Good morning, ladies and gentlemen. And welcome to the Lawson Products Fourth 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 question 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 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. 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 also be available on the website through March 31st, 2022. I will now turn the call over to Lawson Products CEO, Mike DeCata..

Good morning, and thank you for joining the call. This morning, I'll comment on the fourth quarter and the full year. I will also share some thoughts on the state of the business and our expectations for 2022. Ron Knutson, our CFO, will provide a more detailed review of our financial results, followed by your questions.

Before I discuss the quarter, on December 29th, we announced that Lawson entered into two merger agreements in which Lawson agreed to combine with two of Luther King Capital Management 's portfolio companies, TestEquity, and Jets Pro services in all stock transactions.

I will not be commenting on these merger agreements further on this call, except to say that the proxy has been mailed to all shareholders of record, and that the shareholder meeting is scheduled for March 15th.

Lawson reported solid fourth quarter performance, growing our average daily sales by 5.7% as compared to the fourth quarter of 2020, and 19.7% for the full year of 2021 over 2020. Adjusted EBITDA margin for the quarter was 8.3%, and 8.6% for the year.

Both sales and earnings impacted by a myriad of factors related to the lingering effects of the pandemic and global supply chain disruption, inflation, product availability, transportation disruptions, and labor cost increases. Throughout most of 2021, we have seen good organic growth on a sequential month-to-month basis.

This growth is encouraging as we believe that shortages in customer labor and our operational excellence are beginning to favorably impact our organic growth.

On previous calls, I've commented on many of our organic growth initiatives, including investments in people and process associated with state, local, and educational, we call it SLED, markets, developing new channels to market, and the roll-out of our parts washing system. The fourth quarter included some initial investments into these initiatives.

I am pleased to report that we are beginning to see encouraging signs that these initiatives will contribute to growth in 2022 and beyond. Ron will comment more on our overall gross margin for 2021 and the fourth quarter.

But let me say that throughout 2021, we pushed through several price increases associated with input cost increases to protect our margins. We anticipate that this activity will have to continue in 2022.

While supply chain disruptions have continued to impact most companies, we've made good progress in reducing our customer backorders and managing through longer-than-normal lead times from suppliers. Our sales and pricing teams have done a great job in managing our cost increases and realizing price increases across our end-customer segments.

Customers continue to recognize that Lawson Products is the lowest cost option for managing their consumable MRO supplies. This combined with acute labor shortages, is resulting in more new prospects, turning to Lawson Products for our service-intensive, vendor-managed inventory offering. During the quarter, revenue retention with nearly 91%.

The Partsmaster operational integration is now fully complete. Sales reps, products, distribution centers, and financial reporting have been fully integrated into Lawson. Overall, Partsmaster performed well throughout the year. However, a slowdown in military procurement in the second half of 2021 impacted the overall business.

Military activity appears to be rebounding early in 2022. We're pleased that our two largest acquisitions, Partsmaster and the Bolt Supply House, have performed very well. As we've discussed, Bolt Supply is operated as a standalone business whereas Partsmaster is fully integrated into Lawson.

The fact that both businesses have performed well gives us additional confidence in our future acquisition strategy. This quarter, Bolt Supply achieved nearly 19% sales increase, capped by an all-time record sales month in November 2021. Now, turning to sales.

Strategic accounts growth was down sequentially 2.4% for the fourth quarter as compared to the third quarter, and up 9.7% from the fourth quarter 2020. However, on an average daily sales basis excluding oil and gas segment, strategic accounts were up 2.4%. Non-oil and gas customers represent 93% of our total strategic account customer base.

Several strategic account segments are growing faster than others. Industrial customers, through our integrated supply partnerships, have grown over the past several years and growth is accelerating. Of the 17 integrated supply partnerships, 13 are growing nicely.

Another growth segment within strategic account is the construction equipment rental market. Looking forward, this is a significant growth opportunity for us. Additionally, Kent Automotive strategic accounts achieved 16% growth sequentially versus the third quarter and 38% compared to the fourth quarter of 2020.

As you may recall, our Kent business was more significantly impacted at the outset of the pandemic but recovered faster than other businesses. We added 236 new strategic account locations on the Lawson side of the business and 331 new Kent locations during the fourth quarter of 2021.

We also added several large strategic account customers, including two construction equipment rental companies, and integrated supply company and a seven location manufacturing customer. While these new relationships are early in their development, we expect these kinds of new relationships to help us achieve our 2022 growth plans.

