Michael DeCata - President and Chief Executive Officer Ronald Knutson - Executive Vice President and Chief Financial Officer.

Jon Tanwanteng - CJS Securities Kevin Steinke - Barrington Research.

Good morning, ladies and gentlemen, and welcome to the Lawson Products first quarter 2015 earnings call. This call will be hosted by Michael DeCata, Lawson Products', President and Chief Executive Officer; and Ron Knutson, Lawson Products' Chief Financial Officer. They will open the call with an overview of the first quarter results.

There will 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 May 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 contained 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..

first, continue to add sales reps; second, give seasons reps to tools and processes to enable them to become more productive; and third, continue to look for acquisitions. We've elected to continue on this path, because of the very positive impact that this provides over the intermediate and longer-term.

While we're not satisfied with 1% sales growth, we believe that we're on track to achieve our stated goal of 10% EBITDA margin and improved organic growth over the next few years. Now, let me turn it over to Ron for a more detailed financial review..

Thank you, Mike, and good morning, everyone. As Mike indicated, while the first quarter was a bit challenging from a topline sales perspective, we are pleased with the overall operating performance for the quarter. We continue to benefit from our previous investments and are now consistently growing our business on a very solid foundation.

Let me review some of the highlights for the quarter. First, our adjusted operating income, taking into consideration non-recurring items, was $972,000 for the quarter compared to $54,000 a year ago. Second, sales finished at $69.9 million for the quarter, during which there were 63 selling days.

This represents an increase in our average daily sales of 1% over a year ago. I'll share some further insight into the items that impacted our sales for the quarter shortly. Third, we created additional gross profit of $1.6 million through leveraging our distribution costs and focusing on improving our purchasing costs.

And fourth, we ended the quarter with no outstanding debt under our credit facility and $2 million of available cash. Let me now share some of the details. As I just mentioned, we finished the quarter with sales of $69.9 million compared to $69.2 million a year ago, and $70.3 million from the fourth quarter.

The first quarters of both 2015 and 2014 included 63 selling days, while the fourth quarter of 2014 had 61 selling days. For first quarter, average daily sales increased 1% over a year ago, however were down 3.6% sequentially over the fourth quarter. Our first quarter sales were impacted by the following.

First, the weakening Canadian dollar impacted sales by approximately $800,000 or 1.1 percentage points on sales. Second, similar to others in our space, the slowdown in the oil and gas industry negatively impacted our sales by approximately $900,000. While our customer base is very diverse, energy now approximates 6% of our total business.

The oil and gas portion of the energy segment was down 24% versus a year ago, and 32% or $1.3 million from the fourth quarter. So this is a fairly significant drop-off. And third, as mentioned on our previous call, we held our North American sales meeting in February. The last meeting was held in the first quarter of 2013.

While we firmly believe that this is an extremely beneficial for the entire organization, it is a long-term investment in our sales force that impacted us in the first quarter. We pulled the sales team out of the field for approximately one week, which negatively impacted our sales by an estimated range of $800,000 to $1.3 million.

We expect that the training, education, sharing of best practices as well as the interaction with approximately 100 suppliers will create incremental sales over the longer-term. However, we did see an anticipated decline during the week of the events.

These factors negatively impacted our first quarter sales by approximately $2.5 million to $3 million. From a segment standpoint, the sales increase for the quarter was driven by our Kent Automotive division, increasing approximately 6% and our core loss in regional business being up approximately 1%.

These were offset by a decline in our strategic account business of approximately 2%, again, related to the slowdown in the energy sector. As Mike mentioned, our rep count ended at 917 for the quarter, essentially flat with the end of 2014.

We did purposely slowdown some of our hiring efforts in the weeks immediately prior to our North American sales meeting, to ensure that our training team and our district sales managers would be available to the new reps upon there onboarding.

While turnover in the first quarter has put some pressure to hit our goal of 1,000 sales reps by yearend, we are committed to expanding our sales force for the remainder of 2015.

As 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. Adding sales reps will also negatively impact our earnings in the short-term.

Since we are still 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 decreased 1.7% versus a year ago, primarily driven by the three factors previously mentioned.

Over the long-term, we fully expect that adding additional sales reps will drive topline 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 and their carriers with us, to ensure that they can ramp up quickly. In 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 14% of our total volume, and decreased nearly 2% over the prior-year quarter. This decrease was primarily driven by decline in the oil and gas sector.

