Good morning, ladies and gentlemen and welcome to the Lawson Products' Fourth Quarter 2016 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’ Investors Relations page on the company’s website, lawsonproducts.com. A replay of the webcast will be available on the website through March 31, 2016. During the call, the company will be providing an update on the business as well as covering relevant financial and operational information. I’d 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 the 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 would now like to turn the call over to Lawson Products’ CEO, Mike DeCata. Please go ahead, sir.

Good morning and thank you for joining the call. This morning, I’ll comment on the quarter and our overall progress. Ron Knutson will provide more detailed review of our financial results for the quarter and then we’ll take questions. Let me start by saying that 2016 was a productive year for Lawson Products. As we mentioned in our release today, there was a slight improvement in the ISM index, which measures expansion in the manufacturing economy, primarily in the second half. We saw some modest growth in the fourth quarter of 2016 and believe that it is carrying forward into early 2017. First, we begin to see encouragement in top line growth, which we believe is both the result of improvement in the economy as well as a direct result of many of our own initiatives. We finished the quarter at 5.4% growth over the fourth quarter of 2015 at an average daily sales basis and an increase of 2.3% sequentially over the third quarter. Overall, this enabled us to achieve a 0.3% growth for the year on an ADS basis. Our Government segment grew over 17% versus the fourth quarter of last year. Strategic accounts grew 11%. Canada grew over 4% and Kent grew nearly 6% versus the fourth quarter of last year. We also began to see some encouragement from our core customers. Some of these improved results are likely attributable to general stabilization of the industrial economy. For example, while oil and gas represents approximately 3% of our business, we've seen the improvement sequentially from the third quarter to the fourth quarter on top of growth from the second quarter to the third quarter. We've also experienced significant growth with several large customers in this sector. In addition, some of these results are also attributable to actions…

Thank you, Mike and good morning, everyone. As Mike indicated, we did see a stabilization of sales as we moved through the fourth quarter. We continued to invest in the business and make acquisitions that will provide future growth opportunities to expand and increase our geographic density in a large fragmented MRO marketplace. Here are some of the highlights for the quarter. First, sales finished at 67.3 million for the quarter. Average daily sales were up 5.4% versus a year ago quarter and up 2.3% sequentially from the third quarter. Excluding the impact of acquisitions, average daily sales increased 4.1% over a year ago with one less selling day in 2016. Second, our adjusted operating income for the quarter improved by 500,000 to 419,000 from a loss of 81,000 in the fourth quarter a year ago. Third, gross margin percentage ended at 60.2% for the quarter, in line with a year ago. And fourth, we generated net operating cash flows of 3.2 million for the quarter. We ended the year with 10.4 million of available cash and an additional availability of 35 million under our credit facility. Let me now go through some of the details. As I just mentioned, we finished the quarter with sales of 67.3 million. On an average daily sales basis, this represents an increase of 5.4% versus a year ago and 2.3% from Q3. The fourth quarter of 2016 had 60 selling days, while Q4 of 2015 had 61 selling days and Q3 of ’16 had 64 selling days. As compared to a year ago, our fourth quarter sales were impacted by the following. First, we did see some stabilization in the MRO marketplace this quarter. It continues to be softer than in the past, but is improving. Second, Q4 sales were positively impacted by…

[Operator Instructions] We’ll take our first question from Kevin Steinke with Barrington Research. Please go ahead. Your line is open.

Good morning, Mike and Ron. So wanted to ask about, as we move in to 2017 here, you obviously talked about planned slowdown in hiring in the second half of ’16, but it sounds like you can expect to add to the sales force in 2017. So just wondering if you can give more thoughts on how the hiring might play out as we move throughout this year?

