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

Kevin Steinke - Barrington Research Ryan Cieslak - KeyBanc Gary Hatton - Granahan Investment Larry Pfeffer - Avondale Partners Beth Lilly - GAMCO Investors.

Good morning, ladies and gentlemen. And welcome to the Lawson Products' Third Quarter 2016 Earnings call. This call will be hosted by Michael DeCata, Lawson Products’ President and Chief Executive Officer; and Ron Knutson, Lawson Products’ Chief Financial Officer.

They will open the call with an overview of the third quarter results, there then be time for questions and answers. This call is being audio simulcast on the internet via the Lawson Products Investors Relations page on the company’s website, lawsonproducts.com. A replay of the webcast will be available on the website through November 30, 2016.

During this call, the company will be providing an update on the business as well as covering relevant financial and operational information.

I would like to point out that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those just described.

In addition, statements made during this call are based on the company’s views as of today. The company anticipates that future developments may cause those views to change. Please consider the information presented in that light.

The company may at some point elect to update the forward-looking statements made today but specifically disclaims any obligation to do so. I will now turn the call over to Lawson Products’ CEO, Mike DeCata. Please go ahead..

Good morning. And thank you for joining the call. This morning, I’ll comment on the quarter and our overall progress. Ron Knutson will provide a more detailed review of our financial results for the quarter and then we’ll take questions.

Similar to the second quarter and really much like we've experienced over the past 18-24 months, there is still softness in the industrial economy. However, we are beginning to see some encouraging signs in several of our market segments.

Our government business grew over 10% during the third quarter versus the third quarter last year and is up over 5% year-to-date, largely driven by state and local government as we mentioned in the past. Government now comprises 10% of our overall revenue.

Kent Automotive grew nearly 8% during the third quarter and is up over 7% year-to-date and comprises 19% of overall revenue. Our Canadian business is up in part because of FB Feeney acquisition.

The addition of sales reps over the past several years and during three quarters of this year is resulting in some nice incremental growth from new territories. Unfortunately, these gains are being offset by continued softness in some of our established Lawson customers or experiencing reductions in machine time utilization and fleet utilization.

Overall, sales for the third quarter were roughly unchanged versus the year ago and up 1.2% versus the second quarter. On ADS, September showed the strongest performance of the three months. Excluding oil and gas, sales grew 1.1% versus the third quarter of 2015 and 0.9% year-to-date. Oil and gas has also improved recently.

Our three part growth strategy is unchanged. First, we will continue to add sales reps. However, during this quarter and continuing in the near future we will sharpen our focus on enabling our sales reps to grow their territories.

We've previously discussed the ebb and flow of hiring followed by a period of onboarding and training to help sales reps become more successful. We are also focused on performance management. It is likely that our sales rep count will fluctuate but remain on modest growth trend for the foreseeable future and into 2017.

Our sales rep count ended the quarter at 1,006, an increase of 69 year-to-date but down from 1,020 at the end of the second quarter. Second, we continue to focus on enabling our seasoned reps win additional share of wallet and add new accounts in their existing territories.

This has been specially challenging this year as our established customers and seasoned reps have worn the brunt of the overall industrial softness. Third, we remain committed to growth through acquisitions. We have successfully completed three acquisitions over the past year. Each acquisition has been larger than the previous acquisition.

We anticipate that this trend will continue and size will continue to increase. The acquisitions that we had completed are performing very well. And are now integrated into our operations. Acquired sales reps are adding new accounts and winning share of wallet by utilizing their access to a broader product offering.

We are also pleased that the pipeline for future acquisitions continuous to grow. As planned, we gained valuable insight through the integration of the three acquisitions that we've already completed. This insight serves to lower the integration risk of future acquisitions and as well run the risk of potential acquisitions.

While Ron will provide more detail financial review, I wanted to highlight some key areas related to our financial performance. Sales were in line with the year ago and up sequentially from the second quarter.

While there was a slight decline in gross profit percent this quarter, it was not caused by either pricing pressure or increases in landed costs. Our product margin has remained stable for the past several quarters.

While operating a net income was down on a year-over-year basis, we did see a significant improvement sequentially over the second quarter.

The full quarter carrying cost associated with the significant number of sales reps added during the second quarter combined with continued carrying cost of previously added reps continues to put pressure on our overall operating costs. However, we remain confident these investments will pay off and will position the company for growth in the future.

