Michael DeCata - President and CEO Ron Knutson - CFO.

Kevin Steinke - Barrington Research Steve Barger - KeyBanc Capital Markets.

Good morning, ladies and gentlemen, and welcome to the Lawson Products' Second Quarter 2017 Earnings Call. This call will be hosted by both 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 second quarter results.

There will 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 August 31, 2017.

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

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

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 more detailed review of our financial results for the quarter and then we'll take questions.

We have several accomplishments to discuss with you today starting with 8.2% growth on an ADS basis for the quarter on top of the 7% increase during the first quarter. This represents the fourth consecutive quarter-over-quarter of growth. Organically we grew 6.9% for the quarter.

We also completed the sale of our Fairfield New Jersey Distribution Center, which resulted in a $5.4 million gain, optimizing our DC infrastructure has enabled us to improve order completeness and is resulting in ongoing operating costs reductions, while still leaving significant growth capacity in our existing DCs.

We're also celebrating the 60 anniversary of Lawson Products and our 46th year listed on the NASDAQ. On May 30, we celebrated this milestone by ringing the closing bell at the NASDAQ along with 20 of our teammates. It's interesting to note that we were the 37th company to join the NASDAQ and that happened the year the NASDAQ was formed.

Now let's discuss some of the specifics for the quarter. We saw broad-based growth across the company. Every one of our regions achieved growth and every market segment achieved growth. National accounts achieved 55% growth versus last year and 40% growth year-to-date. This was influenced by a significant rebound in the oil and gas segment.

Kent Automotive and our Government business, both achieved 3% growth, while Canada grew 21% for the quarter as compared to the second quarter of 2016. An integral part of our value proposition is a function that we call Specials.

The Specials Group focuses on finding non-core nonstock items for our customers, enabling us to remain a single source of supply. For example, a customer contacted us recently looking for a tool bag, which also charges his electronics. We found a backpack design for mechanics and electricians, which includes integrated USB charters.

Another example is a customer that needed a specialized 2.25 inch by 4.5-inch Grade 8 hex head bolt and a matching nut and lock washer. We were able to find this item and ship it to the supplier -- ship it from the supplier in one day. Our Specials team have seen significant growth during the quarter and on a year-to-date basis.

Let me comment on why we're seeing such strong results. First, we're taking deliberate actions to drive sales, such as our recent acquisitions, improving training and onboarding of our sales team and enhancing growth incentives. Second, our acquisition strategy is yielding results.

Organic sales were up 6.9%, so 1.3 percentage points of our revenue growth is directly attributable toward 2016 acquisitions and third, we're benefiting from a stronger industrial economy. The ISM Index is up over a year ago and is fairly flat compared to the first quarter.

Gross margin was stable and essentially flat at 60.2% this quarter versus 60.1% for the first quarter, but down versus the second quarter of 2016. This is primarily attributable to significant growth and strategic accounts as well as our 2016 acquisitions. Ron will provide further insight to this.

I'd also like to take a moment to discuss the basis for our confidence that our gross margin percent will remain essentially flat when taking into consideration changes in market segment and product mix. The following is an example that will illustrate the point. We conduct quarterly business reviews with some of our largest customers.

One such account is a multisite customer. In 2016, we sold $4 million across a broad array of products to this customer. The average piece price was $0.94. The average piece price of the 100 largest volume items that we provide to them is $0.11 and the average piece price of the 100 most expensive items that we provide to that customer is $3.54.

These numbers have not changed over several years and are broadly representative of our overall customer base.

As a plant manager, a branch manager or a shop manager, our customers focus their limited human resources on high value-added activities rather than putting away $0.11 fasteners or checking hundreds of bin locations to determine weekly usage patterns and expense items and placing purchase orders for dozens of unique items every week.

This is the service that we provide along with technical problem-solving. Our customers value this service. They recognize that having that fitting or fastener on hand and easy to find is critical to getting the piece of equipment back into operation. The alternative would cost them time and far more money.

