than pushing them into a one-size-fits-all approach. We are also deeply into our Project Blaze, which really the essentials of that is combining the Culp segments into one operating platform and an integrated brand, Culp branded business. Mary Beth is going to have a lot more to say about that, I am sure. Basically, we want to be easier to do business with. Another important change is that customers increasingly want solutions, not just products.
That's one reason we've really expanded into the sewn mattress cover business, and we've got capabilities that help customers simplify their supply chain. Same thing is true when it comes to innovation, whether it's cooling technology, sustainability, performance, or manufacturing efficiencies. Customers are looking for ways to differentiate themselves, and we want to be part of helping them do that. Really, I guess the way I think about our evolution is simple. We've worked to become more valuable to our customers by helping them solve more problems. That's strengthened our relationships with customers, it's improved our competitive position, and we're positioned well regardless of where we are in the cycle.
Sounds good, Iv. You touched on innovation a bit, and on the last call you alluded to a mattress innovation coming, I think, in early calendar 2027. Can you talk about that? To the extent you can give us any kind of foreshadowing of what that's about, and also just in general, focus a little more on innovation and how that plays a role in your gaining market share in the industry.
Yeah, absolutely. I actually think innovation becomes especially important when demand is relatively soft, like we see today. When markets are growing more rapidly, companies can offer to grow or just kind of grow alongside the market. But when growth is tougher to find, innovation becomes the most effective way to stand out and create opportunities. At Culp, our innovation goes way beyond aesthetics. We think about products, materials, manufacturing processes, and ways to help customers create more compelling offerings. In bedding, first great example is our mattress cover business. We've developed capabilities that allow us to provide complete solutions rather than simply individual components. As you touched on, we are investing in products that combine multiple consumer benefits like cooling, comfort, sustainability, and manufacturing efficiency.
I don't want to get in, Linda, too much to what it is and who it's for because it's early, and we hope to make a nice splash with that in the market soon. But rest assured, we're pretty encouraged, and these are things that have taken time to develop, and we're excited to get them to market. It's also true in upholstery. Our LiveSmart performance fabric platform has become well-received. It's a technology that's accepted in the market, and we're continuing to build on that foundation with new performance features and aesthetics that help customers differentiate their furniture as well. Really, I'd say we're focused on the biggest trends shaping both industries today, and they're not simply line extensions. These are opportunities to create meaningful value for customers and further strengthen our competitive position. Maybe if I was to summarize an innovation, we're pretty practical about it.
It has to solve a real customer problem, create value for the consumer, and be commercially scalable. That's the lens we use when evaluating every opportunity, and it's one of the reasons we're confident innovation will be an important driver of our growth as we look forward.
Great. Thanks. Thanks for that. You also alluded, Iv, to the major restructuring that you've kind of just completed. Mary Beth, you were important in spearheading this project, and you've achieved significant cost savings. Can you talk about the actions you took and how they're favorably affecting your supply chain flexibility and competitiveness?
Sure, yes, Linda. That's a great question and a topic I'm very passionate about. We have spent about two and years on several major restructuring initiatives with the goal of substantially reducing our fixed costs, as well as streamlining processes and procedures within our operations areas. We did all of this to be more agile in an ever-changing world. We've been through some difficult times in the industry in the past two years. A few of the details, just for anyone who might not be familiar with what we've been working on. We did consolidate our knit manufacturing into a mega facility in North Carolina. It was great to take the best of the best of all of our equipment and use it to shore up this tremendous plant we have here.
We also consolidated our distribution centers in North America in North Carolina as well, which is a big cost savings. We also streamlined our Asia platform. We have facilities in Shanghai and in Vietnam, and we were able to invest in some areas and streamline others. What Iv was mentioning is our internal branded project called Project Blaze, which is where we really wanted to blaze a new trail and create a unified Culp company instead of a company with two separate divisions, which, as you can imagine, had some redundancy in it at this stage of the life of the company. All of that helped us reduce our costs to match the demand we're in. It also has benefits to give us a more balanced global footprint. We can really meet our customers anywhere they might be. It also preserved.
We did this in such a way that it preserved 100% of our ability to grow. In no way have we limited our capacity or capabilities going forward, which was the part that made it complicated. We did that, and that makes us more nimble in this difficult environment. Iv mentioned our, or maybe you mentioned our domestic nearshore, offshore capabilities. We really do have that flexibility, which is what customers value. It just gives us better competitiveness and operating leverage for when the industry does recover. I will mention too, our investor deck outlines these projects in more detail, and they do total over $22 million in annualized savings, so we are very proud of that.
Yes, that is a really big number in terms of the savings. Mary Beth, to sort of drill down a little bit more into your bedding segment. You have reported steady gross margin improvement in recent years in bedding. I think you started out at a gross margin, a t the gross margin line, a loss a couple of years ago, and you improved to a 9.2% gross margin last fiscal year. Then in the first quarter of 2027, the margin expanded further to 13.6%, up 300 basis points year-over-year. Very strong performance. Can you kind of give us some color on how sustainable that higher gross margin level is, and could we even see more improvement there in the bedding segment?