Earlier this year we began using a new inventory optimization tool which we implemented to help improve inventory turn while still improving customer order metrics. Our fill rate for customers continues to hover at 99%. At the same time, we've reduced inventory by $1.3 million during the quarter and $2.7 million year-to-date.

Through Lean Six Sigma and the hard work of our teammates, we've been able to hold our G&A cost flat through process reengineering. On a side note, our G&A headcount essentially remain flat over the past four years.

We've done this by building a stronger and more robust workforce and enabling teammates to take cross functional positions, participate in new Lean Six Sigma project and participate in the integration of acquisitions. Our employees are working smarter, contributing to the overall success of the organization. Overall, it was a solid quarter.

In particular, the sequential improvement from the second quarter. We continue to win best in our organization despite a challenging environment. Finally, turning to operations. Our distribution centers are continuing to refine their processes and utilize inventory more effectively.

Productivity continues to improve and our DC network has capacity to grow sale significantly without adding any extra costs. We will continue to optimize our DC infrastructure. We are incorporating new customers and products gained organically and as a result of our continuing acquisition efforts. Our commitment to Lean Six Sigma continues.

We are completing the data gathering and pilot phase of the four projects that we discussed several quarters ago. Projects that we began several years ago continue to bear fruit. For example, we began Lean Six Sigma in 2013 and it took 102 days to fill a requisition for a greenfield sales reposition. Recently that number was 40 days.

It used to take 29 hours to complete a quote for a special source item. Today that number is 10 hours. Lean Six Sigma is enabling us to become more productive and improve customer service while holding G&A cost flat. Overall, we have confidence in our three part growth plan.

The addition of sales reps and acquisitions will help us grow beyond the market. Our value proposition is more critical than ever and helping customers maximize the machine time and achieve maximum labor productivity in their operations. Looking forward, the fourth quarter is always challenging because of the number of selling days.

And this year we lose one day compared to 2015. However, October is showing some encouragement. Now, let me turn it over to Ron for detailed financial review. .

Thank you, Mike. And good morning, everyone. As Mike indicated, the market remains soft. Despite these conditions, we continue to invest in the business and making acquisitions that will provide future growth opportunities to expand and increase our geographic entity in the large, fragmented MRO marketplace.

Here are some of the highlights for the quarter. First, our adjusted operating income for the quarter, taking into consideration non-recurring items, improved sequentially to $2.1 million from $687,000 in the second quarter, but did decline from the year-ago quarter impacted by the continuation of our sales force expansion throughout 2016.

Second, sales finished at $70.2 million for the quarter. Average daily sales were up 1.2% from the second quarter and were flat versus the year ago quarter. Excluding the impact of lower sales to the direct oil and gas customers, sales increased 1.1% over a year ago with the same number of selling days in 2016.

Third, gross margin percentage ended at 60.6% for the quarter. And fourth, we created net cash flows of $2 million for the quarter. We ended the quarter with $10.7 million of available cash, no outstanding borrowings under our credit facility, and additional availability of $34.8 million under that facility. Now let me share some of the details.

As I just mentioned, we finished the quarter with sales of $70.2 million, flat with the year ago and up versus $69.3 million from the second quarter. The third quarter of both 2016 and 2015, as well as the second quarter of 2016 all had 64 selling days. As compared to a year ago, our first quarter sales were impacted by the following.

First, the ongoing softness in MRO marketplace. And second, while the slowdown in the oil and gas segment has moderated a bit, the decline from a year ago negatively impacted our sales by approximately $824,000.

This only includes customers directly defined as oil and gas and did not include customers in related industries that were impacted by the segment. While our customer base is very diverse, energy, which oil and gas is a subset of, approximates it is 4% of our total business.

Excluding this effect, sales were up 1.1% for the quarter and up 0.9% year-to-date. From a divisional standpoint, strategic accounts represent approximately 12% of our total volume. Many of our strategic relationships continue with solid growth for the quarter.

And Kent Automotive average daily sales were up nearly 8% as compared to the year ago quarter driven primarily by expanding our existing strategic customer relationships. Kent is now approximate 19% of our business.

We also realized solid growth in our government business primarily driven by additional penetration in these local and state opportunities. From a sequential average daily sales basis, July sales finished at $1.090 million, August finished at $1.081 million, and September finished at $1.121 million.

As Mike mentioned, we ended the quarter with a 1,006 sales reps. As we’ve said in the past, while adding sales reps negatively impacts our earnings in the short term, adding reps will ultimately drive our total revenues and allow us to further leverage our existing infrastructure.

