Distribution Solutions Group Inc (DSGR) 2012 Q1 法說會逐字稿

Good morning, and welcome to the Lawson Products Inc. first-quarter 2012 conference call and webcast. All participants will be in listen-only mode. (Operator Instructions)

I would now like to turn the conference over to Lawson Products Communications Director, Carolyn Ballard. Please begin.

Thank you, Andrew, and welcome to the Lawson Products first-quarter 2012 earnings conference call. This call will be hosted by Tom Neri, our Chief Executive Officer; Ron Knutson, our Chief Financial Officer; and Harry Dochelli, our Chief Operating Officer.

We will open the call with an overview of our first-quarter results. There will then be time for questions and answers. This call is being audio simulcast on the Internet, via the Lawson Products Investor Relations page on the Company's website, lawsonproducts.com. A replay of the webcast will be available on the website through May 10, 2012.

During this call we will be providing an update on the business as well as covering the relevant financial information and operational data. I would like to point out that statements on this call and in our press release containing forward-looking statements concerning our goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions are subject to risks and uncertainties that could cause actual results to differ materially from those described.

In addition, our statements during this call are based on our views as of today. We anticipate that future developments will cause our view to change. Please consider the information presented in that light. We may, at some point, elect to update the forward-looking statements made today, but specifically disclaim any obligation to do so.

I will now turn the call over to our CEO, Tom Neri.

Thank you, Carolyn, and good morning, everyone. I want to thank you for joining us to discuss our first-quarter 2012 results. As we have discussed before, Lawson has embarked on a significant transformation of our business. Our goal is to become our customers' first choice for MRO products and solutions. To that end, we have made, and will continue to make, investments to move our Company forward.

In the third quarter of last year, we implemented an enterprise resource planning system. We have continued to work through operational issues that are not uncommon with this kind of transition. Our first-quarter 2012 results, in part, reflect the difficult nature of this implementation. Our ERP system is a critical component of providing us the necessary systems and processes as the backbone of our transformation.

While our first-quarter results were disappointing, I believe we are taking the critical steps necessary to move this business forward and keep us competitive. We are also making bold moves forward to optimize our supply-chain network, with the leasing of a new state-of-the-art distribution center. And we will move forward with sales and channel transformation this year, as well.

These investments are essential to realizing our goal of being our customers' first choice. With that being said, I would like to ask Ron to review our operating results in more detail. And then Harry will talk about our business initiatives, as well as some of the ways we are addressing sales and gross profit and managing our overall operating costs.

Ron?

Thanks, Tom, and good morning, everyone. We finished the quarter at $76 million in sales compared to $82.6 million a year ago. Approximately one half of the decline is due to a decrease in our government segment as a result of lower sales to two military bases that support troop deployment. Additionally, during the quarter we experienced higher customer attrition within our small account base as we worked through many of our post-ERP go-live issues. We are working hard to win back the loyalty of our smaller accounts with improved service levels.

From a sequential average daily sales basis, January sales finished at $1.249 million. February finished at $1.201 million, and March finished at $1.115 million. Excluding the government segment, average daily sales for the quarter were relatively flat with December 2011 levels. For the quarter, average daily sales were down 2.2% sequentially over the fourth quarter, primarily driven by the decline in our government segment and customer attrition.

We continue to actively pursue larger national accounts. For the quarter, our national or strategic accounts increased approximately 5% to $8.1 million, as we increased our penetration with existing customers and signed new locations. Strategic accounts now make up approximately 11% of our sales compared to approximately 9% a year ago. This area continues to be an opportunity for us, and we have solid prospects that should continue to provide growth within this segment.

For the quarter, gross margins finished at 54.4% versus 60.5% a year ago, and 53.5% in Q4. The decline over a year ago was driven by three items. First, lower freight recoveries due to increased outbound freight costs; second, an increase in our inventory reserves as sales softened on increased inventory levels; and, third, increased labor costs within our distribution centers as a percent of sales, as we worked through some of the challenges of our new system.

Total operating expenses decreased by 4.4%, or $2 million for the quarter. The decrease was primarily driven by lower selling costs as a result of lower sales. We continue to gain leverage on our selling expenses, as selling expenses as a percent of sales decreased to 26.5% from 26.8% a year ago.

Our general and administrative costs were flat compared to a year ago, as additional post-ERP implementation costs and an increase in depreciation expenses were similar to costs incurred last year from our ERP implementation.