Sure, Kevin. Thank you. This is Mike. We're always going to be hiring in that we're always very quickly focused on replacing any turnover that happens because as someone leaves us, there's a viable territory. So it’s a high priority to continue to maintain those customers. So that element will always be consistent. As we’ve said in the past, what we see in net new hiring, which is to say Greenfield territories are opening up new and additional territories, we've seen an ebb and flow. This past year, we brought on a net 72, which is in addition to all the replacements. By the way, of the 72, 17 were acquired from the companies that joined us. So you're going to see a similar kind of but probably a slightly lower number this year as we go throughout the year, we will continue to add net new reps in addition to all the replacements necessary and the goal here is to continue to mature the sales force because what we know, a couple of variables, as a sales rep, matured in their territory, of course the revenue in the territory goes up, good for the rep because the commission goes up, good for the company, but the other thing that happens is as we get more and more mature reps, the attrition goes down substantially. So a lot of variables play in our favor even though it is somewhat of a challenging environment to bring someone in and get them through this non-hole for the first couple of years. So the long and short of it is replacements will always be consistent and a modest increase this year in net new territories and sales reps.

Okay. That's helpful. And what sort of trends have you been seeing in rep attrition in this environment and in light of your new on boarding processes. And then secondly, it sounds like you're pretty pleased with how new reps are maturing. So just what you're seeing in terms of sales trends or improving sales out of the new reps that stick with you.

Yes. So we’ve mentioned in previous calls sort of a systematic approach to first hiring new apps and the whole process of going from an open rack to when the job is filled and how do we tilt the odds in our favor. With people, it's never a certainty, but tilt the odds in our favor so that the reps that join us have the high likelihood of succeeding. And then first day on the job through the first nine months, focused on all the daily processes, training them with specific demonstrations, territory management, group planning, a lot of time spent with district sales managers and there's really evidence that that seems to be working. Now, I will say on the flip side, we are also assertively focused on performance management. I mentioned in my prepared comments that many sales reps really have an aptitude for our service intensive model and it's the service intensive model that customers value most in us. Yes, they value our private label products and the superior performance products that we bring to them, but it's really the service that our customers are paying for, because in the perfect world, our customers will prefer to completely and totally ignore consumable MRO. It's just magically there when the mechanic reaches into the drawer. So the more we can train our sales force to provide the level of service, never overstocking, but never letting the customer run out of what they're using, the more that all clicks with the sales rep, the more quickly they're going to be successful. We haven't seen a huge change yet in the short term turnover. But there's early evidence that it's fairly encouraging. Now, I will say that in ’15 and ’16, our industry was, it was a challenging time for our industry and that made it even were challenging when you hire a new rep and put him into a greenfield territory or even a replacement rep going into seasoned customers, those customers were fairly soft in their production, soft in their trucking miles, rental rates, so on and so forth. So we were hiring sales reps into a challenging economic environment, which made it even harder for them to get a foothold in their territory. That seems to be softening a little bit. There's a little -- clearly a little encouragement in the fourth quarter and we're seeing a little encouragement so far. So I think that combination makes it a little easier for the rep to hit the ground running early on.

I think and you mentioned in the prepared comments about changing incentives to reward sales growth. So could you just expand on that? Was that for the district managers or are the reps or yeah, if you could just talk about that a little bit more that would be helpful.

It's a small shift but it shifts the emphasis to net growth for sales rep. It shifts and again these are very small changes, but sometimes very small changes can have a big impact on the psychology of selling. So it shifts from promo only focus, incentives to sell certain product categories or so on and so forth to the combination of incentives to grow that product category, but in the context of growing the overall territory. So again it's a very small shift, but it's an important psychological change for the rep. It's no longer just focused on the promo as a standalone, but the promo in the context of net growth for the territory.

And then in terms of the oil and gas headwinds, it sounds like you feel like you're mostly - that's mostly behind you. I mean and you know the comps will easier I suppose as we move into 2017 year, so. And you also talked about I think some sequential growth in that customer base, so. Do you believe that the worst is behind you there and we could actually start seeing a little improvement in that space as we move forward?

Sure Kevin, this is Ron. So I’ll take that one. We did see just a little bit of lift from oil and gas from Q4 over Q3 and Q3 over Q2 but compared to a year ago, it was relatively flat. So the 2.6 million that I referenced earlier really occurred in most part earlier in the year. So we are up against a little bit easier comps as we move into the second and third quarter. And we are starting to see some increase from customers within that end market. So it's hard to tell whether or not we're - that's completely behind us but we are seeing some positive trends over the last couple of quarters.