Sales in our government civilian segment were down as compared to the fourth quarter of 2020. Like the third quarter, this is attributed to lower PPE sales as compared to 2020. However, our Omnia contract continues to add growth.

We were recently awarded a contract in the automotive category through Omnia, and we are beginning to do business under the recently awarded State of Iowa contract. We're optimistic about our government growth trajectory in 2022.

All three of our previously mentioned growth initiatives, SLED, development of new channels to market, and the Torrent parts washing system are still in the early investment stage. However, these initiatives will start to drive sales in '22 as well.

One other sales-related topic, sales rep productivity increased by 8.6% as compared to the fourth quarter of 2020 and up 5.1% sequentially as compared to the third quarter. Looking forward, 2022 has gotten off to a solid start. While supply chain challenges and inflation continue, we have learned to manage in this new environment.

The initiatives that we've discussed previously are poised to contribute growth in several important segments. And as momentum builds, it is likely to be sustained for a long period. Beyond the growth initiatives that I just mentioned, our core market is expanding.

Customers across all segments are struggling to find people to run and maintain their equipment. More businesses are turning to outsourcing as a solution to this problem. And we are seeing the benefits of investments that Lawson made over the past years in operational excellence and Lean Six Sigma, which are differentiating us in the market.

This year, Lawson celebrates its 70th anniversary, and next year, Bolt Supply will celebrate their 75th anniversary. Over those years, we've been refining our value proposition and employing state-of-the-art processes. We've kept the best of our culture while remaining resilient and embracing change.

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 start with some key takeaways for the quarter, and then we'll get into some of the details. I'll also share some highlights for the full year of 2021. First, a few highlights for the quarter. Consolidated sales improved by $4 million to $102.1 million on one less selling day this year.

Average daily sales were up 5.7% versus a year-ago quarter. MRO sales rep productivity during the quarter improved by 8.6% versus a year ago. Second, our consolidated gross margin percentage was 52.9% versus 53.1% a year-ago quarter and 53.1% in the third quarter.

We've proactively managed margins this quarter despite the global supply chain issues in the marketplace and inflationary pressures. 3. Inclusive of $6.9 million of non-operating items, our reported operating loss was $825,000 for the quarter compared to a loss of $658,000 a year-ago quarter.

Our adjusted diluted earnings per share was $0.52 for the quarter. 4. Our adjusted EBITDA was $8.4 million, or 8.3% of sales. As we reflect on the fourth quarter in the full year, 2021, we have continued to drive our business forward. Sales continue to sequentially improve in the Lawson and Bolt business, as does our sales rep productivity.

Most product categories realized sequential daily sales increases over Q3. We continue to make great progress in this environment and continue our focus on driving sales, protecting our margins, cost controls, and cash flows.

We remain focused on supporting our customers in generating revenue in this environment while continuing to ensure the safety of our teammates. As Mike mentioned, we are excited to celebrate that this year, 2022, is our 70th anniversary as an organization.

We've built this company through strong customer relationships that rely upon us for our services, products, and expertise. In light of the current and anticipated future labor shortages, we have become more critical than ever to our customers ' operations.

Partnering with Lawson, we'll ensure that they continue to operate in the most efficient manner and reduce their downtime. During the fourth quarter, average daily sales were $1.676 million in October, $1.733 million in November, and $1.695 million in December.

It's not unusual to see December sales trend down sequentially given the seasonal aspect of our business and the reduced number of selling days. Additionally, November sales included an all-time record sales month for Bolt Supply as they continue their customer outreach programs, and improve their branch operations.

Congratulations to the entire Bolt team for this major accomplishment. For the quarter, historical loss in MRO business at average daily sales increased 9.6% over Q4 of 2020, while Bolt Supply increased nearly 27%.

These increases were offset by lower Partsmaster sales, primarily within the military segment of this business as the federal government pulled back on some of their spend. Consolidated gross margins for the quarter came in at 52.9% compared to 53.1%% a year ago and in the third quarter of 2021.

On a standalone basis, before the classification of certain service-related costs into gross margin, Lawson MRO margin was 59.2% in Q4 compared to 58.7% in Q3 and 57.2% in Q2. This sequential improvement in the Lawson MRO business is a direct result of actions taken as 2021 progressed to offset increasing vendor, transportation, and labor costs.

While the fourth-quarter consolidated gross margin percentage fell slightly versus a year ago, we generated $1.9 million of additional gross margin dollars as compared to a year ago quarter on one less selling day.

In this challenging supply chain environment, we remain focused on growing our gross margin dollars in managing through the related inflationary impacts.

Specific actions taken throughout 2021 include putting price increases in place as appropriate, identifying secondary sources of supply, including national-branded products, reallocating our labor resources to focus on fast-moving products to ensure we fill our customers ' needs and working closely with our suppliers to gain insight on delivery times, and cross-stocking from our McCook facility to our forward DC's when possible.

While we're pleased with our overall margin percentages for the fourth quarter of 2021, our ability to access products has negatively impacted our sales. Our customer back orders in service-level metrics have improved sequentially from Q3 to Q4. However, are not back to our normalized levels.

We're adjusting our actions to manage through this unusual period and expect that we'll have to continue with these types of activities throughout most of 2022. For the quarter, operating expenses were $54.8 million compared to $52.7 million a year ago and $51.4 million in the third quarter.

The fourth quarter of 2021 includes approximately $7.3 million of non-operating costs related to mark-to-market accounting for stock-based compensation, severance, and costs related to the negotiation, review, and execution of the merger agreements related to Lawson's proposed business combination with TestEquity and Gexpro Services.

The fourth quarter of 2020 also included non-recurring expenses of $7.6 million for stock-based compensation, acquisition costs, severance, and a goodwill impairment.

Excluding nonrecurring items, adjusted operating expenses were up $2.4 million, or 5.3% compared to the year-ago quarter, primarily driven to support higher sales, the return of more customer-facing selling activities, and planned upfront investments to grow sales by expanding our channels to market.

Our reported operating loss was $825,000 for the fourth quarter. On an adjusted basis, including the non-operating items, non-GAAP operating income was $6.1 million for the quarter compared to $6.9 million in Q4 of 2020.

Adjusted EBITDA as a percent of sales was 8.3% for the fourth quarter compared to 9.1% in Q4, 2020, with 2021 having one less selling day. On an adjusted basis, excluding stock-based compensation and other non-operating items, diluted earnings per share was $0.52 for the quarter versus $0.60 in the year-ago quarter.

Capital expenditures for the quarter were approximately $2.5 million, including work being performed to expand our Suwanee distribution capabilities, and the purchase of Torrent's parts washing machines.

Total 2021 capex was $8.2 million, including the planned upgrades to our Suwanee infrastructure to allow for increased volume in the future, the build-out of our new Dallas facility, and the purchase of our parts washing machines that we leased to customers.

In 2022, we will be relocating our Calgary distribution center to a new location with expanded square footage to better service our Bolt in Western Canadian MRO customers. We expect our Capex to be in the range of $10 million to $12 million in 2022.

As an organization, we continue to make investments in the business, in particular, areas that have a direct impact on sales.

While the ongoing uncertainties and unevenness from the pandemic recovery and the related supply chain challenges continued, we were still able to generate improvement in the business while balancing our cost structure against our sales trends.

We ended the quarter in a net borrowing position of $7.5 million, inclusive of making the final $33 million payment for the Partsmaster acquisition in the second quarter and increasing our working capital on higher sales.

During 2021, we increased our working capital, in particular inventory, reflecting the vendor cost increases, carrying of PPE items, and investments in certain inventory categories to support upcoming planned marketing programs.

We ended the quarter with $91.3 million of liquidity, consisting of $4.2 million of cash and cash equivalents, and $87.1 million of availability under our $100 million credit facility. This places us in a great position to invest in the business and support future acquisitions.

As 2021 progressed, we managed our way through a slowly recovering environment over 2020, but not without a few twists and turns related to the pandemic, as well as various supply chain disruptions; including accessing product, rising vendor costs and labor shortages. Consolidated sales for the full year 2021 were $417.7 million.

This represents an 18.8% increase over 2020 levels, driven by Partsmaster being included for all of 2021 as compared to only the four-month post-acquisition period in 2020 and in an organic sales growth of 9.4% over 2020 levels.

This increase was driven by a 9.1% increase in Lawson organic MRO average daily sales and nearly a 19% increase at Bolt Supply. For the most part, putting aside some one-off items, sales grew sequentially as 2021 progressed in nearly every category and all segments. For the full year, adjusted EBITDA finished at $35.8 million, or 8.6% of sales.

This represents an improvement of $1.7 million over 2020 levels, and also exceeded our 2019 levels by $1.3 million. Keep in mind that during 2020, significant temporary cost reductions were put in place to protect our margins and cash flows in a very uncertain pandemic environment, for which many have now been put back in place.