For the quarter, our net loss was $1.8 million, or $0.21 per diluted share, compared to a profit of $2 million a year ago, or $0.23 per diluted share. We continue to be mindful of our operating expenses. In fact, earlier this week, we announced a 5% reduction in our corporate staff to help us manage cost as we work through -- as we work on topline growth. We will continue to evaluate our cost structure versus our current sales trends.

From a balance sheet perspective, we ended the quarter with $13.4 million of outstanding debt. The increase from year-end is primarily due to catching up on the processing of outstanding vendor invoices, and an increase in inventory to support specific 2012 sales initiatives. We anticipate that we will be in a borrowing position throughout the remainder of 2012.

Our forecasted net CapEx is a range of $4 million to $8 million, consisting primarily of equipment to support the opening of our new consolidated Illinois facility; investments in the launch of our new website; and capital for our new headquarters. The amount is net of anticipated sales proceeds from three of our Illinois facilities.

During the quarter, we paid a dividend of $0.12 per share for an aggregate amount of approximately $1 million, representing an annual yield of approximately 3% at our current stock price.

So in closing, our focus in the immediate term is to drive revenues, reduce customer attrition, and control our operating expenses.

I will now turn it over to Harry Dochelli.

Thank you, Ron. Ron's review of the numbers provides a good snapshot of the quarter. Obviously, the decrease in sales in military bases created sales challenges for us in the quarter. We continue to focus on growth in our strategic accounts to offset the declines we have faced from lower government spending in military.

During the quarter, we also continued to feel the effects of our ERP implementation, which took place in August 2011. As Ron mentioned, and we have previously explained, after implementation we immediately experienced operating challenges and sales decreases that affected our 2011 results. Additionally, in the first quarter, we felt the lagging effect of the operational issues which occurred in 2011 and which resulted in higher, smaller customer attrition for the quarter. These customers tend to be higher-margin; so we not only lost sales, but we also experienced a decrease in margins. We have now made progress in resolving many of our operational challenges we experienced as a result of our ERP implementation. Our backorder levels are now at pre-go-live numbers.

We also have immediate programs to get back to basics, to drive revenue and rebuild our customers' confidence. We have a year-long sales incentive program in place that will help us grow sales among our current customers and win back lost customers. We have also continued to build out our business development manager positions, which are providing a steady pipeline of new midmarket accounts. We are also focused on addressing our gross profits through several immediate steps in managing our operating costs.

Despite the difficulties from our ERP implementation, we are very pleased with several of the benefits we have begun to realize. For example, with our SAP system in place, we've identified and are developing customer programs that we believe will improve our margins and grow our sales. One of these new sales capabilities supported by SAP is our new and enhanced website. We will introduce our new website this year, beginning with our current Web customers and then expanding to our new customers. We believe our new website will be a significant improvement for our customers.

Another important component of our improving on our customers' experience is our sales transformation initiative. We are on track to begin a pilot program this fall with a small group from our sales force. We believe, through our transformation initiative, we will create the necessary organizational design to further drive revenue.

SAP is also the technological backbone for our network optimization business initiative, which includes leasing a newly constructed state-of-the-art distribution and packaging center in McCook, Illinois. In terms of this new facility, we are making good progress on the construction. We will begin to consolidate our three distribution centers this summer, with the move to the new facility completed by year-end. With the facility operational, we have a much more efficient distribution network to meet our customers' needs nationally.

As we undertake all of these actions, we will be mindful of expenses and managing our operations as efficiently as possible.

Now I'd like to turn it back over to Tom.

Thank you, Ron and Harry. As I said, while it was a challenging quarter, I believe that we are taking the right steps for the business, as we work through our transformation. Harry and Ron have provided a good picture of the short- and long-term initiatives in place to help us drive revenue and manage our operating profit and overall expenses. The steps we are taking are foundational to transform our business. With the support of our dedicated sales teams and employees, we will continue to make the required investments to move forward. I would now like to open it up for questions.

(Operator Instructions) Ed Marshall, Sidoti & Company.

Hey, guys. Good morning. You mentioned customer retention; and I'm just curious, what exactly are you doing? I mean, are you giving price concessions to the customer? Or -- can you help me understand that a little bit further?