Additionally, approximately 5% of our business is transacted through e-commerce. While we believe a robust e-commerce platform is important, as it augments our service, it's clear that our customers prefer to outsource all aspects of consumable MRO to us.

Lastly, I would like to mention that several large integrated supply MRO companies have outsourced vendor-managed inventory to Lawson. This enhances their value proposition and enables them to focus on non-consumable MRO while depending on Lawson to conduct the service intensive VMI that we're known for.

As we track product price, when adjusting for market mix and product mix, we have not experienced any meaningful change in 2017. We also retain the ability to pass along cost increases as we have in the past. As I've mentioned before, we have not changed our strategy or commitment to our core customers, which are generally smaller in nature.

Nonstrategic accounts were [four] [ph], grew by 4.1% for the quarter. Overall, we're confident that we've built a differentiated value proposition that over 70,000 customers depend on and that value proposition is the optimum blend of on-site service and superior products.

In addition to our sales accomplishments, we've realized operational improvements in our distribution centers. This quarter we achieved a 5% increase in lines per man hour worked as compared to the second quarter and third quarters of '16. Over the past few calls, I've mentioned a few of our lien Six Sigma projects.

Several years ago, we began a project to understand and improve the quote turnaround time for the Specials Group that I mentioned a moment ago. Through process reengineering, we improved the quote turnaround time from 28 hours to 12 hours with the goal of eight hours.

We've achieved this while growing our Specials business significantly with the same headcount. This is an example of removing non-value-added work. Overall, the combination of cost management, previous and ongoing lean Six Sigma projects and the growth that we've realized has enabled us to exceed our targeted 25% to 30% flow-through.

This quarter we achieved 6% adjusted EBITDA. We remain committed to improving our EBITDA percent, while driving topline growth. Our overall growth strategy is track. During the second quarter, we added eight net new sales reps. As I mentioned on the last call, our primary 2017 focus is new rep onboarding and new rep productivity.

Our sales per rep per day improved 1.4% over the first quarter primarily driven by our existing rep performance. It is our expectation that over the long-term, sales rep count will continue to grow. We will also work to add sales reps through direct hiring and through acquisitions.

Through whichever way sales reps join us, we will focus on accelerating their sales by adding new customers and earning more share of wallet. The second leg of our growth strategy is overall rep productivity. Our seasoned reps, those with greater than 42 months of tenure, posted 4.2% sales improvement over a year ago.

Also, the ratio of seasoned reps to new reps has continued to increase. This is significant because reps with greater tenure build larger territories and as a result are more profitable for the company. They all develop deeper relationships with their customers becoming trusted teammates to their customers.

Our acquisition growth strategy continues to progress as well. We consolidated two smaller locations in British Columbia and we reached an agreement on June 30 to exit the lease on the facility that we acquired in Toronto. These transactions were completed without disruption. We're also building a pipeline of larger acquisitions.

Based on the success that we've achieved with the four smaller acquisitions, we're confident that we can successfully integrate larger acquisitions. We're also continuing to add new locations within strategic and government accounts and our Greenfield reps are working hard to open new local accounts.

Overall, we're feeling good about the actions that we've taken and our plans for the balance of the year. Having said that, you may remember that the second half of 2016 saw improvement over the first half. As a result, comps will become more challenging in the second half.

Now I'll turn it over to Ron for more insight into the second quarter financial results..

Thanks Mike and good morning, everyone. As Mike indicated, we've see an acceleration of solid sales into the second quarter of 2017. This represents the fourth sequential increase in quarterly average daily sales.

We continue to invest in the business and pursue acquisitions that will provide future growth opportunities to expand and increase our geographic density and leverage our current infrastructure. Here are some Q2 highlights. First, sales finished at $75 million for the quarter.

Average daily sales were up 8.2% versus a year ago and up 0.5% from the first quarter. Excluding the impact of acquisitions, average daily sales increased 6.9% over a year ago on the same number of selling days.

Second, our adjusted operating income for the quarter improved by $2.2 million to $2.9 million from $687,000 in the second quarter a year ago. Our reporting GAAP operating income was $7.9 million, including a one-time gain of $5.4 million on the sale of real estate.

Third, gross margin percentage remained stable at 60.2%, despite the customer sales mix shift and in line with our first quarter of 2017 and for we ended the year with $11.1 million of available cash and an additional availability of $35.5 million under our credit facility with no outstanding debt.

As I just mentioned, we finished the quarter with sales of $75 million and 64 days, the same as a year ago quarter. On a sequential basis, from Q1 2017, we're up 0.5% on the same number of selling days.

As compared to a year ago, our second quarter sales benefited from the following; first, delivered actions we've taken to drive growth are getting results.

This includes actively converting new locations for our strategic relationships improving the onboarding process of new reps, driving more accountability to the field management, providing forums to support technical questions to our sales reps, continuing to invest in technology and incentivizing reps to reward those with significant growth.

Second, our 2016 acquisitions generated Q2 sales of approximately $1.6 million. On an organic basis, sales were up 6.9% for the quarter. Third, sales of oil and gas segment were up $1.9 million versus a year-ago quarter and fourth the general improvement in the MRO marketplace.

The 8.2% sales increase was widespread throughout the business with all customer categories of our business increasing and 12 out of 13 product categories realizing gains, consistent with the first quarter. U.S. sales were up 6.8% while our Canadian sales were up over 21% in local currency fueled primarily by our previous acquisitions.

From a divisional standpoint, strategic accounts were up 55% over a year ago and now represent 15% of our total volume. Our Kent Automotive average daily sales were up 3% as compared to the year ago quarter, driven primarily by expanding our existing strategic customer relationships. Kent approximate 18% of our business.

We also realized solid 4% growth in our loss in core business and 3% growth in our government business. From a sequential average daily sales basis, April sales finished at $1.176 million, May finished at $1.196 million and June finished at $1.144 million.

The reduction from May to June was primarily related to quarter-end customer volume rebate accruals, a backlog of June 30 orders into July and lower spend in state and local government business. As Mike mentioned, we ended the quarter with 987 sales reps.

As we've said in the past while adding sales rep negatively impacts our earnings in the short-term due to the upfront investments, it will ultimately help drive our total revenues and allow us to further leverage our existing infrastructure. We are continuing to focus on our sales team during 2017, both hiring and productivity.

We will balance that effort with other priorities to drive the highest return to the company. For the quarter, gross margin was 60.2% in line with the 60.1% in the first quarter, but down versus a year ago quarter of 61.3%.

The decrease versus a year ago was primarily driven by a 60-basis point impact of customer mix and the impact of our 2016 acquisitions. There is currently a lot of attention in the marketplace being drawn to pricing and margin pressures. Let me emphasize this.

When we look at our pricing to the same customers for their same product from a year ago, quarter and the second quarter versus the first quarter of 2017, our pricing has not declined. our customers understand the value of the service and the premium products that we provide and understand that there is a premium for our offering.

As discussed in the past, 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, our goal is to increase aggregate margin dollars as we did in the last two quarters.

Selling, general and administrative expenses were $42.7 million for the second quarter compared to $42.5 million a year ago and $44.2 million in the first quarter. As evidenced by our results, we worked hard to manage our operating costs to be essentially flat on a $5.7 million increase in sales.

As compared to a year ago, operating expenses before the gain on the sale of the Fairfield Distribution Center were essentially flat. Increased compensation from higher sales and restoring incentive accrual were offset by lower depreciation, legal costs and health insurance claims. We will continue to tightly manage our ongoing operating costs.

Operating income was $7.9 million for the quarter. Adjusted non-GAAP operating income taking into account stock-based compensation, severance and the gain on the sale of the Fairfield property was $2.9 million for the quarter, compared to $687,000 a year ago and $1.1 million in the first quarter.

Net income for the quarter was $7.3 million or $0.80 per diluted share or $0.20 on a recurring basis compared to $172,000 or $0.02 per diluted share in the year ago quarter. From a balance sheet perspective, we ended the quarter with $11.1 million of cash on hand, no outstanding borrowings and $35.5 million of availability under our credit facility.

This puts us in a great position to deploy our capital to continue to grow the business. CapEx for the quarter was $296,000.

We expect our CapEx for the full year of 2017 to be in the range of $1.5 million to $2.5 million, primarily in maintenance capital for our distribution network and continue technology enhancements to improve our customer-facing processes. Let me now comment on a few items for the second half of 2017.

First, we are optimistic about the remainder of 2017, given our sales over the past few quarters, other economic indicators in our space and actions that we are taking to drive growth. However, similar to others in the MRO space, sales comps do get tougher later in the year.

Second, we will continue with our current strategy to expand our sales force while also focusing on existing rep productivity and acquisitions. And third, we will continue to leverage our existing infrastructure to drive adjusted EBITDA. We firmly believe that we are well-positioned to leverage our existing operating costs.

I'll now turn it over to the operator for questions..

Thank you. We'll now be conducting a question-and-answer session. [Operator instructions] Our first question today comes from Kevin Steinke of Barrington Research. Please go ahead..

Good morning, Mike and Ron..

Good morning, Kevin..

Good morning, Kevin..

So, I just wanted to start off by talking about national accounts, strategic account space, again clearly very strong growth there.

So, if you could just talk about the opportunity over the next few quarters in terms of continuing to drive growth in that strategic account space both with the larger oil and gas customer as well as just overall penetration of other national accounts?.

Yeah, Kevin, thank you. This is Mike. We continue to see growth in our national and strategic accounts. I want to emphasize though that we haven't changed our strategy relative to the regional account.

Our conversion process that we mentioned on the last call, is a very deliberate and systematic and broad-reaching process that involves marketing, training, specific action items for sales reps and that continues to roll out well as we continue to penetrate existing strategic accounts, but we really want to win all of their business.

We believe that we are the best alternative and the lowest cost alternative that any of our customers have and in doing so, we feel anything less than 100% share as a disservice to our customers. That of course includes our national and strategic accounts.

We continue to work to add new strategic accounts on an ongoing basis, but once we pick one up, very often they have many, many sites across the U.S. and Canada.

So, through a combination of adding new strategic accounts, which happens periodically, we don't add a lot of new accounts all the time, but rather when we add a new account, in many cases includes hundreds of locations.

As an example, in the automotive body shop space, an account that we have has 300 locations and through this conversion process, we have added 80 more locations. Now when I say adding a location, it means the sales rep is making calls.

We've signed that location up as an active customer and then we begin the process of understanding that location’s specific and often unique needs. So is a systematic and ongoing process to fully penetrate all the locations within existing accounts, while our strategic account team is earning new strategic accounts.

We're very confident about our ability to continue to grow and it's my belief that the more successful we are, the better reputation we have, the more attractive we are to everybody else in adjacent areas. So, we're pretty confident about earning more business..

Okay. That's helpful. And then you talked about the gross margin continuing to hold up despite that growth in national account. You called out specifically your strong value proposition is supporting your margins.

Any other factors that you would point to just that continue to hold up gross margin in the face of national account growth, is there still opportunity to work with suppliers or other initiatives like that going on?.

I think there is opportunity to work with suppliers. We feel good about our pricing structure, more importantly, our customers feel good about our pricing structure. They recognize and again the analogy I use and the example I used in my prepared comments, when you're talking about very inexpensive parts, those parts have huge leverage.

Imagine $4 fitting or a $0.95 part that your mechanic who has the most limited resource you have and machine time availability, so there is very inexpensive parts and tremendous leverage. So, customers recognize how important it is and yet the whole brown wall or orange wall for Kent product is relatively inexpensive thing with tremendous leverage.

Our customers really want us to attend to this on a weekly or biweekly basis, so that they never have to think about the availability of critical parts. With that said, we're not seeing any pricing pressure more than normal. We always have to earn the value proposition.

We always have to convince customers that we are the lowest cost alternative all considered and we do as we grow and become more attractive and more systematic in our processes, we become a more attractive channel to our suppliers and they're working with us as well.

So, we see opportunity in the supply side and we see opportunity on the customer side, but the long and short of it is we see stability..

Okay.

So, as I just going to ask a follow-up and Ron, you still feel comfortable around that 60% level or so going forward?.

Yes, Kevin, we do and in fact this last quarter coming in at that 60.2% and we feel good about that overall percentage given that shift in customer mix that we saw. Although as I mentioned in our prepared comments we're really going after gross margin dollars.

So as opportunities continue to grow with strategic customers, that will continue to put some downward pressure on the percentage; however, I think this quarter is a good benchmark moving forward just given the fact that it reflects that shift in customer mix..

Okay. Thank you for that and then you talked about the seasoned reps really driving growth here.

Sales per rep per day were up 8% year-over-year, can you just give us an update on just the overall mix of your sales rep base in terms of how many you would categorize is at seasoned level that 42 months plus I believe you said? And then also the percentage in the pipeline getting close to that seasoned rep level that will help continue to sustain that growth..

Sure Kevin, so this is Ron. So, our sales per rep per day I think what Mike mentioned was actually up 1.4%. Relative to - and that was over the previous quarter or actually that was on a sequential quarterly basis.

So, as we look at our sales reps, about half of the call it thousand sales reps or approximately about half of the sales reps have in excess of 42 months of experience with us and we are starting to see a bit of a shift as the newly hired sales reps are getting to more of a tenured stay with us.

So as a percentage of the total reps, that number is increasing slightly. Now it takes a while to get there right. We've been hiring sales reps for the last three or four years and it takes a while for them to get to that more mature state.

One of the factors that we always look at is what are the average sales that a more tenured sales rep is performing at versus a newly hired sales rep and typically it takes a few years to get to that more mature state.

So we feel confident that as we continue to add sales reps that as they mature out, it will help drive up our overall sales on a longer-term basis and I think it's evidence that in this quarter, the past few years we've been continuing to invest heavily into the organization even in and I would call, challenging times in '15 and '16 and now that things are starting to turn from an overall market perspective, I think that continued investment that we made in previous years has placed us in a very good position as the market continues to improve..

Okay. And I was just referring to our sales per rep per day, I think 8% up year-over-year as you pointed out sequentially obviously that was a little bit lower, but good continued trends there.

Just one more question then I'll turn it over to others, did the Canadian dollar have any meaningful impact on the growth rate all this quarter?.

No. I would say not meaningfully. Canada represents about 10% of our volume. So, nothing meaningful. Really what drove the sizable piece of the increase in Canada really were our 2016 acquisitions. However even excluding those acquisitions, Canada saw nice mid-single digit growth excluding the acquisitions that we made previously..

Okay. Thank you very much..

Thanks Kevin..

[Operator instructions] Our next question is from Steve Barger of KeyBanc Capital Markets. Please go ahead..

Hey. Good morning, guys..

Good morning, Steve..

Good morning, Steve..

I just want to make sure I understand the philosophy here, now that you're seeing some end market recovery, do you want your newer less productive reps to place more emphasis on growing bigger accounts potentially at the expense of gross margin or do you want them to focus on smaller accounts that could offer better pricing and leverage?.

I would say Steve, it's a little bit opportunistic. It is not a philosophy change. We have over 70,000 active accounts. And so, it's a broad focus. Most of our accounts are small in nature, but when you look at even a strategic account or a broad-based national account, very often they at the rep level, they look like another small account.

For example, a construction equipment rental company might have hundreds of locations and yet at the individual rep level, that one brand looks like any other brand whether it's a strategic account construction equipment company or a nonstrategic account construction equipment company or any other company in their geography, from the rep level, they look the same.

Now the difference is there's an aggregation of maybe hundreds of sites or multiple locations, but there really is not a change in our strategy your philosophy after just GP dollars versus GP percent it's really about continuing with local accounts even though that local account maybe one of 100 or 500 that we're servicing under an umbrella.