We're very pleased with our overall performance as 2021 progressed. We were able to manage through the continued effects of the pandemic, including the global supply chain disruptions that started in early 2021, as well as the resulting inflation.

As Mike and I have both previously stated, we are managing through this challenging time with the expectation that we will come out of this environment in a stronger position than how we entered it. The integration of Partsmaster into the organization was completed in 2021, and we are now one organization.

As with many other companies, we have experienced inflationary costs due to the global supply chain disruptions. We are proactively monitoring and managing through this situation, and have taken the necessary actions, including price increases to protect our margins. Before I turn it over to the Operator, let me thank the entire team.

We have had significant activities taking place on many fronts, not to mention managing through the effects of the pandemic and more extensive inflation and supply chain challenges than most of us have ever seen. The team continues to work through this unusual period to make us stronger for our customers, our employees, and our shareholders.

Thank you for all of your commitment to the company. I will now turn it over to the Operator for questions..

We will now begin the question-and-answer session. [Operator Instructions]. At this time, we will pause momentarily to assemble our roster. And the first question coming in is from Kevin Steinke from Barrington Research Associates. Kevin, your line is live..

Good morning, Mike and Ron..

Morning, Kevin..

Morning, Kevin..

I just wanted to ask you about, like you mentioned in your upfront comments there, that you think labor shortages are starting to help your organic growth, then obviously that's a theme you've been talking about for a while.

Shortages of maintenance, mechanics, etc., but is there anything you're seeing in the field or hearing from the customers now? Any anecdotes that are really pointing to that situation in the labor market, really starting to help drive growth even more for you?.

Thank you, Kevin. Yes, we are beginning to see that in new customers coming to us. People who were not customers prospects, who are reaching out and engaging us. I would say, still a little anecdotal, what I'm really looking forward to is reporting statistically significant customer accounts.

That's when it moves from a lot of good encouraging anecdotal examples to statistically valid examples, and that's really what we're excited about. So as soon as we can communicate, not anecdotes, in which there are a lot of them, and many of us have personally seen that in sales calls that we've made and speaking with sales reps.

there's a lot of good anecdotal evidence. It will really show up in customer accounts and it will really show up in a continued increase, albeit it will be a slow increase in revenue retention. I think the last time we talked, our revenue retention was a hair over 90%, and now we'll just a hair under 91%. So we're feeling very good about that.

That gets very hard, the more you go from 91 to 2, to 3, to 4. There are companies that go out of business and that counts against us. But the combination of customer account and revenue retention are two key metrics that are statistically valid when we are able to report them..

All right, that's helpful. It will be interesting to be able to track those metrics over time. And you mentioned investments in the three growth initiatives that you've been talking about during the fourth quarter.

Any way to size those investments? And then following up on that, you mentioned, you're seeing some early -- very early signs that it will start to contribute to the growth in 2022.

So maybe what's your seeing from those investments?.

Yes. Absolutely. So maybe I'll start, and Ron can sort of punctuate it with little bit of data. So in this SLED area, a lot of activity there, in investment I'm talking about, and that is the addition of a number of field-based government strategic account managers.

And there are more to come at this quarter and this first half year, as well the addition of a number of backroom office folks to help us win more bids and quotes, and also make the field, both the field strategic account -- government strategic account managers more productive, and the general population of sales reps.

And the general population of sales reps do the bulk of the selling, even the government.The government strategic account managers win larger contracts. They're generally populated in large counties, large cities, and where we have real density of government and near large educational opportunities. That's where we're placing those folks.

Moving on to the second initiative being channels to market. There again, that's the combination of proactive outbound marketing. It's hiring inside sales reps and retention sales reps, retention sales reps helping with the revenue retention balls that we have. And also, we've engaged an external firm for more customer outreach.

The combination of that is the addition of outside resources, inside resources, and sort of building that channel-to-market. Lastly, is the Torrent parts washing system. Ron alluded to that a minute ago with our -- some of our Capex, but they are, again, a unique system.

It's more about training existing sales reps and opening them to new center products for us, ones that we had not previously are carried. Now, the Partsmaster sales reps were intimately familiar with the Torrent parts washing system. We just have to have all the rest of the legacy Lawson sales reps focused on it as well.

So in the early stage of investments -- in the early stage of return on those investments at this moment, but really optimistic that they will have a real impact on accelerating growth..

Yes, Kevin, this is Ron. So from the fourth-quarter perspective, as Mike mentioned some pretty significant investments, primarily in people to drive sales.

