CULP - NYSE

Good day, and welcome to the Culp, Inc. Fourth Quarter Fiscal 2025 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.

Thank you. Good morning, and welcome to the Culp conference call to review the company's results for the fourth quarter and fiscal 2025. 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 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 8-K filed yesterday and also posted on the company's website at culp.com. A slide presentation on the company's restructuring plan and related topics 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 Call. Please go ahead.

Thank you, Dru, and good morning, and thank you to everyone for joining us today and for your interest in our company. 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; Mary Beth Hunsberger, who is now our Chief Operating Officer; and Tommy Bruno, now our Chief Commercial Officer. I'll begin the call with some detailed comments. And as mentioned in the introduction, we have posted a slide presentation to our Investor Relations website that covers information related to our restructuring plans and actions, along with some associated topics, which I will speak about in detail today. That slide presentation is entitled Positioning for the Future. Ken will then review the financial results for the quarter and the full year. After that, I'll briefly review our business outlook as we turn the page to fiscal 2026, and we will take some questions. Fiscal 2025 was a truly transformative year for Culp, marked by substantial efforts across the entire company to streamline our cost structure, maximize efficiency and facilitate long-term growth. Despite a challenging revenue environment across the industry and additional complexities from the ongoing tariff and global trade negotiations, we successfully implemented numerous measures that we expect to enhance our operating profile and position us to improve operating performance across a wide spectrum of demand scenarios. In addition, we believe that we are now even better positioned from a competitive standpoint to take advantage of any improvement in market conditions. I'm proud of our team for executing on what were a variety of unique initiatives during the year and doing so both according to our expected time lines and while remaining committed to doing what we do best, delivering the high levels of service and on-trend products for which the Culp brand is known throughout the market and also ensuring that our global footprint continues to offer customers the most flexible supply chain in the industry. The recent completion of the restructuring plan we announced in May of 2024 is an excellent example of our team's execution on consequential and accretive activities during fiscal '25. That plan involved a lot of heavy lifting to significantly reduce the fixed cost base in our mattress fabrics business, including facility closures and consolidations to establish a strengthened U.S.A. manufacturing platform, along with the transition of a major product line, our Damask weaving fabrics to an asset-light strategic sourcing model, mostly with a long-term partner in Turkey. Corresponding details and outcomes from this initiative are covered on Pages 3 through 5 of our posted slide presentation. We essentially transformed the entire cost structure and manufacturing base of our mattress fabrics business and now have what we believe is a solid operating foundation for that business to better navigate even the depressed demand environment we continue to see across the mattress industry. The recent sale of our former facility in Canada in April provided a nice exclamation point to our completion of the plan, essentially 1 year from the date we announced it. Through this restructuring plan, we also reduced fixed costs in our upholstery fabrics business by transitioning our finishing operations in China to an outsourced model. With the uncertainty around global supply chains, tariff and cost impacts, we believe it is wise to deleverage fixed costs and lean more on the expertise of our long-term partners to continue our wide array of product offerings in upholstery fabrics. We continue to realize $10 million to $11 million in consolidated annualized savings through this restructuring plan, and we are pleased to see those benefits and related efficiency gains begin to take shape and impact operating performance in our mattress fabrics business, including steady progress throughout the year despite continued pressure on industry sales. The lower fixed costs and the resulting operating enhancements in our mattress fabric business, along with lower inventory markdowns, helped drive significant year-over-year improvement in our overall results for the quarter. Looking at our overall sales for the fourth quarter, while they were generally in line with our sales in the prior year fourth quarter, we are actually encouraged by that outcome given the well-publicized low demand environment and related unit volume challenges pressuring sales across the industry. Notably, we achieved a year-over-year sales increase in our mattress fabrics business during the quarter despite the industry consensus projecting a decline in overall mattress sales with a report issued by the International Sleep Products Association projecting a decline in units of around 11% or more for the March calendar quarter. We believe this provides some important context for our growth in mattress fabric sales during the fourth quarter and supports our belief that we are winning market share, particularly in key segments we are targeting in mattress fabrics and especially cut and sew covers through our strong relationships with major customers. Our mattress fabric sales growth is also a testament to our product development and design team's ability to stay closely aligned with current market trends and consistently deliver products that are well received by customers. And our revamped manufacturing base for mattress fabrics and covers, again, featuring a strong USA platform, complemented by production and sourcing capabilities in Haiti located on the Dominican Republic border as well as Turkey, Vietnam and China, provide our customers with valuable optionality and mitigation opportunities for global tariffs and trade risks going forward. In our upholstery fabrics business, demand trends in the furniture market segment continue to be historically low, and our sales in that business reflected those trends to a large degree during the quarter, particularly on the residential side. Our upholstery fabric sales were also challenged by several relatively unique factors, including the recent tariff changes affecting China produced goods. The fabric manufacturing and supply chain for the residential furniture business to a large degree, is dependent on China and the frequent shifting of tariff amounts and enforcement policies occurring in our fiscal fourth quarter were debilitating to demand. Most of our customers stopped shipping containers as tariff rates were prohibitive, even above 150% in some cases for roughly a month, which, of course, meant we stopped shipping as well. Current tariff rates under review currently have allowed business to resume, but there is still uncertainty in the industry as to where it will all land. This uncertainty and lack of container shipments from the fourth quarter continues to pressure our business, at least as we look into the first quarter of fiscal '26. Additionally, the timing of the Chinese New Year holiday, which impacted pretty much only the fourth quarter rather than multiple quarters was a pressure to