Good morning, ladies and gentlemen, and welcome to the Lawson Products Third Quarter 2015 Earnings Call. This call will be hosted by Michael DeCata, Lawson Products' President and Chief Executive Officer; and Ron Knutson, Lawson Products' Chief Financial Officer. They will open the call with an overview of the third quarter results. There will then be time for questions and answers. 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 November 23, 2015. During this call, the Company will be providing an update on the business as well as covering relevant financial and operational information. I would like to point out that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results, and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those described. In addition, statements made during this call are based on the Company's views as of today. The Company anticipates that future developments may cause those views to change. Please consider the information presented in that light. The Company may at some point elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so. I will now turn the call over to Lawson Products' CEO, Mike DeCata.

Good morning, and thank you for joining our call. We appreciate your interest in Lawson Products and we're excited to discuss our performance with you today. This morning, I'll comment broadly on our progress overall and specifically on the third quarter. We continue on the path we set a few years ago. Our three-part growth strategy remains unchanged. Add sales reps, increase sales rep productivity, and pursue DNA match acquisitions. In addition, we're committed to refining our processes, including the application of Lean Six Sigma methodology, broadly across all of our functions in the Company, and increasing profits. I will comment on these topics and others on this call. Ron Knutson will provide a financial update and then we'll take questions. Our focus on top line sales. First, sales have stabilized during the quarter versus the second quarter. We're seeing a small uptick from oil and gas customers, over the second quarter. This was offset by continued weakening of the Canadian dollar and a general malaise in the industrial economy. We continue to gain traction with our non-oil and gas strategic accounts and our Kent Automotive division experienced 3.4% growth versus the third quarter of 2014. We're also seeing continued incremental improvements and overall customer retention and a number of ship to locations continues to trend upward slightly. These are encouraging signs. However, they're not large enough to compensate for the overall softness in the market. For the quarter, sales were $70.2 million, versus $74.1 million a year ago. As in the second quarter, we continued to add sales reps, but at a slower pace than we had initially planned. We finished the quarter with 925 sales reps and were committed to adding sales reps for the balance of 2015 and in 2016. We completed the rollout of a Lean…

Thank you, Mike and good morning everyone. As Mike indicated, although some of the softness that we experienced in the second quarter continued into the third quarter we delivered very solid operating results given the current environment. We continue to invest in the Company, in particular, in our sales organization while driving improved performance. Additionally, we are benefiting from our previous investments, demonstrated by the improvement in our overall operating results. Let me review some of the highlights for the quarter. First, operating income was $2.8 million, up $2.1 million from a year ago. Our adjusted operating income, taking into consideration nonrecurring items, was $3.2 million for the quarter, compared to $2.2 million a year ago. Second, sales finished at $70.2 million. This represents a decrease in our average daily sales of 5.2% over the year ago quarter. 70% of this decline was driven by lower sales to our oil and gas customers and the weaker Canadian dollar. Third, gross margins improved to 61.7% for the quarter from 60.1% a year ago and were stable with the second quarter of 2015. Fourth, we ended the quarter with no outstanding debt under our credit facility and $7.8 million of available cash. This is net of the cash utilized for the September 30th acquisition that Mike discussed. Let me now share some of the details. As I just mentioned, we finished the quarter with sales of $70.2 million compared to $74.1 million a year ago and $70.7 million from the second quarter. The third quarters of both 2015 and 2014 and the second quarter of '15, all had 64 selling days. For the third quarter, average daily sales decreased 5.2% over a year ago and were down 0.7% sequentially from the second quarter of 2015. About one half of that decline from…

[Operator Instructions] Our first question comes from Ryan Cieslak of KeyBanc.

Good morning, Mike and Ron.

Good morning, Ryan.

Good morning, Ryan.

Congratulations on another nice quarter here in a difficult environment.

Thank you.