And I mentioned previously that we are continuing to invest in areas specifically to drive our top-line sales, and then we've talked about the operating leverage that we can create as an organization being between 25% and 30%.

In terms of dollars, that hit the fourth quarter related to these investments, it's about $300,000 to $400,000 for the quarter. So if you're thinking about the comparison either versus Q4 or even Q3, I'd use the number of about $400,000 of some of these upfront investments.

And as Mike said, I mean, we're early -- in the fourth quarter in particular, early in this process. So -- but we are confident about the return on those investments as we move throughout 2022..

All right, that's helpful. And should we expect a similar size of investment for the next couple of quarters here, or does that begin to taper off or even accelerate. Just how should we think about kind of that $400,000 --.

Yeah..

is kind of being a baseline or --.

Yeah, I think it's a pretty good baseline. However, I will say that, in particular, in attracting new customers in the market segment -- segmentation area and some of those other channel-to-market, we'll probably make more investments here in the early part of 2022 to really get that kicked off.

Mike had mentioned outsourcing some of the customer acquisition. So that may come up a little -- that may go up a little bit, but at the same time, we should be generating -- starting to generate those revenue dollars as well, where that wasn't necessarily so much the case in the fourth quarter just because it was a pretty early start on it.

And within that middle segment, the channels to market segment; there are four initial market sub-segments that we have identified very rich opportunity for us, where we have good track record, but they're very large and fragmented customer opportunities, that we're very optimistic that we want far greater share in those areas, where we already have tremendous credibility and marquee accounts.

Part of that is directed at marketing programs, marketing communication, subject matter experts, but it's a really rich opportunity..

All right. Great. And Mike, you called out construction equipment rental as a significant potential growth area for your strategic account initiatives. And I know construction equipment rental is always been a source of strength for you anyway, but you've mentioned adding two more strategic accounts there.

So is there something changing or even picking up a little bit more on that market that gives you optimism there?.

I think there are two things, but the most important thing is that, as we have continued to work on that industry, our sales reps and our market segment leaders, strategic account teammates, have developed a real in-depth understanding of the customers needs.

The American Rental Association, who most of the rental companies belong to, would say that that is about a $60 billion -- I'm talking about rental revenue, not our opportunity.

Rental revenue is $60 billion highly fragmented industry, and again, it's extremely fragmented, most rental shops or one or two branches, unlike the largest players in the space, which may have a thousand branches. But the fact that we're doing business with the largest earns us some marquee credibility.

More importantly, it earns us tremendous knowledge of what the customer needs so we can offer real value to customers in that space. And little by little, our reputation is getting out for the very high quality work we do. And the service intensity -- the service intensive vendor-managed inventory, which helps them keep their equipment rental.

Again, if you're an asset manager, specifically in the rental industry, there are really two variables as you look at. Rental rate and time utilization, those are the two [Indiscernible] of lifeblood of a rental company, time utilization and rental rate. We help you with time utilization. So we're uniquely positioned.

Our way more than 1000 sales reps are positioned to really make a difference for that marketplace. And by the way, there are other similar marketplaces, you asked about that one, but there are other markets that have those same characteristics..

All right. Great. I just wanted to ask you a couple of more here. It sounds like you're planning for supply chain disruptions to continue for much of 2022, and you've done a good job of managing through that. I believe you mentioned improved back orders.

Have we seen that come down in any meaningful fashion? I don't know if you put numbers around it or not, but at least qualitatively, how that's trending..

Yes. We have seen an improvement in backorders, that is in large part to the outstanding work of our supply chain team and purchasing team. We have seen improvement during the fourth quarter and continuing.

We're almost transitioning, you mentioned the word supply chain disruption and yes, that's true as compared to '19, but we're getting confident, really used to on managing in this new environment. I don't think it will be further disruptive than it's already disruptive, and we are learning very well to manage in this new environment.

We're doing quarterly business reviews with suppliers. Again, far more frequently we ever did. We're working hard to develop cross-docking with suppliers. We've staked cycle time out of the our order, through to us, to the customer delivery time. So there are a number of actions that we've taken to manage in the new environment.

We, as well, would certainly anticipate that inflation has not yet fully run its course. And we have pushed through several price increases last year, with very high price realization. And again, even one this year, with very high price realization. So a lot is changing, but our team has been incredibly nimble.

Our access to rich data, Lean Six Sigma, has helped people do better and more thorough analysis. We talked about them in the company. So more people are coming to better answers and more quickly on all these topics than ever before. Ron, I'm sure you want to jump there with some data..