I think, Ed, it's more around the service levels to our customers. And, as we mentioned in our comments -- the smaller customer, our value proposition there is different than it is on our larger customer, which is why we've been so focused on the strategic customer. They really -- when we put our value proposition in front of them about our full-service model, it's really attractive to the strategic larger customer.

On the smaller customer side, they are more dependent on a day-to-day service that we provide. And as a result of some of the challenges we had with our ERP implementation, our stickiness with that customer is not as strong as it is at the larger customer level.

What we are doing now is to go back at some of those smaller customers through various initiatives that we have in place -- through the field sales force as well as through our telephone channel -- to go back and attract that customer back to us, to bring those attrition rates down, and to begin to level out that small customer base that we have.

Wasn't that the plan all along, though, to focus on the strategic accounts? And not necessarily to lose the smaller accounts, but to be a smaller portion of the overall pie. So, you know, I'm curious -- is this surprising to you, that you're losing some of these? Or is it an issue that the strategic account growth isn't necessarily going as you've planned at this point?

No. You know what, Ed? I would say it's not surprising to us. We've always had turned churn in this small customer base. I think we've talked about that before. And as we mentioned, we are still growing in our strategic account base. We were up 5% for the quarter. So ERP accelerated some of that churn in that the smaller customer base. And, unfortunately, we weren't able to offset it just with strategic accounts.

But I wouldn't call it a surprise, because we've always known we've had it. And you have some service interruptions to that small customer. The cost of change for a small customer is really insignificant, as opposed to a larger customer where they are fully invested with you.

Sure. And, finally, inventory you are carrying -- you said you're carrying an extra, maybe call it safety stock or whatever. How much of that inventory are you carrying? How much will be eventually bled out from the working capital needs? And when do you think that might happen?

Ed, this is Ron Knutson. So we did build some inventory within the first quarter to really support a couple of category initiatives around the safety line, as well as around the chemical line. The safety initiative -- the safety sales initiative is currently underway right now. So we built up about $3 million from that category alone. And then we also built some inventory within the fluid power category to support some of our strategic customers.

So we do feel that that will bleed down throughout the year. I would comment, though, that with the move into our McCook, Illinois, facility later this year, just in that overall transition we will be buying up some inventory and make sure that we can keep our service levels back -- have them back to where they are today.

So 2012 would be another year of cash outflow, I'm assuming.

Yes. We'll be in a borrowing position, really, for the remainder of 2012.

Okay. Thanks, guys.

Jonathan Tanwanteng, CJS Securities.

Hey, guys. Thanks for taking my question. Can you discuss the recent Amazon announcement, and their entry into distribution? Have you thought about what kind of impact they might have? And also follow-up after that.

You know, we're watching it closely, Jonathan. Obviously, they are a serious competitor that entered the marketplace. But our value proposition to our customer is about a full solution, which is why our field sales organization is so important. We're not just an independent Internet channel. And if you follow some of the comments around this Amazon launch, many of the folks that follow our industry closely see it as a competitive threat. But they also know that there's customers out there that will tell you -- and from our research, supports this -- that the value that our salesperson brings from a technical standpoint is critical to that customer.

And so having just a Web channel only for our customer base is really not a complete solution for them. It's an option, but not a complete solution. So we're not taking it lightly; because, obviously, their entrance is important to us. But we really believe our full value proposition with our technical expertise that our salespeople bring is a differentiating point for us from an Amazon offering.

Got it. Thank you. And, also, did you guys have any severance or ERP costs? Did you break that out in the press release? I don't believe you did. And, also, you've mentioned the duplicate shipping as a result of the ERP. What progress have you made?

Jonathan, this is Ron Knutson. So we had a little bit of severance in the first quarter, about $200,000. We did not break it out separately, just as that amount has become a much smaller amount relative to our total operating expenses. And then, on the freight piece side, we have made improvements from Q4 to Q1. We're still down relative to Q1 a year ago. But we are seeing some improvement, relative to our freight recoveries from a billing standpoint versus outbound freight costs.

And would you mind breaking out the ERP expense again?

Oh, I'm sorry. The ERP expense -- so we did, we incurred -- the ERP expense that we incurred in Q1 of this year was really more, what I would call, post-go-live support. And that number for the quarter was about $900,000. And a year ago, we were incurring our implementation costs, so that would compare against Q1 of last year of about $1.9 million that rolled through the P&L.

Got it. Thank you very much.

(Operator Instructions) The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line.