Our Kent Automotive business was up nearly 6% as compared to a year-ago quarter, primarily driven by expanding our existing customer relationships. Kent now approximates 17% of our business. Both the strategic and Kent divisions are up against tough numbers from a year-ago quarter.

From a sequential average daily sales basis, January sales finished at $1.112 million, February finished at $1.066 million and March finished at $1.138 million. For the quarter gross margins was 61.3%. We continue to drive margins through leveraging distribution center efficiencies as well as initiatives to lower our product purchasing costs.

Looking into the future, we believe that our plan to increase strategic customer relationships, and to pursue more greenfield sales territories may 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 $43.8 million for the first quarter compared to $43.1 million a year ago, and $44.7 million in the fourth quarter. We continue to tightly manage our ongoing operating costs.

Expenses in the first quarter were impacted by the cost of our North American sales meeting of $1.9 million, partially offset by lower stock-based compensation expense, as our stock price decreased during the quarter.

Excluding the cost of the North American sales meeting and stock-based compensation expensed, total SG&A increased by $530,000 or 1.3%. This is primarily due to higher insurance costs and employee cost, as a result of having 81 more sales reps than a year ago, offset by continued cost control measures.

Adjusted non-GAAP operating income, taking into account the North American sales meeting, stock-based compensation and severance was $972,000 for the quarter compared to $54,000 a year ago, and $6,000 from the fourth quarter.

The improvement over a year ago was primarily driven by enhancing our margin dollars, and controlling our operating costs, all while continuing to incur upfront costs as we invest in our sales team. We had 81 more sales 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 sales reps, we do not expect the salary expense to normalize until 2016. Net loss for the quarter was $1.4 million or $0.16 per diluted share compared to a net loss of $3 million or $0.34 per diluted share a year-ago quarter.

This reflects the effect of the North American sales meeting, lower stock-based compensation expense and a 2014 non-recurring expense related to the impairment of the distribution center and the gain on the sale of our ASMP business.

From a balance sheet perspective, as I mentioned earlier, we ended the quarter with no outstanding debt under our credit facility and $2 million of cash on hand. We continue to closely manage our working capital and now have more flexibility, when it comes to investing back into the business. Year-to-date CapEx was $352,000.

We expect that our CapEx for the full year of 2015 to be in the range of $2.5 million to $3.5 million, primarily in maintenance capital for our distribution network and continued technology enhancements. Let me comment on a couple of items, as we look into the remainder of 2015.

As previously mentioned, the first quarter was negatively impacted by the weakening Canadian dollar and weaker demand in the oil and gas industry. While it's difficult to predict both of these, it is not our expectation that the downward pressure on either of these will subside, as we move throughout 2015.

We will manage gross margins and operating expenses with this in mind. And second, as both Mike and I have mentioned, we will continue to add sales reps in 2015. While we ended the first quarter essentially flat with the end of 2014, we will continue with our current strategy to expand our sales force in 2015.

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, given the pressure we faced in the quarter on the topline and the short-term impact of our business from the North American sales meeting, we are pleased with our overall financial performance for the quarter.

We remain committed to our gross strategy of adding sales reps, driving productivity of existing sales representatives and continuing to evaluate potential acquisition opportunities. I'll now turn it over to the operator for questions..

[Operator Instructions] And the first question comes from Jon Tanwanteng with CJS Securities..

What are you guys doing to attract or hire more reps, given the slowdown and slightly higher attrition in the quarter? Also, can you provide an update on the productivity of the recent hires and if it's matching your expectations?.

There are number of things we're doing to attract more reps, but the most important things we're doing is in our operating performance. As our fill rates, backorders and operating performance improves that becomes well known in the marketplace And both customers, competitors all see that. So nothing like good performance to attract more people.

That is probably the single biggest thing that is attracting people. Now, we do have a multimedia out there. We have social media. There has become more conventional media about us, magazine, articles, and so on and so forth, I'm sure that's having an impact.

But I'd like to believe that our own performance is the single biggest driver to attracting people..

John, relative to the productivity really what we're continuing to focus on there is to invest in the sales reps early in their carrier with us. So things that we're currently working on include looking at processes that the district sales managers are working with or what are they doing with the new sales reps within their first three to six months.