Yeah. Kevin, I would just add to Mike's comments about this -- on the supply chain side and the margin management side clearly has been a real focus for us as 2021 developed.

And as you go back and you look at our product margins, and I'm going to talk here about our historical loss and margins before some of the service costs reclassifications and so forth. And when you look at that, what we did experience, and I think a lot of companies saw this, was a dip in those margins in the second quarter.

However, we've improved our gross margin percentage really going from Q2 to Q3 to Q4. I would say, as Mike mentioned, even we've taken actions in the first quarter of 2022 to work on trying to expand that. And I would also say that that's up against some headwind relative to our sales mix from our customer.

And the fact that, as Mike mentioned, our strategic customers continue to see some really nice growth, and in particular, our Kent Automotive strategic customers. We understand what those levers are that we need to pull in order to protect our margins.

And I think in -- well, I know in 2021, we were very active in making those necessary moves in order to do that in the end to the extent that some of those same pressures continue into 2022, even though we have seen -- as Mike mentioned, we've seen a reduction on our customer backorders versus where we ended at the end of Q3.

It's probably about a 20% reduction in our customer backorders, so our line service levels have improved accordingly as well sequentially from Q3 to Q4. So something that we're clearly monitoring and managing and taking the appropriate actions..

One last thing, Kevin, on this question. It's important to put it in context, we now ship about 35 -- of process, about 35,000 lines a day back to where we were in '19, and we're shipping 97% of them out as appropriate, same-day. Now, that's not exactly where we want to be. We want to be north of 97%. But it has to be put into a little bit of context.

We're doing a very good job as it relates to this challenging situation, and more improvement, of course, to come..

Okay, that's helpful. And just lastly, you mentioned in the press release the -- obviously, the sequential daily gain -- sales gains you saw over the third quarter that are pointing to evidence of strong customer demand and that has continued into early 2022.

So maybe what color numbers can you give us around what you're seeing thus far in the first quarter here, maybe from an average daily sales basis..

Yes. Kevin, let me -- I'll take that. It -- so we have seen a nice start to 2022, and both I would say sequentially going from Q4 into January and January into February, and then also versus January a year ago. And so versus January, I'm sorry, versus January -- combined January and February a year ago.

If you combine what's called the first seven weeks, we are in I would say mid-to-high single-digits of an increase versus a year ago. So -- and we experienced that in both January and February.

So I think it's to Mike's points earlier about some of the increases that we're seeing from just an overall customer demand standpoint, and also some of the additional points that Mike pointed out relative to strategic account growth.

Although we've seen -- really even as you go back into 2021, for the most part our growth was across all product categories, and for the most part across most customer segments. And we're really seeing the same thing here early in 2022..

All right. Great. Just one last numbers question here.

Do you have the selling days for 2022, the total and then by quarter?.

I do. Yes. So in 2022, Q1 is 64 days, Q2 is 64 days, Q3 is 64, and then Q4 is 60. So we have 252 total days in 2022, there were 251 selling days in 2021, and we pick up that extra day here in the first quarter..

Alright great, thanks for taking all the questions..

Thanks, Kevin..

Thanks, Kevin..

[Operator Instructions] And the next question is coming from Ken Newman from KeyBanc Capital Markets. Ken, your line is live..

Hey, good morning, guys..

Morning, Ken..

Hey, Ken..

Morning. I appreciate that you don't want to talk about the merger. And I mean, that makes sense, but I do think you've published some longer-term forecast for the standalone business in the proxy earlier this month. I think that highlighted 7.5% growth, and I think adjusted EBITDA margin at around 9.5% for 2022.

I just want to clarify if that outlook is still in the ballpark of higher thinking about the standalone business for the year, and if not, what's changed?.

Thank you, Ken. And you're right, we're not going to comment on the merger, that document stands. And so I think we'll just let the documents -- the proxy stands as it is and leave it at that..

Understood. I think the question is more so on the forecast that you had for just the standalone Lawson business rather than the other two mergers.

And so I just -- again, just going back to the forecast for just standalone loss, is that still kind of in-line with your expectations with the outlook that you're providing today?.

Yeah, Kevin. So what I -- yeah, so this is Ron. So we don't typically go out and provide any formal guidance on a routine basis or on an update basis.

What I would really point you back to is what we've seen here so far in the first seven weeks of the year, and our comments around really how the first, call it, almost two months have developed around the top-line sales numbers.

And you guys know our business pretty well in terms of the operating leverage that comes through on that incremental growth.