My first question, I guess, maybe Mike, you could talk a little bit about how the top line trended through the quarter, particularly in September relative to what you saw going into it and then also, do some initial commentary on how October is looking right now relative to the end of the second quarter in your expectations.

Yeah Ryan, we continue to see the ongoing trend. Things have flattened out a bit. Ron has some of the specific month by month numbers that we can share, but what we see is a continuation of what we have seen. It's especially acute in the consumable space, because we are a direct reflection of the usage, the demand usage of our customers. If you're running your injection moulding machines hard, the maintenance goes up. If you don't run them at all or you were operating three shifts and now you're operating two shifts, we see that almost instantly in our consumables space. So, what we're seeing is a continued softening, moving sideways really in the industrial economy. Beyond oil and gas and beyond energy, we just sort of see a softness everywhere, but what we don't see is any full stop or the kind of step function we saw in February, and I think the whole industry saw in the first quarter.

Ryan, this is Ron. So, we did see as I commented earlier, we saw a little bit of an uptick going from July to August to September, nothing substantial I would say, and to Mike's comments, you know, really as we sit here in mid to late October, not a lot of change from what we saw in the third quarter.

Okay, that's great. So, if I hear you right, it wasn't -- the underlying demand trend doesn't feel like it's getting significantly worse in the last couple of months.

That's correct.

Okay, good color. Then, on the sales rep count, you guys had talked about the last couple of quarters of some initiatives on the recruiting, the retention side and some changes that you'd made there, maybe talk a little bit about the impact from those here in the quarter and maybe more importantly into 2016 and then sort of backing into what you sort of think, initially, the sales rep growth could be for you guys on an organic basis going into next year or maybe what you're targeting.

Yeah, so a number of activities. We'd mentioned in the prepared comments that we just finished rolling out this sort of Lean Six Sigma process and a lot of people think about Lean Six Sigma in the context of manufacturing, but it's really sort of a systematic way of dissecting a problem and achieving process improvement. So, we've just now finished rolling that out to the last of the regions and what it is at its core is a very perspective process of onboarding a sales rep for their first three, four, five months with a lot of checks and balances to make sure that people are on track to do what we've asked them to do, and what we've asked them to do is what has been proven to work. The other thing we did was we brought in a number of months ago now, I think it was 14 or 15 of the most successful brand-new sales reps that we'd hired over the last year, and sought some advice and counsel from them as to ways to improve the process, ways to improve the onboarding. We changed our compensation plan in a small way, but again at their suggestion. So, there are a number of activities that we've engaged in. Very, very optimistic about the effect, but it's relatively early to start measuring quantitatively the impact of those changes. We have seen a modest reduction in initial attrition of sales reps, which is again encouraging. So, what it says to us is process refinement is happening as you would expect, when you start a new initiative, there are things that you want to dial in. We've now dialed them in. There will be always opportunities for more process improvement. Now, we're committed to continuing to add sales reps in '15, and it's a little early to sort of nail down numbers for '16, because we're in the budget and planning process, and our challenge is to find the balanced use of resources that includes adding sales reps, technology which drives sales rep productivity, and some of the other initiatives that we have planned. So, it's a little early for us to have a really clear, detailed understanding exactly where we're going to be next year, but we will be adding sales reps next year and likely beyond that.

Okay great. Fair enough. Good color. Then on the gross margins, Ron, again, very nice year over year improvement. I think this continues to trend above maybe some of the longer term targets you've laid out there. How much do you think is sustainable here going forward into the fourth and maybe into '16 as well, in terms of really what's still in your control, that you guys can target and improve on to maintain these type of levels?

Sure Ryan. So, as we'd released, the quarter ended at 61.7%, and a pretty significant improvement, up 160 basis points versus the year ago, but relatively flat with the second quarter. On previous calls, we've talked about some of the headwinds that we will continue to face being increase in our strategic account relationships, just the competitive market that's out there from a pricing perspective. However, so far, what we've been able to do is we've been able to offset some of those headwinds, which is really improving our overall purchasing process. So, as we look forward into the rest of '15 as well as 2016, we're not seeing anything that would cause that number to move dramatically, one way or the other, a couple of years ago, we were saying, margins in the high 50s, 59-ish and given the trend and given some of the improvements we've made over the last four to five quarters, in that 60 to 61 range is not an uncomfortable place for us to be.

Okay, great color and then. Go ahead.

Ryan, we also need to focus on our supply relationships and as they see us investing in sales reps and process improvement and order to delivery cycles, all the things operationally that are improving, it encourages our suppliers to work more aggressively, because they see growth opportunities with us as a channel for them. So we put real emphasis on the supply relationships and continuing to work with them and as we continue to grow and penetrate the large strategic accounts, suppliers are beginning to help us sort of keep that in balance as Ron had just mentioned.

Okay, that's great color. Then the last question I had -- congratulations on the acquisition. I know this is something you guys have been talking about and good to see it finally come to -- one come to fruition. Mike, talk a little bit about -- is this now where you maybe wait and see and integrate this or get this acquisition through and maybe wait until next year for another acquisition or maybe talk a little bit about the pipeline and what you're seeing there and sort of your receptiveness to continue to do this for the balance of this year and certainly into next year.

Yeah sure. We feel good about, as I'd mentioned, and we'd mentioned on previous calls, it's sort of get your sea legs. Its, make smaller acquisitions and understand the process of working with a small team, the unique characteristics of small companies as well the integration process and all that goes into it, but it's a little opportunistic. If the world really worked to our beck and call, we might do things slightly differently, but we would like to see more acquisitions and we're ready to do them as quickly as they come along. We feel great about the process we've engaged in, in doing the first phase of the acquisition, and so far, though we're very early into it, the early indications are that the integration is going smoothly. No surprises, no unforeseen developments. So, that gives us some confidence that we are capable of doing this and will want to do more of it. Some of it is a little out of our control. We like the idea when people come to us and say, we think we're better together than competing against each other, and certainly we agree that with our infrastructure, with our physical and technology infrastructure we can benefit, people who come join us, we can benefit their sales reps by giving them a broader product portfolio to sell, which in turn benefits the customers that come with us, associated with that acquisition. So no, I don't think we have an artificial timeframe to say, we're going to stop the process for three or six months or nine months, whenever the next one comes along, it'll come along and sooner is better. Then there's a pipeline that is developing, so we feel good about it as well.

Good to hear. Well, lastly just being from Cleveland [indiscernible]. Go Hawks right?

Thank you.

Our next question is from Beth Lilly of GAMCO Investors. Please go ahead.

So, I wanted to drill down a little bit on the acquisition. Can you just provide a little more insight into what was so unique about this acquisition? I mean, Mike this is the first deal that you've done, since you joined Lawson and the attractiveness of this specific company and the market that it serves and such.

Sure. Well, first and foremost, what we've tried to confine ourselves to is what we're referring to as a DNA match. When we talk about that we're talking about companies that have the same kind of value proposition we do. They're servicing the same end markets. They're going to market in the same basic way and so at its core, the western acquisition that we made, was that value proposition. Same kind of channel to market. Now, as it turns out, this one lines up more in the automotive industry. Looks exactly like Kent, only much smaller of course. Whether it's Kent or Lawson, the value proposition is the same and it's nice and that it's small and that it gives us the opportunity to sort of walk our way into the smaller ones in preparation for larger ones. Again, same kind of business Kent is in, automotive focused.

And, can you just talk about the metrics? What you paid for it and -- mentioned in terms of revenues, can you go over those numbers again?

Sure. So, Beth, so from a purchased price perspective, we paid approximately 60% of revenues -- of their revenues and from an overall revenue standpoint, they're relatively small. I mean, they're less than 0.5% of our consolidated sales. So again, relatively small, but one of the items that we looked at very closely was the overlap of their product mix and what we found was that essentially they were selling heavily on the distributors or on the actual parts, the clips and rivets and so forth and so part of the -- I think the lift that the sales reps will have if we acquired during this process will be the availability of the Lawson product and the Kent product. So they will be able to have a much wider range of SKU availability and I think that'll be a real positive for both our new customers that came through that acquisition as well as those sales reps that joined us well.

The other thing we see Beth, that is sort of a common denominator and I'm speaking very generally now, we tend not to share customers with our competitors. Either our competitor has all of the customer's business in the product categories they serve or we have all of the business. So, in general, more often than not, we're picking up all new customers to us. Now, again, to Ron's point, with our 12 product categories, we can offer or the acquired sales reps can offer a broader solution to the customer and more broadly, solve problems which is a huge benefit for the sales rep that we acquire and is a huge benefit for the customer, and that seems to be a common denominator in everything we're looking and everything we aspire to work on.

And how -- this may seem like a pedantic question, but how did you find them? I mean, is it just because you were in the market competing and did you have a banker that was out there looking for deals for you?

In this case, well, it's a little bit of both, yes, we have a relationship. Someone is doing some research for us, but more often than not, because our industry is so fragmented and by the way very often that fragmented industry of competitors is also where we're acquiring sales reps, now not in this case, but our district managers, our sales reps come in contact with competitors in every city, everywhere in the U.S. and Canada because again our product is so ubiquitous and so necessary, so a lot of these leads come from our sales reps and district managers and region directors and then we follow up and do a little bit of research and reach out to them and have a discussion, but there are hundreds and hundreds of small competitors out there.

Yeah okay, great work. Thanks so much and congratulations on a great quarter.

Thank you.

Thanks Beth.

Our next question is from Kevin Steinke of Barrington Research. Please go ahead.

Good morning, Mike and Ron.

Good morning.

Good morning.

I wanted to talk a little bit more about the sales force and good to hear that you got the new onboarding and training program rolled out. I think, you talked about last quarter that you, in part, intentionally slowed down the hiring a little bit to just get the -- all the reps you hired in 2014 better integrated and onboarded, just wondering how you're feeling about that process and kind of getting the people that were already on board up and running and productive?

Well, the early indications, and one of the metrics is attrition, which we believe is directly tied to their success. As you may know and we've communicated in the past, the long-term attrition is pretty low, below 10%. So once you are a sales rep and you enjoy the work and you're successful, you're likely to stay with us for a very long time. Now, it's very hard as in a lot of other industries to start with a greenfield territory and build a book of business kind of from scratch, but the early indication is that the process is working. We've made some other changes. A small change for example the came out of our meeting with the most successful new sale reps is we pushed off the initial corporate training where they come to Chicago in McCook distribution center for a week. That was happening in about three weeks or four weeks into a person's employment. We've now pushed that off to five or six weeks. Now, that small change enables the new sales rep to have a better understanding of what's being taught. They used the expression drinking from a firehose. We throw a lot at them very quickly and by giving them just a couple of extra weeks in the field with their district manager and their peers, they have a better understanding of what's actually going to be taught in the course. So, these are very small changes. Again, these all happened in the last couple of months, so we certainly measure everything. So, we'll have a better understanding of the quantitative impact of these process improvements over the next couple of months. A little early to tell yet, but the early indication has been encouraging.

Okay good, and does the 925 rep count at the end of the quarter include the small acquisition that you made?

Yes, it does.

Okay. I think last quarter, Ron, you separated out the benefit you got from the lower performance-based comp and maybe also commissions. I think you said, operating expenses excluding some of the onetime items were down $2.3 million year-over-year. Just wondering how much of a benefit you got from the lower commissions and lower base performance comp on a year-over-year basis.

I'm sure -- there's quite a few puts and takes within the comparison between Q3 of '14 versus Q3 of '15. Certainly severance and the stock-based comp and then the favorable legal settlement we had in 2014. So, if you back all of those items out being nonrecurring, you're right, we're sitting in about a little bit north of $2 million from a total expense reduction standpoint. All of that, about $1 million of that is just on commissions on lower sales. So we haven't changed our commission structure but it's variable with our sales. So, we did see a reduction there. Then versus -- again, versus Q3 from a year ago, about $500,000 is a reduction in performance based compensation. So, the combination of those two is about $1.5 million. The other, close to $800,000 really came from other cost savings that we created throughout the organization when looking at where we are in our current run rate on operating expenses versus a year ago and that's, you name it, overtime is down, temp labor is down, consulting is down, T&E is down. So it's really across the board, just better expense management.

All right. That's good to hear. It sounds like there's still room for some incremental improvement to just expense management with all the initiatives you have on the table. So, I mean, would you say that's fair and that you can kind of hold that G&A stable or even coming down a little bit going forward?

Yeah, I think when I look at it sequentially versus the second quarter, again kind of taking into account those nonrecurring items, excluding a little bit of the performance based incentive items, we got a little bit of a lift in the second quarter versus Q3, but excluding those types of items we're relatively flat Q2 to Q3 and, I think we made that comment in the second quarter that we felt that the current run rate from an expense standpoint was a good number and that we didn't see any major movements that would cause that to go dramatically up or down. So, we feel pretty good about where we are on the overall expense run rate today, and as you know, this is a day in and day out effort by everybody on the entire team, just as we manage our way through a tough environment on the top line. So, I think we're pretty comfortable with where the run rate is at and again, I don't think we would see, dramatic movements in either direction off of that.

Okay great, and I think you said that you saw, actually a slight uptick in your oil and gas customers from -- going from the second quarter to third quarter, I mean, is that anything meaningful or just is that to more indicate some stabilization on a sequential basis?

It's really not meaningful. Our largest oil and gas customer has ticked up a little bit relative to third quarter, but quite far off versus last year. So it's more about stabilization. It's definitely not a meaningful uptick. It's -- probably the better takeaway is it's not a downtick. It's kind of moving sideways. Not a lot of encouragement yet in oil and gas.

Sure, yeah that's not a surprise. So, well, thanks for taking my questions and congratulations on the nice profitability in the quarter.

Thank you. Thanks Kevin.

Our next question is from Jack O'Brien of CJS Securities.

Good morning, Mike and Ron.

Good morning, Jack.

Good morning, Jack.

Just a quick follow-up on Kevin's question. With the acquired reps being in the total sales rep number for the end of the quarter, how many reps would you guys have been at ex the acquisition?

The acquisition brought on three reps. Two of the reps had more than 10 years' experience. One of the rep has about two years' experience. So again, this is the reason we say, it's a very, very small acquisition, a means to an end and that end is, start the process. So, it'd be a difference of three.

Okay great. Then, how many reps did you guys hire during the quarter?

So, if you look at -- on a gross basis, we were sitting at about 55 reps that were hired, and we lost about 50 reps and in that, the lost rep number has gone down versus where we were in the first and the second quarter. So, that's to Mike's comments earlier about, we are seeing some improvements in the retention as we progress throughout the year.

Okay great. That's all from me.

Part of that Jack, the real question is, we hired a net 110 last year whoa are sort of working through the process and climbing the hill.

Okay. Thanks guys. Appreciate it.

Thank you.

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

Thank you. Thanks again for your interest in the Company and for joining our call today. In closing, let me say, I'm confident that we're on the right path. Our value proposition is sound and customers recognize that we enable them to maximize their profitability and their profits and their productivity. I believe that we're executing on our value proposition better than anyone else in the VMI consumable MRO space. Our teammates have a renewed commitment to excellence in customer service. Our growth strategy is balanced and beginning to produce results. Thanks again for joining the call today and have a great day.

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