Good morning, ladies and gentlemen and welcome to the Lawson Products Second Quarter 2021 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.

During this call, they will be providing an update on the business as well as covering relevant financial and operational information. There will then be time for questions and answers.

Please note 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 these 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. 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 August 31, 2021. I will now turn the call over to Lawson Products’ CEO, Mike DeCata..

developing additional channels to market to serve underserved markets, SLED and the rollout of our newly acquired Torrent’s Parts Washer line of products. We’ve made good progress in all three areas.

The Torrent product line, which is now available for our entire sales force to sell, is beginning to produce the first incremental results with both sales and rental machines. We are optimistic about placing several hundred additional units into customers’ locations during the second half of this year.

Hiring and process infrastructure associated with SLED and our strategy of developing additional channels to market in underserved areas is proceeding well, and we expect to report results from these efforts during 2022. Our three-part growth strategy remains unchanged. Sales rep productivity remains a key focus area.

We realized a 41% improvement in sales per rep per day versus the second quarter of 2020. The three new investment initiatives mentioned previously will likely be measured in the productivity section of our strategy. However, all three also have a hiring component. We are also continuing to work on our M&A pipeline.

Our recent success with the Partsmaster acquisition and integration, as well as the continuing success of Bolt Supply, which is operated as a stand-alone organization, has broadened our horizon of opportunities. Looking forward, in 1980, Peter Drucker wrote a book titled Managing in Turbulent Times. We are certainly managing in turbulent times.

A year ago, I don’t think most people were thinking about supply shortages or labor shortages, and they probably weren’t thinking about inflation. We were worried about demand and customers shut their doors to keep their employees safe.

While we will spend considerable time analyzing trends and preparing, I don’t believe we will be able to predict the next challenge with any degree of operational accuracy. However, we have spent many years building a strong, resilient and dedicated team across all aspects of the company, and our customers have benefited from that work.

The team turned in a dime last march to address the pandemic. While we have limited ability to predict the future, I have very high confidence in the Lawson team’s ability to thrive and prosper in turbulent times. Last week, I spent 2 days with our newly combined sales leadership team.

They are optimistic about the coming quarters and our ability to accelerate growth. Bumps in the road are inevitable. However, our trajectory and value proposition will continue to improve for the foreseeable future.

We are focusing on exciting new products as part of the Partsmaster acquisition, deeper penetration into several underserved markets and the development of additional channels to market, along with our traditional growth strategy. These programs will enhance our value proposition and bolster our strong service offering.

Now, I’d like to turn it over to Ron for more information on our financial performance..

Thank you, Mike and good morning everyone. I will first provide some key takeaways and business trends during the quarter and I’ll then discuss some of the details and provide an update on the integration of Partsmaster. A few highlights of the quarter.

First, consolidated sales improved by $34.4 million to $106.5 million or nearly 48% over the second quarter of 2020 due to the inclusion of Partsmaster and reflecting our continued recovery from the impact of the pandemic. Sales also increased $3 million or 2.9% over the first quarter of 2021, with one additional selling day in this quarter.

For the quarter, excluding the Partsmaster acquisition, organic average daily sales increased by 27% compared to a year ago. On a consolidated basis, average daily sales increased 1.3% over the first quarter on the same number of selling days. Second, our adjusted EBITDA was $8.8 million or 8.3% of sales.

And third, we ended the quarter in a net cash position of $0.9 million. During the quarter, we paid the final $33 million payment for the Partsmaster acquisition. As we reflect on the second quarter, we have continued to see improvement in many aspects of our business. Sales continue to sequentially improve as does our sales rep productivity.

Most product categories realized sequential increases over the first quarter. We continue to make great progress in this environment and continue our focus on driving sales, cost controls and cash flows, all while ensuring the safety of our team. As Mike mentioned, we are not isolated from the global supply chain disruptions.

However, we are working closely with our supplier partners and our customers to ensure that we are meeting their needs. We remain focused on supporting our customers and generating revenue in this environment while ensuring the safety of our teammates. We are performing onsite visits to essentially all of our customers.

