Good morning, ladies and gentlemen, and welcome to the Lawson Products first quarter 2016 earnings call. This call will be hosted by Michael DeCata, Lawson Products' President and Chief Executive Officer; and Ron Knutson, Lawson Products' Chief Financial Officer. They will open the call with an overview of the first quarter results. There will be time for questions-and-answers. This call is being audio simulcast on the internet via the Lawson Products Investor Relations page on the company's website, lawsonproducts.com. A replay of the webcast will be available on the website through May 31, 2016. During this call, the company will be providing an update on the business as well as covering relevant financial and operational information. I would like to point out that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those described. In addition, statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change. Please consider the information presented in that light. The company may at some point elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so. I will now turn the call over to Lawson Products CEO, Mike DeCata.

Good morning, and thank you for joining our call. This morning I will comment on the quarter and our progress overall. Ron Knutson will provide more detailed review of our financial results for the quarter, and then we'll take questions. While we continue to experience general softness in industrial economy, demand seems to be stabilizing, albeit at a lower level than we saw during the beginning of 2015. With that said, all of our key metrics have improved. Sales increased 7.3% versus the fourth quarter with three additional selling days. Excluding oil and gas and FX, sales increased 1.8% versus the first quarter of 2015. Overall, ADS contracted 1.9% versus the first quarter of '15, but increased 2.3% versus the fourth quarter. Operating income and adjusted operating income improved sequentially. Gross profit percent increased from 60.2% to 60.9%, a pick up of 70 basis points versus the fourth quarter. Fill rates improved, backorders were reduced to record levels, we added 23 net new sales reps in the quarter versus 21 all of last year and inventories are starting to come down. We achieved these improvements in spite of continuing challenges, the weakness in the oil and gas industry continued, as is the ripple effect on industries supplying and supporting oil and gas. In addition, the general softness in the industrial economy put downward pressure on sales, resulting in the contraction of 1.9% versus the first quarter of '15. On the positive side, we completed our second small acquisition in March with the purchase of Perfect Products of Michigan, as a result we added four sales reps. Prefect Products is predominantly focused on the auto body segment similar to our Kent Automotive Division. We are also very pleased with the integration of our Western Canada acquisition completed in 2015. Sales, SKU…

Thank you, Mike, and good morning, everyone. As Mike indicated, the economic trends we experienced in much of the first quarter were consistent with what we experienced for March of 2015. As we work through a soft MRO environment, our strategy remains unchanged as we continue to invest in the company, in particular, in our sales organizations to be in a great position as economy improves. Let me review some of the highlights for the quarter. First, our adjusted operating income for the quarter taking into consideration non-recurring items improved sequentially to $156,000 from a loss of $72,000 in the fourth quarter, but did decline from year-ago quarter, as we continued our sales force expansion. Second, sales finished at $69.7 million for the quarter. This represents a sequential increase in our average daily sales of 2.3% over the fourth quarter, however, a decrease of 1.9% over the year-ago quarter. Excluding the impact of lower sales to the direct oil and gas customers and weaker Canadian exchange rate, sales increased 1.8% over year-ago quarter with one additional selling day in 2016. Third, gross margin percentage ended at 60.9% for the quarter, an improvement from 60.2% realized in the fourth quarter and more in line with 61.3% in Q1 of 2015. Fourth, we posted net income of $1 million or $0.11 per diluted share. And fifth, we had $10.1 million of available cash on hand and borrowings of $2.2 million under our credit facility. Now, let me share some of the details. As I just mentioned, we finished the quarter with sales of $69.7 million compared to $69.9 million a year ago and $65 million from the fourth quarter. The first quarter of 2016 had 64 selling days compared to 63 selling days a year ago and 61 selling days in the…

[Operator Instructions] And we can take our first question from Kevin Steinke.

I wanted to start off with I think, Mike, at the outset of your comments you talked about demand stabilizing, but at a lower level than maybe at the beginning of 2015. So if you could elaborate on that anymore, what you're seeing among your oil and gas customers here that there is still layoffs going on? But just expand on that I suppose and what you're feeling in the overall environment?

Yes, that's exactly what we're seeing. Oil and gas as we think probably stabilized at the current level. As you remember, the first quarter of last year was a bit stronger in oil and gas for the industry, including us. It fell off rather steeply starting in March, again, I'm talking about the industry in general, and we did as well in March, and then for the balance of the year. So that's kind of what we're seeing. And the oil companies, oil exploration and services companies have reacted through layoffs and reengineering their internal processes. Some of our largest customers have reorganized themselves to deal with that new reality. And some of our locations that has benefited us a little bit and stabilized, but at those same customers that's hurt us in other locations. So at the moment it feels kind of steady state. I think as we read the industry journals, it will take a little time even as oil prices rise, before exploration comes back into the market and things start picking up. But I feel like we've reacted well. We're supporting our customers. We have real close partnerships with many customers in that space. And so we're working with them during this difficult time, and they are rewarding us accordingly, again, in the context of lower volume. I keep coming back and I said in other context as well. As a maintenance supply and especially a consumable company, we are a direct connect to the usage of equipment. When you run your machines, they need to be maintained, and when you put your machines on idle and they don't run, they don't break. So we are a direct reflection of the state-of-the-market both in oil and gas, but across the rest of the industrial economy as well. We have seen stabilization. I think in one of the previous calls, I had mentioned that the number of customers is steady state. But we had seen last year that the order size, Q was the same and a number of items we were selling was the same, but the order size was going down, again, reflecting usage of equipment. We've seen a barely small pickup in that metric this quarter, which again says it was kind of flattening.

I guess, related again to oil and gas, you've been calling out or separating out the revenue impact from lower sales to oil and gas customers sort of last few quarters, and that did was cut about in half relative to the fourth quarter in terms of that negative impact. I mean, you think that something you'll need to keep calling out in the next three quarters of 2016 or now that you're lapping that initial downturn is that something that you maybe won't be calling out anymore or is it just you can't tell it right now?

What I would say is, is that, as Mike mentioned, we have seen some stabilization. Compared to the year ago, we were up against our toughest comps in the first quarter and it did stabilize a bit in mid-2015. What I would say is, is that the sales to the direct oil and gas customers in the first quarter were still less than what we realized in Q2 and Q3 of last year. So it somewhat depends. I mean, if we see a little bit of a rebound here in the second and third quarters in that segment, probably not as necessary to break that impact out separately. But we'll have to see how that plays out over the next couple of quarters.

I was just wondering, how much perhaps lower turnover played into that increased number of reps? And if you could talk about as you're a little further along in that new onboarding and training program, if that's benefiting turnover and contributing to the increase in rep additions?

We saw improvements in rep turnover through most of last year and we continue to make continuous, but small progress in rep turnover. We have accelerated the hiring. And what you'll notice is over the last couple of years, it's kind of lumpy. And part of that is process improvement, time to fully integrate people we've brought on. Just as a recap, you remember, and I think it was '13 we hired 49 net new reps; '14 I think it was 110; last year 21; and then so far this year 23. Part of that is the ability to successfully onboard them. We did employ Lean Six Sigma. We're doing Six Sigma project to be more prescriptive and structured and how we onboard rep. So as an example, now when we bring a rep on, firstly, the upfront process of interviewing them and having them ride along with reps before they accept the job continues. But now we have mobile apps, where we ask the reps every single day and every week to check off accomplishments that are prescriptive, the District Manager reviews that every week. And then prior to training, which is approximately six weeks into their employment with us, the Region Director has to certify that they are ready to come to training. So this more systematic approach gets them on a solid footing before they come to training in Chicago to fully embrace all of that content we're going to give them. And then after, for the next 90 days, there is a systematic process of making sure that they are demoing products correctly, understanding the lessons learned, and all of that seems to be a working for us. So there are a lot of moving pieces naturally, the economy is part of it, addition of all the reps. This puts a burden on our District Managers, because it's very time consuming from a District Manager's perspective. But the short answer is rep retention is continuing to improve slightly, we're hiring more, and we believe we're better able to make the reps that we're bringing on even more successful more quickly. Time will tell, of course.

I wanted to ask also quickly about the gross margin improvement, and you talked about the change in the inventory forecasting process and how that's starting to help you. I mean, is that something that can be a meaningful benefit to gross margin going forward beyond -- you talk about procurement opportunities and distribution center efficiencies and alike. Is this inventory process kind of just lumped into all that or is it something maybe a more meaningful step change to gross margin going forward?

So really I think what you saw in the first quarter was improvement from the fourth quarter, primarily driven by what I would almost call, almost call it, startup cost to get the system up and going, and for us to really work on balancing order size and so forth and moving some inventories around. The majority of that was incurred in the fourth quarter. So we did see a nice bump here in the first quarter. But what I would say is, is that most of the opportunity around that process will probably be more on the balance sheet side than running through the P&L from a gross margin standpoint. So as Mike mentioned, and as you can see on the balance sheet, we have seen a slight decrease in inventory in the first quarter and we would expect that that decrease would be accelerated here in the second quarter. So we're still working through some of the balancing between optimizing our order size, balancing out the labor that we're incurring within the distribution centers against how much inventory or positive cash flow or working capital impact that we can have on the organization. So I wouldn't look for there to be significant step changes up in our gross margin percentage relative to the inventory forecasting system, and some of those efficiencies that we will gain continue to be offset by just some of the pricing pressures that are out in the market, and particularly, with some of our larger accounts.

And then just one last question for me. It looks like another nice tuck-in acquisition completed, and you talked about how the first one you're pleased with the integration. And you mentioned again that perhaps smaller acquisitions are springboard to larger ones. I guess, at what point would you feel comfortable doing a larger one? And I know timing of that would be difficult to predict, but I guess how many small ones would you have to integrate before you feel like you have the process down and you have the platform to maybe do a little bit larger one.

I guess the short answer is we feel good right now. We will likely continue, of course, opportunistic what comes our way. And since we started focusing on the smaller ones, it's more likely then not, the next one or two will be smaller, but we are capable today of doing the larger ones. We've learned a lot from these first two and feel good about our integration ability, and understanding the appropriate process, that's we'd really like to do the integrations as flawlessly as possible, and it's quite a high standard. But the short answer is, we are looking today for larger ones and we will continue both opportunistically to look at small tuck-in ones that are important to us strategically for various reasons, but we are also prepared today to look at larger ones and engage those discussions as well. We do monitor also the ones that we've completed. And we are seeing really nice evidence in SKU count, and sales expansion, and satisfaction of the sales reps that we bring on. And the owners and founders of these companies, we want to go back and make sure that it's a flawless integration from their perspective as well and that any promise that we've made or any implications we've made to them are being executed flawlessly from their perspective, because for us, an acquisition is really about acquiring the sales reps and making them part of our team, welcoming them on to our team. And along those lines, I just want to -- a quick thank you to our sales team who have embraced the new sales rep team mates and helped coached them and make them feel part of the family all of that needs to be extended to even larger acquisitions in future.

We'll take our next question from Ryan Cieslak.

This is Ryan Mills on behalf of Ryan Cieslak. Trying to get a better sense of how sales trends are trending so far in the second quarter. If you could provide some more color on that how it compares to margin on a year-over-year standpoint?

As I had in my prepared comments of what our monthly sales were, in January, February and March, not a lot of shifting around; very consistent. February was down a little bit. We saw a little bit of a pickup in the month of March. And I would say that April has moved kind of sideways with that, not dramatically up or down. We still have a couple of days here left in the month and typically later towards the end of the month is typically stronger for us. But I would say, what we've seen for April is pretty flat, which where we were in the first quarter.

Our next question is from Larry Pfeffer.

Just sticking on that ADS progression, could you give the year-over-year for what January, February, March were?

So let me pull that, for the month of January, we were down slightly. Month of February we were essentially flat, and month of March we were down a little bit as well. So we don't report monthly numbers on an ongoing basis, other than at the end of the quarter. So we didn't see a lot of shifting going on compared to a year ago, but really January and March were the months that would have pulled us down in the aggregate that 1.9% for the quarter.

So April turning sideways sequentially, maybe year-over-year still sticking in the same kind of flat to down very low single-digit?

That's fair, yes.

And then just looking at the rep count obviously was a great number in the quarter. How do you feel like your progress through the rest of the year? I mean, I know, you talked about a thousand has been go for a while, how do you feel about moving towards that number?

We are going to continue -- we're feeling great about the caliber and quality of people that we're hiring. It's a little limited by our abilities to successfully onboard, and as we're putting a lot more effort into their first couple, three, four, five months on the job, it's a little bit gated by the ability of the District Managers to fully train them and our own ability to fully train them. It's likely that we're going to continue probably not the whole year at this pace, but it's likely that we're going to continue for the foreseeable future this year hiring a bunch of rep. I don't know what the endpoint will be, but we're very aggressively hiring reps, because we feel good about turnover and our ability to integrate them successfully. So while we're prepared to come forward with a number, it's certainly going to increase significantly over the year.

And then, Ron, I know you mentioned maybe not all the costs are fully ramped on the SG&A lines in the first quarter. What do you think a good run rate is for looking into Q2 and for the rest of the year?

It somewhat depends, Larry, on Mike's comments regarding the number of sales reps that we hire. I think putting those costs aside, we feel pretty good about where we are from an overall G&A expense and from a selling expense. So if you look at those two lines, excluding the investments that we're making into the hiring process, our overall cost throughout the organization are relatively flat, actually down just slightly. So it does somewhat depend. And as Mike and I have mentioned on previous call, there is an investment in the first couple of years when we hire on a sales rep. So to the extent that we become more aggressive in bringing on additional sales reps that number may tick up a little bit. But I think in future quarters, that's what you will see is probably the most variability within our expense line is how far we're pushing on the expansion of sales team. And then certainly the other piece that's variable is the commissions that we pay to our sales reps, which tie directly into our sales volumes.

We'll go next to Charles Hoeveler.

Actually my question has been answered.

And we can go to a follow-up from Kevin Steinke.

In terms of housekeeping here, as we look through the next three quarters of 2016, is there any difference in the number of business days or selling days versus the prior-year quarters?

Yes, Kevin. So the second quarter is the same as what it was in '15, the third quarter is the same as well. I think we lose one day in the fourth quarter, I believe its 60 days in Q4 this year versus 61 a year ago. But other than that the second and third quarters should be consistent.

And it does appear we have no further questions at this time. I'll return the floor to Mr. DeCata for any closing remarks. End of Q&A

Great. Thank you. Thank you, again, for your interest in Lawson Products. I'd like to take this opportunity to thank our teammates. Their continued commitment to excellence and process improvement is transforming our culture and enabling us to do a better job in servicing our customers. We continue to invest in the future. Our value proposition and service excellence is important to our customers and more important than ever. We're working with customers to improve their productivity and our customers have demonstrated a royalty during these challenging economic times. I have 100% confidence that we're making good progress and that we'll make more progress for the balance of 2016. We'll continue to add sales reps, we'll continue to enable our sales reps to be more productive and we will continue to make acquisitions. Thank you, again, and have a great day.