So there really not a change in strategy..

Steve, the other comment I would add to that is that our new reps certainly pick up strategic account locations, but we have -- internally we have a team of dedicated towards supporting our strategic account relationships and so it's not as though that new reps are going out and selling specifically our service to win brand-new strategic relationships.

Typically, they will support a strategic location as we win that location, but they continue to focus on opening up new regional business and also are the beneficiaries of our strategic relationships..

And at the other end of the spectrum, some of the reps that we have with the very largest single site locations also have a very significant number of very small customers even while servicing huge customers..

Right, I guess I get that at the local level the accounts look the same to the rep, but at the consolidated P&L level, it seems like it's better to have those local accounts that have higher gross margins, but maybe I'm just thinking wrong about that.

Well I guess you use the example of adding 80 locations, can you talk about what the average revenue opportunity is for newly acquired accounts like that and typically how long does it take to get those new accounts up to the ultimate revenue run rate?.

Yeah let me talk a little bit about the nature of share of wallet. Very often the way and by the way even this is true in some new strategic accounts and again I am not talking about the corporate relationship, but the on-site reality of a factory, a branch or a location, maybe a borrower or a repair site.

Even if it is a strategic account, very often what ends up happening is we work with the local customer and we might pick up two, three, four product categories, maybe it's hydraulic and electronics and chemicals and then over time, we earn our way into more share of wallet, again because the customer recognizes our sales rep is going to be there every week or every other week.

They willing to seamlessly come in and deliver the service that will put away the product, count the inventory and place orders for the customer and over time that's incredibly attractive to the customer. So, it enables the customer more and more to not consider disregard, not think about consumable MRO.

It's just because somebody else is taking care of it and it sends our sales rep acts like a customer employee, but only for about 45 minutes or an hour a week, rather than the customer having to dedicate someone do that job. So that's the nature of how we win share of wallet even within a strategic account.

Also, most and there are some very important exceptions, but most strategic accounts, we have a hunting license. It's not a mandated buy.

Some are a mandated buy, but for the most part, the strategic account in the corporate folks add our strategic accounts, they open doors for us, they encourage, we create sometimes growth rebates, but at the end of the day, it's really more like a hunting license and we've got to go in and earn one location at a time..

Is there a rule of thumb in terms of how long it take to you get in the door with that one product line before you start to get to some much bigger percentage of share of that MRO product? Does that take a month or a year?.

I really can't say. It depends on who we're competing against. When we train our sales reps, we always say that you're never going to walk into a customer who doesn't know what a nut and bolt does. So, everything that the customer is consuming because again we focus on consumable MRO is already getting into that location one way or another.

If the customer is running up the street to get it or some competitor in some form is providing it to the customer. So, in locations where the customer service is inadequate and the customer very quickly bring us in and give us a very broad share of wallet.

In other cases, we have to earn our way in, one product category, even in a subcategory at a time and the way we do that is either and it's usually both through superior service and also superior performance products and the customer see, hey this private label product performs better than the alternative I had before, but it's all -- there is one rule of thumb.

Something it's very fast and sometimes it takes years..

Understood.

And since you brought up Specials, what percentage of your business is that and what's the typical gross margin for Special?.

Yeah, so Steve, this is Ron. So today, Specials what we really refer to is kind of non-core, nonstock, represents about 10% of our business. The margins are a little bit less than our overall margins and generally that's because we're not -- we're buying a one-off product. So, we're not getting huge discounts from our suppliers on a one-off by.

So, the margin is overall a little bit less than our general margins. So, it pulls it down a little bit on a total company basis..

And Specials is their predominantly as a way of our sales folks say, if they come to the Specials Organization with a request, in effect, they already have the order. The customer needs the product and the question is, can we secure the product for the customer, but it's generally not an optional thing.

It's got to be acquired from someone and would likely to be acquired from us and so to our customers, but it's not something we lead with is an incredible support infrastructure..