our sales as was the ordering cadence of a large residential fabric customer that uniquely front-loaded more of its total purchasing in the first half of fiscal '25. We do expect sales for this large customer to be more consistent quarter-to-quarter in fiscal '26, but the first quarter is likely to be a particularly difficult comp given the anomalous sales spike in the first quarter last year. Encouragingly, demand in our upholstery fabrics business, hospitality and commercial markets has remained relatively solid with our sales in that higher-margin area of our business growing to constitute approximately 42% of our total upholstery sales during the quarter. The team has done a good job of investing time and resources in those markets and developing relationships with key customers that we expect to continue to grow over time. The main drivers of our success in this area include the fabric business that we are selling into commercial markets and our roller shade production that we are selling into hotel installations, offices and other public spaces. Of note, I will comment that we also see first quarter demand pressure in the commercial area as many property owners delayed projects due to tariffs and the resulting product cost uncertainty. Our pipeline is healthy in the hospitality and contract segment. So a return to normalcy should be a solid tailwind for us. The overall market uncertainty created by the recent global trade and tariff- related actions is hard to overstate. I think our team has done a good job of reacting and making adjustments to our business in real time. But as I mentioned, given the high concentration of upholstery fabric manufactured in China and the current lack of viable options elsewhere, the tariff landscape puts significant pressure on an already depressed demand environment in the home furnishings industry, particularly again on residential furniture. Our diversified manufacturing and sourcing platform for mattress fabrics and sewn covers should continue to provide competitive advantages for us in this fluid environment. and we continue to emphasize our Vietnam operations to our upholstery customers and believe it will continue to grow in importance and increase volumes over time as the industry continues to look for alternatives to its current China-centric model. Looking at our upholstery business from a big picture perspective, our product line remains in style and on trend, and we are diversifying our supply base. We were pleased with customer reaction from the May Interwoven Fabric Show and expect to generate solid placements on retail floors. We are also pleased that our upholstery fabrics business has been able to operate profitably in the face of the extremely difficult home furnishings industry environment and the unique challenges from the tariffs. Now importantly, we are not done taking action to adjust our model for better adaptability and alignment with the volume pressure across the industry. We recently initiated a comprehensive effort to integrate our mattress fabric and upholstery fabric divisions into a single unified business. As part of this integration, which we are internally calling Project Blaze, we are consolidating facilities, relocating equipment and making other operational adjustments, all without reducing production capacity levels. While there is a significant cost reduction aspect to this initiative, it is heavily focused on creating synergies and scale efficiencies through cross-functional and shared management strategies. Above all, we believe it will result in a more agile and flexible organization, better equipped to respond to customer needs and market trends. A summary slide of the actions comprising this initiative are listed on Page 6 of the attached slide presentation. As part of this initiative, we made some recent changes to our executive leadership team that we believe will drive positive change throughout Culp and accelerate our transition away from the somewhat siloed approach that characterized our 2 stand-alone divisions. Mary Beth Hunsberger and Tommy Bruno, who previously served as the presidents of our 2 former divisions have both moved into key leadership roles with a company-wide scope. Mary Beth Hunsberger now serves as our Chief Operating Officer, tasked with driving efficiency and operational excellence across all of Culp. And Tommy Bruno now serves as our Chief Commercial Officer and is charged with ensuring that all of our product development and innovation, merchandising, marketing, sales and other customer- facing activities are designed to drive revenue growth. We are excited to see Tommy and Mary Beth impact Culp's success in their new roles without any divisional constraints. Another initial steps in the integration strategy includes the closure of our lease facility in Burlington, North Carolina, with operations there transitioning to a shared management and resource model within our Stokesdale, North Carolina facility, which we own. This facility consolidation is expected to generate approximately $2 million in annualized savings beginning in the third quarter of fiscal '26, and we believe that this and related actions will significantly enhance the operating profile of our upholstery business and position it to better navigate the challenges currently impacting the home furnishings market. Overall, we anticipate total annualized savings of approximately $3 million per year from this integration effort, which are in addition to the $10 million to $11 million in annualized savings achieved through our recently completed restructuring plan. In addition to the integration, we have also taken action to initiate price increases responding to the tariff landscape, which we expect to be helpful in softening the new tariff impacts when the prices are fully implemented after the first quarter of fiscal '26. The approximate annualized benefit of these price increases is expected to be $2.5 million and effective in our fiscal second quarter. We are pushing these prices through as expeditiously as possible, but the immediacy of the recent tariff measures does create a margin lag impacting our first quarter. We have done our best to navigate the situation in support of our customers, and we are grateful for our strong partnerships. This price action, which impacts both our mattress and upholstery businesses, coupled with the expected cost savings and synergy benefits of the integration initiative totaled $5 million to $6 million of annualized benefit, which again is on top of the $10 million to $11 million of annualized savings from the restructuring project we completed in fiscal '25. We are doing everything we can to improve performance in a tough demand environment, and our actions should bolster sales and operating performance as we move further into fiscal '26. Finally, as Ken will talk about in more detail, we recently took action to extend our credit facility with Wells Fargo for an additional 3 years. We are pleased to have this new agreement in place and the liquidity and financing flexibility it provides us to support our ongoing initiatives and fund our growth strategies. Our team's hard work in fiscal '25 has fundamentally transformed our business, positioning Culp to leverage synergies through centralized operations and a unified management team laser-focused on the home furnishings industry. This streamlined approach, which we'll continue to enhance and improve on in fiscal '26, strengthens our ability to adapt to varying demand scenarios and respond effectively to market changes. With that, I'll turn the call over to Ken.

Thanks, Iv. Here are the financial highlights for the fourth quarter. Net sales were $48.8 million and generally flat with our net sales in the prior year period of $49.5 million. The company reported a loss from operations of $2.2 million, which included $1.5 million in restructuring-related expenses as compared with a loss from operations of $4.2 million for the prior year period, which included $204,000 in restructuring expense. Non-GAAP operating loss for the fourth quarter was $704,000 as compared to a non-GAAP operating loss of $4 million for the prior year period. I'll comment in more detail on our segment sales and operating performance in a moment. Net loss for the fourth quarter was $2.1 million or $0.17 per diluted share compared with a net loss of $4.9 million or $0.39 per diluted share for the prior year period. Adjusted EBITDA for the fourth quarter was $559,000 compared to a negative $2.2 million in the prior year period. Our overall operating performance for the fourth quarter as compared to the prior year period benefited from continued momentum in the mattress fabrics operating performance, including significant improvement in operating loss from the prior year period driven by the cost and efficiency benefits derived from the restructuring plan. Operating performance also benefited from the continued profitability in the upholstery fabrics segment despite the lower revenue industry environment and tariff-related challenges I spoke to earlier and was also favorably impacted by lower inventory markdowns resulting from a change in our accounting estimates for finished goods inventory. For the full fiscal year, net sales were $213.2 million, down 5.4% compared to the previous year. Loss from operations for the full fiscal year was $18.4 million, which included $9.4 million in restructuring-related expenses compared with a loss from operations of $11.3 million for the prior fiscal year, which included approximately $676,000 in restructuring and related expenses during the period. Non-GAAP operating loss for the full fiscal year was $9 million compared to a non-GAAP operating loss of $10.6 million for the prior fiscal year. The improvement in non-GAAP operating performance for the year as compared to the prior year period was impacted generally by the same dynamics driving operating improvement in the fourth quarter. Net loss for the full fiscal year was $19.1 million or $1.53 per diluted share compared with a net loss of $13.8 million or $1.11 per diluted share for the prior year. Adjusted EBITDA for the 12 months ending the fourth quarter of fiscal 2025 was a negative $3.5 million compared to negative $3.4 million in the prior year period. Importantly, the effective income tax rate for the fourth quarter of this fiscal year was 10.5% compared with a negative 19.8% for the same period a year ago. The effective income tax rate for fiscal 2025 was a negative 2.1% compared with a negative 28.3% for the prior fiscal year. Our effective income tax rate for the fourth quarter and for the full fiscal year continues to be impacted by the company's mix of earnings between our U.S. and foreign subsidiaries with an operating loss in the U.S. and our China operations generated income that was taxed at a higher rate as compared to the U.S. Our cash income tax payments totaled $2.3 million for this fiscal year. Expected cash income tax payments for fiscal 2026 will not be given at this time due to the ongoing integration effort, tariff uncertainty and other drivers. Now let's take a look at our reporting segments. For the mattress fabrics segment, sales for the fourth quarter were $27.1 million, up 5.3% compared to last year's fourth quarter. For the full year, sales were $113.9 million, down 2.1% compared with the prior fiscal year. Sales continue to be pressured during the quarter by muted demand across the industry and related challenges from consumer spending and housing market trends. However, as Iv said, we are generally pleased with the sales growth in this segment given the overall industry consensus projecting declines as well as our ability to continue to win new business with larger customers. Operating loss in the mattress fabrics segment for the quarter was $217,000 compared with an operating loss of $2.9 million in the prior year period. For the full year, operating loss in the mattress fabrics segment was $5.2 million compared with an operating loss of $6.8 million in fiscal 2024. This improved operating performance for the quarter was driven primarily