As we refine our hiring and onboarding process, our overall retention rate improved slightly in late 2015, which has continued into 2016. As we mentioned on the previous earnings call, we anticipated a slowdown in our hiring in the second half of 2016 which we realized this quarter.

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. Adding sales reps will negatively impact our earnings in the short term; however, over the long term we fully expect that adding additional reps will drive top line sales and improved earnings.

For the quarter, gross margin was 60.6% compared to 61.3% in the second quarter and 61.7% a year ago. About one half of the decline from Q2 is primarily driven by higher non-recurring transportation costs into Canada that we do not expect to continue.

Our customer service metrics of backorders, order completeness rate and line service levels, all continued to be at improved levels.

Looking forward, we believe that our plan to increase strategic customer relationships and to pursue more Greenfield sales territories will put some downward pressure on our gross margin percentage; however, we expect this to be partially offset by other procurement opportunities and efficiencies within our DCs.

Selling, general and administrative expenses were $40.2 million for the third quarter compared to $40.5 million a year ago and $42.5 million in the second quarter. We continue to tightly manage our ongoing operating costs given the flat sales environment.

As compared to a year ago, expenses during the third quarter decreased primarily due to lower stock based compensation expense and lower performance-based compensation, offset by investments made to hire additional sales reps into 2016 and increased health insurance claims. Operating income was $2.4 million for the quarter.

Adjusted non-GAAP operating income, taking into account stock-based compensation and severance, was $2.1 million for the quarter compared to $3.2 million a year ago and $687,000 in the second quarter.

Net income for the quarter was $1.8 million or $0.20 per diluted share compared to $2.4 million or $0.27 per diluted share a year-ago quarter and $172,000 or $0.02 per diluted share last quarter. From a balance sheet perspective, we ended the quarter with $10.7 million of cash on hand and no outstanding borrowings under our credit facility.

We continued to be pleased with the previous investment in our new inventory forecasting system as evidenced by our $2.7 million reduction in inventory form yearend. I'd also like to take this time to highlight that we recently renewed our existing credit facility, extending the maturity date to August 2020.

Under the new facility, we have greater access to capital, reduced the financial covenant requirements and also reduce the fees. Should we need additional capital for growth, in particular to support future acquisitions, we believe that we have many options available to us and gaining access to capital will not be an issue.

CapEx for the quarter was $1 million and $2.6 million year-to-date. We expect our CapEx for the full year of 2016 to be in the range of $3 million to $3.5 million primarily in maintenance capital for our distribution network and continued technology enhancements. Let me now comment on a few items as we look into the next few quarters.

First, we expect to continue to operate in a soft MRO market. We expect the market will continue to be challenging during the remainder of 2016 and into 2017 and we'll manage the business accordingly.

Second, as both Mike and I have mentioned our rep hiring will slow in the second half of the year as we focus our resources on enabling our expanded sales force to be productive. In the longer term, we will continue with our current strategy to expand our sales force while also focusing on existing rep productivity and acquisitions.

And third, our adjusted EBITDA was 5.8% for the quarter compared to 4.2% that we reported last quarter. While we did receive some benefit from reducing performance based incentive accruals in the quarter, the quarter was also impacted by the expansion of our sales force in the first half of the year.

We are managing the business in a challenging environment while at the same time moving in the right direction toward our stated 10% EBITDA goal. I'll now turn it over to the operator for questions. .

[Operator Instructions] And we will take our first question from Kevin Steinke from Barrington Research. Please go ahead..

Good morning, Mike and Ron. I wanted to start off by asking about the monthly trends that you discussed. You talked about September being the strongest month of the third quarter and also some encouraging signs in October.

So I don't know if you could elaborate on that in terms of that the stronger September and what you are seeing so far in October?.

Let me start with the quick comment. What we are seeing is sort of broad based encouragements. We wouldn't be commenting in that way if it was one specific customer or one specific large piece of business. So it is a kind of across the board. Let me quickly say it is not so encouraging as to say that there is a fundamental trend happening.

It is just seems like it is stabilizing a little bit of pretty anemic base.

Nonetheless, it feels like maybe we are bottoming, maybe considering our consumable maintenance and small quantity maintenance business that at some point even when you are running machines with lesser time utilization or driving your trucks with less over the road miles, soon or later they have to be maintained.

And at some point even at a low level things start breaking. That could be what's happening or there could be a little bit more fundamental encouragement, time will tell. Ron, you want to --.

