Michael DeCata - President, Chief Executive Officer Ron Knutson - Executive Vice President, Chief Financial Officer.

Jack O’Brien - CJS Securities Kevin Steinke - Barrington Research Beth Lilly - Gabelli Gregg Hillman - First Wilshire Securities Management.

Good morning ladies and gentlemen and welcome to the Lawson Products Fourth Quarter 2014 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 fourth 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 website, lawsonproducts.com. A replay of the webcast will be available on the website through March 31, 2015.

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 cal 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..

backorders, line service levels, and order of completeness. For example, over the past two years, backorders have been reduced by 80% while reducing inventory. This has a very positive impact on customer satisfaction and sales rep productivity. As we’ve discussed on previous calls, we continue to utilize Lean Six Sigma throughout the organization.

Lean Six Sigma will continue to benefit us in several areas. First, it will allow us to remove non value-added work. For example, we now have a comprehensive supply chain guide with detailed packaging requirements for our suppliers. This will reduce labor costs in the distribution centers.

We’re also rolling out a supplier quality report card to help suppliers drive better process improvements. Second, we’re striving to grow our business without adding overhead costs. Third, we’re focused on compressing cycle time to perform activities to better service customers. We’re also continuing to invest in our teammates.

For example, 22 people have completed the Apex training and certification, which is helping us to improve inventory effectiveness. Seventy people have received Lean Six Sigma training, and yesterday we began a process to train the sales management team, including district sales managers, on financial literacy.

This will enable them to better address customers’ needs and help our customers become more profitable. Let me also take a minute to discuss our upcoming national sales meeting, which kicks off this afternoon. This sales rally will include active sales reps, sales management, and various corporate departments.

We will educate, train and invest in the sales team as well as share best practices. One hundred suppliers are also participating in this event to train, demonstrate and introduce new products.

With so much institutional knowledge among our sales reps, this provides an excellent opportunity to share best practices, which translates into improved customer service and improved sales rep productivity. Let’s turn to our drive to improve profitability. We’re pleased with our financial results for the quarter and the full year.

Ron will share more details, but let me point out that our adjusted operating income was $0.6 million for the quarter and $4.9 million for the year. We consider this, as well as the improvement over 2013 a significant accomplishment.

Gross margins have improved despite the increase in strategic accounts as we gain leverage on our distribution center operations and work closer with our suppliers. This is positive reinforcement that our customers value the service and products that they receive from us. We’re completing the rollout of a new ordering tool for our sales reps.

This software give sales reps access to far more information than they had before, and the ability to scan bins and cabinets with Bluetooth scanners. This will improve sales rep productivity. We’re also seeing increased support from our suppliers and a willingness to explore new approaches to improving productivity.

We continue to manage our expenses tightly. We’re also continuing to make smart investments in our business and allocating capital to achieve revenue growth. Additionally, it’s important to note that our distribution network is capable of significant volume growth without any additional investments in brick and mortar.

Lastly, let me say that we recognize that adding sales reps is an investment which has a delaying effect on earnings. We’ve elected to continue on this path because of the very positive impacts that this provides over the intermediate and longer term. Large and small customers have convinced us that our value proposition remains strong.

We are seeing growth in large and small customers, and our customer retention has improved by 22% over the past year. Now let me turn it over to Ron for a more detailed financial review..

Thank you, Mike, and good morning everyone. As Mike indicated, we are pleased with our financial performance for the fourth quarter. While the fourth quarter included some incremental employee-related costs, we continue to benefit from our previous investments and are now consistently growing the company through our improved foundation.

Let me review some of the highlights for the quarter and the year. First, our adjusted operating income, taking into consideration non-recurring items, was $600,000 for the quarter compared to breakeven a year ago. This resulted in the full-year adjusted operating income improving by $3.9 million to $4.9 million.

Second, sales finished at $70.3 million for the quarter, during which there were 61 selling days, three fewer days than Q3. This represents an increase in our average daily sales of 6.9% over a year-ago quarter. This is on top of the third quarter increase of 8.6% and the second quarter increase of 5.5% over the prior year.

Sales increased 6% on a full-year basis over the prior year. Third, we created additional gross profit of $3.3 million through leveraging our distribution costs and focusing on improving our purchasing process.