by higher gross margins attributable to lower fixed cost and operating efficiency improvements derived from the restructuring plan and the lower inventory markdowns I mentioned earlier. We were pleased to see operating performance in this segment improved consistently during the year with the improvement driven primarily by the same dynamics impacting the segment's operating performance for the fourth quarter. For the upholstery fabrics segment, sales for the fourth quarter were $21.7 million, down 8.9% over the prior year period. For the full year, sales were $99.3 million, down 8.8% compared to fiscal 2024. This sales decline was driven primarily by continued demand deterioration in the home furnishings industry pressuring our residential sales as well as lower comparable sales to the large residential fabric customer Iv mentioned earlier that uniquely concentrated more of its annual purchasing in the first half of fiscal 2025 and strategically managed inventory levels in the back half of the year. The market uncertainty from the recent tariff-related actions and the timing of the Chinese New Year holiday also hindered sales. Operating income in the upholstery fabrics segment for the quarter was $1.1 million compared with operating income of $975,000 in the prior year period. Our operating performance for the quarter continued to be pressured by lower sales. However, that sales pressure was partially offset by lower inventory markdowns I mentioned earlier as well as a more favorable mix of higher-margin hospitality contract sales and lower SG&A expenses. For the full year, operating income in our upholstery fabrics segment was $4.1 million compared to operating income of $5.8 million for fiscal 2024, with the decline driven primarily by lower sales, partially offset by lower inventory markdowns and lower SG&A expenses. Now I'll turn to the balance sheet. We reported $5.6 million in total cash and $12.7 million in outstanding debt as of the end of this fiscal year. The outstanding debt was primarily incurred for restructuring activities and to fund worldwide working capital. Notably, $2.8 million of the outstanding debt was attributable to the supplier financing arrangements in our China operations. Cash flow from operations and free cash flow were negative $17.7 million and negative $17.1 million, respectively, for the full fiscal year. As expected, our cash flow from operations and free cash flow during the fiscal year were pressured by operating losses and included $5.6 million in nonrecurring cash restructuring expenses. In addition, free cash flow was impacted by planned strategic investments in capital expenditures, mostly related to the mattress fabrics segment as we focused on restructuring that business. Generating free cash flow in fiscal 2026 will continue to be among our highest priorities and a key focus point throughout all areas of our company. Capital expenditures were $2.9 million for the year compared with $3.7 million for last fiscal year. This decrease stems from our strategic focus on projects targeting operating efficiency and future growth. Based on current expectations, capital spending for fiscal 2026 is projected to be in line with fiscal 2025 as we continue to tightly manage our cash and spend only as absolutely necessary. Based on current expectations, depreciation for fiscal 2026 is expected to be approximately $4.5 million. With respect to liquidity, as of the end of fiscal 2025, we had approximately $27 million, consisting of $5.6 million in cash and $21.4 million in borrowing availability under our domestic credit facility. Finally, as Iv mentioned earlier, we were pleased to be able to extend the term of our domestic credit facility with Wells Fargo on June 12 for an additional 3 years and at interest rates we believe are in line with the market. Subject to borrowing base limitation, this facility allows us to borrow up to $30 million and contains an accordion feature that could increase that amount an additional $10 million based on mutual agreement. We intend to continue utilizing borrowings only as necessary under both our domestic and foreign credit facilities during fiscal 2026 in connection with funding working capital needs and growth, integration and efficiency initiatives, and we will continue to aggressively manage liquidity and capital expenditures and prioritize free cash flow. With that, I'll turn the call back over to Iv to discuss your general outlook for the fiscal year 2026, and then we will take your questions.

