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GSE Holding Inc (NYSE:GSE)

Q3 2013 Earnings Conference Call

November 15, 2013 10:00 AM ET

Executives

J. Michael Kirksey – Chief Financial Officer

Charles A. Sorrentino – President and Chief Executive Officer

Daniel C. Storey – Vice President, Chief Accounting Officer and Corporate Controller

Analysts

Jon Tanwanteng – CJS Securities, Inc.

Brian P. Drab – William Blair & Co. LLC

Rob W. Stone – Cowen & Co. LLC

Saagar S. Parikh – KeyBanc Capital Markets, Inc.

Jim Giannakouros – Oppenheimer & Co., Inc.

Matt F. Sherwood – Cooper Creek Partners Management LLC

Operator

Good day, ladies and gentlemen. And welcome to the GSE Environmental Third Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this call maybe recorded. I would now like to introduce your host for today’s conference, Mike Kirksey. Sir, you may begin.

J. Michael Kirksey

Thank you, Mary, and good morning, everyone. By now you have seen a copy of the press release for GSE’s third quarter 2013 results. If you have not, a copy is available on the Investor Relations portion of our website.

Joining us today on this call are Chuck Sorrentino, President and Chief Executive Officer; and Daniel Storey, Senior Vice President and Chief Financial Officer.

Before we begin, I’d like to remind you that some of the comments made on today’s call are forward-looking statements. These statements are subject to the risk and uncertainties described in the Risk Factor section of the Company’s Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. Actual results may differ materially from those described during the call.

In addition, all statements are made as of today and the company does not undertake any responsibility to update any statements based on new circumstances or revised expectations. Also non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the table attached to our press release.

Before I turn the call over to Chuck, I would like to say that my time at GSE has been very rewarding. I’ve been offered a CFO position at another company here in Houston, that I feel is best for me and my family. I will say the management team here is excellent and I am extremely pleased that Chuck has accepted the permanent CEO role. He is the breath of fresh air for the GSE team and his capabilities increased my confidence in the future of GSE.

For your addition information, the 10-Q we filed yesterday was prepared by Daniel, myself, and the rest of our team and I’ve signed the certifications accompanying that filing.

With that I’d like to now turn the call over to Chuck Sorrentino.

Charles A. Sorrentino

Thanks Mike and good morning everyone. I’d like to take this opportunity on behalf of all the GSE stakeholders to thank you Mike for your service to GSE and in particular for making sure that you had a succession plan in place and allocating the ample time to assure a smooth transition. We wish you the best.

Well a lot has transpired since our last conference call. Most recently our Board has asked me to move from Interim position to permanent CEO and I thank the Board for this opportunity.

Additionally, Daniel Storey will be joining our executive team as he has been promoted to Chief Financial Officer replacing Mike. I am thrilled that Daniel has accepted his new position as CFO. He has a strong financial background from spending several years at HP and various senior level accounting assignments throughout their network.

As you can see from the press release, we’ve had a significant churn in the business from our 2013 first half running rate. In fact, we made as much adjusted EBITDA in quarter three of this year as the entire first half of this year. Those churn is a result of a number of initiatives that the management team as taken.

Let me highlight some of these. We implemented an SG&A reduction that yields approximately $45 million annualized when netted against anticipated 2014 headwinds. These savings resulted from reduced headcount, lower professional fees and ancillary expense reduction.

The next initiative is streamlining our regional business models. We started by targeting Europe and we are now moving to the Americas as we look to reformulate the business model in each market.

Examples of actions taken are territory realignments, headcount optimization, productivity improvements, incentive plan changes and dedicated accounting assignments.

Europe is the first example of this business realignment and the early returns are excellent. We made $3.4 million in adjusted EBITDA in the third quarter which compares to $2 million loss in the first half of 2013. I believe the fix is working.

Next is the SynTec integration. We completed the SynTec acquisition earlier this year and as of October 1, transition their business on to our system. We are now in the process of continued sales force training, customer service expansions and the early stages of manufacturing integration.

Furthermore, we have added new geogrid and erosion controlled products for our mining environmental products to our existing array of infrastructure products and we anticipate seeing benefit in the first half of 2014. Additionally, I expect margins from this acquisition to favorably impact our business.

Let’s move to product diversification. We are introducing new products for the oil and gas industry in the fourth quarter of this year. Additionally, two new products for the mining industry will also be introduced in the fourth quarter of this year. These latter products will have longer sales to station cycles as they will need to move through layers of specifying engineers over the next several months before we see any meaningful result.

Additionally, we are excited about new advantage product adoptions in Europe as we have been working with specifying engineers for several months. Furthermore, in late fourth quarter of this year, we expect to begin shipments of a major mining project in Asia, subject to improving weather conditions.

The last initiative for today’s discussion is capacity expansions. In the third quarter, we had a production capacity in Thailand to meet our growing needs in Asia. When fully utilized, we anticipate revenue increase of approximately $15 million measured in today’s business environment.

Our new China production facility remains on schedule and we expect to begin commercial shipments in the first quarter of next year. All of these capacity additions will amount to approximately 20% increase when they ramp up to full production.

As you can see, we have made significant progress in the quarter and look to continued success with product and service diversification, while the company continues to optimize expense management and working capital.

Now I would like to introduce Daniel Storey. Daniel?

Daniel C. Storey

Thank you Chuck and good morning everyone. First I just wanted to say that I am excited about the opportunity to serve as GSE’s Chief Financial Officer. My previous role as Chief Accounting Officer for the company, I have had the opportunity to build my knowledge of GSE financial and operational activity. As I step into my new role, I look forward to continuing to work with the leadership team to execute our business strategy.

Before I cover our third quarter business results, I wanted to comment on our current financing initiatives. As previously reported, in July, we engaged in an investment bank to assist us process of raising additional unsecured mezzanine indebtedness or other subordinated additional capital.

With the help of the investment bank, we have been seeking to secure a complete refinancing of our first lien credit facility which had about $172 million outstanding as of September 30.

To-date, we are continuing to work with the investment bank or existing lenders and other interested parties to complete the refinancing by the end of the year. As of September 30, company was in compliance with all required debt covenants.

Based on current facts and circumstances at the time of our 10-Q filing and in accordance with U.S. GAAP requirements, we reclassified the outstanding balance under this facility from long-term to current as of September 30. To reiterate, company’s objective is to complete a full refinancing by the end of the year and the management team is very actively engaged and involved in the process of accomplishing this objective.

Now turning to our third quarter results, our reported results for the third quarter were as follows: total revenue was $118 million, down 3% versus the prior year; gross margin was 11.6%, down 5.8 points; adjusted EBITDA was $7.5 million; and adjusted net loss in the third quarter, which is adjusted for non-recurring items was $1.8 million or adjusted loss of $0.09 per fully diluted share.

As we communicated last quarter, we have implemented a cost reduction plan, which includes headcount reduction, streamline of our European operations and other cost control measures. We expect these actions to generate approximately $4 million to $5 million in net annualized savings. SG&A expense was down $1.8 million in Q3 versus the prior year when adjusted for non-recurring restructuring charges, professional fees and other non-recurring items.

We saw significant improvement in Europe/Africa business during the quarter. Adjusted EBITDA of $3.4 million compared to the loss of $2 million for the first half of the year, as Chuck previously noted. Despite lower volume this improvement was driven by higher gross margin and lower SG&A expense, which resulted from productivity improvement and cost reduction actions.

The Latin America and Middle East regions delivered strong results with significant revenue growth in higher gross profit. Asia Pacific revenue and gross margin was down during the quarter due to lower business volume in Australia and difficult weather conditions, which delayed shipment of a very large order in Southeast Asia.

Finally, North America revenue was up slightly, while gross margins continue to be affected by competitive pricing pressures in the region. Given the occurrence of certain triggering events during the quarter, including a declining stock price and projected continued challenges in North America, we were required to complete an interim assessment of goodwill in accordance with U.S. GAAP. Based on the results of goodwill impairment test, we recorded a non-cash goodwill impairment charge of $25.2 million related to our North America reporting unit.

In addition, we assess the realizability of our U.S. deferred tax assets and based upon projections for U.S. taxable income, which include our unallocated corporate SG&A expense and interest expense we recorded a impairment or allowance of $6.6 million.

Interest expense increased $1.9 million due to higher interest rates into the non-cash write-off and deferred financing cost, both resulting from the Sixth Amendment to our First Lien Credit Facility as well as increased debt levels in Asia-Pac in support of our new China facility.

Now turning to the balance sheet, as of September 30, we had $18.7 million in cash. Comparing to the 12/31/2012 balance sheet, our accounts receivable were down $7.5 million due to improved collections. Inventory was up $14.7 million and accounts payable was up $12.8 million due to the seasonality of our business as the comparison period of December falls in our slow period of the year.

PP&E increased due to capital expenditures of $15.6 million related to additional lines in Thailand and Egypt and construction of our new manufacturing facility in China. Long-term debt increased $9.8 million primarily due to China plant construction and financing and incremental borrowings against our First Lien Credit Facility during the first half of the year.

Before I close, I think it’s important to note that while our business performance was down year-over-year, we did see strong improvement in Q3 relative to the second quarter of this year. On this sequential basis revenue was up 9% led by Europe/Africa growth of 24% and North America growth of nearly 6%. Further, gross margins began to stabilize, dropping only 0.6 point with Europe/Africa gross margins improving nearly nine point.

SG&A expense declined $2.7 million when adjusted for non-recurring items due to cost reduction actions previously noted. Finally, as we close the quarter our backlog was approximately $97.6 million versus $91.2 million in the prior year.

With that, Mary, I’ll hand back to you, so we can open to questions.

Question-and-Answer Session

Operator

Thanks. (Operator Instructions) Our first question comes from Jon Tanwanteng from CJS Securities. Your line is open. One moment please.

Jon Tanwanteng – CJS Securities, Inc.

Can you hear me?

Operator

Your line is open.

Jon Tanwanteng – CJS Securities, Inc.

Can you hear me now?

Charles A. Sorrentino

Yes, we can hear you.

J. Michael Kirksey

Yes, we can hear you, Jon.

Jon Tanwanteng – CJS Securities, Inc.

Thanks for taking my question guys. Just wondering why gross margin has actually declined quarter-over-quarter, if you had an improvement in utilization. What’s the normalized level there after you finish up your restructuring?

Charles A. Sorrentino

Jon, I think you’ll notice that if you read the Q that the gross margin in U.S. dropped quarter-over-quarter and that was more than the improvements in the other parts of the world. So I think the overall gross margin drop you saw was primarily related to North America.

Jon Tanwanteng – CJS Securities, Inc.

Okay. And do you expect any kind of normalization in that market going forward at all?

J. Michael Kirksey

Yes, I think we do, Jon. We’re seeing the market stabilize somewhat and it’s our expectation that it will.

Jon Tanwanteng – CJS Securities, Inc.

Okay. And then just the same question on SG&A. What is the normalized level once you finish all your restructuring efforts?

Charles A. Sorrentino

Jon, you heard Daniel say that this quarter was about $9.9 million, that’s on annualized basis that’s $40 million, a little bit under. I think you can take that as kind of a run rate. Of course next year there will be some headwinds as Jeff alluded to. There will be some wage inflation and other inflation in there, but right now we’re at kind of a $40 million run rate number.

Jon Tanwanteng – CJS Securities, Inc.

Okay. Thanks. And then, maybe can you just talk a little bit about your end markets broadly a little bit, maybe landfill and then mining and then some of the new efforts you’re in like fracking and coal ash, how do you see demand across all the segments?

Charles A. Sorrentino

Fracking is going well. Mining is going well. Waste containment is okay. We’re seeing growth in Asia-Pac, Europe is responding well, and as Daniel mentioned, North America sequentially has shown growth.

Jon Tanwanteng – CJS Securities, Inc.

Okay. Thank you.

Operator

Thank you. Our next question comes from Brian Drab from William Blair. Your line is open.

Brian P. Drab – William Blair & Co. LLC

Fourth quarter outlook, you mentioned the large project in Southeast Asia. Could that project or anything else in the outlook possibly result in a departure from the typical seasonality that you see in the fourth quarter, which has typically caused for a somewhat softer result in fourth quarter compared with third?

Charles A. Sorrentino

No. No, Brian. We’re expecting normal seasonality in the fourth quarter.

Brian P. Drab – William Blair & Co. LLC

And just to be clear, that would mean on the revenue line we would expect sequential decline from the third quarter?

Charles A. Sorrentino

Yes, that’s the historical pattern. Yes.

Brian P. Drab – William Blair & Co. LLC

Yes, okay. Thanks. And then, just want to make sure I understand a little bit better the outlook for gross margin. Just going back a year or so go gross margin was in the high-teens. You’ve talked about some of the initiatives here the thing that you're doing that get the gross margin backup. It is high teens gross margin a target that you still have in your sights or is that something that at this point given the pressures in North America looks a little aggressive.

Charles A. Sorrentino

I think given the pressures in North America it looks aggressive Brian near-term.

Brian P. Drab – William Blair & Co. LLC

Okay. Something longer a target that could be possible in the longer term?

Charles A. Sorrentino

We certainly have – our goals are certainly to improve that long-term and a variety of things some of which, I mentioned today, product diversification is in tact, acquisition the advantage – with the increase in the advantage products. We have changed compensation programs, incentive programs in North America to ramp up the commission for advantage products versus our everyday products. So we're taken a lot of actions that are headed in the direction – or certainly are directed towards improving gross margin and frankly improving sales and all of that, most of that is through product diversification and as I said incentive changes.

Brian P. Drab – William Blair & Co. LLC

Okay. And then just lastly maybe in North America, what is your biggest challenge right now. Which end market is the most challenged and what has changed in the competitive landscape there over the last year or so?

Charles A. Sorrentino

Well, in North America the biggest end market challenge is – right now is mining and what has changed in the last year is, there has been some capacity additions in the marketplace by competition. And in fact that’s the primary reason for the pressure on the gross margins.

We are doing a number of things to offset that. I mentioned to you that the changes in the incentive plan and the reorganization of the North American salesforce and the realignment of the salesforce also, we are also looking at taking advantage of our lower resin costs in the U.S. versus outside of the U.S. and we began exporting from the U.S., our capacity.

So one strong advantage, we have versus the competition here is that we have a global salesforce and we can search business globally and then reallocate it accordingly to where we have production capabilities. And right now that is working out very well in the U.S. where we have a material amount of cover capacity in the U.S. dedicated to our export business.

Brian P. Drab – William Blair & Co. LLC

And sorry if I can just ask one more follow-up to that and the waste containment market in North America is where I would have guess that you’re seeing more pressure given that just historically a more commoditized market. And then in the mining market, my understanding is a lot of your product offering is little bit higher on the specification spectrum and are you seeing competitors coming to market with the more sophisticated type of product or is it more on the commodity type product in mining that you're just seeing the pressure?

Charles A. Sorrentino

Well the mining business is just because it is half a little bit the containment business that you mentioned we realized that pressure on that and my answer was, what's the differential, what's the change in the environment, so the waste containment business has always been pressured in recent years certainly.

Brian P. Drab – William Blair & Co. LLC

Okay so the competitive challenge in North America just to be clear is really more in the waste containment and the end markets challenge that you saw more recently is just in the mining market?

Charles A. Sorrentino

Yes.

Brian P. Drab – William Blair & Co. LLC

Okay. Thanks very much for taking my questions.

Charles A. Sorrentino

Yes, thank you.

Operator

Thank you. Our next question comes from Rob Stone from Cowen and Co. Your line is open.

Rob W. Stone – Cowen & Co. LLC

Good morning, gentlemen. I wanted to follow-up a little bit on the concept of capacity. You mentioned I think that part of the pressure on price is competitors adding some capacity, you yourselves are adding capacity in certain locations, so is there a mismatch between industry capacity and demand that’s acute in particular regions or is it related to specific products, trying to understand the over and under on the impact of excess industry capacity? Thanks.

Charles A. Sorrentino

The capacity that we have added and are adding are in markets in which we are experiencing good growth and expect significantly more growth over the long term. The capacity that exits in North America – as our capacity has – we have been here forever, but we have had competitors add capacity in the last 12 to 15 months, so the mismatch is that there has been more capacity added in the U.S. at the same time, our capacity has remained relatively constant here. We are adding capacity in Asia and in Egypt and we have added, so that’s kind of the summary globally.

Rob W. Stone – Cowen & Co. LLC

Okay. And I know it’s premature probably to talk about final terms and conditions while you are still working on a refinance, but do you have a sense of the range of rates that might be available on that as you are looking to do the refinancing? Thanks.

J. Michael Kirksey

I think it’s just best to leave the comments about refinancing to what Daniel had mentioned, that’s as much as we can release at this point in time.

Rob W. Stone – Cowen & Co. LLC

Okay, fair enough. Thank you.

J. Michael Kirksey

You bet.

Operator

Thank you. Our next question comes from Saagar Parikh from KeyBanc. Your line is open.

Saagar S. Parikh – KeyBanc Capital Markets, Inc.

Hi, good morning.

Charles A. Sorrentino

Good morning.

J. Michael Kirksey

Good morning.

Saagar S. Parikh – KeyBanc Capital Markets, Inc.

First off, you mentioned that you have finished your restructuring in Europe and that’s helped margins year-over-year and you are going to move on and start doing that in North America now, can you remind us exactly what you did in Europe and how much cost you intend to collar marking?

Charles A. Sorrentino

There is a variety of things that we did. I’m also through the things that we did are substantial amount of SG&A was removed. We made major productivity improvements in addition to that we are able to secure new business, substantially more new business. So there is a variety of things that came together as confluence of events that have substantially increased our profitability and our outlook in Europe.

Saagar S. Parikh – KeyBanc Capital Markets, Inc.

And then with the initial signs that the European economy is starting to get better, have you seen any indication that your European competitors that had been pricing low in North America have started to pull back a bit or no change there?

J. Michael Kirksey

We haven’t seen any change.

Saagar S. Parikh – KeyBanc Capital Markets, Inc.

Okay. And then the last question on my part and I thank you for taking my questions; it’s really on account of the 90 million to 100 million pounds of capacity that you guys have coming on line in 2013. I know you mentioned Egypt, Thailand and China, can you give us a break out and just remind us of that 90 million to 100 million, how it’s going to break out for those facilities?

Charles A. Sorrentino

Yes, 18 million in Egypt, in 18 million in Thailand and 44 million in China. That’s in pounds.

Saagar S. Parikh – KeyBanc Capital Markets, Inc.

Okay, perfect thank you.

Charles A. Sorrentino

Yes.

Operator

Thank you. Our next question comes from Jim Giannakouros from Oppenheimer. Your line is open.

Jim Giannakouros – Oppenheimer & Co., Inc.

All right, good morning, gentlemen.

Charles A. Sorrentino

Good morning, Jim.

Jim Giannakouros – Oppenheimer & Co., Inc.

Just on Europe, to better understand the puts and takes on the margin improvement, how much is isolated to gross margin there that’s sustainable? I know that you mentioned that you may have either entered more attractive areas or secured new business there that’s more attractive. Can you speak to that and if this gross margin that you achieved in 3Q if we should be thinking that that’s sustainable?

Charles A. Sorrentino

Well, we can’t promise anything or commit on anything, but I see no reason at this point in time that we should doubt a sustainability of current performance in Europe. Having said that anything can change, it’s a dynamic business environment globally.

Jim Giannakouros – Oppenheimer & Co., Inc.

Can you speak to the specifics as to where you are targeting I know that historically you have been predominately a municipal southwest in Europe. I mean where are the other focus areas that you have your sales force kind of trying to penetrate going forward?

Charles A. Sorrentino

I think probably best if we pass on that question. Okay, for competitive reasons.

Jim Giannakouros – Oppenheimer & Co., Inc.

Fair enough. And on the Asian margin in your Q, you did talk about increased manufacturing costs, curious if those can you give a little more granularity and describe what’s going on there and will they persist in the coming quarters. Just trying to get a grasp on gross margin trend in Asia where I would have anticipated.

Charles A. Sorrentino

Well, those are couple of things in Asia with respect to the gross margins. The plant startup cost in Thailand was a new line. And secondly, we had a product dispute with a customer and that has also contributed to our lower gross margin. So those two things are contributing to the lower gross margin, both of which we expect to be corrected.

Jim Giannakouros – Oppenheimer & Co., Inc.

Got it. Okay and one last one, if I may. Coal ash regulation, we’re hearing that final ruling maybe coming down from EPA in the next few months. Curious if you can just actually comment to that end market? Do you see an acceleration in the coming quarters? And also historically I kind of isolated your commentary on the North American opportunity, curious to hear if you are gaining any traction there outside of the U.S.

Charles A. Sorrentino

The coal ash opportunity remains a significant long-term opportunity for our company. In terms of when the regulation occurs and if the regulation occurs, I don’t think we should speculate that. We have an excellent system. We have an opportunity not only in the U.S. but to take the U.S. technology globally and that’s certainly our long-term intend. Legislation will accelerate or help – jump start that business but even without legislation we think we have a viable product offering, and I might add a viable global product offering and we expect to aggressively pursue it.

Jim Giannakouros – Oppenheimer & Co., Inc.

Thanks very much.

Charles A. Sorrentino

You bet.

Operator

Thank you once again. (Operator Instructions) Our next question comes from Matt Sherwood from Cooper Creek Partners. Your line is open.

Matt F. Sherwood – Cooper Creek Partners Management LLC

Hi, guys. Good morning.

Charles A. Sorrentino

Good morning, Matt.

Matt F. Sherwood – Cooper Creek Partners Management LLC

Just to a sort of big picture question, I guess if you look at your EBITDA, it seems like you’re unlikely to hit covenant levels that you just renegotiated last quarter which is typically not the best scenario, but then that your bigger tone you sound very optimistic about the opportunity and what’s going on behind the scenes to improve margins and get EBITDA back to historical levels. So can you sort of help reconcile what success looks like and what’s giving you confidence on there?

Charles A. Sorrentino

Yes, Matt. Big picture wise, if you look at the first half of this year and compare to the first half of last year, the first half of this year was a little bit more $7 million in EBITDA last year. It was around $23 million. There’s three main components that caused that demise or that drop-off. Number one was the European situation, number two is the North American capacity additions and number three was the SG&A increases that the company continued with during the first half of this year. So we’ve addressed all of those. Over the last 16, 17 weeks, we’ve addressed all of those. We have action plans in place for corrective action on every front.

I mentioned some of that. We talked about the European fix. That was the first one we went for and that is working well. Certainly the early indication suggests that it’s working very well. Last year in Europe we made $6 million in the first half. In this year we lost $2 million, so there’s an $8 million differential. And now we’ve got Europe back on track. So that’s a significant fix. And as I said, early indications are very favorable.

The North American capacity problem additions is also one that we’ve addressed and I mentioned to you that not only are we reconfiguring our North American sales force and drive our incentive plans towards advantage products, higher gross margin products, well we have in many cases a proprietary position. In addition to that, we are allocating our North American capacity more for export and we feel that’s certainly advantageous right now because of the lower natural gas prices and it offers us the favorable resin raw material cost.

And the third item, third cause of that fix is the SG&A expenses that were up substantially higher in the first half of this year than the prior year, for that matter our prior years. And we have addressed that by a significant reduction in SG&A across the board. So those are the main items or the main reasons why a performance slide in the first half and those are the things that we’re addressing. And I will add that we continue to address all of those items and continue to look for increasing opportunities.

We haven’t talked about Latin America, but that’s another area that we’re looking at in terms of improving our performance and I’m very encouraged by the ability to have an infection point in our business in the third quarter. Well, we’ve actually turned and had a major infection point and I believe that we’re on a positive road, we’re on a very positive road and then going forward we have a number of things that I haven’t mentioned because we’ll talk about it after we’ve had some success with them. But we haven’t been a major inflection point, I mean the fact that we made more money in the third quarter than we made in the entire half, I think is a statement to that effect.

Matt F. Sherwood – Cooper Creek Partners Management LLC

That’s great. And then, I guess you talked about seasonality. Just on the revenue side, do you think that there’s – just how should we evaluate, just a view [ph] from the outside that the inflection is continuing given the seasonality in the business? And I guess on that note, there are large orders that you referenced, I think could have a material swing depending on when it delivers.

Charles A. Sorrentino

I’m sorry. I did not mean to imply that there was a material swing. I’m just saying that it starts shipping. This order will go out over many, many months. Okay.

Matt F. Sherwood – Cooper Creek Partners Management LLC

Okay.

Charles A. Sorrentino

All right, it’s not a single one shipment. Thank you for asking that so we could clarify that. In terms of the seasonality, last year, in 2012 our seasonal – fourth quarter, 100%, we had an index of 100% in the third quarter. In other words, our sales in the fourth quarter essentially equaled our sales in the third quarter, okay. That is an anomaly. In addition to that that scale inversed in the fourth quarter of last year carries very high gross margins associated with it. So we expect going forward that normal seasonality will return to the business and last year was an anomaly.

Matt F. Sherwood – Cooper Creek Partners Management LLC

Right. On the flipside though your North American gross margins, I think someone referenced on the call, have been unusually low. So when you look at the three buckets of improvement that you referenced, it does seem like the year business has turned quite dramatically. The SG&A is, I mean, incredibly good sequentially, but North America, just from the outside, it’s hard to see the improvements that you’ve discussed. Just looking at the third quarter the point in time when should we start to sort of see the…?

Charles A. Sorrentino

Well, let’s talk about the process here because what we’re doing is putting emphasis on our advantage products with higher-margin products for North America and that’s a longer term sale. It’s a 12 to 24-month sales gestation cycle. By the time we go in and see the specified engineer that time we get a purchase order. Those are just approximate timeframes. So there’s not a switch that we can flip immediately to improve gross margins.

Now, the good news in all that is that as difficult and as time-consuming as that is it presents a barrier, essentially a barrier of entry to other people that don’t have the proprietary products and the advantage products. And it repositions us to North America as an engineered products company and that’s the direction that we’re going.

Matt F. Sherwood – Cooper Creek Partners Management LLC

Great. So hopefully it seems like we do have the right team in place now. Thanks a lot.

Charles A. Sorrentino

Thank you.

Operator

Thank you. I show no further questions in the queue. And I’d like to turn the conference back to Mr. Chuck Sorrentino for closing remarks.

Charles A. Sorrentino

Well, thank you everyone for joining us on our conference call today. Have a good day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does concludes the program and you may all disconnect at this time.

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