As we sit here today, we really can't speak to any formal guidance or any update to that, but I think our commentary around how the first couple of months are trending is positive in terms of how we've gotten the year started so far in 2022. Yeah. That's fair enough. And then just kind of moving over to the cash flow.

Maybe just talk a little bit about the outlook for inventory build. I know you've built inventories through 2021. Maybe any color on how you view your inventories relative to your customer needs. And just where you expect working capital as a percentage of sales to trend in 2022. Yes.

So you're right, Ken, we have built inventories throughout 2021 as you know. I mean, some of that is just a direct reflection of the cost increase coming through from our vendor base. Where we sit today, we're pretty comfortable with our overall inventory levels.

I think that as we move throughout 2022 -- we have invested in some upcoming programs relative to carrying some inventory on programs that we're going to accelerate from historical Partsmaster product into our loss on sales base. But the vast majority of those investments have already been made.

So we think that most of that increase that we saw in 2021, certainly that increase won't be there again here in 2022, we're pretty comfortable with where we're at. In '21, we also consolidated in all of the Partsmaster inventory, so we now have really all of that inventory within the existing distribution network.

So we don't feel like there will need to be a necessary build here in 2022 on that. So we are -- historically, if you look back as a percent of sales, you -- really between AR, inventory, and AP, we've ran kind of 20 - ish percent from an overall working capital percent of sales.

'21 was higher than that, just because of the build in inventory, but that's a pretty comfortable number for us to still be -- as we think about going forward still in the low 20% relative to sales..

[Indiscernible] We also added about nine -- more than 9,000 skews when we acquired Partsmaster, and now we need to -- want to make them available. They are available to the total sales population. So there's a little bit of that.

It will also be interesting to see this whole economic challenge, I'm really talking about for our customers, not so much ours, is supply-driven. So our customers are challenged with labor availability, raw material availability.

There are a number of them that if they could be operating on a second or a third shift, they would be, and yet because of raw material and labor, they're having a hard time operating on a second or a third shift. As these forces sort of abate a little bit, we would except -- expect an acceleration of machine time utilization.

And the more you run your machine, the more you have to maintain your machine. So I think we have tailwinds for the future. Because at some point, everybody's going to settle into the new reality, and that will have an impact on inventory turns and inventory in general..

Yeah, and as I try to wrap that question up -- I mean, I know you're expecting a decent increase in Capex for some of these new investments.

Would you expect -- can free cash flow be positive in 2022, just thinking about the moving pieces and operating cash flow? And then, how do you think about the run rate free cash flow conversion as a percentage of net income throughout the cycle?.

Yes. So definitely for 2022, we'll be throwing off positive cash. And even though our Capex, as I mentioned, is in that I call it 10 to 12 range this year, and some of that are the investments that Mike talked about relative to the three initiatives.

But then also, we are making some investments into -- the Suwanee distribution center will finish off in terms of those investments to expand throughput there. And then we're also going to be kicking off, really kind of a similar process in McCook to expand their line of throughput volume as well, or their capabilities.

But yes, we -- from an overall cash flow perspective, we as an organization with a 30% drop through on EBITDA, I would say putting aside some of those incremental investments made in 2021, we were throwing off positive cash flow. And we certainly expect that to be the case in 2022 as well..

Understood. Just a few more here from me. I think you had talked a little bit about the strategic account mix. And I know it's a small part with the oil and gas customers. But with oil prices kind of where they are, do you have any idea or color on what you think about activity for those accounts into 2022..

The little step back in that segment -- first, let me say we haven't lost customers.

In particular, what I was referring to is we have a couple of very large pipeline construction companies, gas pipelines, and very close relationships, very loyal customers, and yet, this happens periodically where they move from one 30-mile spread up the road, another 30 miles, and they're building 600-mile long pipelines.

And so this past winter, fourth-quarter, they slowed a bit because they were finishing one segment, moving to other segments. And that's a little bit of what we see was big enough because of this specific individual pipeline. I think it's going from Canada through West Virginia through Ohio. I mean, really neat stuff.

But in any event, the volatility of that project had a little impact. I don't think we've seen yet -- you would think with oil prices where there are things like exploration, fracking, things like that may or may not come back. Those are long cycle projects. And the exploration companies have to think hard about whether now is the time.

it -- will the prices be sustained enough to afford them the opportunity to make their capital investments to restart projects that are dormant and to explore new tracks.

