Mike DeCata - President and Chief Executive Officer Ron Knutson - Chief Financial Officer.

Jack O'Brien - CJS Securities Alex Paris - Barrington Research Beth Lilly - Gabelli & Co Mitchell Scott - KDI Capital Partners Brett Scarbrough - Luther King Capital Management.

Good morning ladies and gentlemen, and welcome to the Lawson Products Third Quarter 2014 Earnings Call. This call will be hosted by Michael DeCata, Lawson Products’ Chief Executive Officer, and Ron Knutson, Lawson Products’ Chief Financial Officer. They will open the call with an overview of the third quarter results.

There will then 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 Web site lawsonproducts.com. A replay of the webcast will be available on the Web site through November 21, 2014.

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 the 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 the call. First I’d like to ask you to bear with me. I'm a little bit under the weather today which you might hear in my voice. We appreciate your interest in Lawson Products, and we're excited to share the progress with you today.

As we've done in previous calls, I will first comment on three main areas, growing top line sales, continued operational improvements and the drive toward improved profitability. Ron Knutson will provide a financial update, and then we'll take questions. First let me say we're very pleased with the progress this quarter.

Sales for the quarter at 74.1 million were up 8.6% over a year ago and ADS was also up 8.6% versus a year ago and 2.8% over the second quarter. Our sales team continues to drive results. We ended the third quarter at 894 direct sales reps with 88 additions though September.

We are on track with the previous guidance of 15% to 20% net new reps but mostly likely we’ll end up closer to finishing at 15% increase. We are focused on the balance between the resources spent on hiring new reps and as well making sure new reps are successful. I’d like to spend a moment discussing our enhanced on boarding process.

All the new reps go through extensive field-based and headquarter-based training.

They spend time with other sales reps and their district managers in the field then they come to Chicago for an intense week of product and process training and they begin the long and systemic process of gaining the product knowledge, knowledge of the customers’ needs and knowledge of the Lawson managed inventory process.

We ask our sales reps to become subject matter experts and anticipate the needs of their customers. Additionally we’re seeing improving productivity of our existing base of over 800 sales reps, excluding reps that joined in the last 15 months. Sales of existing reps were up approximately 7.3%.

We anticipate that we will continue to aggressively add sales reps during 2015. We continue to see improvements in many of our daily metrics. Back orders, line service levels and order service levels are all improving. Next I would like to comment on Lean Six Sigma, we’re continuing to implement changes brought about by our first five Wave 1 projects.

We’ve seen improvements in all five areas. This approach to systematically improving processes is spreading beyond the confines of the five formal projects. For example the folks in our mailroom working with their colleagues to redesign invoicing as a result they say 700,000 printed pages annually and approximately $50,000.

This is 700,000 pieces of paper that customers don’t need to get. This is an example of Lean Six Sigma becoming part of our culture. Three weeks ago we began our next five Wave 2 projects.

They range from a systematic and quantitative approach to sales rep on boarding which I refer to a moment ago to the sales and operations planning process which targets inventory effectiveness. We’ve seen great enthusiasm across the company to participate in Lean Six Sigma projects and Lean Six Sigma teams.

We’re very pleased with our financial results for the quarter. Ron will share more details but let me point out that our adjusted operating income of $2.2 million was up 25% from a year ago and we consider this a significant accomplishment. Gross margins have stabilized despite the increase in strategic accounts.

This is positive reinforcement that our customers value the service and products that they receive from us. We are also seeing increased support from our suppliers and a willingness to explore new approaches to improving productivity.

Expenses continue to be managed tightly; we continue to make smart investments in our business and allocating our capital to achieve revenue growth. Additionally we continue to focus on streamlining our processes across the value chain from suppliers through to customers. This manifest itself an improving customer productivity.

It is important to note that our distribution network is capable of significant volume growth without any additional investments in brick-and-mortar. Now that we have divested our non-core operations we are able to focus on our core MRO business.

Lastly we are confident that our value proposition remains strong, we’re seeing broad based growth from large and small customers. Fundamentals of the business are strong allowing us to make investments to grow the company. Looking forward we have hard work ahead of us.

The fourth quarter only has 61 selling days versus a traditional 64 selling day quarter. However our systematic progress continues with plenty of positive reinforcement along the way. Now, let m e turn it over to Ron Knutson for a detailed financial review..

Thank you Mike and good morning everyone. As Mike indicated we are very pleased with our financial performance in the third quarter. We are clearly realizing the benefits of our previous investments and have established a solid platform for growth to the company.

As you can see from our results we are beginning to leverage our current infrastructure which was not in place a few years ago and are confident that it will help us grow the company going forward. Let me review some of the highlights for the quarter.

First, our adjusted operating income taking into consideration non-recurring items was 2.2 million for the quarter up 25% over a year-ago. Second, sales finished at 74.1 million for the quarter during which there were 64 selling days.

This represents an increase in our average daily sales of 8.6% over the year-ago quarter and an increase of 2.8% over the second quarter of 2014. This is on top of the second quarter increase of 5.5% over the prior year. So top-line growth in 2014 has been strong for us this year and demonstrates the success of our current strategy.

And third, with our improved operations and our close management of working capital we ended the quarter with no outstanding debt under our credit facility. Now let me share some of the details. We finished the quarter with sales of 74.1 million compared to 68.2 million a year-ago and 72.1 million from the second quarter.

The third quarters of both 2014 and 2013 as well as the second quarter of 2014 included 64 selling days. For the quarter average daily sales increased 8.6% over year-ago and were up 2.8% sequentially over the second quarter. This is on top of the sequential 2.6% second quarter 2014 growth over the first quarter.

This also represents the fifth consecutive quarter that our sales increased versus a year-ago. Both the increase over year-ago and over the second quarter was primarily driven by productivity from existing sales representatives and a higher average rep count as we further supported our strategic and Kent Automotive customers.

Our rep count is now increased for sixth consecutive quarters, new reps will have a positive impact on our average daily sales in 2014 and future years as they develop their respective book-to-business.

However as you might expect and as we have previously stated adding new sales reps will temporarily bring down our sales per rep per day productivity measurement as the newly hired sales reps are in the early stages of developing customer relationships in their territories.

Excluding those reps that joined us over the past five quarters sales per rep per day increased 7.3% versus a year-ago and were also positive over the second quarter. Over the long-term we fully expect that adding additional sales reps will drive top-line sales.

We have rebuilt our hiring and on-boarding process which has allowed us to attract qualified sales candidates with previous selling experience and many with in-depth product knowledge. We continue to invest in them early in their careers with us to ensure that they can ramp up quickly.

As we move through the end of 2014 and into 2015 we plan to continue adding sales reps in under-served territories. From a segment standpoint strategic accounts now represent approximately 15% of our total volume and increase nearly 13% over the prior year quarter. This increase was driven by an expansion of our existing relationships.

Our Kent Automotive business was also up over 19% as compared to the year-ago quarter primarily driven by new business. Kent Automotive now approximates 16% of our total business. These increases were offset by a slight decline in our government segment as government spending continues to contract.

From a sequential average daily sales basis July sales finished at 1.136 million August finished at 1.139 million and September finished at 1.201 million. Average daily sales have been trending up over the last four quarters. For the quarter, gross margin finished at 60.1% which was in line with our expectations.

This is down slightly over a year-ago primarily due to lower freight recoveries and growth within our lower margin strategic business. We continue to take advantage of margin opportunities wherever possible. Increasing strategic customers will continue to put a downward pressure on our gross margin percentage.

However, we expect this to be partially offset by other procurement opportunities in operating efficiencies. Selling, general and administrative expenses were flat as a percent of sales were 43.9 million for the third quarter compared to 40.4 million a year ago and 42.4 million in the second quarter.

We continue to tightly manage our ongoing operating costs.

Expenses in the third quarter were positively impacted by proceeds received from a favorable legal settlement and lower severance and the aggregate amounted to 1 million offset by stock based compensation expense of 2.4 million which is directly tied to our stock price increase during the quarter.

Adjusted operating income, taking into account stock-based compensation, severance and the favorable legal settlement was 2.2 million for the quarter compared to 1.7 million a year ago and 2.1 million in the second quarter of 2014.

The improvement over a year ago was primarily driven by improved top-line sales, enhancing our margin dollars and controlling our operating costs all while continuing to invest in our sales team.

Net income for the quarter was 460,000 or $0.05 per diluted share compared to net income of 601,000 or $0.07 per diluted share a year ago quarter reflecting the impact of increased stock price on stock based compensation expense. From a balance sheet perspective we ended the quarter with no outstanding debt under our credit facility.

We continue to closely manage our working capital and are now in a position to have more flexibility on how we re-invest back into the business. Year-to-date CapEx was 1.3 million.

We expect our CapEx for the full year of 2014 to be in the range of 2 million to 3 million primarily in maintenance capital for our distribution network and continued re-profiling of the space we’re now leasing in our Reno Distribution Center. In closing we’re very pleased with our financial results for the quarter.

These results on top of the results over the past few quarters reemphasizes that our value proposition is strong. We are particularly pleased that we’re able to invest heavily in our sales organization while at the same time drive to improve operating income.

We’re excited about the business, the progress that we’ve made and our ability to improve the operations of the company. As we look into the fourth quarter and into 2015 we feel confident that our initiatives will continue to grow our business.

Keep in mind the seasonality of our business around the holiday weeks and then our fourth quarter include 61 selling days which is three days fewer than our most recent quarter. I’ll now turn it over to the operator for questions..

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And the first question comes from Jack O'Brien with CJS Securities..

Quickly for Ron, the SG&A was impacted by the non-cash stock-based comp expense reflecting the sharp rise in the share price.

How should we think about that expense item going forward, assuming a more modest rise over the next year?.

Our stock price increased during the quarter by about $6 from about $16 to $22 that resulted in the [$2.6] of expense taken in the quarter.

So you can kind of do the math on what that equates to on a go forward basis, but it’s directly tied to the fact that we have stock performance rights that are outstanding and those require us to mark-to-market accounting on those.

So I think going forward its increasing stock price will result in an additional expense for us that we’ll need to take and vice versa if the stock price was down a little bit it will actually resulted a slight pickup in income for us. .

And you addressed CapEx for the rest of this year, but I was wondering if you could give any insight on what CapEx for 2015 looks like and what D&A for the remainder of this year in ‘15 looks like?.

So CapEx, let me say that we’re right in the middle of our budgeting process for 2015, but typically we roll in about 3 million to 4 million of general or normal type of maintenance capital, so that’s way we would anticipate going into 2015.

Our annual depreciation rate runs between $8.5 million and $9 million a year and I would say that we wouldn’t see that changing dramatically from the run rate in ‘14 to ‘15..

Then for Mike, just taking a step back for a minute, could you discuss the investments Lawson has made and the actions you have taken since being appointed CEO in 2012? And more importantly, discuss the next 12 months to 18 months and the plans to continue the very attractive growth track that Lawson is on, as well as investments you may need to incur to accomplish the strategy..

It’s been a busy couple of years, we finished the plant, we implemented SAP and SAP now pays tremendous dividends for us in the form granularity of the data that we get and the ability to look at data every single day all the key metrics for the company and we’re able to make decisions everyday based on that data.

As all we sold off a number of the buildings a couple of years ago Addison, Illinois; Vernon Hills, Illinois, a number of facilities and consolidate all of those activities into our McCook distribution center which is a state-of-the-art distribution center.

And McCook is now able to deliver far better labor productivity, better a throughput and everything about McCook is State of the Art and again paying dividends in that form.

As well in the past year, we sold Reno distribution center and leased back the half of the building that we were actually using that resulted in cash proceeds but also a small operating cost savings on an ongoing basis. We divested ASMP a non-core business, so that freezes us up the focus on the core business of consumable MRO.

As well very importantly we’ve brought Lean Six Sigma to the Company and Lean Six Sigma is a process of sort of systemically solving problems using data and getting at the root causes of inefficient processes.

And so what’s that being able to do is take cost out of the system, improve the quality of work life for our employees by focusing them and value added activities and discarding stuff that no one values. Its rework stuff that wasn’t done right the first time that’s now done right and everybody up and down the value chain benefits from it.

And then when I think about this, I think about it in the context of an umbrella over our culture as our culture is changing to become more systemic and problem solving, we become more efficient in all of our activities. We’re investing in our people.

Lean Six Sigma in an investment, the apex training which is a supply train certification process, we’ve invested in that. There are other process training that we’ve taken people through and so they’re able to do their jobs better. But they all also feel great about the company investing in employees of the company.

And at its core, all of these activities resulted in a revitalization of our commitment to customer service and customer excellence. So a lot has happened over the last couple of years. Now going forward, we’ll continue to add sales reps in 2015.

I mentioned that one of our Wave 2 Lean Six Sigma Project is the process of when sales rep starts and then what happens over the next 24 months? How do we make them more productive, more efficient, get them into their Greenfield territories more quickly. So we’ll continue to add sales reps in 2015 and likely beyond.

We’ll continue to optimize a supply chain and as all these other activities have happened suppliers are now far more open minded to working with us around the total cost orientation, so that we can take cost out of the system starting with our suppliers and acquisition cost right through to the system. And lastly providing superior customer service.

So I think we’re all driven by the belief that in the end if we do our job well, it’s going to make our customers more productive and ultimately make our customers more profitable and that’s kind of what drives everybody in the company especially the sales reps in the frontline.

So that’s some of the activities going forward it’s a long way sayings we’re really confident in our value proposition. We don’t need any fundamental change to continue on the path we’re on and we feel great about continued growth..

And the next question comes from Alex Paris with Barrington Research..

I have a few, but I think I'm going to focus it on this one, given the thorough response to the previous question. So looking at this company from 50,000 feet, you did a great job turning it around, getting it on the right path, we have had five consecutive quarters of improved year-over-year sales; we’ve had two consecutive quarters of sales growth.

Longer term the company is a mid single-digit grower on an organic basis, high single-digit grower on an organic basis. I am assuming you are GDP plus something on apples-to-apples. But then you are adding people, you’re increasing the productivity of the people.

And then I wanted to dive a little in after responding to that on potentially the third leg of the stool. So if the first leg is organic growth and the second leg is operational improvement, the third leg potentially acquisitions giving your under leveraged balance sheet, so as it is. And the fact that the industry is quite fragmented. .

So Alex let me, this is Ron I’ll jump in on the first one and then have Mike probably cover the second piece of that question.

So I think you are aware, I mean our policy is to not provide any form of guidance but let me just comment on a little bit about kind of the organic growth that we have seen and as we look forward going to the next couple of years what that can look like.

I think both Mike and I commented in our prepared remarks that that we’ve seen nice growth of our existing sales reps from a productivity standpoint, and then that certainly is complemented by adding additional sales reps.

And for us that’s versus GDP, I mean we should be growing in excess of GDP primarily because of that second piece of that by adding sales reps. And we have been able to I think penetrate both new customers as well as gain the benefit of our existing customer growth especially on the strategic side and the Kent Automotive side of the business.

So that scenario that we’ll continue to pursue and hit pretty hard. And to Mike’s comment earlier we planned on adding sales reps certainly throughout of the rest of ‘14 and certainly in to 2015 as well.

I would say there is not a magic number that we’re trying to get to from a sales rep count, but what I would say is that we operate in a sub-segment of $175 billion to $200 billion market and redefined our market at about $25 billion. So there is plenty of opportunities for us to grow out there and place sales reps in underserved territories today.

So that’s certainly key to our growth going forward.

So Mike maybe if you want to?.

Yes absolutely. Regarding third leg of the stool we talk about the growth for acquisition. This was an area that we’re just beginning to think about is at the absolute formative stages.

And the reason it is at the formative stages as we feel great about our ability to add sales reps to attracting people and the better we do on all these dimensions, whether its operationally or the better we do from a customer service perspective the more attractive we are as an employer, also the processes we’re putting in place to drive sales rep productivity, things like market segmentation, technologies, even as we add root density there is less windshield time for a sales rep, although that drive sales rep productivity.

Because of those two are so attractive to us and working quite nicely it makes the third leg of the stool that much higher bar. We talked about a DNA match and it really is a DNA match. So we’re beginning to think about it.

We certainly see the opportunity ahead of us, but that’s one that’s little ways into the future and again we are at ground zero on those lines. But there is an obvious reason to do it and we understand that reason and we are beginning to think hard about it..

So given your response then, I think what we are to expect is continued organic growth due to the attractive opportunities to increase sales force, increase productivity. And maybe a period of time down the road, I don’t want to use the phrase when it’s run its course, but at some point external growth makes more sense than it makes sense today..

I am not sure if I would phrase it exactly that way. I don’t see it running its course, with a $20 billion to $25 billion available market with the highly fragmented competitor base and our products which are used everywhere, I don’t see an end in sight to the model.

Having said that if it’s more profitable, more productive to pick up a nice DNA match acquisition; opportunistically will do that. But it’s not because the current model runs its course. We feel great about our capacity to add very significant amount of business to our physical infrastructure without adding anymore brick-and-mortar.

So, it’s kind of the best of both. It’s no ending site organic growth and opportunistically looking at a nice match where it makes sense. .

Then I guess last question, and I will turn it over. As you know, I am newer to the story and I thank you for all the time that you have given me in the recent past, we’re very interested. The margins, I think last year on an adjusted EBITDA -- maybe it was an EBITDA basis, were in the low 2% range.

Where should a business -- without asking you for guidance, but where should a business like this a few years down the road be in terms of margin profile?.

Sure Alex. This is Ron Knutson. So if you look at the way we typically measured is on an adjusted EBITDA basis and if you work through the numbers for Q3 we ended pretty close to 6% and that backs off the effect of the favorable legal settlement and adds back to stock based compensation expense that we took.

So if you look at others in our space they are clearly ahead of the 6% and I would say that we continue to push that number forward, again we don’t provide any formal guidance relative to our operating income or our EPS numbers.

But I think if you look at that trend line over the last six to eight quarters you will see that we continue to move that number up. And certainly that would be our expectation during 2015 as well..

Thank you. And the next question comes from Beth Lilly with Gabelli..

I have two questions. One is, Mike you and Ron have talked about, of course being very clear about adding sales reps. And I think in the past you have talked about the number being 1,000 and now you’re talking about even maybe going beyond that.

Can you talk about, as you look the business model maybe three years out, how many sales reps you think Lawson will have?.

The reason really a magic number, the way we’re building the model and we’re building one sales rep territory at a time. We look at untapped territories. We also look at the route density of our sales reps. So whether you’re looking at a place like Macon, Georgia or Los Angeles. The Los Angeles is a huge potential market.

Northern New York State, the New Jersey, New York City area because of the fleet market both huge opportunities.

But even in very small communities, because our product is used so broadly, so we are sort of ratcheting it up one territory at a time, then when you add all that in our budget planning process, that’s how we got to the numbers we’re budgeting this year and we’re in the process of working through it for next year.

But there really doesn’t seem like there is end in sight. We had a much larger number of sales reps a number of years ago, now all be at the composition of the sales reps was different and the personal profiles of the people was substantially different.

But we really don’t see an end in sight in our hiring process relative to the number of territories.

Again when you’re chasing a highly fragmented $20 billion to $25 billion market, this is the reason that Wave 2 Lean Six Sigma project is so important to us as we can continue to refine the on-boarding process as we can get them to the more productive, more quickly that really reinforces the desire to continue on the path that we’re on.

So unfortunately I don’t really have any answer for when it ends or what it looks like three or four years from now, pretty sure it’ll be a larger numbers three or four years ago than it is today..

Okay. Thank you. (Operator Instructions). And we do have a question from Mitchell Scott with KDI Capital Partners..

Looks like another good quarter here with pretty good progress on the company growth initiatives. I was wondering if you could just give us a little bit more color around the new reps that you are adding in and some of the processes that you are wrapping around, giving them up to existing rep levels and what kind of that runway looks like. .

Sure. We’re recruiting people from across the spectrum. Some of the come, most of them come with some industrial selling experience, but again across the spectrum it’s interesting as we do a better job operationally we just become a more attractive place to work.

We’re in the process, we’ve engaged an outside firm now more than a year ago, recruitment outsource processing firm and that helped us get scale because we’re bringing in a large number of people. It is our intention to maintain that process of recruiting people.

But also there are processes before someone gets recruited so they know what the nature of the job is, our value proposition is somewhat unique. Again it’s service proposition even more so than a product proposition. And so we want to make sure that incoming sales reps know that what we deliver is service less so than the delivering physical product.

And that I would see as the differentiation between traditional MRO and consumable MRO. If you’re selling a ladder or drill or a compressor, you expect it to last little while. Whereas when you are selling flat washers and electrical fittings, they’re consumables and that’s a big difference for us.