And some of the actions that a couple of our key and highest profile customers are taking themselves would suggest that they believe that there's growth for them. And relationships remain very, very strong with those customers. so their actions would suggest growth in that sector for us

Just I’ll throw in a couple of just housekeeping items here at the end. I saw that interest expense you know normally have some levels there that kind of dropped fairly significantly. And then also did currency have any meaningful impact in the quarter?

I'll take those Kevin. So, on the currency side, no, it really didn't have a meaningful full impact from quarter to quarter, our currency risk is relative to the Canadian dollar and that’s for the most part pretty well stabilized. Relative to interest expense, we've managed our borrowings I would say very closely over the last couple of quarters and as Mike and I both mentioned in our prepared comments we ended the quarter with about 10.4 million of cash on hand and minimal outstanding borrowings. The other piece of that if you compare our cash position versus the end of Q3, even taking into consideration the acquisition that we made in the fourth quarter, mid-November we still ended up in a net cash position similar to where we were at the end of the third quarter. So we were able to fund that acquisition basically through our operating activities.

And then just lastly, did you mention the number of selling days in 2017 or how that quarterly trend is going to play out this year?

I did not mention it, but I can certainly comment on it. So in 2017, there are 64 days in the first quarter, 64 days in the second quarter, 63 days in the third quarter and 60 days in the fourth quarter. so, all-in for the year there's 251 selling days which is one selling day less than what we had in 2016 all-in for the year.

Next we'll move to Larry Pfeffer with Avondale Partners. Please go ahead, your line is open.

And if you can't give a specific numbers, I understand but just curious when you looking at January, February versus the ADS trend you did in the fourth quarter. Are you seeing kind of mid-single digit so far to start the year or since you get a little bit less easy of a comp in Q1 from Q4, is it maybe more in the low-single digit area.

Yeah, so Larry, this is Ron. I’ll take that. So I think everybody on the call realizes that we don't provide formal guidance but let me share just the general stance. What we've seen in particular in January and February is what I would call kind of a continuation of what we saw later in the quarter, in the fourth quarter. So we finished December pretty positive, I mentioned those numbers in my I prepared remarks albeit we were up against a pretty weak December from 2015 as well. But in that - I would call it in that mid single digit range, similar to what we saw in the fourth quarter.

And then on the government side that was a really nice number, obviously you’ve been doing that for a few quarters now. How should we think about that segment it ’17?

For us and let me you know so go a little further back, a couple years ago, our primary focus was Department of Defense, as their forward deployments reversed you know Afghanistan and Iraq that all reversed and there was quite a long period of sort of negatives because of our focus. We've now shifted that focus to GSA in general but to the state, local and municipal governments. And across the board, our sales reps are really focused and these are highly distributed customers, there you know every library, every small department of transportation, you've got a snowplow in your community you're a customer. And so it's highly distributed, so it’s more resilient for any one military base that can go up and down based on local funding and local initiatives. But when you advocate it across the entire US that's the reason you're seeing consistent improvement. Now there may also be some improvement coming, we'll see about this in sort of rebuilding the maintenance of the military that is a possibility. We have in no way given up on Department Of Defense. But what you're seeing is evidence of local, state and municipal government activities and there's no reason to think it's going to change in a fundamental way.

Would you still expect that business to be strongest grower, at least from a specific kind of segmentation standpoint in ‘17.

That's awfully hard to say, but we had such a diverse customer base, 70,000 customers, 28,000 unique ship though locations a month. So it's so diverse, the application level we would still say something like 40% of our business not at the SIC code level but at the application level below that comes from transportation related activities or what we would call fleet, could be a fleet of rental equipment, it could be a fleet of fracking equipment, could be a US postal fleet. By the way it could be a fleet of tanks also. So with such a diverse customer base I would hesitate to say that government would likely be the strongest grower.

The other item Larry to consider is that today government represents about 10% of our business. So it's an important segment, but it's not you know quite yet the size of Kent or the strategic business as well.

And then looking at gross margins, you mentioned higher freight expense this quarter, was that largely fuel related and if so, kind of just how are you thinking about the overall gross margin, I know you've talked kind of 60% to 61% range moving forward, but just curious A, what you saw on freight and B, kind of you're thinking about that overall range in ‘17.

So let me take the second piece of that first and what we've indicated in the past is exactly what you said, Larry, you know in that 60% to 61% and what’s probably more important for us is the gross margin dollars versus the percentage. And in particular as we see sales growth in strategic and Kent and government sectors which are generally a little bit lower margin percentage, but it creates gross margin dollars for us. So that's really our focus as we think about sales growth within those segments. Relative to freight, this is something that I think a lot of companies in our space are maybe not struggling with but certainly focused in on. And it is an area that we continue to look at relative to freight inclusive for some of our pricing, for some of our customers to whether or not we have the ability to charge freight. So, we see that number move around a little bit from time to time and it's something that we're continuing to focus on. I wouldn't say that its necessarily fuel related, it's really more about the customers that are driving our sales growth and whether or not they are [indiscernible] freight or not.

Larry, on the other half of that equation, we continue to work with suppliers and suppliers recognize that as we've gone from 757 sales reps to over 1,000 reps. Suppliers are more and more willing to work with us. They recognize that we represent a real channel to market for them, our global sourcing initiatives are important to us. So there's a lot of activities on both sides of the equation, a strategic accounts and government accounts and large accounts grow, of course that puts a little downward pressure, but as our sourcing efforts and supply chain efforts continue to take all that pushes GAAP up, and in the perfect world it sort of stays kind of where it is.

Understood, so you had noise quarter to quarter but largely the range that we talked in the past is intact?

Yes.

[Operator Instructions] Meanwhile we'll move to Ryan Mills with KeyBanc Capital Markets. Please go ahead, your line is open.

Just curious to hear about what kind of opportunities you’re seeing in M&A front and a couple of your acquisitions were tied to Canada, are you still exploring opportunities in that region as well.

Of course we’ll hesitate being very specific here, but we continue to focus on filling the pipeline of acquisitions. The four that we've done have taught us so much about integration, we've been very, very pleased with how the integrations have gone and the team work that we've seen between the folks we've acquired including the business leaders, the owners of those companies and our own teams. So we've been on a very deliberate march to start with small acquisitions and step up and move toward even larger acquisitions. It is pure coincidence that three of the acquisitions have been in Canada. We still are certainly open minded to continued acquisition growth in Canada, but it has never been our primary strategy it's been opportunistic relative to where they are. By the way several have been Kent oriented with the auto body shop and auto dealership oriented acquisitions and one has been more Lawson oriented. So it's kind of about filling the pipeline and it's a little hard to predict which ones cross over the finish line first, second and third. But we do continue to fill the right pipeline of larger acquisitions.

And then as it relates to border adjustment tax, have you guys have disclosed the percentage of imports in your product?

We have not disclosed that actively in the past, Ryan.

[Operator Instructions] And we'll take our next question from Beth Lilly with GAMCO Investors. Please go ahead, your line is open.

So I sense a glimmer of optimism from both of you in terms of the overall outlook. When you talk, you spoke in the prepared comments as well as just in your comments during the Q&A about the improving macro environment and such you know your average daily sales are up and everything like that. Can you just talk - can you, I mean you've talked about oil and gas and stuff. Can you talk about you know as you look across your customer base where your seem to strength from in particular just give us a little more granularity?

Maybe as a backdrop, I’m not sure everybody you know on the phone recognizes, we sell a lot of different skews but in very small quantities and because of the service intensive model, our sales reps are visiting with customers, counting inventory, placing orders and putting stuff away kind of every other week or every week basis. In some cases with high demand customers, sometimes twice a week and so our business is such an extremely short cycle business. What we see is when a customer goes from two shift operation to three shift operation, literally in about a week and a half or two weeks they start consuming more of the stuff. Whatever it is we're selling they consume more of it. That happen in reverse in ’15 and ’16 where we saw slowdown. When we see over the road truck miles, when we see a rental equipment fleet time utilization going up right away almost instantaneously, a couple weeks kind of thing. You start seeing more consumption of more basic items, nuts, bolts, spray paint, lubricants and that's what we're experiencing. So it's kind of across the board though it’s a little easier for us to talk about strategic accounts and we have specific while we don't share all of this. We can look at specific large accounts and see what they're doing just because their large names and it's easy to look at a specific name. But we kind of see across the board stabilization a little glimmer of encouragement, the three months of the fourth quarter were pretty encouraging and also you know there is a little spring in the step with our sales reps. There's a little optimism there at the local level. So it is kind of across the board that we're seeing encouragement. Most importantly you know anecdotally and this is purely anecdotal, when a strategic account comes to us and says I was recently at a large event with one of our strategic accounts. And they said you're really earning all of our business and pushing the other guys out. And that's the sort of thing we like to hear, where we're earning through customer service and operational excellence and the sales reps are in there every week and the CEO of this very large company says I recognize that you're doing a great job for us. So all these are anecdotal, but in aggregate, it feels a little encouraging.

Yeah Beth, the other thing I would add to that is what we did see sequentially over the third quarter was it was an increase in our average order size and it's been a few quarters since we've seen that as well. So the number of customers that we're shipping to stays relatively constant, but I think that's an indicator as well on the usage for our process that we've seen an increase in the average order size.

So the other question is, you said something in terms of anecdotally that you're strategic accounts are saying you're earning more of our business. So I can't imagine the market is growing faster but it sounds like then you're taking share maybe from an existing competitor that might be supplying that customer, now their exciting to give you more business.

It's very hard to measure of course but that's always been our goal and aspiration is to grow through our own you know through our own actions and in a relatively flat market. I mean I don't it's a little hard to tell whether there are more fasteners being sold in the world or not, but what we can say is through operational excellence, the breadth of our product, the training of our sales reps and all the other stuff we're doing, our aspiration is take share away from everybody we possibly can and to earn that whether it's a small account or a huge account. In that way we control our own destiny and is less dependent only on the economy. Now it's impossible for us to fully extricate ourselves because if the time utilization of the rental fleet goes down or you go from three shifts to two shift there's not a lot we can do about that no matter how excellent we are. Our aspiration has always been to take share through operational excellence and customer service. And there might be evidence that we're beginning to make some inroads there.

So I have one other question along those lines and you may not want to answer this for competitive reasons but as you are maybe taking more share on the strategic account side, are you running into the likes of Grainger, I mean who are you, who do you see the most in those marketplaces.

Beth you're right, there is a level of sensitivity and it's a huge market, the broad line MRO market some people would say 150 billion, some would say 170 billion, ours is a small subsegment of that very large broad line market being consumable MRO. Candidly most of the competitors we run into are the small mom and pop up the street that are doing a very good job of servicing their customers. We think we're doing a better job than earning, but ours is a service business and many of the names that you would recognize would be more product oriented and ours is more service oriented. Whether you’re broad line or a service company like ours both have both elements. But the short answer is it's such a fragmented market that the competitors we run into every day tend to be small names not public companies and there are probably hundreds of them.

I have one last question and not to beat a dead horse, but I just want to make sure. So you in the past talked about getting to double digit EBITDA margins and I know you don't like to forecast, but I want to just make sure that that's that that site is still on the horizon?

Yeah it is Beth, our industry and we're part of that too, ‘15 and ‘16 we were feeling pretty encouraged in ‘14 with the market doing what it was doing in our own actions, ’15 and ‘16 have been sort of sideways pause for all of us and it takes real tenacity in that environment to keep investing and focusing and refining which we have done, but yeah we continue to believe that there is real potential for very encouraging profitability in our model and the more share we gain, the more encouragement we get from both the large and the small customers, gives us even more encouragement in this environment in particular that maybe we can get back on that track.

This does conclude our question-and-answer session, I would like to turn the conference back over to Mike DeCata for closing remarks.

Thank you. And thank you for joining the call and for following Lawson Products. As I just mentioned in the question and answer, 2015 and 2016 have been challenging years for our industry. But throughout that time Lawson has remained committed to process improvement across all aspects of the company. Operational excellence and customer service excellence, cost management and improved productivity and as we discussed our three-part growth strategy. It’s a little too early to tell how 2017 is going to shape out. However, the actions that we've taken position Lawson for profitable growth through share gain and enable us to win new customers. I’d like to say thank you to our wonderful and dedicated employees ,we appreciate every day our team and the collaboration that exists throughout our company, it’s so encouraging. And thank you to all of you for your interest in Lawson Products have a wonderful day.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect and have a great day.