A little hard to predict at this time, but bearing in mind our cycle and responsiveness, our cycle time and responsiveness can be so fast that if when someone calls us on Monday, we can start having product to them on Tuesday and quick setups. So the idea of lead time for us is not really a concept.

We can respond extremely quickly as we see opportunities. And again, we have a great reputation with a huge number of these companies. But what you saw in that number was a couple of specific project-related volatility..

Understood. Last one from me. I appreciate all the color on gross margins, on historical MRO side, it sounds like you guys have been able to execute pretty well in terms of realizing higher prices to offset inflation.

As I think about the progress or the cadence of gross margins into '22, any color on how you can help us think about the operating leverage in gross margin expansion for '22 as the higher sales flow-through, and just maybe some incremental color on where you see the price-cost spread, whether that's widening out with supply chain, maybe normalizing.

I think you had mentioned getting used to operating in this type of tight environment and whether that kind of shows through as a widening out of price-cost spreads here..

You know, I have to think about it but I don't think we'd see it widening out. I think it's relatively stable, we will likely see cost increases continue to come through. We have already put in place a price increase with very high price realization. I think the market, our customers recognize that this is a necessity.

They also recognize though, that while our prices are going up, we are by far the lowest cost option they have in maintaining their equipment. Opportunity cost is a very real thing, Kevin asked a moment ago about the construction equipment rental market. A large excavator will rent for $3,000 or $4,000 a day.

Bearing in mind that our average piece price is of $0.94, do you want your $400,000 excavator down for one extra day when you rent it for $3,000 or $4,000 a day for a $0.94 part or a $5 part? Of course, the answer is no.

So the value proposition is rock solid, in fact, becoming more valuable to more companies who are choosing to outsource what they used to manage internally, the expansion of the market I referred to. And we are not trying -- I've been saying this for years. We're not trying to expand our gross profit percent through price increases.

Now, we don't want it to contract because of cost increases, which is we're in the step. But we feel like we're fairly paid by our customers, and we offer a tremendous value to our customers. And so we expect neither long-term contraction nor long-term expansion of those margin percents..

Got it. And just since you mentioned the rental companies, this will be my last one here. I just -- I wanted to clarify. I know you're working to help improve time yield on the fleets there. I imagine that time utilization is pretty tight right now for a lot of these rental fleets just because of the availability of equipment.

I do know that a lot of those larger suppliers are expecting to open up production in the back half of this year. So maybe just help us think about how you're planning to strategize around that market as fleet availability opens up a little bit, maybe time yield comes off with pretty high peaks that we saw in '21..

That's right, and we'll see how production becomes available. Yes, the major manufacturers are talking about production expansion, it's contingent on raw materials and labor at the large equipment manufacturers. So I hope they're right, because the industry could use new and fresher equipment.

There's a life expectancy in an age associated with the equipment, ground engaging equipment like [Indiscernible] and bulldozers have a much shorter lives than aerially equipment. And so a lot of this equipment is really getting long in the tooth..

So the larger the fleet becomes and the more we talk about outsourcing of consumable MRO, well, the same trend is happening in the construction equipment industry where people used to own their backhaul or their bulldozer, and now, they're saying, let me just rent it for the days I need.

So I think that market is expanding as well, and all of that represents opportunity for us. We also have very, very close relationships with the largest companies. I mean, very close relationships with senior management, from the CEOs down to the purchasing departments in these large companies. So we're in lock-step with them quarterly..

Very helpful color. Thanks for the time, guys..

Thank you..

Thanks, Ken..

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, Paul. Thank you for joining us today. The fourth quarter and full-year reflect Lawson's ability to be nimble and adapt to the changing environment. The year also highlighted the critical nature of our service-intensive vendor-managed inventory value proposition.

More customers and prospects are turning to Lawson to enable them to keep their plant and equipment operating in the face of increasingly acute labor -- maintenance labor shortages. While supply chain challenges persist, our team has done an extraordinary job of managing in the new environment.

Thank you for all your hard work and commitment to ensuring our success in 2021, and for years to come. We're investing in programs to accelerate growth. 2022 has started strong. Investments that we've made years ago are enabling us to make decisions across the company based on rich data and an outstanding team.

Throughout our 70-year history and 75-year history at Bolt Supply, we've strived to keep the best of our culture based on customer commitment, integrity, and a commitment to our stakeholders. These investments and culture are serving us, our customers, and our investors well, and we'll continue to do so into the future.

Thank you for your continued interest in Lawson Products. We look forward to a great 2022 and we look forward to speaking with you on the next call. Have a wonderful day. Thank you..

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