We are also providing them lifting and previous customer list of activity that previously was within their area that can give these sales reps a head start on gaining some volume as well. We've actually have a separate team. Mike mentioned, our Lean Six Sigma Process. We have a separate team that is completely focused on improving that productivity.

So far what we're seeing is that we're still kind of in that range of trying to get the sales reps to a run rate of by their twelve month of 120,000.

And I think we've talked about this in the past, and that's really kind of when they become accretive to the organization, and although there is wide variation, typically that happens in kind of that 12 to18 month period from when they join us..

John, if I might also add that as we look at the statistics, approximately 43% of the people we brought on board come from the great many small competitors' names that most of us don't recognize, very small competitors. About 41% come from larger companies. And then the balance comes from other route-related sales reps.

They might come from the auto industry or the rental industry or uniforms or broad spectrum of other sort of feeder companies. As well when we look at some of the statistics, now, they were hiring enough people to have statistical validity.

We're beginning to do so multivariable analysis to look at what are the attributes of the people we're bringing on that tend to suggest that we're more or less successful. This is a relatively early analysis and it is very much dependent on statistical validity.

But we are seeing some trends that certain profiles become more successful, more quickly than other profiles and we'll certainly use that knowledge in our future recruiting efforts..

Can you also remind me, what the exposure to downstream versus upstream energy is, if that makes a difference? And do you expect another leg down at all heading into Q2?.

Sure. So our overall business within the energy sector mix up about 6% of our revenue and that's really based upon SIC code as defined by our customers.

So although our customer base is certainly highly diverse with sorting many different end-markets, certainly, as we mentioned in our prepared comments, the impact and the slow down of our oil and gas customers certainly had an impact for us in the first quarter. It's really difficult to predict that into the next couple of quarters.

But at this point, we are managing the business that some of that slowdown will continue for remainder of the year and really making sure that we retain our gross margin dollars as well as really manage our operating expenses closely. So that if that trend continues we'll still be in a position to throw up positive EBITDA..

And then what does the overall trend look like heading into April so far?.

I would say, relatively flat with the first quarter. And what I would say is within the oil and gas customers that trend has not really changed from what we saw in February and March either..

And then any update on the M&A pipeline, what are you seeing out there?.

Yes. We continue to look at a number of opportunities. Again, you start as you know with the very large funnel and we are looking for a real DNA match and it continues. Nothing really to report early days, but its something we're seriously committed to. We're focused on.

But again, we've set ourselves a bit of challenge, because we're looking for people almost exactly like us only smaller. That will be good for them, should they join us. It will also be seamless from the customer's perspective and from the suppliers' perspective, but the closure you hold yourself to a DNA match, the finer the screen becomes.

And so far it's tough letting to find a DNA match, but eventually I am confident we will..

And then finally, you mentioned strength at Kent.

Was there anything particular from an end demand or customer specific standpoint there or was it purely just share gain?.

It's a little bit of share gain, but with our largest and most important customers we have very close partnership, so there is a great dialog when they need us to bring in new products, we do, if there are additional services.

I have gone out -- as we've mentioned in past calls, all the executives of our company go out and make sales calls every single month. I've gone out and made many sales calls on Kent customers. And we just have a tremendous relationship, and let me say, partnership with our Kent customers.

And that enables us to win more share of wallet and more closely service them, and of course in doing so it enables them to become more profitable and more productive, because of the close relationship with us. So a lot of that is shared gain.

Some of it is just the consolidation of the industry, where large auto body shops are acquiring smaller regional players. And they bring us in with them, because they've seen what we've been able to do for them in the base business. As they acquire someone, the first call is to us to translate the existing business into the newly acquired company.

So all of those are factors, but at its core, a very close partnership with our customers is probably the single biggest factor..

The next question comes from Kevin Steinke with Barrington Research..

Wanted to follow-up a little on the oil and gas sector, and just wondering if the weakness there might have led to a little bit greater sales force attrition, or if you feel less pressure to add sales headcount, because of the headwinds in that sector?.

I think the answer is yes. There are certainly some sales reps, individuals with individual locations that have been hurt. And occasionally, while it doesn't happen often, because none of the sales reps have only one customer, they have many, many, many customers.

But where there is a slow down in a specific customer, it's put some pressure on the sales rep. We had seen at least at the couple of occasions where sales reps have said, hey, this is going to be a tough slot, maybe I'll consider doing something else. Of course, we're very disappointed when that happens.

But it also gives a sales rep an opportunity to develop new accounts that initially start small and over time grow. So freeing up a little bit of time is not at all complete negative.

They just redeploy that time to other customers, or reset and clean up, do an even better job of organizing customers and positioning us to win share of wallet at the existing customers. Relative to the pressure or lack of pressure to add sales reps, they are kind of disconnected.

We see significant market opportunity in many, many geographies, both real, suburban, and across the board we see opportunities to add sales reps and we are continuing to do that unrelated to the energy industry or anything else, just untapped opportunity.

And again built on the foundation of our operational excellence or continuous improvement, whether it's distribution center productivity, the Lean Six Sigma efforts, all of that gives us confidence that we're able to deliver a better service to our customers, make our customers more profitable themselves.

And customers reward us with gross profit, with share of wallet, strategic accounts bring us to more locations, all of this continues to encourage us to grow the business. And we continue to focus on -- we've used the analogy, three legs of the stool. We are very much focused on adding reps and we will continue to add reps for quite sometime to come.

We're focused on delivering tools that enable our existing base of reps to do a better job, and of course even better supplier alignment helps put tools in the hands of our sales reps, technology puts tools in the hands of our sales reps. And the third leg of the stool, of course, is that focus on acquisitions.

So independent of the energy industry, we are very much committed to our strategy, which include all three legs that stool..

You did characterize it as more pressure to reach that 1,000 rep goal by the end of the year.

But would you rather just kind of take your time and do it right rather than focus on trying to reach that goal, and if you came up a little bit shorted wouldn't be the end of the world, or how are you thinking about that?.

Absolutely, far more important to us to hire high quality, high caliber sales reps that can do a great job for their customers and help deliver the productivity that our customers depend on. That is by far more important to us than getting to some arbitrary number. A 1,000 is a nice round number, but it is a relatively arbitrary number.

When we get there, there will still be untapped geography, and there is nothing magic about that number. So far more important to add high caliber people that we can train and onboard successfully than an arbitrary number..

And could you just delve a little bit more into the takeaways from the national sales meeting and the benefits that you see accruing from that over the next year or two?.

Yes, it was a really wonderful event. We do these event, but the last one we did was two years ago. And we do them for a whole host of reasons. First and foremost, there is so much institutional knowledge in the company and among our sales reps.

So first and foremost, getting sales reps to network with each other, so that when a Kent person has a question about a loss in product, they have a teammate to call, or when we've got a subject matter expert on oil well drilling, they're available for a teammate across the company.

So first and foremost, just the idea, and we provide a service structured vehicle to bring reps together to get to know each other, so that later they can be advised and counsel and mentor each other. So that's a huge benefit.

Now, we did bring a 100 suppliers together, they demonstrated new product, they showed new product, they trained on new product and the suppliers uniformly came back to us, and I spent a lot of time myself at that trade show.

And the suppliers were blown away by the caliber, intensity and focus of our sales reps, because our sales reps are commissioned sales reps, they take it very, very seriously. And they spend a lot of time delving into detail with our suppliers, which of course the suppliers appreciate.

As well, we have sessions on pricing, on technology, on market segmentation. For example, an important market for us is the fleet segment. For us fleet is defined as something just not bolted to floor.

It could be a fleet of tanks, it could be a fleet of oil well drilling equipment, could be a rental fleet, so training our reps on market segmentation on how better to serve those customers.

All of these and many other topics come together at that sales rally, and it pays significant benefits to our sales reps, and in turn they are better able to service their customers and solve customer problems for years to come. It's an investment. It's a cost.

We do take sales reps out of the field for a number of days, but over the long term it's exactly the right thing to do to make investments in our sales reps.

And also, I'm convinced that our suppliers see the caliber of sales reps, and suppliers have come to the table with us and committed to sort of investing in us on speaking figuratively, of course, and investing in us in training, in samples, and all manner of support that our suppliers can help enable our sales reps to do a better job, so again a really good thing to do..

And if I could, ask about the one of the legs of the stool in terms of increased rep productivity. You have the new ordering tool rolled out.

What other initiatives are you working onto to increase existing rep productivity?.

Sure, there are number of them. Let me try and put them into some buckets. One of them we talked about was the technology.

And that something as simple as a Bluetooth scanner that integrates directly to SAP, it gives the rep the ability rather than in past years, where they would write down an item number, and then go at lunch or after dinner and enter it into computer. We can now scan that in directly. So that's a pretty straightforward thing to do.

It also has the effect of dropping orders more quickly and earlier in the day to the distribution centers, which in turn level loads our distribution labor or distribution center labor for us. But technology also helps us with scanners, cross referencing items, pulling up product availability, if we've got a competitors item, cross referencing that.

So all of those kind of fall into the technology bucket, and there are many other things that I won't go into just for the sake of time, as well, things like market segmentation. So when we think about the role of marketing organization sort of divided into two halves.

One half is fairly tactical, and that is putting tools in the hands of sales reps, so they can better service specific market segment. That is to say, when you're opening a new account, what product should you lead with knowing that other accounts, like the one I'm trying to open, already values these products.

So it makes the sales rep more productive, more quickly. So that's market segmentation. Market training, product supplier's promos, we mentioned a Lean Six Sigma effort around the Canadian promotional products. We saw some deficiencies that we weren't happy with, now we've got a Lean Six Sigma effort going there.

That will have the effective driving sales rep productivity.

The third kind of area of productivity is as we're adding sales reps, one of the secondary benefits is just this whole idea of route density where the sales reps and their district managers together are determining what's the optimum territory size and where a sales rep feels like they can move an account over to a newly-hired sales rep, they're doing that, that freeze the existing rep to drive less time and spend more time in front of customers, and just the process of adding sales reps inevitably gets you route density.

Now, that's something that's happening bottoms up. It's not something that we're driving tops down, because in order to do that successfully you need the knowledge of the sales reps and the district managers to better optimize the territories and the relationships that the sales reps have with certain customers. So that's something they know.

But it is happening and is paying benefits in freeing up again windshield time from sales reps. So those are the three kind of buckets that existing sales reps are getting productivity from those three broad ideas. There are others of course, but those are three big ones..

Just one last question from me. The gross margin remained very solid at this 60% level and cost control was good on the G&A line.

Do you feel good about holding gross margin around this level, given all the puts and takes and also not having to add significantly to G&A cost going forward?.

So we feel good about our gross margin where we ended the quarter. And in fact, if you look back at the last few quarters, we've been able to manage that number north of 60%. And historically, we've given guidance around that percentage being in the high-50s and call it kind of 59-ish.

And really what we're seeing there is the leveraging effects of our distribution centers. As we talked about in the past, as far as us being able to push through additional volume through our DCs, it certainly helps that overall percentage.

As well as our relationship with our suppliers, and Mike referenced this earlier, we are and continuing to build out tighter relationships with our suppliers that is providing us some additional benefit there as well.

And even though, there are some headwinds as we continue to push forward in new greenfield locations as well as more strategic relationships with our customers and new customers, that's some of the headwinds, but we will pretty good about being able to, for the most part, offset some of those headwinds with these other initiatives.

And relative to SG&A, by all means, I mean this is something that we look at on a daily basis. I think you saw that in the first quarter of us being able to control, not only our selling expenses, but certainly the G&A costs as well, even as you take out some of the non-recurring effect, so stock-based comp and those types of items.

Our G&A costs were down over 3% versus a year ago. So something that we never take our eye off the ball on that and we'll continue to manage that for the remainder of the year..

As there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mike DeCata for any closing remarks. End of Q&A.

Thank you, Gary. And thank you for your interest in the company. As I had mentioned in my prepared comments, we're not completely satisfied with our first quarter sales growth. However, I'm confident that we're on the right track. The North American sales meeting will benefit future quarters.

Strategic account customers are bringing us to more of their sites and we're earning more shared wallet. We continue to demonstrate our value by helping customers become more productive. Employee confidence and morale is at all-time high. Employees are sharing best practices with each other, and that has the effect of better service to our customers.

Customers become the beneficiary, better sharing between our sales reps, and between sales reps, and suppliers. Our growth strategy has not changed. We'll continue to stay the course and focus on continuous improvement in everything we do. Thank you, again, for your interest. Have a great day.

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