So we’re feeling good about that now, we’re always looking to refine the on-boarding process. So one of the challenges as I think all companies have in our space is we have tremendous institutional knowledge, we’ve got employees that have been with us 30 years outselling, so they have an incredible wealth of knowledge.

And one of the challenges are trying to tap is how do we get those people with 10 years and 20 years experience as mentors to all the rest of people that little newer in their tenure. All of that pays dividends in getting people more productive more quickly.

Ron maybe you want to go some of the numbers?.

Yes, so, Mitchell on the run-rate view of things typically when we bring in a sales rep especially if it’s a Greenfield territory where they’re building it out from scratch. It’s certainly takes those individuals a little bit longer barely building out their book of business.

And generally the sales reps become accretive to us, accretive to the company kind of that 120,000 sales territory. So given our compensation model and given our gross margins, it’s about 120,000. And typically our reps will -- again there is some pretty wide variation in this.

But typically the new reps coming on board, they’ll hit that mark somewhere between 12 months and 18 months on average. Again some variation in there, but on average that’s really when they hit it..

Last one for me just on the gross margin line, looks like is kind of down a little bit year-over-year, 30 basis points, but up 50 basis points year-to-date, year-over-year.

You talked about it a little bit in the prepared remarks, but if you could just give us a little bit more color around some of the puts and takes there and what the outlook is over the next one or two years?.

Couple of comments on some of it and Ron can fill in some more of the details. But as we add more large strategic accounts, that tends to push GP percent down a little bit. Now on the other side as we work more closely with our suppliers which we’re now doing in earnest. They’re able to through process reengineering, as we’re growing that’s helping.

So a number of activities that push GP up we would say take cost out. As well some activities like large strategic accounts that come to us and as we increase the penetration that pushes GP down. The long and short of it is we feel like where it is about is about where we expect it to be..

I think that’s right Mike. The 60.1% that we ended for the quarter that’s really in line with our expectations. Previously, we’ve commented that we should be in kind of high 50ish range kind of meeting 59ish range.

So we’re comfortable with where we’re at and there were really major kind puts and takes that brought it down or up, I mean 30 basis points for us. To Mike’s point it’s really a function of our customer base in our wide range of product mix as well..

Thank you. And we do have a follow-up question from Beth Lilly..

Mike, I didn't hear your full answer, but I will follow up with you off-line. The other question I wanted to ask is, you’ve talked about your adjusted EBITDA margins have come up substantially and in the quarter they were 5.9. Mike, I wanted, and Ron as you look out the competitive field has EBITDA margins closer to double-digit level.

And I want to just reassure -- be reassured that that's the level that you think that Lawson can get to over time?.

Yes, that’s right. I mean if you look at especially some of the larger players in our industry in our segment, they are certainly double-digits. And that’s our aspiration, the timing around that depends a little bit around how much we invest back into adding new sales reps into the organization.

As we’ve commented before certainly that’s a net investment for us and particularly we’re in the first year but clearly we get the benefit in the second and third year and in future years. So certainly it’s our aspiration to get that double-digit level.

I think we’re on the right trends and again timing a little bit to be undefined, but that’s where we’re headed..

So, to the extent that you continue to add sales reps and grow rep force, then that will impact margins. But I am imagining that if not that you’re going to do this, but if you stop getting sales reps your margin would expand pretty substantially..

I think it’s correct, the other thing what you’re seeing now is for so many years we didn’t add any reps. So now that we are sort of rebuilding; starting from kind of scratch. Once we build the little momentum the site as we’re adding new reps the ones that are two years and three years in are paying for the addition of new ones.

So a little bit of what you are seeing is a function of that fact that for a number of years we didn’t add any reps. Once we get to a sort of a steady state trajectory of adding numbers of reps, I think you will see things improve..

And I would add to that. It’s really now in our run rate. So as we think about future years it’s not as though that it’s incremental investment for us it’s already in our current run rate from certainly the latter half of ‘13 and 2014 as well..

One other question, it just occurred to me as I am looking through your numbers. The industry certainly is not growing at that 8.6%.

And so would say you are gaining share?.

Absolutely, and the reason I believe that we’re gaining share is our fill rates, our back orders, our operational processes as all of that improves. I mentioned it’s a little thing but taking 700,000 pieces of paper away from the customer all of that just makes us easier to do business with.

I believe we can now easily demonstrate that we are differentiated out there in the marketplace. And with our focus on driving customer profitability and customer productivity, I think customers recognize that partnering with us enables them to be more profitable. So I think it’s through operational excellence we’re gaining share..

Thank you. And we have a question from Brett Scarbrough with Luther King Capital Management..

I wanted to follow up on the new salesman ramp. You guys provide the strategic account growth and the Kent Automotive growth, but I think there is some overlap there in those two categories.

Could you maybe help us understand what the growth is excluding those two groups?.

Sure. So if you look at I think I have commented in fact that our strategic accounts grew about 13% and our Kent Automotive business which is exclusive of the 13% growth in the strategic grew about 19% in the quarter. So those two numbers are independent of each other. Now we do have strategic accounts within our Kent’s business.

And those strategic accounts grew as well; actually they were a large driver of the 19%.

So excluding those two categories we did see a decline in our government business, not big dollars because that’s now in a smaller run rate for us and makes up about 4% of our business, but if you back out the strategic government in the Kent side of the business kind of the core business for us grew about 6% versus the year-ago quarter..

And then on working capital as a percentage of sales, kind of just focusing on AR and inventory. You guys have talked a lot about initiatives to improve operations, but we haven't seen a huge improvement in kind of working capital intensity.

Where does that stack up on your initiatives and where do you think you can get that to?.

Brett typically we’ve run kind of 22% to 24% of our sales in working capital. What I would say is that and particularly on the AR side of the working capital piece our aging continues to improve, so our receivables are better today than what they have been in quite some time. So we are comfortable with where we are there.

And to Mike’s point earlier as we grow the strategic business typically we’ll have to provide some additional terms on the AR side. On the inventory side, I mean this is an area that we continue to focus on, are having McCook in place gives us some additional flexibility going forward.

But at this point it’s a real balance between our order completeness rate our backorders and our line service rates really what our customers expect for us to be able to achieve there. So it’s a bit of a balance there but I think looking forward there are some opportunities and inventory as we refined that process.

And on AP side we continue to work with our vendors our suppliers relative to terms and ability to pay them on a timely basis. So I would add to Mike’s comments that we have great relationships with our suppliers and there is probably a little bit of an opportunity there from a working capital side.

But we’re also in midst of negotiating other support from them as well including and training and pricing and so forth. We look at it on a combined basis versus just the working capital piece.

So one way of answering, there is some opportunity there, I wouldn’t say that its huge opportunity but there was probably some areas that we -- well there are areas that we’re still going after..

And maybe just a final question. Now that you guys are debt-free, where do you think -- what’s kind of the next step for free cash flows, dividend, buyback? I know you’ve talked about M&A.

What are the priorities of the Board at this point do you think?.

I think the priorities are stay the course, we’re continuing to invest in sales reps. There are number of activities here ahead of us growing continued. And when we think about adding a sales rep, let me say, it’s almost analogous to adding a one unit acquisition, because the sales reps that we’re talking about are Greenfield sales reps.

So there is an analogy between the Greenfield sales rep and doing an acquisition primary difference is you’re hiring 100 reps at a time versus one at the time. So we continue to invest in that way I think we’ve articulated that.

We don’t have big investments ahead of us from a brick-and-mortar perspective, but there are opportunities to continue to penetrate markets. So it’s kind of stay the course. Board is excited about what we’re doing and we absolutely believe in the vision and so I think we’re on the same track we’ve been on. We don’t really see any big changes..

(Operator Instructions). All right this concludes our question-and-answer session. I would like to turn the conference back over to Mike DeCata for any closing remarks..

Thank you very much. Let me say in closing and reinforce that we have great confidence in our ability to grow. We are on track with our primary growth initiatives those being adding sales reps and getting more productivity out of our existing base of sales reps.

Lean Six Sigma is changing the company and changing the culture to become more systematic and problem solving and that pays dividends over the long-term. Our operating processes are improving and as we add more sales reps we’re better able to deliver productivity for our customers enabling our customers to be more profitable themselves.

And lastly we’re confident that our actions, the action that we’ve taken over the last couple of years will continue to pay dividends for the foreseeable future. And let me again say on a personal note thanks for hanging in there, I know the voice has been a little of a rough sledding this morning. Have a great day and thank you very much..

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..