Right.

And last question for me, free cash year-to-date use of $5 million, if revenue continues to increase sequentially, what would you expect free cash like to look -- free cash flow to look like for the year?.

Yeah, so Steve, really as we look at it from a quarterly standpoint, one thing that you probably noticed is that we did utilize some cash on the accounts payable side and that was really more of a timing as far as release of that cash back into our vendors based upon the way that the calendar fell at the end of the second quarter.

So, we clearly expect that some of that will reverse out in future quarters and we'll get the positive cash benefit.

The other piece that I would comment on is I mentioned in my prepared remarks our CapEx estimate of $1.5 million to $2.5 million, typically we do spend a little bit more CapEx later in the year that's down versus our original guidance a the beginning of the year, but that'll help overall cash flow in the second half the year as well..

So, you definitely expect the back half and the full year to be positive from a free cash flow standpoint?.

Yes, we do..

Okay. Very good. Thanks for the time..

Thanks Steve..

[Operator instructions] We have a follow-up question from Kevin Steinke of Barrington Research. Please go ahead..

Yes, so you've talked about how 2017 is more of the focus on just getting your reps onboarded and more productive focus on increasing productivity. At what point or what would be the trigger for you to say okay, we want to start hiring more aggressively again.

I know you still added a few reps here in the quarter on a net basis, but is there any sort of indicator of when you would want to start adding more aggressively?.

Yeah Kevin, I would say that the three parallel growth strategies we've talked about continue in place. We think that there are many untapped territories. As we continue to penetrate those territories, optimize our existing territories, we expect continuous growth of sales reps.

Now in a sense that again we've said there are three parallel growth strategies. One is adding the reps. The second is enabling the existing reps to be more productive through technology and tools and market segmentation, through training and growth incentives. And then the third is growth through acquisition.

More often than not when we grow through acquisition, we're also infusing a large number of reps.

So, the first leg of our growth strategy and the third leg of our growth strategy are closely related through, whichever way, whether through acquisition or in a sense growing adding one rep at a time, the commitment is to continue to fill out the territories -- to continue to grow and at our core is the service proposition, which is focused on sales reps and delivering service.

So, I think you're going to see and ebb and flow of all three of those growth strategies. This year to your point greater focus on onboarding productivity, territory optimization, all of those things and there will be an ebb and flow. This year happens to be relatively -- we're hiring relatively fewer net new reps as we build out territories.

That's likely to cycle up and cycle down over the couple of years but in conjunction, you'll see up grow through acquisition as well, which is another way of getting reps..

Okay. Fair enough.

And just lastly, any thoughts on what you're seeing in the acquisition pipeline at this point?.

Yeah, we feel great about the acquisitions we've made. We've learned a lot. They've been really productive acquisitions for us and so now, we shift gears a little bit.

We've said all along that the early acquisitions were ones where we understand the process, the integration process, the whole cycle of attracting acquisitions, completing the deal and then integrating them successfully and then helping their sales reps who are now our sales reps to accelerate from there.

With all of that education and learning behind us now, we feel great about pursuing larger acquisitions. So, we are building a pipeline of larger acquisitions ones that are far more significant in size than the ones we've done in the past and we feel great about that pipeline.

Stay tuned, but we feel great about the pipeline and we continue to fill the pipeline and its likely to be our strategy for the foreseeable futures to grow that third leg of the stool in addition to the other two legs..

Okay. Great. Thanks for the time..

Thank you..

There are no further questions at this time. I would like to turn the floor back over to Mr. DeCata for closing comments..

Great. Thank you. Thank you very much for joining the call and thanks for following Lawson Products. The second quarter has been a good continuation of the positive results we've seen from the previous two quarters. We believe that Lawson Products is well positioned to grow in the current economy and our hard work is beginning to pay off.

We're working hard to effectively execute the plan, which we've discussed on this call and previous calls. Thank you to our dedicated employees who make an impact every day and thanks again. Have a wonderful day and we appreciate your interest in Lawson Products. Thank you..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..