Fourth, with our improved operations and our close management of working capital, we ended the quarter with no outstanding debt under our credit facility and $4.2 million of available cash compared to borrowings of $16.1 million a year ago. Let me now share some of the details.

As I just mentioned, we finished the quarter with sales of $70.3 million compared to $65.7 million a year ago, and $74.1 million from the third quarter. The fourth quarters of both 2014 and 2013 included 61 selling days while the third quarter of 2014 had three additional selling days, or 64 for the period.

For the fourth quarter, average daily sales increased 6.9% over a year ago, however were done 0.5% sequentially over the third quarter. This represents the sixth consecutive quarter that our sales increased versus a year ago.

The increase over a year ago was primarily driven by additional productivity from existing sales representatives and a higher average rep count as we further supported our strategic and Kent Automotive customers. Our rep count has now increased for seven consecutive quarters.

New reps will have a positive impact on our average daily sales in 2015 and future years as they develop their respective books of business.

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 measurements as the newly hired sales reps are in the early stages of developing customer relationships in their territories. Adding sales reps will also negatively impact our earnings in the short term.

Since we are in the early stages of adding sales reps, we do not yet have the full run rate of salary expense in our results from quarter to quarter. Excluding those reps that joined us over the past five quarters, sales per rep per day increased 4.4% versus a year ago.

Over the long term, we fully expect that adding additional sales reps will drive top line sales and improved earnings. We continue to refine our hiring and onboarding process, which has allowed us to attract qualified sales reps with previous selling experience.

We continue to invest in them early in their careers with us to ensure that they can ramp up quickly. As we move into 2015, we plan to continue adding sales reps in underserved territories in both the U.S. and Canada.

From a segment standpoint, strategic accounts now represent approximately 15% of our total volume and increased nearly 12% over the prior year quarter. This increase was driven by an expansion of our existing relationships. Our Kent Automotive business was also up over 12% as compared to the year-ago quarter primarily driven by new business.

Kent now approximates 17% of our business. These increases were offset by a decline in our government segment as government spending continues to contract. From a sequential average daily sales basis, October sales finished at $1.150 million, November finished at $1.186 million, and December finished at $1.123 million.

For the quarter, gross margins were 61.1%, which was slightly ahead of our expectations. We continue to drive margins through our ability to leverage distribution costs as well as initiatives to lower our product landed cost.

Increasing strategic customer relationships and pursuing greenfield sales territories will continue to put downward pressure on our gross margins; however, we expect this to be partially offset by other procurement opportunities and efficiencies within our DCs.

Selling, general and administrative expenses were $44.7 million for the fourth quarter compared to $40.1 million a year ago and $43.9 million in the third quarter. We continued to manage our ongoing operating costs tightly.

Expenses in the fourth quarter were negatively impacted by additional stock-based compensation expense of $1.9 million, which is tied to our stock price increase during the quarter, higher health insurance costs, and employee costs as a result of having 110 more sales reps than a year ago.

Adjusted non-GAAP operating income, taking into account stock-based compensation, severance and an established environmental reserve, was $600,000 for the quarter compared to a loss of $7,000 a year ago.

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 incur upfront costs as we invest in our sales team.

While we realized an increase in our adjusted operating income over a year ago, a significant portion of our increased gross profit dollars were offset by the required stock-based compensation expense as our stock price increased during the quarter.

Higher health insurance costs and sale rep salaries of the 2014 hires also offset our earned gross profit. We had 110 more reps than the year-ago quarter, and our newly hired reps have a three-year declining base compensation structure. As a result, since we will continue to add reps, we do not expect the salary expense to normalize until 2016.

Adjusted operating income for the full year of 2014 improved by $3.9 million to $4.9 million due to improved sales, expansion of our gross margins, and control of our operating expenses all while continuing to add to our sales team.

For the year, we created $11.3 million of additional gross profit dollars, which was offset by incremental stock-based compensation of $4.1 million under the current accounting standards. Net loss for the quarter was $2.7 million or $0.31 per diluted share compared to a net loss of $2.9 million or $0.33 per diluted share a year ago.

This reflects the effect of the increase in the stock price in 2014 on stock-based compensation expense and a 2013 non-recurring expense related to a sublease of a portion of our corporate headquarters.

From a balance sheet perspective, as I mentioned earlier, we ended the quarter with no outstanding borrowings under our credit facility and $4.2 million of available cash. We continue to closely manage our working capital and are now in a position to have more flexibility on how we invest back in the business.

Year-to-date capex for 2014 was $2.8 million. We expect our capex for the full year of 2014 to be approximately $4 million primarily in maintenance capital for our distribution network and continued technology enhancements. Let me comment on a couple of items as we move into 2015. First, keep in mind that the first quarter includes 63 selling days.

While that should help our aggregate sales, we typically incur higher seasonal payroll taxes in the first quarter. Additionally, we have our national sales meeting this week that will result in incremental expense over the fourth quarter as well as a year ago, as our last national sales meeting was held in the first quarter of 2013.

Second, as both Mike and I have mentioned, we will continue to add sales reps in 2015. While we ended 2014 with 916 reps, our goal is to end 2015 with approximately 1,000 sales reps. We continue to balance our resources between adding new reps and investing in tools and processes to ensure that they can become productive quickly.

In closing, we are pleased with our results for the quarter. These results, on top of the results over the past few quarters, confirm that our value proposition is strong. This allows us to invest heavily in our sales organization while at the same time drive improved adjusted operating income. I’ll now turn it over to the Operator for questions..

[Operator instructions].

While Emily is preparing the roster, I thought I would also comment that you may have seen a shelf filing this morning. This action provides us the flexibility with future capital access. We also believe that it’s a prudent thing to do and a prudent process to put in place at this time.

It also provides our large shareholders flexibility with their shares that are not currently registered, so I thought I would comment on that before Emily starts the roster..

Our first question is from Jack O’Brien of CJS Securities. Please go ahead..

Good morning, Mike and Ron..

Good morning, Jack..

First, I was wondering if you guys could elaborate on the characteristics of sales reps you’re hiring now and how the profiles of the reps may have changed from when you started the process..

Thank you, Jack, that’s a great question. You know, we look at that regularly and we collect a lot of data on the folks that we’re hiring. We do that so that we can better understand the profile that’s optimized for us. Over the past year, about 40%, 41, 42% of the people we’ve hired have come from what we’d consider larger obvious competitors.

About 43% of the folks that we’ve hired have come from the many, many, many small mom and pop competitors out there, and the balance has come from other route-related sales reps not in our industry.

So that’s kind of the profile, and as we’re now getting statistical validity on the people we’re hiring, it gives us the better ability to refine what are the key elements that we should be looking for in sales reps. But this ratio really hasn’t changed.

Again, biggest percentage from large, well-known competitors, equal number from the small mom and pop competitors.

I like them the most because they’re the sales reps who have said to us by their actions that it’s easier to join us than compete against us, and of course, the sales reps are looking out for their own family’s best interest, and then the balance comes from other industries that still fit the profile..

Okay, and then sticking with the sales force for another question, can you discuss the significant upfront costs you incur, and furthermore the actions you are taking to ramp up the productivity of the new reps and shorten your payback period on that investment?.

Sure. Maybe both Ron and I can comment on that. One of the things that I mentioned, we’re now in the middle of our second wave of Lean Six Sigma projects, so the first wave, you might remember, discussed the compression of the period between when we open a rep to find a new sales rep, and when the rep is actually brought into the company.

In Wave 1, we compressed that period by about 50%. Now in Wave 2, of which this wave there’s five projects within the Wave 2, one of those is focused on how do we get those sales reps to be more productive, so we look at their first day on the job through two years. It includes a refinement and we’ve changed our onboarding process.

As I mentioned, our sales reps have the opportunity--or candidates have the opportunity to ride with an existing sales rep for a day to better understand the nature of the job. After they join, we’ve changed our training programs, a lot more role play, product demos.

They come and spend pretty much a week here in Chicago, a day here at corporate and then four days at the distribution center in McCook, Illinois, so all of these as well as the mentoring processes, district manager ride alongs and training, all of these things have been modified and refined to try and compress that period.

Ron, do you want to comment on what we’re seeing?.

Sure. So yeah, just to add on top of Mike’s comments, really our breakeven point or, I should say, when the newly hired sales reps become accretive to the organization, today typically runs in the 12 to 18-month period, and as you can imagine, there is a wide range of variation within the reps that we hire.

