Good morning ladies and gentlemen, and welcome to the Lawson Products Second 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, then there will be time for questions and answers. This call is being audio simulcast on the internet via the Lawson Products Investors 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 just 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, Michael DeCata. Please go ahead.

Good morning and thank you for joining the call. This morning, I’ll comment on the quarter and our overall progress. Ron Knutson will provide a more detailed financial review of our results for the quarter and then we’ll take questions. Similar to the first quarter, we continued to experience softness across the industrial economy. Having said that, we remain committed to our three-part growth strategy: adding sales reps, enabling the sales force to be more productive, and pursuing acquisitions. We continue to make investments in all three elements of our strategy. We’re highly confident that we’re on the right track. Our investments will generate profitable growth and improving EBITDA margins. Second quarter proved challenging as we invested in the company while the industrial economy remained weak. Sales were roughly flat versus the first quarter and down 1.9% versus second quarter of 2015. While oil prices have rebounded a bit, our oil and gas customers are still under real pricing pressures. Excluding oil and gas and FX, sales decreased 0.3% versus the second quarter of 2015. Our operating profit was breakeven and was significantly impacted by the addition of sales reps, which we expected and have discussed previously. We added 60 net sales reps in the quarter versus 23 in the first quarter and 21 all of last year. This brings our total to 1,020 sales reps. Gross profit percent increased from 60.9% to 61.3%, a pickup of 40 basis points versus the first quarter. Product margin has remained stable for the past several quarters. Customer service rates continue to improve while at the same time bringing down inventory by $1.4 million year-to-date. We maintain our commitment to our growth strategy in spite of the challenges because of positive reinforcement that we receive from existing and new customers. This is evidenced…

Thank you, Mike, and good morning everyone. As Mike indicated, we continue to experience a soft MRO market which has limited our growth over the past few quarters. Despite these conditions, we continue to invest in the business, in particular by adding more sales reps and making acquisitions that will provide future opportunities to expand and increase our geographic coverage in the large, fragmented MRO marketplace. 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 $687,000 from $156,000 in the first quarter, but we did decline from the year-ago quarter as we continued our sales force expansion. Second, sales finished at $69.3 million for the quarter. Average daily sales were essentially flat with the first quarter, however decreased 1.9% over the year-ago quarter. Excluding the impact of lower sales to the direct oil and gas customers and the weaker Canadian exchange rate, sales decreased 0.3% over a year ago with the same number of selling days in 2016; however, we are up 0.8% on a year-to-date basis. Third, gross margin percentage ended at 61.3% for the quarter, an improvement from 60.9% realized in the first quarter and a slight decrease from 61.9% in the second quarter of 2015. Fourth, we had $8.9 million of available cash on hand, borrowings of $175,000 under our credit facility, and additional availability of $31.9 million under our existing facility. Now let me share some of the details. As I just mentioned, we finished the quarter with sales of $69.3 million compared to $70.7 million a year ago and $69.7 million from the first quarter. The second quarter of both 2016 and 2015, as well as the first quarter of 2016 had 64 selling days. As compared to…

[Operator instructions] We can take our first question from Ryan Cieslak. Please go ahead, your line is open.

Hey, good morning, Mike and Ron.

Morning Ryan.

Morning Ryan.

So the first area I wanted to focus in on is discussing or talking about the general environment, clearly things are tough out there right now. Maybe Ron, if you can provide some color on how July has looked so far relative to what you saw coming out of the second quarter; and then secondly when you think about the back half of the year, it sounds like you guys are going to slow sales rep expansion, the comps should get significantly easier, but it sounds like the environment essentially could remain difficult. How should we be thinking about the top line in the back half of the year? Can we actually see some modest growth, or is it more an environment that on a year-over-year basis sales might continue to decline?

Yes Ryan, so let me comment on a couple of items that you touched on. First of all, relative to the back half of the year, you’re right in that the numbers get a little bit easier from an overall year-over-year comparison standpoint, and in particular in the oil and gas area where we saw flattening out in 2015 as we entered into late Q1 and into Q2, so it gets a little bit easier on a year-over-year comparison. Relative to the first few weeks of July, we’re down slightly, kind of low single digits versus the second quarter. Partially probably we’ve got the holiday in there for July 4, but we continue to see a little bit of the sideways movement, call it, as we’ve entered into the third quarter here.

I can jump in relative to our forecasted plans for sales rep expansion. I think as we’ve talked about in previous quarters, this quarter we brought on a large number of people, and after we do that - and you’ve seen this in previous years as well - there’s this period of bringing them in, settling them, getting them trained. There’s a real burden on our district sales managers to ride along with reps and get them pointed in the right direction, so there is this natural ebb and flow of hiring and then slowdown. We will continue to hire, and there are many more market expansion opportunities, territory expansion opportunities everywhere, so this is not in any way the end of the line. It’s sort of the ebb and flow you’ve seen from us in previous years. As we’ve mentioned both in our prepared comments and as well for the last couple quarters, it does take a little time when we start with a greenfield rep for them to build a book of business, and that’s the reason that we are committed to staying this course. There is a little cost upfront, but over the longer term, we are quite confident that this pays dividends and builds the business for the future, so we are reinforced in our commitment to invest in growth of the company especially considering the operational excellence, the progress we’ve made in all aspects of the supply chain, the distribution centers, so feeling very good about having built a really state-of-the-art infrastructure that can accommodate growth, and now we are very much committed to staying the course as it relates to growth.

Okay, great. That’s really good color, I appreciate it. I would agree - I think the ongoing expansion and scaring up the business is important longer term for you guys. So Mike, thinking into next year, I know it’s still early, but it sounds like, again, moderating the pace of sales rep expansion and hiring, is there maybe a way of thinking about the type of sales rep expansion we should put as a placeholder into next year? Obviously a big year this year that you guys have executed on, but what type of growth would we expect to see potentially in this environment into next year from a sales rep expansion standpoint?

I think first and foremost, we’ve made great progress relative to the people we’ve brought on board. We want to maintain these numbers and get those people successful. While it’s way early for us to think about our operating plan for 2017, it’s likely it will moderate a little. It will not likely come to a stop, but it will moderate some. I think we’ve talked over the last quite a number of quarters about our three parallel growth strategy - add sales reps, sales rep productivity, and continue to grow through acquisitions. That is absolutely still in place, so again way ahead of our operating plan, we’ll want to put a little more emphasis on sales rep productivity, enabling our sales reps to do better through the use of tools and technology, maybe service reps. There are a lot of things that we’ll consider to bolster that middle leg of our strategy, which is productivity, but the long and short of it is - again, ahead of the plan - it’s likely you’ll see a little slowdown, but not zero for next year.

And then Mike, as the business model works itself through and the hiring does slow, the expectation as I recall should still be that you guys have the opportunity to expand margins even in this type of environment into next year as the productivity improves. Is that a fair way of thinking about it, or do you actually at this point need the environment to pick up to help you out there?

Well, when we think about gross profit margins, we’ve got opposing forces. First, our supply chain activities continue to be fruitful. We’re working closely with suppliers to lower cost of goods sold, but you know, we’re splitting hairs here. We are not trying to raise price in the marketplace, so from a product margin perspective that has been stable and we fully expect that it will continue to be stable. So gross margin, it’s also probably pretty close to steady state - it might go up a little, it might go down a little, but that really focused on operational excellence, it focuses on freight, it focuses on labor productivity and distribution centers. So the long and short of it is our gross profit is likely to be more or less stable for the foreseeable future.

But from a maybe operating margin or EBITDA margin standpoint into next year, is the expectation you can continue to work that higher, even in this type of environment, as you slow the sales rep hiring and you continue to lever investments you’ve made the last couple years?

Yes, and I’ll ask Ron to comment as well, but as the reps that we’ve brought on continue to march along that maturation curve, we think of reps almost as this concept of backlog, because as they march through their tenure with us and go from zero to three months, to one to two years, to five years, they consistently build a book of business over time, so that process will continue. Again, our focus is very much on top line growth, and with relatively fixed costs - G&A costs, capacity in our distribution center - it’s all about top line growth, and that just naturally brings us better EBITDA dollars and margin.

I would just add on to Mike’s comments in that I think we’ve discussed this on previous calls, is that it generally takes a sales rep about two years before they become accretive to the organization’s bottom line, so in the first year there’s a heavier investment than the second year, so as Mike mentioned, as they build out their book of business, less of a financial impact from a negative standpoint in year two than year one. So to the extent that we slow down the net hiring or the net adds of sales reps in 2017, we should have a little bit of a lift from that just because there’s probably more upfront hiring costs and onboarding costs in ’16 than what there will be in 2017. Also to Mike’s point, we achieve a higher volume of sales level in their second year than their first year.

The other thing I could just add on is because of the way we’re pursuing acquisitions, and again every acquisition has been sequentially larger than the previous one, albeit their small, but they are doing exactly as we had hoped they would. They’re validating our thesis, they’re showing us how to do very accretive and successful integrations. But again, because predominantly what we’re doing in an acquisition is we’re acquiring sales reps and their customers, so what you’ll likely see is a larger percentage of sales reps being acquired than hired, or let me say it will be more balanced - we will continue to hire and we will continue to bring sale reps on through acquisition. They look very similar after your first day of the acquisition - if you’re an employee for one day, you look like all other sales reps, with the exception of the fact that you now have a whole lot more products to sell, and that’s exactly what we’ve seen in our acquisitions, very satisfied and happy sales reps.

Okay, that’s really good color. The last one for me and then I’ll jump back into the queue, just a housekeeping question for Ron. In the press release, you had called out [indiscernible] on the freight side of things in terms of the cost there. It sounds like an incremental labor cost from the acquisitions you made. Is that more [indiscernible], more unusual in the quarter, or how do I think about those [indiscernible] in the second half of the year?

Yes Ryan, those are a little bit more unusual for the quarter, I would say, in that as you saw, our gross margins improved sequentially from Q1 into Q2, but they came down--I mean, they were brought down a little bit because of some of the upfront cost. So you know, on the freight side, we manage that closely relative to our freight expense versus the freight charges to some of our customers, and then on the inventory side relative to bringing over some of the acquisitions, that will come and go as acquisitions take place. Certainly it’s part of the overall integration cost, so that—[indiscernible] to comment on what it will look like going forward. It really depends upon when the acquisitions will fall in each of the quarters.

Is there a way to think about it, just from a quantification standpoint, or it’s hard really to pin that down at this point?

Yes, I would say a couple things. One is both on the freight side as well as what I would say still from additional labor dollars that we incurred, both on the acquisition side as well as continuing to refine and work through our inventory forecasting system, on a combined basis those make up 90% of the 60 basis point decrease that we saw from a year ago.

Okay, perfect. Thanks guys, I appreciate it.

Thank you.

Ladies and gentlemen, I’d like to remind you that it’s star, one to ask a question - star, one. We’ll go next to Kevin Steinke. Please go ahead, your line is open.

Good morning, Mike and Ryan. So the rep hiring number obviously was a great number, and looking back historically, I believe that the largest number of reps you’ve added in the quarter since you started this accelerated hiring plan over two years ago. Is there anything in particular you would highlight that enabled that accelerated rep hiring in the quarter?

Yes, there were a couple of things. We’ve changed our processes a little bit. I think I’d mentioned quite some time ago—you know, I think a lot of people have not a comprehensive understanding of Lean Six Sigma. It’s broadly applicable to all kinds of processes, and in wave one - now, that happened in middle of 2013 - the rep hiring process was one of the processes that we focused on. We’ve seen a real compression in the period to fill an open position, so sometimes it takes a little time for a Lean Six Sigma project to really kind of infuse itself into your culture, but we are certainly seeing the benefit of that work that was begun some time ago. The other thing that is a little different for us, we for the first time in the last six or 12 months have used job fairs, which have been very effective for us, a way for our district sales managers and region directors to meet candidates in person. It’s kind of in parallel with doing a paper analysis and reading resumes and all the other things that we would already do. So it’s more about continuous process refinement, but as we do more and more of this, we’re getting better and better at it. I guess I would characterize many functions of the company where we’re being contemporary and sort of exercising those muscles in a way that we haven’t several years ago. We’re trying to be sharply focused across the board on analytics, process improvements, and real engagement of the sales management team - they’ve done a great job for us. Hats off to our district sales managers and our HR team, and everybody who has sort of rallied together to jump on that goal. But in a broad way, I would just say it’s characterized by a company focused on process excellence and an analytical approach to all processes. You’re just seeing this in one process, but this is also happening in many other processes.

Kevin, the other point I would add to that is that - and we’ve covered a little bit in the previous questions, is really about maintaining that growth that we achieved in the second quarter, and certainly there will still be hiring going on within the organization relative to any type of attrition that takes place, but going forward when we talk about expansion of the sales force, it will probably moderate a little bit on a net basis but clearly as we experience turnover, we’ll be replacing and backfilling those positions.

Okay, understood. It’s good to hear that those initiatives and process improvements that you’ve put in place are taking hold. I also wanted to ask about just the overall environment, the softer MRO environment relative to hiring. Do you think that’s having any impact on your ability to hire, say—I mean, in terms of maybe people at smaller competitors are looking around and saying, Lawson looks like a strong company and it might be a good place to join in this softer environment. Is there anything in your pipeline you’re seeing that maybe people are seeking you out in this softer environment?

Not specific to the second quarter, but I would say that is a trend we’ve seen over the past several quarters as the company has gotten stronger, as we’ve become higher profile, there’s more media coverage from an operational perspective. Our outreach relative to social media, all of these things again coming together, I would characterize another process improvement area that’s having a very positive effect. I don’t think our basic ratios of attracting small competitor reps versus large competitor reps versus reps that have industrial selling experience but not necessarily from our industry, I don’t think those ratios have fundamentally changed. I continue to believe that that is real validation. That’s a very personal thing when you decide your family is better off working for us than competing against us - I like hearing that every day, so feel really good about that. But we haven’t seen a particular change in the first or second quarter - this has just been something evolving over the last couple quarters, and I hope we become more attractive every day, both to employees and as well people, companies looking to join us, acquisitions. But let me reinforce, for us an acquisition is more like an invitation to join us than the connotation of what that word acquisition means.

Okay, very helpful color. You talked about your reinforced commitment to invest in the business, even in this softer environment. Can you just touch on what’s reinforcing that commitment, if you see the company taking market share, and also given that you’re investing in this softer period, if you feel like you’re really poised to outperform the industry and gain even more share as overall market conditions improve.

Well you know, the reinforcement that we get are things like picking up new strategic accounts. We picked up a couple of new strategic accounts. We continue to penetrate existing strategic accounts. Government has now turned positive - we mentioned that last quarter, and more positive today. Now, it is predominantly municipal and state governments. Federal is still soft for us, but being replaced - and the net is positive - for our government sector. Kent continues to grow really nicely. You know, we talk about value added and differentiation, differentiation and the way that customers genuinely recognize the differentiation. As an example of that, we recently launched a real effort and an initiative around aluminum, and without getting into too much detail, you would think something as simple—how different could aluminum body panels be fro sheet metal or steel body panels? We’re training and teaching our customers and providing consultation to customers that teach that something as simple as using sandpaper or a grinding wheel on steel, and then using that same grinding wheel on aluminum is going to absolutely destroy the paint, so these are things that are not widely known in the industry and customers come to us for that kind of consultative problem solving and differentiated value add. So I think all of these are things that we continue to reinforce, we continue to invest in, we train all of our people, both the new reps who come in. And now—then even [indiscernible], I mentioned in my comments us sharing best practices through our own internal social media. A number of our sales reps share best practices with each other. All of this is making us more productive and more valuable to our customers, so we’re really excited about where we are and where we’re going, and customers provide us a lot of reinforcement to stay the course.

Okay, fantastic. Ron, just on the performance-based comp, I don’t know if you can quantify what the impact was year-over-year. You talked about last year accruals being reversed, and also I guess is that something we should be cognizant as we move into the second half of the year here, that year-ago performance-based comp was lower and you might have some higher accruals this year?