Yeah. Great question. Great line of thought there. These improvements really started with my counterpart, Tommy Bruno, in his role as Chief Commercial Officer, with his experience in bedding. He started some of these initiatives when he joined the company a few years ago, and they are really paying off huge dividends as we see now. That, and then continued operational changes that we just talked about in your last question. When you kind of add all that together, we are in a really good place for bedding, not where we ultimately want to end, but the tremendous sequential improvement is really encouraging. Yes, an d just to clarify, the stats that you referenced are ex-tariff refunds, so it is really pure operating and commercial results that have driven the success. Looking forward, we are still in a period of volatility. We have petroleum-based costs that impact our yarn.
We have rising freight rates. We have a dynamic tariff environment. There is plenty of things that are still really challenging, but I can say that those rates we saw in Q1 are real, and they are based on concrete, quantifiable savings. How do we look at that going forward? Really, we can sustain those rates and optimize them by further enhancing our Stokesdale and Haiti manufacturing sites. We can improve them through product mix. Obviously being very disciplined with our pricing and our inventory management. There is still room to go to improve that, and certainly when the industry recovers, leveraging those fixed costs will be tremendous improvement. We look forward to those days.
Yes, that sounds good. Switching then to the upholstery segment, which actually has a higher gross margin than bedding, in the high teens. We haven't seen that margin expansion trend as consistently as in bedding. Do you need sales growth to drive higher margins in upholstery? Can you give us a little more color on that side of the business?
Sure, yes. Different margin profile for sure on upholstery. That segment for us already operates at a relatively higher margin. The improvement we might see there, or the opportunity we might see there, is going to be less dramatic than we would see in bedding for sure. Things we can do to influence that margin is also product mix, leaning into performance products that Iv mentioned briefly. Also, innovation helps us create products that can't be purchased elsewhere. Then using market share sales growth. That can help us leverage our cost base. So there are still ways we can look to move that margin even in this environment, but it is less steep of a potential curve than all bedding. We've talked in our press release a little bit.
Within our upholstery segment, residential furniture is just still a very pressured part of the industry, but there are some bright spots. We have a good business in the hospitality and commercial areas, and those segments may respond more quickly than furniture. So there's certainly areas there, but again, just maybe a little bit more muted compared to bedding.
Linda, I might just tack on. Mary Beth is doing such an amazing job managing this.
Sure
I hope investors get the scope of the change that the company's making. There are some nuances between the two segments. I mean, upholstery, she's right, it has a pretty good margin level now. It's a very asset light business. We don't have nearly the capital base in upholstery that we do in bedding. So really, if we can get our Project Blaze put together well and drive revenue across both segments, then really make operational improvements in the bedding section of the business, that's where we have such good upside, so much leverage on the growth.
This has been a two-year journey of getting the company right-sized and positioned for what we know is going to come at some point. Really, Mary Beth has been the architect of it, so I'm thrilled she's getting to answer these questions. It's just important to understand some of the nuance that we'd love to follow up with down the road between the two businesses, because we love them both, but they're just different how we approach them. Now that we're managing them together, it's really bringing out some synergy, which is excellent.
Mm-hmm. Yeah, that sounds really good. So, you did get a really large tariff refund in your first fiscal quarter. It was almost $7 million, I believe. Your operating cash flow was significantly improved year-over-year in the quarter, even excluding that inflow from the tariff refund, partly due to reduction of inventory, down 16% year-over-year on inventory. What can we expect going forward in terms of working capital inventory? Can we see more improvement, or have we seen most of it already? What's your outlook there?
Yeah, I can take that one. We have seen tremendous reductions in inventory, for sure. That was really the next logical step once we did some of our synergy projects, and we got all of our footprint where we wanted it, then you have the opportunity to right-size your inventory to current demand. We've spent a good six months in a big way pushing that initiative throughout the company from our commercial teams, who've done an excellent job helping us manage programs, to our operations team, who's tightened up our supply chain. Yes, you can see the results, down about $10 million in the past two sequential quarters, which was about a 20% reduction. We're very proud of that. The hard work is done, and now there i s still inventory discipline we can put into place to continue to see some progress there.
We are still working on optimizing our weeks of stock on hand. We are still optimizing special programs where we might carry specific inventory. There are still ways to continue to be really smart about that, and we do want to continue to make some improvement. Having said that, there's Chinese New Year, there are industry seasonality factors that come into play, there are customer programs that we want to support. We may not be looking for another $10 million. That might be aggressive, but we certainly look to continue to sharpen that line item.
Good. Good to hear. Sticking fo r a moment with cash flow, your capital spending was actually really quite low in FY 2026. It was less than a million dollars. What can we expect for capital spending this fiscal year in fiscal year 2027, and do you foresee any special big expenditures over the next few years?