So that’s really the time frame that we’re trying to shorten up, as Mike explained.

The other piece that I would add to that, and I had this in my prepared comments, is that since we are continuing to add sales reps in 2015 and beyond, the way that our base compensation works with those newly hired sales reps, and since we’re in the early stages of adding reps, that expense really doesn’t level out within our financial results until we enter into 2016.

So every quarter today, we’re still incurring some additional expense, in particular for those new reps that we’ve hired, and then the reps that have come on over the last year as well..

Okay, and then turning the page a little bit, you guys have finished a lot of your kind of turnaround initiatives.

Now that a bunch of those are complete, can you talk about what you’re seeing as far as acquisition pipeline and any opportunities there in the coming year or so?.

Yeah Jack, thank you. We are now in earnest open-minded and looking at potential acquisition targets. Clearly it’s not something we want to discuss a lot in detail, but it’s the third leg of the stool we’ve talked about. We’re adding reps, we will continue to add reps in ’15 and probably in ’16.

We’re driving very much on sales rep productivity, giving the existing base tools to be more productive. The third leg of the stool, but it’s third for that reason because we’re very pleased with the first and second leg, is to look at acquisitions that are just like us.

We’re very happy with the business we’re in, so we don’t feel the desire to be in different product categories or in a fundamentally different geography beyond the U.S. and Canada, so we’re looking at people like us where the combination might be better for both. But again, early stage, looking at it in earnest.

We have hired a third party buy-side analyst to help us do the research, but again early stage in that process..

Okay, thank you very much. I’ll hop back in queue..

Thank you, Jack..

Our next question is from Kevin Steinke of Barrington Research. Please go ahead..

Good morning, Mike and Ron..

Morning, Kevin..

I was wondering if you could just talk a little bit more about the focus on strategic accounts and the Kent Automotive division, and what’s driving the faster growth there relative to the overall business. .

Sure, Kevin. This is Ron, and then I’ll have Mike jump in as well. So as I mentioned in my prepared remarks, both of those businesses were up about 12% for the quarter. As you look at the history probably of both of those segments over the last few years, both are growing quite nicely for us.

Today, the Kent Automotive business - I’ll speak to that first - makes up about 17% of our overall volume, and a fairly sizeable piece of that growth has been driven by some strategic accounts that we’ve been able to start selling to over the last 18 months or so.

However, even excluding those accounts, the Kent Automotive business is still growing in the kind of high single digit area for the full year. On a full-year basis, Kent was up about 16%, so we feel really good about that business.

I think our business is benefiting from some of the consolidation that’s happening within that industry and the relationships that we have with a lot of our strategic accounts, when they make acquisitions of local repair shops, we are able to start selling to those as well.

On the strategic side of the business, again an area that’s been a focus of ours, has grown nicely, up about 10% for the full year, 12% for the quarter.

We continue to pick up additional sites for many of our strategic accounts, as well as identifying some new strategic relationships that we’re just getting started upon as well from a selling perspective. So we feel really good about that segment of the business. We think it’s a tremendous opportunity for us.

The strategic accounts certainly recognize the value that we bring to them, and that business is very sticky as well so it’s a nice business for us to continue to pursue and maintain those relationships..

If I can add, one of our challenges and opportunities with strategic accounts is as we start--as we develop a strategic account relationship, one of the opportunities we have is as we succeed with one or two or a dozen locations, that enables us more quickly to succeed with other locations where a strategic account has other facilities.

But also, as we develop an in-depth, multi-level relationship with our strategic accounts, it enables us to better understand their needs and try and align ourselves with their specific needs. So as they may need a new product offering or new services, that close partnership enables us to more fully service all of their needs.

And even where we have the vast majority of their locations, there is still opportunity to better service their broad set of needs.

The intent here, whether with small accounts or very large accounts, is our drive to make our customers more profitable by enabling them to improve their up time, their machine utilization, their process utilization, so all our focus - and it’s part of the financial training we’re taking our sales management and sales folks through - is how to help our customers become more profitable.

We believe that by doing that, we become more critical to their success and it becomes a stickier relationship and a really true partnership..

Great, that’s very helpful commentary. If I could also ask about the gross margin performance in the quarter was good, and you mentioned lowering purchasing costs and gaining leverage on distribution center costs.

How much room do you think there is to go there on those items? I know they’ve been a priority for you in continuing to maintain or even improve gross margin..

I think as Ron just mentioned, we feel like it was a little higher than we had anticipated. We’re going to continue to refine our relationships with our suppliers as we can take inventory out of the system. By the way, one of the other Lean Six Sigma Wave 2 projects is around inventory forecast accuracy, so that has an impact on us.

But we feel like we are where we should be. We will always look at refining the processes with suppliers where suppliers can help train our sales reps so they can be more effective solving customer problems, where suppliers can help us with samples.

All of those are things that align the suppliers’ interests with our own interests and then enable both of us to serve the customer better. The short answer is we feel like it’s a continuing process, but we’re closer to the end than the beginning..

Mike, I would just add to that on the leveraging effect, I think we’ve stated publicly that we feel that we can push through an additional $100 million of sales through our existing brick and mortar, through our distribution network, and I think that what we’re seeing is that we’re seeing the effect of the ability to do that without adding a lot of DC costs into our infrastructure.

So as we grow top line sales, we’ll continue to get a little bit of a lift on the gross margin percentage just by leveraging those fixed costs.

But being able to increase that percentage slightly and achieve in excess of $3 million of additional gross profit dollars for the quarter, certainly that’s an area that we feel good about where we’re headed in that overall percentage..

Okay, great. Also customer retention, you mentioned was up, I believe, 22% year-over-year.

Do you have more room to go there, and what’s the message that customers are getting that’s causing them to stick around?.

I think, Kevin, that the basis of that is we’ve mentioned our backorders have improved tremendously. We continue to improve our order fill, so the order fill metric is one that describes when we get a multi-line order - it could be a 10-line order - ideally, we want all 10 lines in the same box, shipped in one box to the customer.

All of those things, along with the additional training we’re giving our sales reps so they can more comprehensively solve customer problems, and as we’ve added more sales reps we get the benefit of sales rep productivity in the form of route density, so sales reps can call on customers more frequently.

All of that is being rewarded with better customer retention and customers just more and more depending on us. So I think that’s what’s happening - process improvement leads to more satisfied customers. There’s always going to be some movement of customers, in many cases having nothing to do with us.

Small companies come in and out of business all the time, and locations change and acquisitions happen - that all affects our customers, so all of those things are variables as well. I think, again, we’re always going to try and retain 100% of our customers, but realistically that’s an impossibility for reasons not related to us..

Right, yeah, but that’s a good mindset to have, though, so appreciate the comments on that. When you talk about reaching 1,000 reps by the end of 2015, that’s about a 9% increase year-over-year. Give us a little more insight into the strategic thinking and strategic planning process that got you to that target number..

Well, that’s not an endpoint for us, it’s just the next step in the process. The way we got there is we looked at underserved territories around the U.S. and Canada, and as you know, our market is extremely large and extremely fragmented.

The Lawson managed inventory process, where if we do our job well and comprehensively, we enable our customers to sort of put aside any concerns about consumable MRO.

It just sort of magically shows up because our guys don’t let the customers run out of product that they're consuming, so there’s a tremendous demand and certainly we believe that we are the lowest cost alternative our customers have to keep their consumable MRO stocked at appropriate levels.

So with that said, we looked at underserved territories, and there are a great many underserved territories, and when we get to 1,000 reps there are still going to be a great many underserved territories, so it’s likely we will continue along this path for some time to come..

Kevin, I would just add to that in that we added a net 110 sales reps in 2014 and a net 49 sales reps in 2013, so we’ve placed a lot of burden on our sales organization to really get these reps up to speed, get them trained, get them onboarded, really starting to develop some of the customer relationships.

So part of that, bringing that number down slightly versus where we were in 2014, is really a little bit of a reallocation of resources to make sure that we continue to grow by adding net new sales reps but also that we’re spending the appropriate amount of time to make sure that the reps that we hired in 2014 are successful.

If you pull out our last investor deck, which I think goes back to December, there’s a great graph in there that shows the rep tenure versus the sales by tenure, and I think that will shed some light on why we feel good about continuing to hire sales reps and really get the benefit in not just the current year but probably more so in their second, third and fourth year with us..

Okay, perfect.