We continue to offer additional support through phone outreach, internal customer service representatives, email communication and our website. However, this is being done to a lesser degree than most of 2020 as our customers have reopened for business, and we are able to resume our onsite service in most locations.

Consolidated gross margin for the quarter came in at 51.3% compared to 53.1% a year ago and 52.7% last quarter. On a stand-alone basis, before the classification of certain service-related costs into gross margin, Lawson MRO margin was 57.3% for the quarter compared to 58.2% in Q1.

Both Q1 and Q2 MRO gross margins were burdened with additional inventory reserves associated with the rationalization of Partsmaster inventory as part of the integration process and charges for PPE items in which the current market value dropped below our cost. Excluding these items, MRO gross margins were 59.3% and 58% for Q1 and Q2, respectively.

The 130-basis point sequential quarter decline was due to higher net freight and distribution center labor costs, primarily related to the global supply chain disruptions and costs incurred to migrate the Partsmaster inventory into the Lawson network.

For the quarter, total operating expenses were $51.2 million compared to $37.7 million a year ago and $49.8 million in the first quarter.

The increase over a year ago was primarily due to the increase in sales, the inclusion of Partsmaster expense of $8.6 million, reestablishment of temporary cost savings put in place a year ago during the pandemic, and costs related to potential acquisitions, including the evaluation of the Luther King Capital proposal disclosed in a schedule 13D amendment filed on May 17 of this year.

These items were partially offset by a $1.6 million reduction in the accounting for stock-based compensation. Excluding non-recurring items, adjusted operating expenses were flat as compared to the first quarter of 2021 on higher sales of $3 million. Our reported operating income was $3.4 million for the second quarter.

On an adjusted basis, including non-recurring items, non-GAAP operating income was $6.8 million compared to adjusted operating income of $4.8 million in the year-ago quarter and $7.2 million in Q1 of 2021. Adjusted EBITDA as a percent of sales finished at 8.3% for the quarter.

On an adjusted basis, excluding stock-based compensation and other non-recurring items, diluted earnings per share was $0.60 for the quarter versus adjusted EPS of $0.37 in the year-ago quarter and $0.58 in Q1 of 2021.

Capital expenditures for the quarter were approximately $3 million, including $2 million for the improvement of our Suwanee distribution capabilities. The remaining $1 million of CapEx was for the relocation of a Bolt Supply branch, IT investments and distribution center maintenance capital.

We expect our total capital expenditures in 2021 to be in the range of approximately $5 million to $6 million, including planned upgrades to our Suwanee and McCook infrastructure to allow for increased volume in the future. Additionally, we will be relocating our Calgary distribution center to a new and expanded location in early 2022.

As an organization, we continue to make investments in the business, in particular to areas that have a direct impact on sales. While continuing to respect the uncertainties and unevenness of the pandemic recovery, we continue to make investments in the business and balance our cost structure against our current sales trends.

We continue to place focus on improving our working capital. We ended the quarter net of borrowings and a net cash position of $0.9 million despite making the final $33 million payment for the Partsmaster acquisition.

We ended the quarter with nearly $92 million of availability under our credit facility, placing us in a great position to invest in the business and support future acquisitions.

As Mike and I have both previously stated, we are managing through this challenging time with the expectation that we will come out of the environment in a stronger position than how we entered it. The integration of Partsmaster into the organization is progressing as planned.

And as of July 1, all reps are now utilizing Lawson’s technology systems with the order fulfillment coming from the Lawson distribution center network. We will be managing certain pieces of our government business from a dedicated distribution center in Texas.

As with other companies, and as Mike discussed, we have experienced inflationary costs due to the global supply chain disruptions. We estimate that these disruptions, along with the Partsmaster integration costs, negatively impacted our EBITDA margins by approximately 120 basis points.

While we are actively working closely with our supplier partners, we are implementing pricing actions to offset this inflationary environment. I will now turn it over to the operator for questions..

[Operator Instructions] Our first question today is coming from Kevin Steinke at Barrington Research Associates. Your line is live..

Hi, good morning, Mike and Ron. .

Good morning, Kevin..

Good morning, Kevin..

I wanted to start off by asking about the price increases you’re implementing to offset some of the inflationary headwinds. And you mentioned you’ve had good realization of those price increases thus far.