Okay. All right. You're right. Last year was very low capital spending. As we were restructuring, obviously, where we had redundant equipment or facilities, we kept the better of the two. We really ended in a position where we had a best-in-class fleet, and we obviously disposed of things that were not fitting in that best-of-class category. We have great equipment, great assets. Everything is in really good condition. That's why we did not need much in the way of CapEx last year. For FY 2027, we're still in that same position. Everything is in really good condition, but we may want to make targeted investments to support customer programs or a new capability that we feel like might be important for our innovation.
We'll be looking for, in my opinion, the more exciting end of CapEx, which is where we're investing to create new capabilities rather than replacements or just maintenance. But, again, not tremendous. We don't have a lot of gaps to fill. So we're not looking at a tremendous amount of CapEx. But just maybe a little bit more on that innovation side.
Okay.
Would you add anything to that, Iv?
No, I just think it's important that Mary Beth is doing so well managing our We're just being so focused on getting back to a net cash position. That's just we're just driven on it. But I wouldn't want investors or you, Linda, to think that we won't invest to grow the business.
If there are opportunities from customers for innovation or a special type of equipment or anything we need to grow the business, we're in a great position to invest in it. Absent of that, we're just going to keep maintaining what we have and continuing to grow while the market is like it is. We'll be ready to fund our CapEx when we need it, but we're in a good position not to need anything major. So it feels like a very enviable position for us to be in right today.
We'll just update on that constantly. We'll see where it goes.
Well, you kind of made a good segue into my next question, which is just honing in on the balance sheet, and you did use that tariff refund to pay down a lot of debt in the fiscal first quarter.
Can you just tell us what your plans are for the future in terms of future free cash flow? Do you have specific balance sheet goals that you'd like to achieve in the near term?
We sure do. Yeah.
You start. You start.
We like to talk about cash. We're going to fight over this question. Yeah. I mean, cash flow is the name of the game. Free cash flow is the name of the game. We are working hard to achieve a net cash positive position on our balance sheet in the medium term. We want that to happen as quickly as we can make it happen. That's very important, and that's one of our
top priorities for this year. Yes, we did use the tariff-related recovery to apply to debt. We reduced net debt by over 70% from year-end to end of Q1. We got that net debt number down to just over $3 million. We're not far. We're not far.
We definitely want to continue to strengthen our balance sheet and show that net cash position, and obviously maintain sufficient liquidity for these future growth opportunities that we've been talking about.
Yeah, I couldn't say it any better, Linda. Maybe the only thing I would point an investor to know about Culp is that we just, in 55 years, we've seen kind of, we feel like everything that could be seen in the textile business. We've seen highs and lows, for sure, of the market. We understand having a strong balance sheet, preferably with no debt, is how we want to approach the business. It just is the right way, and we've done it both ways, and we're just focused on cash. I think that's number one. We're going to just drive to getting that where it needs to go. This should be, when we're operating normally, and especially in normal cycle, it's a very good cash flow generating business.
We have every intention of doing that again. If anyone studies our history, when we are in those cycles, and we'll get there again, we'll have really good capital allocation decisions to make, and everything would be on the table. We're just, right now, all heads are focused on getting back out of fully out of debt to a net cash position, and then we can make decisions that are smart for the future. Full steam ahead on that right now.
That sounds good. Well, okay. You guys have provided a lot of really good information. It's been a great discussion. If maybe you could just kind of conclude here with the key points of why an investor should look at you guys. I think it's a great story.
Oh, thank you. Yeah, that's an important way to cap it up, and we've covered everything really well, and I'm thrilled that Mary Beth had a chance to talk to the hard work she and her team have done. I do think, I just want to leave it without saying, Mary Beth is our CFO n ewly appointed as of last week. She also has operational oversight, and she came from a Chief Operating Officer role.
Having knowledge of operations, now driving operational excellence into financial excellence, is just a natural fit for her skillset, and it is going to pay off for the company. We are really, really encouraged about that. Answering your question, why should investor look at Culp today? I think the Culp story today is a stronger, more diversified company, much more than it was a couple of years ago. We have improved our competitive position, we have strengthened the balance sheet, and we have expanded our sourcing capability. Now we are investing in innovation. The industry remains challenging, we talked about that today, but we are demonstrating that we can grow and we can gain share even before a broader market recovery. This just gives me a ton of confidence.
I know it does Mary Beth, and I know it does our whole team, in both near-term opportunities and our long-term prospects. That is why I think investors should look at Culp today.
Okay. Well, thank you very much, Iv, Mary Beth. We certainly appreciate you joining us for this session of the WTR Insights Conference. Thank you to all our viewers, listeners out there who participated. If you would like additional content on Culp, please check our website at www.watertowerresearch.com. For those with further questions, or for investors wishing to meet with management after this event, please reflect that interest through the conference portal. Our next conference session will be starting shortly, so please stay tuned and stay with us. Thank you.
Thank you, Linda.