Good morning, everyone. Welcome to the Lawson Products First Quarter 2022 Earnings Call. As a reminder, this conference call is being recorded. Now I will turn the call over to Steven Hooser, Investor Relations, to provide introductions and read the safe harbor statement. Please go ahead..

Good morning, and welcome to the Lawson Products First Quarter 2022 Earnings Call. With me today are Bryan King, Lawson Products Chairman; and Ron Knutson, Lawson Products' Executive Vice President and Chief Financial Officer. During the call, they will be providing an update on the businesses from an operating and a financial perspective.

Please note that statements made on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results, the 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. Management may also refer to non-GAAP measures, including adjusted EBITDA, adjusted operating income and adjusted diluted EPS.

Reconciliations to the nearest GAAP measures can be found at the end of the earnings release. The earnings press release issued earlier today is posted on the Investor Relations section of our website at investor.lawsonproducts.com. A copy of the release has also been included in the current report on Form 8-K filed with the SEC.

This call is being audio simulcast on the Internet via the Lawson Products' Investor Relations page on the company's website. A replay of the webcast will be available on that website through May 31, 2022. I would now like to turn the call over to Lawson Products' Chairman, Mr. Bryan King.

Bryan?.

Thank you, Steven, and good morning, everyone. It's great to be on the call this morning, and we're excited to comment on the first quarter stand-alone Lawson Products results. The purpose of this call is to discuss the operating and financial results of the Lawson Products operating company.

Lawson had another great quarter and exceeded our expectations with 13.8% in sales growth. The Lawson team has continued to deliver despite inflationary and supply chain challenges that exist in the marketplace.

As most of you are aware, on April 1, 2022, we completed the strategic combination of Lawson Products with TestEquity and Gexpro Services that formed a specialty distribution company.

Given that this occurred subsequent to the end of the first quarter, we've been advised to limit today's comments solely on Lawson Products' performance on a standalone basis, and we will not be taking questions.

Beginning with our second quarter release, which will be in early August, we'll be discussing the consolidated results of all 3 operating divisions and taking questions again. We do understand the desire for more information on what the 3 companies look like on a combined basis as well as our strategic vision for this new company going forward.

Accordingly, we announced this morning that we will be conducting a separate investor call, including a question-and-answer session to further discuss the strategic combination to create a more robust value-added specialty distribution company. That call will be held on May 5 at 11 a.m. Eastern time.

We look forward at that time to sharing more information on the vision and financial highlights. With that, I will now turn it over to Ron to provide insight on Lawson operations and financial performance for the first quarter.

Following Ron's comments, I will come back and discuss the recent leadership changes at the Lawson Products' operating unit and provide some closing comments..

Thank you, Bryan.

In terms of Lawson's performance for the quarter, we saw great progress on many fronts, including strong growth in our strategic customer relationships; continued growth in our Kent Automotive business, in particular, multisite locations; the relocation of our Western Canadian distribution center more than doubling its square footage size from 43,000 square feet to over 100,000 square feet; the continuation of our investments in the 3 initiatives of market segmentation, Torrent part washers and state and local and education initiative; our ability to manage through a tough inflationary environment while generating additional gross margin dollars to offset various cost increases; strong sales and EBITDA performance by the Bolt Supply House; and we exceeded our first quarter expectations even with increased costs in certain areas of the business, which I'll cover more in a moment.

So let's start with some of the key financial takeaways for the quarter and then I'll jump into some of the details. First, consolidated sales improved by $14.3 million to $117.9 million on 1 additional selling day this quarter. Average daily sales increased 12% versus a year ago quarter and improved 8.3% over the fourth quarter of 2021.

Second, our consolidated gross margin increased $5.9 million. We have proactively managed margins this quarter despite the global supply chain issues in the marketplace and inflationary pressures that we are all experiencing. And third, reported operating income was $12.1 million for the quarter compared to $4.8 million a year ago.

On an adjusted basis, our EBITDA was $9.2 million, up $745,000 over the fourth quarter of 2021 and up slightly over $9.1 million a year ago quarter despite being burdened with higher labor costs, including higher health insurance claims coming out of COVID.

As we reflect on the first quarter, sales continued to sequentially improve in the Lawson and Bolt business as does our sales rep productivity. Most product categories realized sequential daily sales increases over the fourth quarter.

We continue to make great progress in this environment and continue our focus on driving sales, protecting our margins, cost control and generating strong cash flows. We are excited to celebrate our 70th year anniversary as an organization.

Over the past 70 years, the company has been built through strong customer relationships that rely upon us for our services, products and expertise. This has become more evident as labor markets continue to tighten and our customers look to us to supplement their labor needs.

Partnering with Lawson will ensure that they continue to operate in the most efficient manner and reduce their downtime. During the first quarter, average daily sales were $1.751 million in January, $1.833 million in February and $1.933 million in March. The integrated Lawson Partsmaster business realized strong sequential growth during the quarter.

Additionally, the Bolt Supply House set another all-time record sales month for March on top of a record sales month realized just last November. We estimate that of the 13.8% sales increase versus a year ago, approximately 9% is price related.

For the quarter, the Lawson Partsmaster MRO business grew 12.1%, while both supply sales increased nearly 27%, driven by success within their branches and a recovery of their corporate sales primarily to oil and gas customers.

We continue to realize strong sales within the Strategic and Kent side of the business, up approximately 25% and 27%, respectively, versus a year ago quarter. Consolidated gross margin for the quarter came in at 51.3% compared to 52.7% a year ago and 52.9% in the fourth quarter of 2021.

On a stand-alone basis, before the classification of certain service-related costs into gross margin, the Lawson Partsmaster MRO margin was 58.2% in Q1 compared to 59.9% in Q4 and 59.4% a year ago quarter.

Excluding the movement in noncash inventory reserves, Q1 gross margins were within 100 bps from Q4, driven by a sales mix shift towards larger, lower-margin profile customers and increased vendor transportation and labor costs that we are all experiencing.

Our gross margin percentage was also negatively affected by approximately 50 bps due to the strong sales within our strategic customer base, which do have lower margins.

While our actions allowed us to create $5.9 million of additional gross margin dollars over a year ago, the recovery of these rising costs on a dollar basis actually narrows the overall margin percentage slightly.

We remain strategically focused on growing our gross margin dollars and being diligent in managing through the related inflationary supply chain and labor shortage impacts.

While we are pleased with our overall margin percentages for the first quarter of 2022, we are experiencing challenges to access certain products like everyone else in the industry. Our customer backorders and service level metrics have improved sequentially from Q4 to Q1. However, they are not yet back to our normalized levels.

We are adjusting our actions to manage through this unusual period. We remain confident in our ability to navigate through this unusual time. However, we do expect that many types of these challenges may continue throughout the remainder of 2022.

For the quarter, total operating expenses were $48.4 million compared to $49.8 million a year ago and $54.8 million in the fourth quarter.

The first quarter of 2022 includes approximately $5 million of net nonoperating benefits related to the mark-to-market accounting for stock-based compensation, offset by severance costs and costs related to Lawson's business combination with TestEquity and Gexpro Services.

Excluding these nonrecurring items, adjusted operating expenses were up $5.2 million compared to the year ago quarter, primarily driven by higher compensation to support higher sales, the return of more customer-facing selling activities, planned upfront investments to grow sales by expanding our channels to market and increased health insurance costs.

Let me take a moment and comment on our health insurance claims briefly. For the quarter, our net health insurance costs rose approximately $1.5 million or 50% versus a year ago. This was driven by an increase in the number of larger claims as well as the frequency and severity of non-large claims.

Many of the trends that we experienced in this quarter are not inconsistent with the rise in health claims throughout most industries coming out of COVID. Historically, for Lawson, this tends to smooth out over the year.

However, the increase that we experienced this quarter negatively impacted our first quarter 2022 adjusted EBITDA margins by approximately 125 basis points. Our reported operating income was $12.1 million for the first quarter compared to $4.8 million a year ago.

On an adjusted basis, including nonoperating items, non-GAAP operating income was $7.1 million for the quarter compared to $6.1 million in Q4 of 2021 and $7.2 million in the first quarter of 2021. Adjusted EBITDA as a percent of sales was 7.8% for the first quarter.

On an adjusted basis, excluding stock-based compensation, severance and acquisition costs, diluted EPS was $0.57 for the quarter versus $0.52 in the fourth quarter of 2021 and $0.58 in the year ago quarter.

Capital expenditures for the quarter were approximately $2.1 million, including work being performed to expand our Suwanee distribution center capabilities, information technology investments and the purchase of Torrent part washing machines.

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 improvements in the business while balancing our cost structure against our sales trends.

We ended the quarter in a net borrowing position of $10 million with $83.4 million of availability under our previous $100 million committed credit facility. Before I turn the call back over to Bryan, let me thank the entire Lawson team.

We've had significant activities taking place on many fronts to drive our business forward, including managing through the lingering effects of the pandemic and more extensive inflation and supply chain challenges than most of us have ever faced.

The team continues to work through these challenges to make us stronger for our customers, our employees and our shareholders. Thank you for all of your commitment to the company. As Bryan mentioned at the beginning of the call, we will be conducting an additional call on May 5 at 11 a.m.

Eastern Time to discuss the strategic combination that closed on April 1 between Lawson, TestEquity and Gexpro services. We look forward to that discussion and being able to answer questions at that time. I'll now turn it back over to Bryan..

Thank you, Ron. Earlier this month, we announced a key leadership transition at the Lawson Products operating company. This management change was made as part of its coordinated succession plan, and we were pleased to welcome Cesar Lanuza as Lawson operating company's new President and Chief Executive Officer.

Cesar is a high-energy executive with a long track record of industry successes, and he is well known for and has a reputation as a customer-centric leader. We're thrilled to have Cesar leading the team as well as the Lawson operating business to the next level of growth and profitability.

Cesar stepped in right away and is already making an impact and was quickly embraced by the Lawson team. I also want to take a moment to recognize and thank Mike DeCata for his thoughtful leadership and significant contributions to the successes of Lawson over the last decade.

During Mike's tenure, the company and team have grown through his commitment to operational excellence and continuous improvement. He has truly been instrumental in the company's turnaround and steady progress and a significant value created for our shareholders, and the Board and I are grateful for his leadership and drive.

We're delighted to have Mike continue as a consultant to the company and as a continued shareholder. With that, I would like to close out today's call and thank you for joining us this morning.

We look forward to talking to you again on May 5, and we genuinely hope you will join us for what we welcome as a robust discussion about the future for the company. Have a great afternoon and thank you very much..

Operator:.