Sure. Kevin, I'd just add to that we have seen a little bit of a pick up in our oil and gas customers sequentially during the quarter, again not dramatic but a little bit of lift. I think that drove some of the sequential improvement going into September.

And down versus a year ago in that overall segment but we are starting to see some positive signs in that sector. .

Yes. To that point, some of our larger oil and gas customers are bringing back maintenance mechanics that had been furloughed in a couple locations in particular. So possibly with the increase in price of oil, we are starting to see some rig count come back and all of that -- again it is a good sign. .

All right. That's helpful. And I guess with this bit of stabilization or improvement, would you attribute that, any of that as well you talked about the incremental sales coming from your aggressive rep hiring.

I mean can you just talk about how much that's contributing to your growth? Obviously, still being offset by the overall macro headwinds but it sound like there are some encouraging signs in terms of incremental new sales from your rep additions. .

Yes. Kevin, this is Ron. So we continue to add sales reps and have done so throughout 2016. And typically what will happen as they start to mature out in their -- even in their early stages with us is as they move from quarter one to quarter two to quarter three of their time with us, they will gradually start increasing their sales.

You recall that we hired a significant number of sales reps in the second quarter. And certainly those reps didn't produce probably many sales in Q2 but now we are starting to get some sales from those reps hired in the second quarter spilling into the third quarter. So, there is always a little bit lift from the new sales reps.

The other piece of the lift that we saw in the third quarter was due to the acquisitions that we made, being the three acquisitions that we've made over the last year. They were certainly not in our numbers a year ago. And we got some lift out of those acquisitions in the third quarter of this year. .

And to that point, we look at the acquired reps because what we are primarily acquiring the sales reps and the customers they bring along.

And so the way that sort of layers into the business is as we acquire a rep, they start their first day with us at their mature run rate whereas a new rep starts a greenfield rep in particular starts at zero and very slowly and by the way for the first call it two months there is almost no sales because they are being trained, the Lean Six Sigma process has them opening developing new relationships but almost no sales come out of a rep in the first couple of months.

A lot of activity that builds and builds to the point where three and four years into the relationship now we got an extremely robust territory.

When we acquire a rep we start at the end of that curve and build from there and the reason we are building from there with this specific reps that we've acquired is what those reps get is new product categories to sell that they didn't have access to in their previous companies, before the companies were combined. .

Right. Right. That makes sense. And so you also commented on given the success in integrating the first three acquisitions that essentially the pipeline or potential acquisition is broadening or the type of acquisitions that you can target is broadening.

I mean can you just elaborate on that as well?.

Yes. Sure. Again, our goal -- if the world really works as smoothly as sort of it will be kind of an interesting situation.

Our goal is to keep stepping up in size and the more acquisitions we do and the more seamless and smoother the integrations go, both they gives us more confidence but also the acquired companies and the owners of the acquired companies become references for the next company on the target list.

So when acquisition integration goes smoothly and everybody on both sides is extremely pleased that all the promises were kept. There was a smooth transition for the employees, customers, there is no customer disruption. That becomes more attractive to the next acquisition discussion.

And then we speak to acquisition targets, we always specifically talk about using the previous acquisitions as a reference. And with their permission we always encourage them to reach out to the people that have already joined us. So that helps open up the pipeline and step up in size.

Now as you know you have a lot of acquisition discussions with a very few that actually become realized. And that's our situation as well. But it is an encouraging process and it is our goal and aspiration to make growth through acquisition a core competency of our company. And everyone we've done we've learned things about the integration process.

It is opened our horizon to product and process and people. And so it gives us more confidence to be a little bit more open minded about future acquisitions. But they've gone very well and the past three we track every single week their performance.

SKU count is increasing, additional customers are being gained, we've retained of course all of the sales reps. So, the three that we've actually completed are performing very, very well which gives us more encouragement about the future.

And enables us to talk about that relative to future reps that we would acquire and how they will do even better with us they were doing with their previous company profile. .

Okay. That's good to hear. And, Ron, I don't know -- are you tracking what the actual revenue contribution was on the quarter from acquired reps or acquisitions or you just not looking to separate that out. Ron, I am just wondering if you could quantify perhaps what acquisition or acquired reps contributed in the quarter. .

Sure. Yes. We are certainly tracking it and they attributed about $800,000 to the quarter. .

Okay. Perfect. And then just last question for me.

What was the delta or the benefit of the lower performance based comp that you referenced in the quarter?.

Sure. So really a combination of incentives to -- our incentive accruals really for both our sales teams as well as our corporate teams. So unfortunately we are not hitting some of our overall top line plans and so we brought some of those accruals down in the quarter.

It would benefit in the third quarter I'd say versus a year ago was about $0.5 million versus the second quarter it was a couple hundred thousand dollar. So not dramatic, not huge dollars but it did impact the quarter from an overall operating income standpoint. .

If I could also add to that. One of the things that are sort of a core tenet of how we operate is deeply in alignment. So we are aligned on sales growth, all the executives in the company, it is a very large number of people out of next year down aligned around sales growth and growth in EBITDA.

And at this time last year we and I believe in the industry were little bit optimistic that 2016 was going to stabilize and get a better. That currently didn't materialize but at this time last year we were far more optimistic than it all turned out.

So it didn't feel like we had unreasonable goals and yet the market has been softer than any of us had anticipated and so with that commitment around alignment this is what happen when you miss even by a bit. .

And we will take our next question from Ryan Cieslak with KeyBanc Capital. Please go ahead..

Hey, good morning, guys. Nice quarter.

I wanted to just first dive a little bit back into the sales trends in the quarter and ask in a different way, is it fair to say that the way that the quarter ended that sales was better than your expectations? And then two, maybe talk a little bit about what you are seeing, it sounds like the commentaries certainly were the better than what you guys has sounded like in the past and I know there has been some fits and starts through the year but, Mike, is it fair to say that there is something that's different over the last couple of months that gives you greater confidence that at the very least we stabilize if not maybe starting to see some improvement?.

Let me comment on both parts. First, the question is it better than we had planned. At this point last year when we were doing the planning on the quarterly and monthly basis, I'd say it is not better than we planned. It is better than it had been previously but it was still below our aspirations the ones we set in November of 2015.

It just stabilizing of this lower level and improving slightly versus again 2015. Relative to what we are seeing out there, again it is kind of broad based with 70,000 customers we are still shipping to 30,000 unique ships to locations per month, so those trends are kind of the same.

What might be happening out there, again, lot of little incremental basis is the idea that just considering that we are a small quantity consumable business with even a little movement we start selling more line items albeit the number of the dollars per line item are still below where they had been in like 2014 and 2015 so for broad based. .

Yes. I'd just add to that Ryan that through the quarter and I'd say even sequentially within the quarter I comment earlier about some of the trends that we are seeing in the oil and gas segment. But also our Kent business continues to grow and really driven by the relationships that we have with many of our strategic customers.

And then the other piece is our government business which we highlighted in our comments, is been positive as well. So in particularly in the state and local opportunities, it seems like we are continuing to make some nice penetration into those opportunities. .

Yes.

An example, we -- I think we mentioned that maybe one or two quarters ago a contract that we had signed a buying consortium at the state and municipal level, state and local level, and we are now servicing over 1,700 small municipalities and it could be something as simple as a small department of transportation with a couple of Paul trucks for the winter or lot of [library] or a police department so a net pick up for us of about almost 700 net new customers recently and more than 1,700 locations against these the small state and municipal contract.

And we fully expect that will continue to grow as we are able to offer more and more, when you think about the number of small state and local facilities out there across the US, there is a huge market potential for us. And little bit by little we are creeping more and more into that. .

And Mike that's really good color.

Is it something different about the way you guys are approaching the government end markets right now or is it more just you are seeing incremental spending coming out of the local and state jurisdictions?.

I think it's more about focus than it is incremental spending.

Couple of years ago, four, five years ago more of our emphasis was on Department of Defense and at the federal level and now more of our emphasis, while we still have to pick up that business and we still worked toward that business but more of our business is focused far more distributed in every community.

So it has been a shift of focus but the primary answer is focus not fundamental spending. I think we are just able to do a better job of delivering our value proposition on an every week basis or every other week basis to that customer, the same as the small business customer that we service. .

And is there been any impact from Hurricane Mathew for you guys? I am not sure if how the exposure there in the South East would be or how do we think about that in entirety in October trend?.

If there is any impact it is negative. When the roads are flooded and customers can't get to their facilities, in the short term it was certainly not a positive.

I think over the longer term stuff has going to have to be repaired that was under water and some of that might have a positive impact but it recently very small negative not material negative but certainly not a positive.

By the way when Hurricane Sandy happened you would have thought that with all those cars under water that our Kent business would pick up a very big piece of incremental business. But that's not what happened. What happened was all those cars were turtled and not repaired.

So it is kind of grey area for us but not materially either negative or probably not positive. .

Okay. That's good color. The last one for me and then I'll hop back into the queue. Ron, I know you mentioned on the prepared remarks, the gross margins were down. I think you said half of that was related to the incremental freight expense.

One, is that right? And then two, did you quantify the specific inventory Canadian tax that you mentioned in the press release?.

Sure. So the impact on the increased cost into Canada really is the additional duties that we are required to pay for the quarters about a couple hundred thousand dollars that was a bit of catch up. So that's certainly -- we pay ongoing duties and so forth but the catch up piece of it was about 30 bips on the margin side.

And in the past we've said we feel pretty comfortable with our gross margins in the kind of 61-ish range and excluding that, that's pretty much right where we were at. .

Okay. And so the incremental freight expense is that separate from that in -- I know that's been seems like it has been in the numbers for a couple of quarters now.

How do we think about that into the fourth quarter and maybe also into next year?.

Yes. It is separate from the Canada dollar I just mentioned. And freight is always one of those areas that we manage very tightly relative to our ability to charge freight or pass freight along to some of our customers. It is nothing really new for us where we have some customers that like to see that freight as a separate line, others that do not.

And it was I would say a minor impact for the quarter. And I think on a go forward basis kind of where we are running today relative to freight, we don't see ourselves taking a big step forward, a big step backwards relative to our overall freight recoveries. .

The other thing relative to freight that, as an underlying issue opportunity for us really more opportunities than anything else is as our order complete continues to creep up, the freight recovery creeps up or the freight cost come down, that's a very slow incremental thing.

But I think we've mentioned in the past our -- we were call it four, five years ago less than 50% of our orders were coming from the distribution center closest to the customer. What was required five years ago for us was that we might have to ship boxes from one, from two or three distribution centers to complete the order.

From the customers' point of view, you still saw high 90s, 98% at that time, 97% of the orders got sent to the customer before the sales reps arrive to put it away. So the customer never saw this but it would take three different shipments from three different locations.

Today, we are much closer to one shipment for all orders coming from the distribution center closest to the customer. And that has the effect of lowering freight costs and increasing freight recovery for us. .

And we will take our next question from Gary Hatton with Granahan Investment. Please go ahead. .

Hi, good morning. Just I was curious in the flow MRO market. You discussed a lot of initiatives that you have been taking for the last period of time. And I was just curious how you measure -- if you have any idea, any metrics that suggest that you are gaining shares.

I am assuming that's just are intended to gain share and just curious how in kind of slow market for everybody how you measure that?.

Yes. I can add a little color there. At the simplest level it is things like customer count, it is number of ship to location per month, now one of the things that offsets that is even if you are shipping to the same number of customers or an increasing number of customers by the way of line count also is another view on that.

All of those things have been stable or positive for us. What has been a negative for us is the dollar volume per line which implies, it implies that we have the customers business but bearing in mind we are selling the customer very small maintenance quantities of products.

And because they are consumable products, if they are not being consumed, let me use an analogy, how many flat washers do you really need if you are not consuming flat washers. So as we consume product we are very quickly on a weekly basis refilling. So our Greenfield reps are adding new accounts.

They are picking up product categories and ship to locations is going up. All of that is being offset by our seasoned customers and seasoned reps who while we have steady state business, line value is still kind of at a low level.

When we see both line level going up, it will imply that our seasoned customers went from two shift operation to three shift operation or fleet utilization for the construction equipment rental industry for example ticked up a few points.

And now the back callers are on rent more day than it was before, that will drive maintenance costs for the customer and volume for us. .

Okay. That's help.

Are there any publicly traded companies that you looked at more closely in terms of how your organic growth numbers compare to them?.

Yes. It is little hard because we are narrowly focused in our niche which is consumable MRO. The other big players in the space we would refer to as broad line MRO. And there is a pretty substantial difference. In that consumable, while quantity consumable MRO is a very short cycle. Again, our sales reps are what we call high service value proposition.

Which means our sales reps are visiting with the customer every week or every other week by contrast a broad line MRO provider might be selling you ladders, motors and fans and lighting retrofits, a next stop candy managed by the customer. I can choose to delay those capital purchases or durables, goods purchases I should say.

I can do this quarter or I can push it off till next year. So the short answer is really we don't have anybody just like us who is narrowly focused on consumable MRO as a good comparison. .

[Operator Instructions] And we will take our next question from Larry Pfeffer with Avondale Partners..

Good morning, Mike. Good morning, Ron. So kind of sticking with that last question.

Do you have the actual numbers for what your unique ship to be in this quarter in terms of a percentage change?.

Yes. I mean they are up a little bit. I mean we wouldn't -- we don't disclose this specific numbers but it is up a point or so relative to unique ship uses we look at. Actually we look at the trend over the last I'd say probably 12 months.

And the same thing my comment on the number of line and the line value, our number of lines are up kind of low single digits. And our line value is down low single digit but to a greater degree of low.

So we are pushing more lines to the distribution center through the DCs but average value of those lines is or the average number of products coming out each one of those picks is down a little bit. So and I think that's clear indication of our existing customers purchasing less.

And the other comment I'd make is that our average order size coming in from our customers is down slightly as well. .

Got you. And obviously you gave some good color on the government side of the business earlier in the call. Kent tracking a little ahead of the year-to-date number in this quarter.

Anything move around at all this quarter in Kent in terms of market share gains or just customer interactions picking up? I am curious if is there any color there?.

Nothing fundamental but our continued focus on our key relationships, our strategic accounts, we worked hard to win every -- win all the share we can with them. And in particular where they have unique special needs.

We are in the process of rolling out a very important program to one of our strategic accounts in the Kent space that we and they are very excited about. It runs our service proposition, it broadens the solution set that we can provide to them. And for our strategic accounts they are very important partners to us.

We take guidance from them and that enables us to service them more comprehensively. So we have very close relationships there. But the up shot is how we can fully service all of their consumable needs. And our best partners help give us guidance as to additional area they want us to focus on.

And we are trying to be as responsive and nimble as possible in servicing their needs. And again working with them hand in glove with their guidance..

Understood.

And, Ron, just kind of housekeeping question, looking at the fourth quarter on G&A expense, I mean I know Q4 can move around but any sense of what a good run rate for that line would be?.

Yes. You are right. It can move around a little bit in particular given that we have 60 selling days in Q4 versus 64 in Q3. There were 64 days in Q2 as well. So you will see some of the selling expenses move right along with what sales do on fewer days.

On the G&A side, excluding what I commented before about some of the lift that we got in the third quarter on some of the incentive accruals, we are expecting that our Q4 expenses would be relatively flat with Q3.

And stock based comp is always a bit of wildcard in there so excluding stock based comp I would say our anticipation would be that we operate in under a flat G&A environment. .

Got you.

You basically flat sequentially plus or minus whatever you get in stock based comp moving around quarter-to-quarter?.

That's right. Yes. I think that's fair. .

And we will take our next question from Beth Lilly from GAMCO. Please go ahead..

Good morning, Mike and Ron. So I have two questions. One is you talked about the slowing of the hiring of rep through the rest of 2016.

I just wanted to get a sense of where you view the bigger opportunity in terms of the number of reps you want to try to get to?.

Yes. It's a great question. And the slowing is not in any way a change of strategy or backing off in a strategy. It is really not at all that. Just like you've seen in previous years where we added 49, 110 then 21, it is more about the digestion process, bringing rep in.

And now we layered on starting about little less than a year ago, a very robust reengineered process it came through Lean Six Sigma around the onboarding process.

So the hiring of the rep is critical but getting them on the ramp and consistently, helping them consistently step up and up and up over three, four, five years to build fully robust territories. That's really where the rubber meets the road. So I think you are going to see this ebb and flow that you've seen in the past.

But over time, there are huge numbers of untapped territories that we can continue to fill into as we continue to refine our operation processes, fill rates, backorders, and product management. We have more to offer more customers and what we are seeing is the opportunity to continue to expand into that.

So you'll see a little slowdown for the short term but there will be an upper trend. Now, the other thing I want to quickly say is that we view acquisitions and the addition of reps as kind of different sides of the coin. You can hire one rep at a time or you can acquire a multiple of reps at a time.

But unlike others who make acquisitions they might be acquiring facilities, they might be acquiring patents and basic technology and new product primarily what we are acquiring is reps. .

The other -- Beth, I think you know this and we've talked on previous calls about the productivity of the new sales reps and that it takes generally about 18 to 24 months for them to build out their book-of-business and become accretive to the organization. And we continue to fund that investment out of our operating cash flow.

So if you look at the quarter, our cash position is up, our net cash position is up about $2 million from the end of the second quarter. And we are up over the end of the year even taking into consideration that we've made some acquisitions during the year.