Yes, I think, Kevin, we basically would anticipate that we’d be relatively flat for the second half of the year. As you pointed out, it was really a reversal that took place in 2015 that kind of gave us a benefit a year ago, so we were up against a tougher number. So we’re not anticipating that on a go-forward basis for the next couple of quarters. We would expect those to be fairly lined up and not any major swings from quarter to quarter.

All right, fair enough. Can you quantify what the impact was in the second quarter, or--?

Yes, so the change versus the year-ago quarter was about $500,000 on operating income.

Okay, that’s very helpful. Okay, that’s all I had for now. Thanks for taking the questions.

Sure, thank you.

As a reminder, it’s star, one to ask a question. We’ll go next to Larry Pfeffer. Please go ahead, your line is open.

Good morning gentlemen.

Morning Larry.

Morning Larry.

So one of your competitors had recently mentioned that they were seeing some small distributors starting to lay off people really for the first time since the recession. Are you seeing that in your recruiting efforts, and then the second part, are you seeing the smaller guys a little more willing, outside of just your internal improvements, but are you seeing a higher willingness out there to listen on the acquisition front?

On the first part of your comment, I’m not aware of that trend in the industry. We haven’t seen disproportionate layoffs, not that I’m aware of, anyway. Relative to your second comment, maybe, but I would attribute more of the—you know, the folks we’re talking to, acquisition candidates, there might be some part of our discussion is precipitated because of that, but I think the more likely driver is the more successful we are, and as well the more successful the acquisitions we’ve made and the fact that the founders, owners and employees of those acquisition companies are very pleased and satisfied with how the process has gone from literally inception through today is also helping us. So you know, you get a good reputation for doing what you promise to do and doing what you communicated in your early discussions, I think all of that helps us. I don’t know—you know, I guess the economy might have some influence, but I’d like to think that the bigger influence is just good performance on our part, consistency and very high integrity in the process.

Got you. Now that you’ve got a couple deals under your belt, and I know you obviously have some excess capacity from a physical plant perspective, it’s something we’ve kind of talked about before, how do you feel about your overall bench strength on the human capital level and how you think the organization evolves as you start to layer on more acquisitions?

Yes - absolutely great. Could not be happier. The team has rallied. We’ve used internal resources across the company. People have volunteered to participate in the integration and the analysis. Again, the first three acquisitions have done precisely what we would hope that they would do. They’ve helped teach many, many people in the company how to do an integration, what to look out for, even mundane things like a cross-reference or switching out back plates on bins and cabinets. All these little things are the difference between a really smooth integration and a rocky one, so we feel great about the human capital and I’m just grateful for an incredible number of people that have stepped up and volunteered and taken on a broader responsibility for the integration work. It gives us real confidence in our ability to do more and larger acquisitions, which of course has always been the goal. These small ones were a means to an end. The goal has always been to do the larger ones. I will caution that for those who have done a lot of acquisitions out there, there are a lot of false starts and it’s a pretty inefficient process, where you might talk to five, 10 or 20 candidates to end up with one coming across the finish line. That’s just the nature of acquisitions in any industry, and of course we experience that as well. But we certainly have the capacity, the knowledge, the financial resources to execute the plan as we’ve laid it out.

Thanks for the insight, Mike, and best of luck in the quarter, guys.

Thank you.

Thanks Larry.

It does appear we have no further questions. I’d like to return the program to Michael DeCata for closing remarks.

Great, thank you very much, and thanks for everyone joining the call. We feel like we’re well positioned to realize the gains from the investments we’ve made over the last few years. In this difficult economy, we enable our customers to prosper, servicing their consumable MRO needs while minimizing their consumable inventories. It’s very important, and it speaks to our sort of high-intensity, vendor-managed inventory services. Our customers recognize the value we bring. One of our customers, quoting Chris Banks from Tandet NationaLease, our Lawson rep got to know our business and is well integrated into our operation. Lawson isn’t just a vendor; they’ve become a strategic advisor to our maintenance shop. Lastly, I’d like to thank our dedicated employees. Our customers depend on you every day and we appreciate your hard work and dedication to customer service. Thanks again to everyone joining the call. Have a great day.

This will conclude today’s program.