Last question from me - Ron, you mentioned the higher expenses associated with the sales meeting in the first quarter, but will that also just have an impact on your sales? You have 63 selling days, but you’re, I guess, taking some people out of the field, so any commentary on the impact that might have on sales?.

Yeah, great point, Kevin. We do feel that it will have a little bit of an impact for us, given that the sales meeting is taking place--really, it started yesterday with some financial training and really going through Sunday.

We’re somewhat in the middle of the month, so we have seen sales slow down a little bit over the last couple of days; however, we do anticipate that we’ll have a strong week next week before the month ends. So a little bit, I wouldn’t call it dramatic.

Our sales reps are able to manage that process pretty well and continue to place orders and stay in contact with their customers, even while they’re here in Chicago..

Okay, perfect. Thanks for taking my questions..

Thanks, Kevin..

Our next question is from Beth Lilly of Gabelli. Please go ahead..

Good morning..

Good morning, Beth..

I wanted to ask about the shelf filing. Can you just help us better understand - so there is 3.6 that will potentially be offered by the family, and then--so it’s $100 million shelf filing, so if you multiple 3.6 times stock price, that’s like $90 million.

So then you might sell an additional number of shares, or can you just drill down?.

Yeah Beth, this is Mike. Our intent with the shelf listing is just to provide sort of the financial flexibility. It just seems like a prudent process to put in place. Relative to the family, what we’re doing there is just by accommodation.

The second and third generations of the founder, Sid Port, had inherited a lot of that stock and it wasn’t registered, so by accommodation we’re doing the shelf filing and enabling them to register shares. But we don’t have any plans for it at this time; it just seems like a prudent financial vehicle to have in place.

It gives us more opportunity, should we need that in the future. .

Okay, so if they sell all--so the total shelf filing is $100 million, correct?.

Right, yes..

Okay, so let’s suppose the family sells all their stock. Let’s just go with that assumption. So we multiply their shares, which is 3.6, by $25 - that gives you $90 million. So if your total shelf filing is $100 million and the family completely liquidates their position, that just gives you $10 million..

Yeah Beth, this is Ron. So as Mike mentioned, we really can’t speak on behalf of what they will do with their shares; however, if they decide to do something, that cash would not come into Lawson Products, so that would--.

No, I understand that.

So are you--what I’m trying to understand is, is the shelf filing for you to sell stock or debt, or is it for the family?.

Well again, should we decide to use it, it would be for us. The registration of family is an accommodation, but it’s not--the shelf has to do with financial tools and a vehicle for us to use, for Lawson to use.

The registration of the shares just is an accommodation, a tag-along, but our primary strategy is the shelf for our future use, should we need it..

Okay, so you’re just--in essence, you’re allowing them to sell stock, but the priority is you. It’s not in terms of the family liquidating their holdings..

That’s correct..

Yes..

Okay, I just wanted to be clear on that. Okay, great. That’s all my questions. Thank you..

Okay, thanks Beth..

Our next question is from Gregg Hillman of First Wilshire Securities Management. Please go ahead..

Good morning. Hi. First of all, I wanted to ask you, I noticed back in 2006 that you had return on equity of 6.8%, and I guess return on tangible equity is 8%.

I was wondering, is that a goal for you to get back to, and do you think you can get back there within two or three years?.

Yeah Gregg, this is Ron Knutson. So really, what we’ve publicly stated, both Mike and I have stated that really what we’re striving towards is to return to a 10% EBITDA as a percent of sales. We have not provided any guidance on a return on equity basis, but you can probably kind of do that calculation as our balance sheet would grow as well.

We finished the fourth quarter - again, back to the EBITDA as a percent of sales - at 3.9%, the third quarter was 5.9%. If you look at that versus the last few years, certainly a move in the right direction, although I would say that Q4 for us is typically a bit of a softer quarter just because we have fewer selling days..

So to get to that 10% EBITDA as a percentage of sales, do you think two or three years is a reasonable timeline?.

Yeah, I think that’s reasonable. As we continue to add additional sales reps, that does have an impact on that, depending on how aggressive we are, since those reps really are not accretive to us until 12 to 18 months out.

So it’s a little bit dependent upon how aggressive we are in that piece of the business, but over the next two to three years is fair..

Okay.

For your customers, what percentage of your customers have bins or cabinets, inventory in that, and is that your inventory or is that their inventory?.

Yeah, pretty much Gregg, 100% of our customers. Again, central to our value proposition is what we call Lawson managed inventory, and so for us those bins and cabinets are sort of like our real estate.

We don’t consign product to our customers, so 100% of that product is owned by the customer; but again, it’s central to our value proposition and it’s ultimately what customers value most in us. .

Okay.

For your inventory, you don’t have sensors in there that tell you when you’re running out of things? It’s just like a regular box?.

Yes, that’s correct.

Again, when we think about what our sales reps do, certainly they provide consultative selling and problem solving that’s central to what they do, but think of our sales reps kind of on a regular route, it might be once a week, every two weeks visiting a customer, unpacking the boxes that are generally unopened and waiting for us, putting that stuff away in the bins and cabinets, doing an informal inventory count of everything that’s been used in what we call the brown wall, or if it’s Kent, orange, looking at everything that’s been used since the rep was there last, and then in many cases placing the purchase order for the customer.

So that’s what I was referring to earlier - consumable MRO just happens for the customer. We just take care of all of it from the unpacking of the boxes to the placing of the purchase order, and everything in between. So in a sense, our guy is there, our gal is there every week or every other week, attending to the consumable needs of the customer..

Okay. Earlier in the call, you mentioned you’re hiring sales reps from larger competitors.

Who are your major competitors that you’re hiring the sales reps from?.

Our primary competitor is the hundreds and hundreds of small mom and pops that are in every community. Because of the products that we’re selling - fasteners, hydraulic fittings, electrical connectors - are used everywhere in every small business and every huge business, our primary competitor is hundreds of small mom and pops.

Those are the competitors that we think of. Some of the other large names that you might know tend not to so much be in the service business and have a broader, non-consumable component to their value proposition. They might sell you motors or ladders or fans or compressors or things like that. That’s really not the business we’re in..

Snap-On Tools would be an example of that?.

Snap-On Tools would not be a competitor..

Okay. In terms of the jobs, you’re trying to help your customer to do a job. I know that you provide, like, cutting tools I think is one of the things that you do.

What would be an example of some of the biggest jobs you’re trying to help the customer to do, and then also, are you able to add new categories of jobs you’re trying to help your customers to do that you heretofore have not done?.

Sure. I guess I wouldn’t describe it exactly the way you’re asking the question. Because of the nature of maintenance repair and operating supplies, consumable MRO in our case, it sort of touches everything.

Whether you are an equipment rental company repairing an excavator or a scissor lift, or you’re a large oil well drilling company or you’re an auto body shop, it’s all of that consumable maintenance stuff.

So it could include drill bits, and including specialized drill bits for drilling out spot welds, or it could include specialty adhesives and chemicals, or a broad range of fasteners. So because of the nature of maintenance, it kind of touches everything. It’s not sort of project-specific type work. .

Okay, so the job you’re trying to help your customers do is to help them do their maintenance more efficiently..

That’s correct..

Okay, but that’s a pretty broad subject.

Are there any areas of maintenance that you’re not in that you can get in?.

You know, for the most part we’re pleased with the breadth of our product offering.

There are probably some services or some unique software that we provide to the Kent Automotive customers that helps customers become more profitable - again, auto body shops, items that used to be an expense item for our customers now, because of software that’s unique to us that we provide, enables a lot of that expense to actually be billed to their customers.

So there are some services, but for the most part we’re pretty pleased with the breadth of our products and don’t feel that we have any major deficiencies in our product offering..

Okay, thanks very much..

Thank you..

As a reminder, if you’d like to ask a question, please press star, then one. I’m showing no additional questions. This concludes our question and answer session. I’d like to turn the conference back over to Mike DeCata for any closing remarks..

Thank you, Emily. Thank you again for your interest in the company. Let me close by saying that customer feedback in the form of organic growth, stable margins, increased customer retention, along with the measurable impacts that we’re seeing in process improvements, have given us confidence to stay the course.

We’ll continue to add sales reps, we’ll continue to invest in tools that enable our sales force to do a better job and do it more productively, and we’ll continue to focus on holding down costs through process improvements. Thank you again for your interest in Lawson Products. Have a great day..

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