Good morning, ladies and gentlemen and welcome to the Lawson Products Third Quarter 2019 Earnings Call. This call will be hosted by Michael DeCata, Lawson Products’ President and Chief Executive Officer; and Ron Knutson, Lawson Products’ Chief Financial Officer. During this call, they will be providing an update on business as well as covering relative financial and operational information. There will then be time for questions-and-answers. Please note that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those described. In addition, statements made during this call are based on the company views as of today. The company anticipates that future developments may cause those views to change. Please consider the information presented in that light. The company may at some point elect to update the forward-looking statements made today, but specifically disclaims any obligation to do so. This call is being audio simulcast on the internet via the Lawson Products Investor Relations page on the company’s website, lawsonproducts.com. A replay of the webcast will be available on the website through November 29, 2019. I will now turn the call over to Lawson Products’ CEO, Mike DeCata.

Good morning and thank you for joining the call. This morning I’ll comment on the third quarter results and our continued progress. Ron Knutson, our CFO will provide a more detailed review of our financial results, followed by your questions. We continue to be very pleased with our results and our trajectory during the third quarter as we again achieved over 10% adjusted EBITDA margin during the quarter. Our results this quarter were driven by strong MRO sales, EBITDA and operating leverage complemented by strong sales performance at Bolt Supply. Consolidated sales grew by 7.1% for the quarter and average daily sales increased by 5.4%, including a 3.7% increase in the Lawson MRO segment. And the 15% increase at Bolt Supply. These results combined with effective management of our cost structure drove adjusted EBITDA as a percent of sales to 10.9%. Previous investments, such as our commitment to Lean Six Sigma, encouraging teammates to explore their intellectual curiosity to the use of analytical tools, and better alignment between departments with an eye toward customers’ service are producing the desired results. This is the second quarter in a row that we’ve exceeded our 10% milestone. Congratulations to the entire Lawson and Bolt teams for the continued improvement in our performance. Trends in our gross margin remain positive, reinforcing that our customers are finding value in our service and premium product. Our gross profit percent has held steady in a narrow range for many years. That was the case again in the third quarter, with MRO margin finishing at 60.9%. In an environment of labor shortages, especially as it relates to maintenance mechanics, shop supervisors, welders and truck drivers, customers rely on their Lawson Products’ sales reps to manage their inventory, solve problems and share best practices every week. Our service model…

Thank you, Mike and good morning, everyone. Before I discuss the third quarter results, I’d like to comment on our new $100 million credit agreement that was recently announced, an achievement that we’re very excited about for several reasons. The new agreement will provide us the additional access to capital to further support our acquisition opportunities as well as our organic growth initiatives. We’re also pleased to expand our bank group to include JPMorgan Chase and Bank of America. These two financial institutions along with our long-term partnership and support from CIBC, positions us well to accelerate our growth. The new facility, which is cash flow-based provides additional borrowing capacity; flexibility on financing acquisitions; and lowers our overall borrowing costs. I’ll now comment on the quarter. As Mike mentioned, the third quarter of 2019 reflects a continuation of our strong results with solid execution, favorable operating leverage and continued improvement in adjusted EBITDA. Let me share some of the highlights. First, for the second quarter in a row, we exceeded our stated 10% EBITDA milestone as a percent of sales. Adjusted EBITDA was $10.3 million for the quarter or 10.9% of sales. This represents a $3 million or 40.9% increase over a year ago quarter. Second, sales were $94.8 million for the quarter, up 7.1%. On an average daily basis, sales were up 5.4% versus the third quarter of 2018. Third, consolidated gross margin was 53.4% and was in line with our expectations. The organic Lawson MRO business segment gross margin percentage was 60.9%, consistent with the year ago quarter prior to allocating service related costs. Fourth, we reported diluted earnings per share of $0.51 for the quarter compared to a loss of $0.09 in the third quarter of 2018. And fifth, we generated cash flows from operations of $10.3…

Thank you. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from the line of Kevin Steinke with Barrington Research. Please proceed with your question.

Good morning, Mike and Ron.

Good morning, Kevin.

Good morning, Kevin.

Hey, congratulations on the really nice results here. You know, you continue to talk about the 25% to 30% incremental operating leverage target and obviously you’ve exceeded that thus far in the first nine months of 2019 here. I know there were some incremental non-recurring costs in 2017 that helped you exceed that goal in 2018. But just trying to get a sense of why you’ve been able to outperform that 25% to 30% target thus far this year. I mean have you been able to manage costs more tightly than you expected or is Lean Six Sigma reducing costs? Anything you could highlight there that’s driving that really strong operating leverage?

Sure, Kevin, this is Ron Knutson, so I’ll take that question. I think it’s a combination of a lot of the activities that we’re doing and a lot of the investments that we’ve made over the past many years. We do feel comfortable in that 25% to 30% range, albeit we have been able to exceed that here for the first nine months of the year. And for us, it’s all about managing margin, continuing to focus on sales growth and as I think both Mike and I said in our prepared comments, really prudently managing our overall operating costs. So as we look into 2020, that’s our continued stated guidance, but again, we continue to manage the business to drive incremental earnings as a percent of sales. So again, we feel good about where we’ve been so far for 2019 and looking into 2020 with that same level of guidance.

Okay, got it. And now that you’ve exceeded that 10% adjusted EBITDA margin goal for two consecutive quarters here, when do you start thinking about maybe is the right time to think about a higher margin goal, if you think that is the case that you can get beyond 10%? I know it’s maybe too early to state anything, but just what are your thoughts long-term on margin goals and maybe where it could go from here?

Hi, Kevin, this is Mike DeCata. Thank you for the question. So I can say that we’ve been saying all along that the 10% was a milestone, certainly not a destination and we certainly will continue to drive that higher to the best of our ability. As Ron mentioned in his prepared comments, our first and fourth quarter are structurally different for us than second and third, so the next step is trying to drive that number on our four quarters. But we will continue to drive through share gain and growing top line, managing costs. We’re extremely pleased with how our team across the company has embraced Lean Six Sigma and the analytical orientation and every day there are opportunities to find a penny here and a penny there in process improvement, both that enables us to grow top line and we’ve commented on a few of those relative to governments and so on and so forth. That’s process reengineering targeting customers, but also process reengineering targeting cost management internally and enabling higher quality work life for our employees. When you put all that together, I’ll say again it’s not a destination, it’s a pass through and our goal is to run the company more profitably, more efficiently and more effectively every day. Continuous incremental improvement is what we’ve been at for a very long time and we’ll continue on this path. Again, not ready to set new numbers, but I can say with a certainty, the number is more.

Right, fair enough. Okay. Okay, that sounds good. Yeah so in relation to, you mentioned Screw Products I know that that’s a pretty small piece of your business right now, but you mentioned you got it integrated into the McCook facility and on to SAP. So with that, what do you think you could do with that business now or what are you looking to do to maybe drive more growth there?

Yeah, Kevin, this is Mike again. It’s a great question. And it is a small acquisition, but it was sort of a means to an end, value-added things like kitting, assembly, modest assembly of components. And so it becomes a platform and a learning exercise for us to springboard that business itself into market growth. And a great many of our customers are looking for value-added, and again, assembling fasteners together or coatings or more value-added services than the physical labor that we deliver in the form of VMI, service-intensive VMI. So it becomes a springboard to other growth. We are working with customers and partners, channel partners to open additional business for Screw Products and now that they’re integrated and our McCook distribution center has always done kitting in building preassemblies of bids in cabinets. So that’s something that we have the processes and labor and applied Lean Six Sigma for quite a number of years at McCook. So now that the Screw Products business is integrated into McCook, it opens the door with a lot more products and even more cost effective service to do that kitting. So we’re sort of at the beginning. The way we do that and everything else is systematic, deliberate, methodical in our strategies and our growth and that’s where we are right now. We’ve got great optimism relative to the future of Screw Products and Screw Products as a platform for organic growth of Screw Products and likely acquisition growth similar to Screw Products.

Okay, yeah that’s interesting. And following up on that, you mentioned potential acquisitions and you’ve made some moves there with the credit facility and in hiring Brian. Maybe what does the pipeline look like right now, the size of deals you’re looking at perhaps and just maybe a general range and that the types of businesses you’d like to acquire?

So again, this is Mike. So what we’re looking at is a continuation of what we have looked at, except larger. We have now done six acquisitions. We feel like we’ve integrated them very successfully, the largest of those being Bolt Supply which we’ve highlighted because of their recent performance, but their performance all along has been very, very solid and just doing far better. So now we feel the confidence. And originally, when we started down this path three, four, five years ago, we talked about our desire to sort of get our sea legs with smaller acquisitions, test our paradigms and integration skills. We’ve now done that and we now have confidence to do substantially larger acquisitions. With the multibank deal that we have and the resources that we have between financial resources, our own integration internal resources and Brian, we feel very confident that we can go after substantially larger acquisitions in our space and in very near adjacencies. Not big differences from where we are, but in the kind of business that we’re in, which is to say value-added, service-intensive vendor managed inventory; characteristics being small parts, consumable; sort of pretty close to sticking to the knitting, but there is a large pipeline and a large number of companies in our space. It’s a huge, some would argue $20 billion highly fragmented market and we will never run out of customers, and I think we will never run out of acquisition targets, but we are very disciplined. We are very disciplined in pushing back from ones that aren’t quite right, because we feel very good about our organic growth and our leverage and where we’re going just in operating the company every day. So that gives us, let me say, the luxury but the discipline to do the right acquisitions that are accretive and make strategic sense to us without the urgency to do ones that are terribly provocative. So that’s kind of our orientation, but we feel great about the pipeline and now we feel great about the resources available to bring to bear on that pipeline.

Okay, great. I guess lastly just in relation to, obviously a bit of a slowing in the industrial economy, you said maybe a little moderation on a sequential basis, but still growing year-over-year, yeah I know it’s still just a few weeks in the quarter here, but maybe what you’ve seen thus far and maybe just broader comments on how your businesses reacted in the past to slowing economic indicators? I know you have a 65-year plus operating history and maybe if we just continue muddling along, do you think you continue to grow here or how long, how deep of a contraction would you think you’d need to see that really, I guess slow things more meaningfully? I know there’s a lot in there, but just wanted to get your overall thoughts on the environment.

Sure, Kevin, this is Ron Knutson. So I’ll take the first part of that. And relative to so I call it, the first few weeks of October, what I would say is, we’ve seen really, I would say, consistent performance with where we saw the third quarter operating. I would say Bolt Supply continues to have a nice month. Again, we’re three weeks into it. And relative to the overall economic cycle and so forth, I think Mike made some comments on this in his prepared comments. And it’s something that as we look at for 2019 as well as moving into 2020, we are seeing a little bit of a softening. But what I would say is that, our internal initiatives, examples of that would be our focus on the government business, adding resources there, our conversion process within the strategic account area, continued investment into our sales force, we feel as though those internal initiatives can help dampen what we’re seeing a little bit on the overall economic side. So again, we feel good about our internal initiatives. We think that those will help fuel our growth going forward. Again, keeping in mind that Q4 being a shorter quarter for us, but beyond that, we feel good about the actions we’re taking internally to drive growth.

Yeah, Kevin I would echo that as well. This is Mike. We feel great about the actions we’re taking, the part of the world that we control, our processes, our strong teammates and their orientation toward continuous improvement every day in every department and at every function, every activity of the company. One thing that does excite me more and more is, it is my view that our value proposition becomes more valuable and more critical to customers every day. Just last week, we had the President of a large customer end, who was talking about how desperate they are for labor, especially in the form of mechanics, welders, shop supervisors, parts managers, yesterday I had a conversation with our Senior Vice President of Sales, who echoed the same thing relative to a customer visit that he was at on Tuesday of this week. So over the long term, customers do think of us as our sales rep as kind of like their employee, I’m speaking figuratively here, for about 45 minutes a week. And because we’re there every week, never letting them down, never letting them run out of product, never overstuffing the bin, so it’s the balance between not letting them run out. And again, with our average piece price being $0.94, the last thing one of our customers wants is their large injection molding machine or their excavator or their big piece of equipment down for a few dollar part. So the combination of all of these macro and demographic factors, I believe makes the Lawson value proposition more valuable and more critical every day for a very long time to come. And that’s echoed by conversations with many customers across the spectrum.

Kevin, I would just add that we continue to make investments into the organization to drive sales, certainly continue to add sales reps and we are also adding individuals, retention specialists, inside sales reps and so forth. So, even as if the economy slows a little bit, we will continue to make investments into the organization to help drive top line sales.

Okay, that’s great color. Thanks for taking all the questions.

Thanks, Kevin.

Thank you, Kevin.

Thank you. [Operator Instructions] This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Mike DeCata for any closing remarks.

Thank you, Michelle. Thank you for joining the call today. Lawson Products had another great quarter. Sales, EBITDA, gross margin and leverage all continue the positive trends that began in late 2016. We’re confident that the actions that the Lawson team has taken over the past few years, along with our commitment to operational excellence, positions the company to prosper in the coming years. Share gain and customer retention highlight the increasing value that customers place and our ability to improve their profitability. I would like to extend special appreciation and thanks to our teammates. I’m grateful for their dedication to customer service and the knowledge that their work is enabling 70,000 customers to prosper. Thank you again for joining the call today. We look forward to speaking with you in 2020. Have a great day.

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