How quickly do you think that starts to show up or benefit your margins? Do we see it as soon as the third quarter, do you think?.

Yes, Kevin, thank you. Yes, we did implement late in the second quarter a price increase. We’ve gotten tremendous price realization. We’re in an environment where people are seeing it in every aspect of their lives. So certainly, customers, both our strategic account customers and our local customers, have certainly understood the necessity of that.

And it will continue to find its way into the third quarter and beyond. We’re in a little bit of an unknown environment as price increases – cost increases from suppliers may or may not continue. We will continue to respond as necessary.

And I think the reason we’re getting the price realization that we are, which is extraordinarily high, is because customers, especially in this labor market – more even than it has been in past years – especially in this labor market, the last thing customers want is a machine down for a $0.94 part or a $1 or $2 part.

So it is – customers really recognize that we are the lowest-cost alternative. And they are more important to them than ever to keep their machines running. Because while our suppliers have supply chain challenges, which affects us, our customers live in that same environment. So our customers are trying to service their customers.

So up and down the chain, we’re integral to our customers and our suppliers. And we certainly expect to continue to respond as appropriate, as necessary, to cost increases as they come along..

Okay, got it. And I’m curious, it was mentioned a couple of times in the earnings release that you’re moving forward with a reduced cost structure. You talked about executing on the three-part growth strategy on a reduced cost structure.

So I’m just trying to get a better sense of the reduced cost structure you’re talking about or is that something kind of newer going forward now that the Partsmaster integration is mostly behind you, I guess?.

Yes, Kevin, this is Ron. So I’ll answer that question. It’s really more from the standpoint of – if you look at our cost structure today versus where we were historically, we took cost out of the organization in 2020. And those have – a portion of those have remained out of the organization.

I think it’s evidenced by the fact that in the second quarter, we still were able to grow sales 3%, so again, with one 2.9, with one additional selling day. However, our overall cost structure was flat. And I think that is just evidence that we’re managing our overall costs. We took some actions throughout 2020, and those actions have stayed with us.

So if you look back historically, it’s more about the cost we’ve taken out of the organization. We certainly will get some additional cost realization as we further integrate Partsmaster, but we are on what I would call a new run rate today versus, certainly, where we were even a year ago..

And Kevin, this is again where – now clearly part of our DNA. It’s the way all of us top and bottom in the company think around Lean Six Sigma. We continue to look at reengineering, non-value-added work out of the system. The activity is to enhance our distribution centers.

The investment we’re making in distribution centers will also have the effect of much more capacity out of the distribution centers. For example, in McCook, that is a combination of software and some hardware changes, carts and conveyors.

It will certainly increase capacity by approximately 20% in that building, but it will also do it with a far more effective labor efficiency. Same thing is true in Suwanee, Georgia. That’s a combination of software and hardware, creating a more resilient system but also a more productive one.

And as well in Calgary, that is just about market – about expansion, capacity expansion. But all of this, combined with what we’ve been doing for like the last 10 years, is all about continuously refining our cost structure with the idea of reengineering work out while we’re growing..

Okay, understood. That’s helpful.

Would it be possible just to touch on the monthly trend and sequential trend in average daily sales you saw throughout the second quarter, and maybe how things are looking on a monthly sequential basis in July here?.

April, $1.676 million; May, $1.676 million; in June was $1.642 million. And just for reference purposes, we ended March at $1.620 million. So what we saw was sequentially a larger increase going from March into April, kind of flattened out a little bit in May, and then dropped just a little bit in the month of June.

Relative to July, I would say, we’re kind of seeing the same level of sales that we saw in the month of June. There are, I think, a number of factors that are probably contributing to that. One that Mike and I both touched on in our prepared comments is some of the supply chain disruptions, certainly, is having a little bit of an impact on our sales.

And then also, timing, I would say, on the Partsmaster business relative to their military sales is probably the other component of that. So again, it’s kind of flattish as you think about the quarter in the latter half of the quarter.

But to Mike’s points earlier, we do have plans for – which we implemented late in the quarter – price increases, which should help third quarter. And then we also should see some of this timing reversal on some of these other military sales..

Great. That’s very helpful. In kind of thinking about the various supply chain issues, you and your customers and your suppliers are managing through. You, I think, have a very broad and diverse base of suppliers.

Is there – are you seeing any meaningful variation among your supplier base where maybe some are operating better than others or are able to access inventory better than others? And therefore, maybe you can migrate to some of those suppliers that are operating better in the current environment to offset some of the bottlenecks you’re experiencing?.

Yes, Kevin. A little bit of that. We see some suppliers more capable than others. One area under a particular challenge is chemical suppliers, small quantity chemical suppliers. That’s been a challenge in particular. But the connection between the supplier and the customer is about a 10-day order – 10-day calling cycle.

So we really have very little backlog; as customers are consuming, we’re replenishing. So there is not a lot of opportunity to shift categories. We have found the necessity to shift to a functional equivalent product in some cases – chemicals in particular – because of the unique challenges that industry is having at the moment.

But in general, our team has done an extraordinary job of managing inventory, buying ahead where it’s possible, which is generally a challenge as well, but working closely with customers to manage their functional need, even though we’ve had some product substitutions.

That keeps them operating before we can get back to the products that we really prefer to be selling them, that those suppliers are struggling. But across the board, we’re seeing this challenge. And across the board, our team is doing an extraordinary job of managing to the challenge with existing suppliers and developing new supply relationships.

And our customers are responding very well. I believe – we will see, this is one that will have to be borne out many quarters from now and even years from now.

I believe that we’re building tremendous loyalty among our customers and an even stronger reputation coming out of COVID than we went into COVID because of the extraordinary commitment our sales team has made to our customers and up and down the company, everything from accounting and finance to purchasing and our distribution center folks.

I believe this is winning even more loyalty in the marketplace than we went into COVID. And as you know, we went into COVID with better than 90% revenue retention. I believe it will be better than that in the future. And the market, I believe, is expanding, and we will get a disproportionate share of that expanding market..

Great. And related to that, kind of the longer term growth outlook – you’ve talked about the labor challenges that your customers are facing, and you’ve been able to manage that relatively well internally.

I mean, are you starting to see that bubble up more in your conversations with customers or potential customers where your value proposition should become even more valuable going forward, given some of the labor constraints that customers are facing?.

Yes, we are. In fact, last week, we had all of our sales managers in the combined new team of sales managers. And many of them talked about challenges that customers have relayed to them about labor.

By the way, they are very optimistic going forward, both in the shorter term and then over the longer term – both comments from customers, new and potential strategic account customers that we’re working on, new state business and government business that we’re bidding on, that we’re very optimistic about.

So there is a real optimism out there constrained a little bit by supply chain but, again, managing through it. I believe – and statistics will have to bear it out, and our numbers will have to bear it out over coming quarters and years – that we’re seeing an expanding market, an accelerating issue as it relates to labor.

And more and more people who today insource inventory management will turn to outsourcing inventory management to folks like us. And again, because of our operational excellence, our footprint and all that we do, I’m 100% certain we will win a disproportionate share of an expanding market..

Okay, great. Well, thanks for the commentary and insight. I will turn it over now. Thanks..

Thank you, Kevin..

Thanks, Kevin..

Thank you. Our next question today is coming from Carl Schemm at KeyBanc Capital Markets. Your line is live..

Hey, good morning..

Good morning, Carl.

Wanted to start out with the gross margin, I think last call you talked about MRO gross margin would be back to that 59% to 60% range throughout sort of FY ‘21. But this quarter, it moved in the opposite direction with some of the headwinds you called out earlier on the call.

So just wanted to get a sense of what was the biggest change relative to your prior expectations from the time of the 1Q call to today?.

Carl, thank you. First, let me say that our previous guidance in that 59%, 61% range is unchanged. We fully expect over time to get back there. I’m sure Ron is going to want to jump in with some of the details as to what happened this quarter.

But some of them have to do with fully planned processes around integrating appropriate Partsmaster new SKUs and the labor associated with that, as well as the Partsmaster, the parts that didn’t come over because they are completely redundant. So there were a number of moving pieces. Yes, of course, supply chain was part of it.

Transportation was a little bit of it. But a large part of it was also fully planned in the Partsmaster integration..

Yes. Mike, I’ll just jump on top of that. If you look at the movement from – in my prepared remarks, from 58% – 59.3% to 58%, excluding the inventory reserves that we had on the Partsmaster piece – if you break that down further, that 130 basis point movement, about 60 of that is related to some of the freight increases that we’ve seen.

And then, say, another 30 of that is relative to some of the additional labor dollars. And we attribute both of those to really the supply chain disruptions that we saw. So, those two on a standalone basis account for the majority of that decrease.

In fact, if you look at our straight product margins sequentially from month to month to month, we dipped a little bit in May. But then June, with some of the actions that we took, we saw a little bit of recovery. Again, it was only a partial month, but we saw a little bit of recovery in our straight product margin.

So putting aside these freight and some of the labor challenges, we were kind of right back to where we were in the first quarter.

The other point that I would make – and it really maybe ties more to the overall impact of that on our reported EBITDA of the 8.3% – I mentioned that we attribute about 120 basis points to the expenses incurred around the Partsmaster integration as well as some of the supply chain disruptions.

So that gets us right back to 9.5%, call it, adjusted EBITDA. And from an earnings per share perspective, if you tax effect that impact, it’s $0.09 to $0.10 a share. So again, we don’t have complete visibility into when some of these supply chain disruptions will go away. I think that will be a headwind as we enter into here in the third quarter.

But we clearly expect for some of these items to temper for the remainder of the year..

Okay, understandable. Maybe back to the Partsmaster reserve point.

Are we through Partsmaster’s sort of inventory reserve write-downs or do you think that there is anything else that could impact that for the rest of the year?.

Yes, we should be through it. So, we have now completed the full evaluation of those – that SKU offering on a go-forward basis, as we added – partially completed in Q1, finished that in Q2 effectively with all the sales reps now placing their orders through the Lawson technology and being fulfilled out of the Lawson distribution center network.

We now have all of those reps really coming through the loss in distribution network.

So, we are – as you can imagine, we are moving a lot of inventory around to make sure that we can fulfill those customer orders and moving inventory from the Greenville distribution center – Greenville, Texas DC into our forward loss in DCs to make sure that we can hit our line service level goals to our customers.

So, moving around a lot of inventory right now, some of that will take – majority of that will take place here in the third quarter. So, we will probably still have some expenses related to that, but not necessarily reserves around the future sell-through of inventory..

Carl, if I could just add, I probably cannot overstate how pleased we are with how the integration has gone; smooth, minimal bumps in the road, both the sales team integration, but all the incredible people that we brought over – really exciting new products. When you do an acquisition, you do all kinds of due diligence and research upfront.

And only later that you fully appreciate the most subtle aspects of what’s going on. And there are a large handful of products that we acquired with the Partsmaster acquisition that are going to be really exciting to our sales team, already embraced in many cases.

And now the full both legacy employed sales team and the new sales team have access to all of the combined products. And many of them are truly exciting, will uniquely serve some of our most important market segments.

So, I just can’t overstate how pleased we are with the progress that the teams have made in pulling themselves together and seamlessly becoming one team rather than two teams. It’s been quite pleasant. Hard work, hard, hard work, but very pleasant to see..

Alright. So along that line, kind of sticking with Partsmaster here – I know you mentioned the sequential decrease. I think – correct me if I am wrong, but this is the second sequential decrease in Partsmaster. And I think you have mentioned that that’s military.

Just kind of curious how we should be thinking about sort of the sequential cadence of Partsmaster going forward, and when that kind of military lumpiness maybe smooths out?.

Yes, there is one specific customer. It’s an important customer that is retooling for new technology. And that for that customer has been a little bit of a challenge. We are optimistic that that customer will get back to fully servicing their customers. By the way, we still have the relationship, it’s nothing like that. It’s about their ebb and flow.

It’s a little hard to predict when they get through that bottleneck, that reengineering of technology they are going through. But we are optimistic. Underneath all of that, though, putting aside that specific customer, the military business over time will become very strong.

It is by nature more volatile than state local and educational, and that’s the reason we invest in both separately. State, local and educational has 90,000 potential buying entities. Every library in America, every police department, fire department, department of transportation and snowplow, and you name it – parts and rec everywhere.

And state, local and educational is more diverse and as a result, less volatile. By contrast, military by definition is more concentrated, fewer number of buying locations, large bases. And so it would inherently be more volatile. We are investing in both and fully expect both to do well.

But it’s a little hard to predict that one market segment just because of the nature of the segment. Putting that aside, the Partsmaster sales reps now have access to all kinds of products that they did not have access to before.

In particular, one that comes to mind is our extremely strong and highly differentiated fastener, private label fastener line. The Partsmaster fastener line was not probably quite as broad or as strong as our fastener line.

And immediately, when we gave that product line – made that product line available to the sales reps, they immediately jumped on it. Because they viewed their – the sales reps I am talking about, viewed their product line is a little bit narrow and not as robust as ours.

So I think over time, you are going to see organic growth across a broad diversity of products and sales reps..

Great. That’s helpful. And I kind of wanted to touch more on that sales rep point. Just in the past, I was reviewing some prior transcripts. And you talked about visiting sales reps on average visiting locations every 10 days on average.

I am just curious, does that sort of create a physical limit to how productive a sales rep can be? And by that, I mean, a sales rep can only visit so many locations.

Is it capped from a revenue standpoint or is there just way more capacity left kind of in the tank per sales rep?.

Yes, there is tremendous capacity. Yes, tremendous capacity in the sales reps. There is a huge diversity, many sales – several sales reps, a bunch of them, so, way more than $1 million, some more than $2 million in their territories. The average is far lower than that.

So, depending upon the composition of customers, nature of the individual site locations, it can be all over the map. Geographically diverse – remote areas are more challenging. And by the way, that’s one of the reasons we have talked about investment in this other channel to market. It is predominantly the service geographically remote areas.

I think I mentioned on the last earnings call that out of about 42,000 ZIP codes in America, we service about 20,000 of them. And the reason we don’t service the other ones is they are geographically remote. There is a lot of aggregate business in those areas, but it’s not concentrated business.

So, we see tremendous just growth potential in building parallel channels or additional channels to market. And that doesn’t speak to the other driver, which is the process of outsourcing inventory management versus currently many companies that buy our kind of products, in-source it, and just buy the product.

So, I think there are a number of drivers, some are in our control. Our market expansion, our channels to market, investments we are making and some are just demographics that hugely favor us..

Great. Thanks. And then just one quick modeling question here. I noticed it looks like tax rate sort of ticked down quite a bit this quarter.

How should we be thinking about tax rate for the rest of the year?.

Yes. I would go ahead and utilize the full year-to-date tax rate that is there for our second quarter. I think it was 24.2%. We did see a slight decrease here. And as you know, I think Carl, that you have to estimate that rate, and then you record the rate on a quarterly basis. So, you can use 24% to 25% for the remainder of the year as well..

Great. Thanks..

Thank you. Our next question today is coming from Brad Hathaway at Far View. Your line is live..

Hi Mike and Ron. Just a quick question on the M&A pipeline, obviously, the company is already back to net cash again, even after the Partsmaster deal.

So, I am curious as to how you think about kind of M&A going forward and what you are seeing on that side?.

Yes, Brad, thank you very much for the question. Unchanged, look, we have been – we generate a lot of cash. We feel great about the acquisitions that we have done. I think importantly, for us – and it’s a state of mind as much as anything else, certainly strategy, of course.

But now we have two very different kinds of large acquisitions that we have been incredibly successful with, one being the Bolt Supply House. It’s a slightly different value proposition, range based. And it’s done very well over an extended period of time. And we feel great about that acquisition.

Now at the other end of the spectrum, Partsmaster, we have completely and totally integrated in every way over time, seamlessly connected to Lawson. We refer to legacy Lawson and new Lawson. Well, that will be so interwoven as to be indistinguishable. So, two very different approaches.

And I believe that the success in both approaches enables us to move forward with an even broader opportunity set than we had previously. We are always filling the pipeline. We are very pleased with the current state of the pipeline and are very, very much committed to progressing.

Now the pipeline generally is filling with larger opportunities than the ones we made initially when we started down this path. And as you remember, we talked about wanting to do small acquisitions so that we can develop our integration team, test our paradigms around product and process. It worked, right.

We did develop the knowledge base and the bandwidth, the human resource bandwidth, to do what has been done since then. Moving forward, we would sure prefer to be doing larger acquisitions than small acquisitions. Not to say that we would reject a small one that was a beautiful fit. But the goal is larger acquisitions.

And going forward, they may be integrated, like Partsmaster or they may not be integrated, like the Bolt Supply House. And again, the good track record we have had on both is very encouraging to us. And the strength of the team, the integration team and the analysis team that we have built internally also gives us capacity.

But the financial capacity is critical. But the human recourse capacity is equally critical. We are very pleased on both fronts..

Got it.

And does the kind of Luther King potential transaction, does that cause any hiccup in terms of your ability – does it force you to kind of pause on your acquisition strategy?.

No..

Okay. That’s it guys I have. Thank you very much..

Thank you..

[Operator Instructions] Our next question today is a follow-up from Kevin Steinke. Your line is live..

Hi. Just one quick follow-up. Ron, I think you mentioned in the prepared comments a 120-basis point headwind to adjusted EBITDA margin from a combination of inflation and the Partsmaster integration. So, I was wondering if you could kind of break that down, like you did for the loss in MRO gross margin, into those pieces.

And I guess we should think about any headwind from the Partsmaster integration being past us now.

Is that correct?.

Yes. Well, I think – so in terms of the 120 bps, if you look at it relative to the entire quarter, yes, I broke it down for Carl on the MRO side. So, you can think about 40 bps of that being freight, or a combination of freight and labor that we experienced on the MRO side, primarily on the MRO side of the business, of about 70 bps.

That 120 bps does include the reserve that we took on the – I am sorry, does not include the inventory reserve we took on the rationalization. There is – because that’s already added back into our adjusted. There is, and we have experienced labor around moving some of the inventory that I commented on before on the Partsmaster side of the business.

That’s another 10 bps to 15 bps. And then, the other piece that I would say that we attributed to that was really just some of the lost sales dollars that we saw in the relative margin on those, just due to inability to get product in the door from our suppliers, and that’s about another 30 basis points.

So, the combination of those, along with some additional inbound freight that we have experienced from our supplier. So, what’s happening to some degree is that if our suppliers cannot send a complete order to us, they are sending partial shipments to us.

And that ultimately drives some additional touches and additional put-aways and just additional movement of product within our distribution network. So, we are incurring some additional labor costs around that. So hopefully, that helps on the 120 bps relative to the aggregation.

And as I said, we saw a little bit of slippage in just our straight product margin, but not a lot. I mean, between customer and sales mix, that was the remaining portion of probably some of that movement that we saw within our gross margin percentage..

Alright. That’s really helpful. I appreciate that. Thanks..

Yes. No problem..

Thanks Kevin..

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mike DeCata for any closing remarks..

Thank you, Kate. Lawson Products is uniquely positioned to prosper in these turbulent times. Over the past few years, I have discussed labor demographics as a driver of our value proposition and the relationship that we have with 90,000 customers. We have discussed that again today. The pandemic has accelerated this trend greatly.

Our operational excellence, geographic coverage and blend of service-intensive vendor-managed inventory is enabling us to win disproportionate share of that expanding market.

Our three-point growth strategy, and specifically the investment in accelerating productivity through new product introduction, new channel development, state, local and educational are beginning to show great results.

Our investment in people and process is enabling us to navigate through the landscape and become more integral to our customers’ success. At every level in the company, our teammates are becoming more capable, and they are turning that capability to winning share and accelerating growth.

Thank you to both our legacy and new Lawson teammates as well as the Bolt Supply teammates. Our ability to be nimble during turbulent times is making a huge difference to our customers and our suppliers. Thank you. We look forward to speaking with you on the next call. Have a wonderful day..

Thank you, ladies and gentlemen. This does conclude today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation..