Good morning, ladies and gentlemen, and welcome to the Lawson Products Fourth 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 fourth 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 Web site, lawsonproducts.com. A replay of the webcast will be available on the Web site through March 19, 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, Michael DeCata.

Good morning and thank you joining the call. We appreciate your interest in Lawson Products. This morning, I will comment broadly on our strategy and our progress to-date along with a number of achievements in 2015, and how they impacted our performance. Ron Knutson will review our financial highlights with you in greater detail and then we will open the call up for questions. A few years ago, we set out our three-part growth strategy and that has remained unchanged; add sales reps, increased sales rep productivity and pursue growth through acquisitions. Let me say that we've made good progress in each of these areas under difficult economic circumstances. It is our belief that we will continue to perform well in these economic challenging times. And should we see significant improvement in the industrial sector resulting in higher sales, we would expect to realize solid bottom line benefits from leveraging our scalable infrastructure. Let's turn our focus to growing the top-line. As I'm sure, you all know 2015 was a challenging year from the sales standpoint. The combination of softness in the MRO marketplace, difficulty in oil and gas sector and a weaker Canadian dollar put tremendous pressure on our top-line and operating margins. Given these issues, I feel good about our performance as it pertains to the fourth quarter sales were $65 million versus $70.2 million during the fourth quarter of 2014. Approximately 60% of this decrease was attributable to oil and gas and FX. The month of December was especially hard hit with many customers taking extended shut downs and in some cases furloughing employees. We continue to gain traction with our strategic accounts and Kent Automotive division grew by nearly 5% versus the fourth quarter of 2014. As I mentioned on the third quarter call, we feel…

Thank you, Mike, and good morning, everyone. As Mike indicated, we had a very good year despite the challenging environment. The trends we experienced in the fourth quarter were not unlike what we have been experiencing for the majority of the year. Our strategy remains unchanged as we continue to invest in the company in particular in our sales organization to position ourselves to further leverage our infrastructure. Let me review some of the highlights for the quarter and the year. First, our adjusted operating loss for the quarter taking into consideration non-recurring items was $72,000 compared to income of $600,000 a year ago. This results in an improvement of $3.4 million for the full year in a very difficult sales environment. Second, sales finished at $65 million for the quarter, this represents a decrease in our average daily sales of 7.6% over the year ago quarter, approximately 60% of this decline was driven by the impact of lower sales to the direct oil and gas customers and the weaker Canadian dollar. Excluding these two factors for the full year, our year-over-year sales were flat with 2014. Third, gross margin percentage ended at 61.3% for the full year and was 60.2% for the fourth quarter. And fourth, we generated $3.1 million of cash flow for the quarter and $9.3 million for the full year ending with borrowings of $925,000 under our credit facility and $10.8 million of available cash. Let me now share some of the details. As I just mentioned, we finished the quarter with sales of $65 million compared to $70.3 million a year ago and $70.2 million from the third quarter. The fourth quarters of both 2015 and 2014 had 61 selling days, while the third quarter of 2015 had 64 selling days. For the fourth quarter…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Ryan Cieslak of KeyBanc. Please go ahead with your question.

Hey, good morning, Mike and Ron.

Good morning, Ryan.

Good morning, Ryan.

Mike maybe the first area I wanted to focus in on is, how the sales trends are trending here into the first part of the first quarter, you mentioned some stabilization. But any color around when you exited the year from a year-over-year standpoint and how that's looked into the mid-part of February at this point?

Certainly. Ryan, thank you for the question. You are right. Fourth quarter for us and December in particular was a challenge, what we saw in December was a number of shutdowns at the large customer site. That some sites -- one large customer particular shutdown for three weeks out of the four and furloughed their entire employee staff. So December was especially challenging. January has started a little more encouraging, it's still going to be a little hard to tell how the year plays out. But early indications are a little better in January. And we are pretty optimistic that we are going to have a respectable year, time will tell. But, the underlying activities that we are engaged in, the processes that we've put in place to improve sales rep productivity, new rep productivity, hiring at an accelerated rate. We feel like to a great extent our destiny is in our own hands. And with that said, we are feeling pretty good about what the year is going to look like.

Okay. And then, in terms of maybe January starting better, if you're down in the 7% to 8%, in the fourth quarter how does that look then so far this year, is it still down obviously, I would expect, but maybe it's more low single, mid-single digits, or how do you think about this -- the underlying year-over-year trend so far?

Sure, Ryan. This is Ron Knutson. So let me jump in real quick. A part of what -- I think what Mike was getting at is, is really the improvement that we're seeing in the first six weeks versus the fourth quarter. So sequentially, we are up and in that low single-digit range, as we look at it sequentially. We are still -- we are up relative to your question on the -- versus a year ago. We are still up against some pretty tough comps in the first quarter of 2016 versus Q1 of 2015, in particular oil and gas, which we saw that fall off really take place and it towards the end of February -- in the March of 2015. So the comps are still going to be a little challenging year-over-year, but sequentially quarter-to-quarter, it's looking up.

Okay. That's good color. And then, Mike you have mentioned about the continued focus on sales rep growth going into 2016, and if I heard you right, I think you said at an accelerated rate, is there anyway to maybe provide some color on what you guys are targeting for sales rep growth in 2016? And then, maybe more broadly speaking how we should be thinking about the top-line going into this year, obviously, some productivity offsets will play into that, but comps do ease. Any sort of color around the direction of the year-over-year trends going into 2016?

Sure. We added a net 21 sales reps last year. It's a little premature. We will probably be more inclined to be more specific at the end of the first quarter. But, we are confident it's going to be a substantially larger number than we added last year. And probably, it's been a couple of weeks when we do our first quarter call; I will be able to put little more specificity into the range that we hope to get to. But the other challenge and for us real opportunity is, people think about Lean Six Sigma as a manufacturing kind of a process. But Lean Six Sigma is really about broad based process improvement and one of the most important processes that we have is the onboarding of sales reps. So as we've gone out and trained our district sales managers in the first 90 days of bringing a rep on, it is our expectation that we'll be able to improve in a measurable way, the first six months, 12 months of a sales reps sales performance. And also the better the sales reps performance, lower the attrition will be of sales reps. So we are seeing early evidence in both cases that this process is beginning to take hold; we are beginning to see a little bit better performance in our attrition or retention, I should say of sales reps both the longer term sales reps and as well as the new sales reps. So both of these are pretty encouraging and from where we sit today and the environment matters here. But from where we sit today, I'm pretty optimistic about how it may play out.

That's good to hear. Okay. And then, the last one I had and then I'll jump back in the queue. Ron, the incremental labor freight in inventory cost that you had called out, is there any way to quantify that in terms of the impact in the quarter, or on the gross margin? And then, is that something that continues to drag into the first quarter, or is that [past] [ph] you guys at this point?

Sure. So relative to a year ago quarter, our gross margin percentage was down about 90 basis points and really about half of that decrease was really the effect of some of the more fixed type of cost impact on a lower sales base. So really kind of the deleveraging effect of what happened with sales -- 61 days. So that's about half of the decrease. The other three components being the freight and warehouse and some of the inventory really kind of equally spread amongst the remaining half, as we think about the first quarter that will be a little bit of carry over into Q1, I would say not as substantial as the fourth quarter because it was more probably related to some of the startup and some of the rebalancing and we feel like we've gotten our way through the majority of that. But, I would anticipate that we'll probably see a little bit of that still come through in the first quarter and impact us slightly.

Okay. Thanks for your help guys.

Thanks Ryan.

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

Good morning, Mike and Ron.

Good morning, Kevin.

Good morning, Kevin.

I wanted to dig a little bit more into your completion of the roll out of the new onboarding and training program. It sounds like you're seeing some good initial benefits from that. Just -- how does that -- is that enabling the -- your ability to hire reps faster now that you have that program in place. Just trying to get percentage for the relationship between that new onboarding program and your ability to hire reps more quickly?

Yes. Kevin that specific program that we were discussing was more about getting new reps that we have hired through the process and getting them more effective, more quickly. There are other activities previous Lean Six Sigma projects that enable us to bring more reps in. Part of what you saw, I think it was 2013, we added a net 49, then I think it was 110, so you see this ebb and flow and part of that is the district managers who bear the primary responsibility for the long-term training and onboarding of reps, I mean we do corporate training and we bring them to Chicago and there is a lot other things we do. But the majority of the responsibility falls on the district managers, so that was a little bit as ebb and flow as we brought in 49, 110 and then 21, part of the reason that we feel good about a larger number this year is that now the district managers have a little bit better tools, a little bit more understanding of the systematic process. Now, this onboarding is literally prescriptive three and four days a week, there are certain things they have to be doing for the first 90 days. And then, it gets a little bit more open after 90 days. But it's a way of launching someone down the right path. So combination of previous activities and by the way, the more successful we get, the more we use social media, the more we are using word of mouth, still many small competitor, sales reps come to us deciding that they are better of joining us than competing against us. So all of that serves to accelerate the attractiveness of us as an employer. We still when we want to bring on people that we can successfully onboard and make the individual sales reps successful. So the combination of four or five activities, but the combination should result in improved initial sales for the first year and then first two years. And our ability to bring in more people and successfully integrate them.

Okay. Fair enough. That makes a lot of sense. I think also in your prepared comments you mentioned some Six Sigma projects related to both helping you find new customers as well as penetrate existing customers more effectively and just wondered if you would be willing to elaborate on those initiatives a little bit more?

Yes. Certainly, I will. And then, actually Ron is leading one of those teams of the executives in the company, all our champions. So, I can let Ron jump into the specific team, he is leading. But there are -- three of the four Lean Six Sigma projects that we are working on at the moment revolve around finding new customers, winning share of wallet within customers and then retaining customers. So as sales rep turns over, or as we rebalance territories, which is something the field does. It's important to retain the customer even if we lose the rep, it's important for us to be able to transition that customer to the rep was going to pick it up. So these three projects all focused on share of wallet and picking up multiple product categories within an existing customer. They focus on how to attract new customers. For example, if you look at the rental construction equipment rental industry, we have a large customer in that space, so largest player in that space. And yet the construction equipment rental industry, their revenue, again then, our opportunity with them, but their revenue there is about $45 billion, the largest handful of players might represent $10 billion or $15 billion out of the $45 billion. So like our market their market is highly fragmented. And yet what we can do for one branch, whether it's a branch of a very large customer, or one branch of a very small customer, what we can do is very similar, we got to sub whether you have 800 branches or 3 or 4. So all of that revolves around how do we pick up new accounts within market segments. And then lastly, how do we continue to improve the relationship with the accounts. Ron, you want to jump into this specific project you are working?

Sure. So, Kevin the project that I'm leading is the retention, or the keep -- basically keep the customer project. And it's a little early; we are still accumulating a lot of data and so forth. But, there is tremendous upside on us being able to establish at a very prescribed process as to what happens when we incur some rep turnover. How do we take care of the customer when that happens to make sure that the customer gets reassigned to a new sales rep? Or even if the customer doesn't order within a certain period of days or weeks, what's the specific action items that our sales team needs to take at that point. So we are kind of right in the middle of this right now. I mean we have accumulated some data and really we are now kind of -- starting to enter that solutionizing phase where you really come up with what's the prescribed process that we need to go through in order to realize some of the benefit. But, as Mike mentioned I mean all three of these projects sales focused and have some pretty good upside to them.

And even the fourth project which is predominantly focused on labor productivity, packaging productivity and shipping productivity out of McCook still has an effect on sales rep productivity because as you can consolidate the number of boxes and aggregate line items within packages, it has the effect of getting more productivity or enabling sales reps to put away product faster and move on to the next customer or to more broadly consult with the customer and solving their problems. The nice thing about Lean Six Sigma, it's a process not about shooting from the head based on wisdom. It's about systematically gathering data and then changing a process that applies to everybody. And usually when you fix something or improve it, it stays fixed.

Okay. Great. Well, thanks for all that good insight. I just wanted to circle back to my first question here again, as I was thinking about it, you talked about kind of this annual ebb and flow in sales rep hiring, you expect to accelerating, hiring in 2016 based on district sales manager capacity. I mean does that mean necessarily that we think the 2017 and then we would see a little bit of a down tick in hiring and it's kind -- going to be the annual ebb and flow going forward, or is that not the right way to envision it?

It's little hard to say. I'm not sure it's the right way to envision it based on that logic. There are a handful of constraints. One of them is capacity of district managers. But then, there are other activities involved. Certainly with -- we believe that there is -- between $20 billion and $25 billion available market for us. So we can continue to expand sales reps for a very long time to come. Now, I think we've talked with everyone about the fact that we are committed to growing also through acquisition. And what I've said is, when we grow through acquisition predominantly what we're acquiring is sales reps and customers. That is mostly what we are acquiring. So acquiring one sales rep at a time or acquiring a company with a multiple of sales reps so to get you at the same thing. In combination, we are going to keep growing our sales force either organically one rep at a time or in larger groups at a time because we invite companies to join us and partner with us through acquisition. So I fully expect that the sales rep count will grow one way or the other whether one at a time or in groups.

Okay. Great. I will turn it over for now. Thanks for taking my questions.

Thank you.

Thanks Kevin.

The next question will come from Charles Hoeveler of Norwood. Please go ahead.

Hey, guys.

Good morning, Charles.

Good morning, Charles.

I thought an exciting data point that I heard was the 30% sales productivity increase at the acquired company given that $10 million of net cash in the balance sheet. What I would assume -- presume to be an exploding M&A pipeline given the environment, I'm wondering what it would take for you guys to get more aggressive in M&A to drive top-line?

Well, first, let me correct one sort of possible misunderstanding. What that 30% refers to is a SKU count. It's not specifically dollars, but of course, adding SKUs eventually when you start with new SKUs eventually the dollars associated and the repeat nature of picking up a new SKU means it becomes an annuity and you pick up volume eventually with the SKU. So I wouldn't want to mislead and think 30% dollar volume but rather an increase of 30% SKUs. Still it's what -- it's the basis of what we are doing from an acquisition perspective. We are being systematic, cautious conservative in our first acquisition, it's the reason we started with the small ones. It's really -- anybody will say it's easy to sign on the dotted line substantially more challenging to make it highly accretive integrate the company without any stumbles. So for the first couple, you're likely to see there tend to be smaller acquisitions. But, they are designed to be the spring board to larger acquisitions. We feel like we got the financial capacity and as we develop the process capacity and the human infrastructure to integrate, you're going to see us doing more acquisitions and likely larger acquisitions at a consistent and hopefully accelerating pace.

Okay. And what kind of timeframe do you see for developing the human infrastructure that process would require?

Yes. We will see how it plays out. But, we would hope to get a couple of acquisitions done this year albeit small ones.

And then, is it safe to assume that if you acquire a business you can run some if not all the volume through your excess capacity at McCook?

Absolutely. In McCook and other the distribution centers, we've consistently said and it's still absolutely true that we have approximately, or at least $100 million of revenue capacity through our existing distribution infrastructure. And of course, from an IT perspective and cross-reference perspective all of that infrastructure is in place. So, yes, it's likely. No, there could be places, where we'd like to put a distribution center. But for the most part we got the physical infrastructure we need to integrate the whole lot of acquisitions.

And then lastly, is it safe to assume that as you run incremental volume and revenue through your excess capacity, it would translate to bottom-line result at a high incremental EBITDA margin?

Yes. I will. Mike, I will take that one. So Charles that's exactly right. And we having that excess capacity today not having to really put any additional cost into that revenue stream and a lot of the companies that we are looking at have gross margins that are very similar to ours. So organizations that are even breakeven or slightly profitable today, it can become very accretive to us pretty quickly just by leveraging our current infrastructure. So we do look at these as being accretive in a very short-term timeframe for us.

Yes. It sounds like a really exciting opportunity.

It is.

We think so as well.

Thanks.

Thanks Charles.

Thanks Charles.

[Operator Instructions] The next question will come from Larry Pfeffer of Avondale Partners. Please go ahead.

Good morning, gentlemen.

Good morning, Larry.

Good morning.

So looking at the gross margins in the 2016, I appreciate you guys laying out some of the factors that impacted Q4. Would you expect to be kind of back to breakeven on a year-over-year basis in the second half there?

Breakeven from a gross margin perspective?

From a year-over-year rate of change.

I got you. Yes. So if you look at gross margins back into earlier into Q1 and Q2 of 2015, we were kind of in that 61% range actually exceeded 61% in a couple of quarters. I think we have been asked similar questions in the past in that, what's our overall forecast for gross margins for 2016. And we are pretty comfortable in that 61-ish range sustaining 61.9% or 61.7% that we had in Q2 and Q3 of 2015, I think would be challenging, especially given we continue to focus on strategic accounts and those typically put some downward pressure from an overall gross margin percentage but certainly help us in gross margin dollars. So again, we will -- we incurred some start-up and kind of some one time items in Q4, which I think will again impact us a little bit in Q1 and probably to a lesser degree as we move into Q2. So I think we will some recovery from that. But, I'm not sure that getting us back at that 61.7% or 61.9% is sustainable long-term.

Okay. Got you. And then, just on the oil and gas SIC code customers, do you have a year-over-year percentage change for them in the fourth quarter?

Yes. So, they are actually down. So our total oil and gas was down about $2 million Q4 versus Q4 a year ago. And it's about 50%, if you just look at that sector. So you can do the math. It was about $4 million in a year ago quarter and about $2 million in this quarter.

Okay. And so for Q1 of last year, would have what the year-over-year change [Technical Difficulty]?

Yes. For Q1 of 2015 as I mentioned earlier, it has softened a little bit. It has [softened] [ph] harder in end of February into the March timeframe. So first quarter of last year 2015 that is, we were sitting at about $3 million of oil and gas.

Okay. That's helpful.

Just site related issue is that, when you look at our regions more than half of our regions were positive for the year. Now, region heavily affected by oil and gas even beyond the oil and gas SIC codes tended to sort of infect everything else in that region -- every other business, for example, in Texas or the Southwest was sort of contingent from oil and gas. And so more than half of our regions were positive for the year, the others being dragged down both by oil and gas and contingent in oil and gas in those regions. So, it's sort of an interesting dichotomy that's going on.

Okay. And so kind of the stabilization an improvement in Q1, is that -- or you seeing maybe less/bad indirect impact in those regions, or is it kind of across the board you've seen just a more stable trend in volumes?

More across the board. We are certainly not seeing a lot of encouragement in oil and gas yet.

Right. Okay. I appreciate the time gentlemen. Best of luck this year.

Great. Thank you.

Thanks Larry.

And the next question will be a follow-up from Ryan Cieslak of KeyBanc. Please go ahead.

Hey, guys. Just one really quick follow-up, if you don't mind. Mike, thinking about this past year, just a really solid year for you guys in a very difficult environment. And just wanted to get your view as we go forward and you guys continue to work towards that 10% EBITDA margin goal. How much of getting near that bridge is still maybe what you would say is, in your control and some things you are doing there internally versus -- maybe at this point, now you just really have to start driving the top-line in growing the overall sales of the company?

For sure, it's top-line growth. Now, there is a lot that we are doing. We will continue to do. We were holding G&A costs. We were getting more productivity and of all the processes of the company, we are enabling all of our teammates to delivery more production with the same amount of work hours. So that's not going to end no matter how profitable we get and there is plenty of room for opportunity there. Having said that, it's all about growth and it's in our control. We are adding sales reps. We are pursuing acquisitions. And we are continuing to work hard on things like share wallet, transitioning customers, when we have a transition of people. So, more of it's in our control than not in our control, the economy certainly plays a little into it. But everyday, it feels like our destiny becomes more and more in our control and less and less about the past.

Okay. Fair enough. Appreciate the help guys.

Thank you.

And we have a follow-up from Kevin Steinke of Barrington Research. Please go ahead.

Hi. Ron, I think last quarter you are able to break out the year-over-year improvement in G&A in terms of the benefit from lower sales commissions, lower performance based comp. But then, also perhaps importantly just the underlying improvement in G&A cost -- core G&A cost through your ability to control expenses. Would you be able to break that out on a year-over-year basis for the fourth quarter?

Yes. So let me -- sure, Kevin. Let me give you a little bit of color around that. So our total SG&A costs were about $41 million in Q4 of 2015 versus call it $44.8 million. So -- or down about $3.8 million versus a year ago for the quarter, a little bit over a $1 million that was commissions. And I think it's important to state that that's really a result of lower sales not that our commission rate is going down. So we are certainly still paying our sales reps, it's the same consistent rate; it's more that the sales base has decreased. Some of the other items that -- that come through, one is certainly stock-based comp which is in the press release and we did see a slight decrease in that. And then we did see a decrease in our incentives -- really is our performance based compensation including a decrease in sales incentive is just because of the difficulty in sales in the fourth quarter. So, those two on a combined basis were about $1.7 million. So those plus the commission makes up close to $3 million of the $3.8 million stock-based comp is a piece of add and then everything else is just controlling all of our operating expenses from labor cost to travel to you name it, we continue to focus on that very closely date in and date out.

Okay. Great. That's what I was looking for. Thanks for taking the follow-up.

Sure.

Thank you.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Michael DeCata for his closing remarks.

Thank you, Denise. And thank you for your interest in Lawson Products. In closing, our strategy is gaining traction. Our value proposition is sound and customers recognize that we enabled them to maximize their productivity and profits. While 2016 is shaping up to be a challenging environment. I'm confident that we will grow and continue to prosper. The investment in additional sales reps, productivity enhancements and growth through acquisitions will propel us forward. Despite the fog masking the underlying strength of the company, I'm confident they were on the right path and that growth and improved profits are in sight. Thank you, again. Have a great day.

Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect.