Good morning, ladies and gentlemen, and welcome to the Lawson Products Second Quarter 2020 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 the business, as well as covering relevant financial and operational information. Then there will 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'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. This call is being audio simulcast on the Internet via Lawson Products Investor Relations page on the company's website, lawsonproducts.com. A replay of the webcast will be available on the website through August 31, 2020. 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 will comment on the second quarter and our actions that we've taken to drive sales and earnings in this challenging economic environment, followed by our plans going forward. Ron Knutson, our CFO, will provide a more detailed review of our second quarter financial results, followed by your questions. The COVID-19 pandemic had an unprecedented adverse effect on the U.S. economy starting in March. However, Lawson is weathering this storm, and we believe will come through this a stronger company in the future. While our second quarter revenues reflected a drop-off early in the quarter, in most of our customer categories, we realized a nice recovery in May, and have seen continued sequential improvement in the following months. Our strategy during this quarter was to ensure a safe working environment for our employees, support our customer and supplier relationships, all while protecting the financial position of the company and long-term interests of our shareholders. I'd be remiss if I didn’t acknowledge the hard work and sacrifice our team members made through this challenging quarter. In that respect, this quarter was a great example of how the most important asset of the organization, our employees, stepped up and allowed us to continue to serve our customers, all while maintaining the financial strength of the organization. We have all learned a great deal during this environment. Rapidly modifying our sales by employing multiple channels to market; protecting a portion of our sales rep compensation; managing our supply chain by working to develop new PPE sources; and re-engineering administrative processes will provide future benefits to our organization. We believe these actions, their near-term results and long-term implications, will help position Lawson to re-establish sold growth into the future. In the current environment,…

Thank you, Mike, and good morning, everyone. I will first provide some key takeaways from the quarter and the trends of the business from April through July, along with an update on the actions that we have taken. I'll then discuss our second quarter results on both a reported and adjusted basis. A few highlights of the quarter. First, sales improved sequentially month-to-month throughout the quarter, both in the MRO business and the Bolt Supply business. On a consolidated basis, average daily sales were $961,000 in April, $1.178 million in May and $1.247 million in June. After the initial step-back in April, sequentially, we realized a 23% increase in May and then an additional 6% increase in June. Second, the cost controls that we discussed on the first quarter call, and put in place in mid-April, continued for the quarter. We have taken a balanced approach on costs, while continuing to invest in the business, in particular, in areas to drive sales. Overall, our operating expenses decreased by $11.7 million for the second quarter. And third, we have proactively managed our working capital and liquidity position to ensure we maintain and exit the pandemic environment with a strong balance sheet. We ended the quarter with $10.8 million of cash and cash equivalents and an additional $97.3 million of availability under our committed credit facility. We were deemed an essential business early in the quarter, which allowed us to continue to service our customers. We quickly adapted our company to a remote work environment. Our distribution centers continue to fulfill customer orders all while adjusting our cost structure to a lower sales level, as demand fell quickly in late March and into early April. As we reflect back on the quarter, there were numerous challenges that impacted the overall business economy…

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

Hi, good morning, Mike and Ron.

Good morning, Kevin.

Good morning, Kevin.

So you talked about with the rebounding trend in sales, gradually bringing some of the cost back. I think last quarter, you talked about $4 million to $4.5 million monthly cost reduction with about two-thirds of those reductions occurring naturally with the change in sales. Of the specific cost actions you took in terms of salary reductions, furloughs, et cetera, how much of that has come back? And I know you talked about bringing some furloughed employees back, but how much of that has come back? And what's your approach to bringing the rest of those costs back over time?

Yes, Kevin, this is Mike. I'll start and then Ron can jump in with some more data. The way we're bringing Suwanee, as an example, or furloughed employees back is as transaction volume – and when I say transaction volume, it could be AP, AR, of course, distribution center line volume. As those volumes come back and the workload increases, we're incrementally bringing one person back at a time. And that's the way we intend to do it on a go-forward basis. Again, to Ron's point, and to mine as well here, the team has just done a truly extraordinary job of working longer hours under difficult circumstances; in many cases, working from home to conduct their work. And at some point – and we are getting to that point – we are incrementally bringing people back because the workload continues to increase. And again, our team has done just such an extraordinary job, that at some point, you just can't keep up with the transaction volume, considering the actions we've taken. So that's how we're rolling people back. Ron, did you want to add?

Yes, I'd like – and Kevin, I'd just add to that, as you saw for the quarter, our overall operating expenses decreased by about $12 million. So we were able to achieve the savings throughout the quarter. And to Mike's point, some of those costs are coming back into the organization, but it's really a balanced approach on how the economy is recovering, as well as what we see from a business recovery on our customer side as well.

Okay, understood. And I think, Mike, in your prepared comments, you mentioned one of the steps you're taking here to come out of the downturn stronger, or just as strong, is that you protected a portion of sales force compensation. Maybe just talk a little bit more about that strategy and your thoughts on retaining the team, and what – how you think that'll benefit you coming out of this.

Well, under these circumstances, we've learned a lot from the environment, from the challenge that everybody has faced across the globe, really. Things like our – the fact that for the last several years, we've been talking about embracing technology. One of those technologies, Microsoft Teams, enables the knowledge of 1,000 sales reps to be resident real-time with every sales rep every day. That's an example where people have embraced that even more. Distance learning is another example, which over the long term, will cut travel costs. Us working from home has opened doors to a different level of productivity. So what we're looking at internally is we feel like we were on a great trajectory prior to this. Our challenge today is how we come out not on that trajectory, but an even steeper positive trajectory because of our commitment to lean Six Sigma, our commitment to technology, how our team has evolved over the past several years to embrace change and new technologies. All of these things will have a structural impact on our future, which should deliver better results than the trajectory we were on before. So across the board, under adversity, you learn to adapt. But some good has come out of this, and some good in the way of innovation and examining how we do things is coming out of it, which will have long-term positive effects for our earnings, for our productivity, for our labor productivity, and for our customers especially.

Okay. Got it. I know you have a lot of data that you kind of get on a daily basis if you want insight into the business. Are you able to dig into specific geographies, specific branches, and see how they're trending relative to others? I ask that just in relation to we've seen a flare-up in COVID cases in certain regions of the country. And maybe are you able to dig into how turbulent relative to others, just maybe if some have taken a step back because of that, or any other trends you might highlight on a geographic basis?

Yes, Kevin, to your point, yes, we do look at data. If anything has happened to our culture over the last handful of years, it is that we've become very analytical and very process-oriented and dig into the data. Yes, we do look at geographic data; every week, we get geographic updates for all the territories and all the states. So we are able to look at as things are trending up or slowing down. We are seeing an across-the-board increase. It's possible that that increase will vary by state. And again, we are looking at the state level and of course, at the sales rep level, we provide even more data than we used to, to sales reps and district sales managers, so that they can manage both new accounts, which we are aggressively working to win, as well as supporting our customers on the same frequency that we were before. So the short answer is here again, technology and a pragmatic use of technology, has been incredibly effective in driving sales rep productivity, winning new customers and just overall, enabling us to get back on that trajectory as soon as possible. And again, I keep saying on an even steeper trajectory is our goal.

Okay, great. And then you said you're starting to add sales reps again selectively in underserved markets. I just wondered in this environment if you're seeing the opportunity to maybe add some more seasoned sales reps due to kind of a competitive dislocation? Or are you still hiring newer inexperienced reps and trying to ramp this up – ramp them up in this environment? What's kind of the approach on adding reps now?

Yes, we've seen a real availability of people, high-caliber, capable people. Still, adding a new sales rep to a new territory is a long-term investment. So in this environment, we're being a little bit prudent about the number of greenfield sales reps we're bringing on. But there are also territories, military bases, for example, or strategic account managers that we've brought back, where they can jump in very, very quickly and produce very good short-term results. So for us at this moment, it's a little bit of a balance between the long-term investment of bringing on greenfield reps, or dividing up territories as district managers see appropriate, and bringing back capable, seasoned people where they can jump in right away. However, fundamentally, our strategy, our three-part growth strategy, has not changed. We will continue to add, incrementally add, sales reps, for the foreseeable future, we'll continue to drive through technology, through all manner of analytics and leadership and training sales rep productivity. And we are absolutely focused on growth through acquisition and M&A. All three activities are unchanged in this environment.

Okay. And following up on that last point there, that leads me to my next question. You mentioned that you're making good progress on the M&A front; you're having a number of discussions. I was just wondering if, in this environment, the likelihood of closing acquisitions increases or decreases? Are targets maybe a little apprehensive about selling when their numbers are down? Or in contrast, are you seeing more businesses may be willing to engage in discussions because of this environment?

I guess the answer would be a little of all of that. We continue to see a very robust pipeline, including new discussions that are new, within the last quarter or six months, that continue on track. We also – there have been a couple that have said, hey, look, I want to take a little pause because of the environment. And we continue to nurture the long-term discussions that we've had. And in many cases, we've had discussions with owners of companies and often, family-owned companies, for several years. And those discussions stay alive and well, and are even more frequent than they had been in the past. So it's a little bit of all of that. But underneath it all, we are deeply committed and very confident in our process and our strategy; and also the discipline though around how we use our capital and the prices we pay and the multiples that we pay for all this stuff. So all in all, we feel great about where we are and where we're going on that dimension as well as the other two.

Okay. That's helpful. That's all I had. And I thought the execution was very good in this difficult environment. So congratulations on that. That's all I had, thanks.

Thank you, Kevin.

Thanks Kevin.

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

Thank you. And thank you for joining the call today. As this pandemic hit, we took aggressive, immediate action to protect our employees and our customers. On an ongoing basis, we also worked hard to protect our balance sheet. To do this, we needed the entire Lawson team to pull together, and I can say unequivocally, that this has been the case across the board. We have supported our customers and we're grateful for their loyalty and support in return. Our long-term initiatives and ambitions may have taken a momentary pause, but with a value proposition which is growing in importance every day, operational excellence, an outstanding team and essentially no debt, we're in a great position moving forward. Finally, we are all encouraged with the strong sequential improvement that we've achieved to date. And we're working hard to ensure that this trajectory will continue. Thank you, again, to the Lawson team. You’ve often heard me say that our values are sometimes tested under challenging circumstances. Your commitment to our values has been inspiring. And on behalf of the management team, our customers, suppliers and our investors, thank you. We look forward to speaking to all of you again on our next call. Have a wonderful day.

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