Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Chad Boland - Raymond James
Chad Boland - Raymond James
Regarding gross margin, extraordinary impressive job even with a modest increase given the declines in volumes that we’re seeing right here, as we look out into the fourth quarter so just to summarize I guess we should expect a better benefit from the price increases as those have had more time to flow through, lower volume sequentially but at the same time more difficult raw material cost environment, so we should expect gross margin to be down sequentially in Q4, is that right?
Jeffrey Ackerman
First off in the fourth quarter we do expect gross profit margin to decline, and that’s consistent with our historical trends. However there are some additional factors impacting the fourth quarter. Based on the increases we saw in the cost of feeds stocks during the third quarter we will see increased raw material prices when the pricing mechanisms that I referenced, when those reset in the fourth quarter.
Also wanted to just bring you back to another comment, on those material costs, at the end of the second quarter when we spoke last time about 90 days ago, we had expected an increase in material costs of 10% to 12% to occur by the end of this fiscal year. So sequentially a 10% to 12% increase in costs. That now looks to be about 14% to 15% based on those feed stock costs and indices that we saw during the third quarter.
We’re going to work to try and mitigate the impact of these cost increases. We’re working with our suppliers to reduce costs and then we’re also developing more cost effective designs and wherever possible we’re trying to substitute some lower cost materials while improving the feel and quality of our products.
The change in these costs have actually opened up some other opportunities for us that were not, up to this point, were not possible.
Chad Boland - Raymond James
Given the pullback that we have seen at least in the spot prices of oil and scrap steel for instance, if we assume those prices stick around, maybe give or take 5% or 10% of the levels that they’re at right now, at what point given the contracts and price mechanisms that you have built in, at what point will we expect to see some moderation in those costs?
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