Material Sciences Earnings Call Insights: Gross Margins and Changing Costs

Material Sciences Corporation (NASDAQ:MASC) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Gross Margins

Steven Schwartz – First Analysis: I guess the first question is just around gross margin. In the second quarter, you had some unscheduled downtime and then, Cliff, you just mentioned you had a little bit in the third quarter as well, but really you saw 190 basis point sequential improvement in gross margin on a very little change in sales sequentially. So, is it just that there was less of this unscheduled downtime or were there other factors that helped get you that 190 basis points?

Start 2013 better than ever by saving time and making money with your Limited Time Offer for our highly-acclaimed Stock Picker Newsletter. Click here for our fresh Feature Stock Pick now!

James Pawlak – VP, CFO: The sales mix can have a dramatic change on just a point or two margin either way. We could have done better than 23.8% in the quarter, but once again we continued to have some productivity problems and some downtime, not just associated with equipment downtime, but also some of the product development efforts that we are doing at both Walbridge and Elk Grove Village this has led to some inefficiencies and things of that nature. So, it’s really not a big number for a point of margins, it’s only $300,000 I mean that we actually probably had a tough quarter in just scrap pricing and secondary sales that equal that. So, there is many, many factors that lead to that. Also, the second quarter has the July in it and July is a shutdown month, so it actually has – we did particularly have lower utilization levels in the second quarter when compared to the third quarter.

Steven Schwartz – First Analysis: You mentioned sales mix, so sales mix was more favorable in the third quarter than second quarter, am I hearing that right?

James Pawlak – VP, CFO: There could be numerous factors within the sales mix. I’d say probably it was slightly better. We’re comparing to prior year, we are obviously struggling with the fact that galvanizing and fuel tank volumes were down and those were pretty high utilization type product. So, we are struggling a little bit year-over-year. But with the second quarter, we probably had a little bit more of inefficiencies and downtimes, product quality issue than we had in third quarter, but we are still not where we want to be.

Clifford Nastas – CEO: Acoustical sales were about the same quarter-over-quarter but our coated products were up in the third quarter versus the second quarter. So, we had a little bit higher volume of the coated products.

Steven Schwartz – First Analysis: And then just as my follow-up, brake sales have moved around quite a bit, right, down in Europe now for a couple quarters, but up significantly elsewhere. Can you guys share with us what your share of total sales is to various brake applications and brake products?

Clifford Nastas – CEO: Steve, that’s kind of hard to say. We generally tend to look at things by region. We have a substantial share in the North American market, I’ll say probably greater than 35%, probably closer to 40% overall. And in Europe we are probably still in that 10% to 12% market share and growing. And in Asia our business tends to be more focused on the after-market and the OE but that is changing. And it’s just really hard to say with all the after-market manufacturers exactly what percent of the market we have. But I can tell you that both after-market and OE are growing at a very fast pace in Asia.

Steven Schwartz – First Analysis: Sure, you’ve had some nice results there. So, of your sales, what percent would you say there is – in terms of your – like that $30 million you did in the third quarter, $30 million in the second quarter, what share of that is to brake applications?

James Pawlak – VP, CFO: It’s roughly about 25% of our business.

Steven Schwartz – First Analysis: 25%?

James Pawlak – VP, CFO: Yes, it’s about 25% of overall sales in the quarter.

Changing Costs

Steven Schwartz – First Analysis: I think your filings are pretty clear with the changing costs in rent with respect to selling Elk Grove Village Plant 7, but are there any cost savings or different costs with having your staff work somewhere else, like (you don’t have fixed rents) or anything, is there…?

James Pawlak – VP, CFO: Yeah Steve, obviously the rental income that we’ve enjoyed over the last couple years is down in other income so it’s pretty easy to see. The costs associated with those facilities has been buried in SG&A. So, our costs are down in terms of depreciation and some real estate taxes and some of the other costs of running the building, obviously net of paying for the lease to then lease the facility. So the P&L impact, if you take the actual lower expenses and the lower income, our P&L impact for the quarter is only about 50 grand negative and the EBITDA impact is about maybe 250 negative for the quarter versus last year.

Steven Schwartz – First Analysis: But there are no costs with where you are moving everyone?

James Pawlak – VP, CFO: Because we were actually leasing the building, so there’s actual lower facility cost to owning the building, offset partially by higher cost to lease the office facility in the second floor of this building.

Steven Schwartz – First Analysis: That lease expense, which is new to you, is not significant, it’s not anything that…

James Pawlak – VP, CFO: Well, actually when you take into account the higher lease expense versus lower depreciation and other operating cost on the building to about a $200,000 quarter net savings in SG&A offset by the rental income that’s down below…

Steven Schwartz – First Analysis: Then one other one is Chrysler still the primary driver of your higher Quiet Steel body panel sales?

James Pawlak – VP, CFO: We’re up at most of the OEs that we serve in that market segment.

Steven Schwartz – First Analysis: Then just one last one, Cliff, can you just remind us of the technology behind the high strength steel, because you mentioned in the press release that that was continuing to gain traction?

James Pawlak – VP, CFO: The automakers to reduce mass as a matter of fact there was an article in the Wall Street Journal today on the front page talking about the OEMs, looking to lighter weight materials to reduce mass to meet the CAFE standards. Well, high strength steel is just one of the materials that they are looking at and essentially those materials are very difficult to process and as far as putting corrosion protection on Walbridge is one of the few lines in North America that’s facilitated to be able to process those high strength materials. So we are working with our mill partners to developing a cost effective robust coating process for those higher strength difficult to process materials.