So during the state where we are continuing to invest and add more sales reps, we are able to do that through cash flow being generated from operations. And I think that's an important note to make relative to how we are funding that expansion as well. .

Okay.

So do you think the number is 2,000?.

It is so far into the distance. I wouldn't nail -- I wouldn't say 2,000 but going from call it 1,000 and creeping up and creeping up little at a time is likely.

Now, if we were to make a large acquisition you would vote on a discreet number whether it is 10 reps or 20 or 30 that would be kind of like a discreet activity that could get the number substantially larger. But 2,000 reps is a long way, way even at the rate that we are hiring them.

It is long time into the future but continuing to creep up 1050, 11 some that independent of acquisitions is likely. .

Okay. Okay. My second question is the ever elusive EBITDA target of 10%.

How long do you think it's going to take you to get there? Are you thinking that's a two year target? Is that a four year? I mean can you give us a sense of timing?.

Let me add, Ron jump in but let me just say in 2014 we had a view and the economy had a little bit to do with it. When we talked about our three part growth strategy, adding reps, productivity of our seasoned reps and then acquisitions, we were little optimistic that the economy in 2014 was going to continue grow little bit.

Fundamentally, our value proposition is capable of 10% and beyond 10%. It is just that middle leg of the stool which is largely influenced by the economy is making a little more challenging. Now we can get there, it's just taking longer than we had hoped. .

Yes that I'd echo Mike's comments relative to -- in particular to the middle leg of the stool which is our existing rep productivity is really the most profitable leg for us and with the market being soft, the MRO marketplace being soft this year as Mike commented earlier are, those existing sales reps are taking the brunt of that.

And so I think it really depends I mean as to growth in that leg versus adding if we really add a large numbers from a rep count standpoint, that's going to put some drag on our earnings in the short term which we've talked about. So it depends a little bit on where we see the growth.

But certainly that productivity in the middle leg can help us get there a lot faster. .

The other thing that's a factor here is that when you start with better than 60% gross margin, and if you are able to hold G&A cost flat both through acquisition -- while doing acquisitions and adding sales reps, it doesn't take that much top line growth to find its way to the bottom line.

And Lean Six Sigma, we keep talking about that and we are staying the course, these processes and reengineering efforts enable us to strip away non value added work, compressed cycle time and enable our existing resource to do more high quality work again with the same resource. Over time, that really pays dividends for us.

So again with the structure that leverages the company doesn't take a lot of top line growth for a lot to fall to the bottom line with the constraints I just put on it. .

[Operator Instructions] And we will take a follow up question from Kevin Steinke with Barrington Research. Please go ahead. .

Hi. Just one quick follow up when looking at the 14% sequential or 14% sequential decline in the rep headcount. I guess we should just think about that is a kind of normalized level of attrition, although I know you said rep retention continues to improve.

So I suppose this normalized attrition but I also wondering if you did actually do any hiring at all in the quarter. .

Yes. We absolute did do hiring. Attrition actually has been pretty steady state. What that numbers reflection of is not a change -- a fundamental change in attrition but a slowdown temporary in hiring because the pull, we had to pull lot of people in previously. So we could have kind of level loaded the onboarding and the hiring.

What we chose to do is put forward a little bit so this is just a slowdown in hiring. But not a change in strategy, not a track change in our activities. It is that kind of variability is sort of noise level for us. But attrition has continued to improve slightly and stay steady state recently. It is more about the onboarding than the attrition.

Given the choice, I'd rather retain more high caliber reps than bring in new reps because it is lower cost to retain and move them along the curve.

So our Lean Six Sigma activities, our training activities, some other practices that we are very excited about inside the company is having the effect of making sales reps early on more successful more quickly. And that is far more profitable track to be on rather than just bringing in sales reps and accepting higher attrition. .

That concludes our question-and-answer session. I'd like to turn the conference back over to Mike DeCata for any closing remarks. .

Thank you. And thank you for joining the call and your interest in Lawson Products. We are confident that our value proposition resonates with our customers. And we are managing in the current environment, which is to say we are making investments that will enable us to outperform the market.

I believe that's the role of management is to beat the market as best we can. And it is my belief that the activities we are engaged in, the actions we are taking, the investments we are making will enable us to outperform the market.

Lastly, I'd like to take this time to thank our teammates for their commitment to excellence and their commitment to superior customer service. Thank you again for joining us today. Have a great day. .

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