Thank you, Ken. Due to the macroeconomic uncertainty and the fluid global trade environment that I previously mentioned, which pressured demand and resulted in suspended China shipments and minimal commercial flow for several weeks during the fourth quarter as well as the immediacy of tariff cost increases. We are not providing specific financial guidance and only limited annual guidance at this time. For fiscal '26, we anticipate year- over-year sales growth in our mattress fabrics business and for the sales pressure on the residential side of our upholstery business to continue. The cost and efficiency benefits of the recently completed restructuring plan are expected to continue to drive meaningful operating improvement as the year progresses, particularly as we move beyond the tariff-related sales and margin pressure impacting the first quarter. In addition, the fiscal '26 division integration initiative and related facility consolidation activity, along with the price increases I discussed, should further bolster operating performance, particularly as we get beyond first quarter. As Ken said, while we intend to continue to utilize borrowings if necessary under our credit facilities during fiscal '26, we will continue to aggressively manage liquidity and capital expenditures and prioritize free cash flow. Our expectations today are based on information available and reflect certain assumptions regarding our business and overall industry trends, the projected impact of restructuring and integration initiatives and ongoing tariff and market headwinds. Our expectations also assume no further meaningful changes from tariffs and trade negotiations. Thank you again for your time today. We appreciate your continued support and look forward to taking some questions. With that, I want to turn it back to the operator.

[Operator Instructions] First question today comes from Brian Gordon with Water Tower Research.

I guess first question, could you talk a little bit about the cadence of business across mattress residential upholstery and the commercial upholstery and fabrics side of the businesses?

Brian, you just mean the current cadence that we're seeing now?

Yes.

Yes. Well, kind of as we laid out in the script, I think we are pretty encouraged about mattress fabrics business. I think we've done some really nice job winning some share in both fabric and sun covers. And we see -- while not always linear like we want it to be, we see optimism and strength in the backlog for mattress fabrics and covers. I think we have a very solid pipeline in place on the hospitality side of our upholstery business, window treatments and fabrics. And again, some of those projects got delayed when the tariffs were at peak pressure, but the pipeline is there, and we're encouraged about that business. Residential upholstery has just been a slog. It's been tough through this demand cycle. We believe we're placing product very well. We just don't believe that things are turning at the retail floors at the level we want them to. So we're maybe a bit more muted on that portion of our business in the short term.

That makes sense. Do you have any sense on sort of like how tariffs specifically have been impacting the end customer demand across your segments?

Yes, it's a good question, Brian. It's funny. A lot of prices are being pushed through. We're going to be doing ours now. I think all prices that have been impacted from the suppliers to the manufacturers are just going straight to retail and being passed to the consumer. I'm not sure that tariff prices are driving consumer demand. I think there's so much uncertainty in the market where the inflation is, where interest rates are, tariffs are one piece of it, too. And it's just not top of mind for consumers today. I do also think on the furniture side, this season is typically a slower season anyway annually. So we just need to -- we're focused on getting through the summertime season and hoping that as we get to the fall, we see prices are pushed through, things are maybe normalized at least at the price level and the consumers will come back to the stores.

Yes. So I have a follow-up question, though, on the pricing actions. So you guys talked about $2.5 million in respect to that over the course of the year. What are the revenue assumptions though that are baked into those gains at this point?

Yes, it's a good question. We are not forecasting those revenue assumptions to get to $2.5 million are what we see today steady state. Obviously, that can be bolstered if things were to pick up, but we aren't banking on that. Those price increases are at steady-state revenue. And a lot of them -- a vast majority of those are on the mattress side that we see as we adjust our pricing in that business for fabrics and covers.

Okay. That makes sense. In terms of all the cost savings that you've outlined, and there's obviously several buckets. There's the restructuring that you first announced a year ago. There's the reorganization of the Project Blaze and then there are the price adjustments. If I try and think about how that's going to impact the bottom line quarter-by-quarter, if my arithmetic is right, we're going to see something like a gain of like maybe $2.5 million or so Q1 up to $4 million, maybe even $4 million plus by Q4. Is that logic right? Is that how we should be thinking about this?

You're speaking about the new actions or just the all actions combined...

All actions combined. Just trying to flip that to a quarterly benefit as we progress across '26.

Yes. I think you see in the -- in our fourth quarter, you see the start of the significant fixed cost reductions coming through from the mattress fabrics restructure. That should continue on pace. I mean that's done. We're really happy to have that behind us. The new actions we're talking about, the integration of the businesses and the warehouse consolidations and the price actions are all phasing in during Q2. So they start to impact Q2 and then they're probably very effective in Q3 and Q4.

Okay. And that's just timing...

We have leases that we have to exit. I mean -- so you start to generate some of the savings from those projects and from headcount reductions or consolidations that we may do to streamline. But when they're fully enact and done, it's the back half of the year.

Next question may be more for Ken. One of the things that you guys mentioned in the release was the change in your approach to inventory markdowns. Could you maybe explain a little bit what's going on there and how that impacted the quarter and how that might impact '26 as we move through the year?

Yes. Thanks, Brian, for the question. Yes, we -- it boiled down to -- we found that we were marking down our fabric for obsolescence too quickly in relation to the final price we were getting. I mean given the longer product life cycles, we're capable now of holding our full price a lot longer, which is great news for us because we're getting full value further down the road. And so that's a great testament to our fabric value. But in light of all this, we wanted to study our activity and make sure that we move our cadence of markdowns to better fit the actual prices we were getting. And so we looked at that, studied it and made some changes, and that generated a $1.7 million benefit in the quarter. Now looking ahead, we feel good about this. We feel it's the right decision, obviously, to get everything balanced. But looking ahead, that way going forward, we balance our markdowns with our pricing. We don't get ahead of ourselves and we don't get behind ourselves. So we can truly track things throughout the year and get a more consistent look at our performance and help us better manage our inventory.

Okay. That's very helpful. This is maybe another question for you, Ken. Given the macro environment and given liquidity and cash flow projections at this point, how aggressive are you guys going to be on the debt paydown side?

Brian, you know us, we are -- we will pay down the debt as quickly as we can. We've got -- obviously, we have the initiatives that we're funding. Priority, obviously, is getting -- making sure we have the working capital needs met around the world. That's always the highest priority. But any time we have a chance to pay down that debt, we will. And obviously, we've got -- with the new 3-year deal, we've got the flexibility to pull it as needed, but also we've got the flexibility to pay it off in both in the U.S. and China. So the answer to that is we will be as aggressive as we possibly can.

Brian, I might just stick in on Ken's tailgate him there. Some of the borrowings we have outstanding in China are just a good strategic play for us as we balance global working capital. They are, in some cases, some borrowings we just pulled because we could get it. It's a very low, very attractive rates. We can pay them back when we want, but we sometimes think in the uncertainty of the world, it's smart to just have some of that money available, especially as we operate our China business.

That's right.

Yes, certainly. I would agree with that. One final question maybe for you, Iv, and maybe for Tommy as well. What are the growth investments in terms of like new products and markets that you're going to be focused on prioritizing in '26? And where do you think, especially do you have the best opportunity to gain share? I mean it sounds like both hospitality and mattress on that side of the business would be maybe the bright spots for share gains.

Yes. We made a lot of comments in the script, Brian. The mattress fabric business, we have gone through a significant -- I mean, transformation is almost not strong enough word to change that model. We now have -- we have all the team we had with design and focus on product and a sales team, and we have a really preferred manufacturing model with a U.S. platform that's certainly desire today, complemented really well by global operations that can mitigate tariffs. We have ways to move that business to where customers want to be served. So -- and we've got a great platform for fabrics and for cut and sew covers. And we have deep relationships with strong customers, and we just believe there's opportunity for us to win share in a tough market. And then someday when that market performs better, we're really in a good spot. And just very happy about that, the mattress potential. Certainly not banking on a market recovery, but just thinking we have potential and we're building and planting a lot of seeds for the future. I think we're also excited a lot about the hospitality business. We have a great model. Our fabric -- sometimes I think investors don't realize how strong our fabric portfolio is to the hospitality market. We talk a lot about Read Window, and we're excited about draperies and roller shades and things like that. But the fabric piece of that business, we've got a new line. It's priced with better margins. It's just an exciting time to be in that space. Certainly got muted when everyone delayed some projects, but that's likely to be something we can be excited about looking forward. And then I don't mean to be too tough on our residential upholstery business because that's our foundation. We -- our company was founded on that. And we love that business. Our product line is as strong as it's been in a long time. I think we're placing it very well. We just don't see a lot of short-term demand in residential furniture. And we hope that changes. But -- and we're not going to stop doing it. We're just going to manage it cost appropriately and put resources through our new integration to the -- to where we think is growing right now. So I'm speaking for Tommy's commercial strategy, but that is where I think we're thinking. But we're not in any way trying to say we're not also working on residential upholstery because we are in a big way. We just are maybe thinking there's a lag for that recovery.

Yes. And that all certainly makes sense. And best of luck with the quarter.

Yes. Thank you, Brian. I appreciate your support, and we look forward to talking to you more.

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

Thank you, operator. And again, thank you for your participation and your interest in Culp. We appreciate everyone's time and look forward to updating you on our progress next quarter. Have a great day.