Distribution Solutions Group Inc (DSGR) 2012 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Lawson Products second-quarter 2012 earnings call. This call will be hosted by Tom Neri, Lawson Products' Chief Executive Officer and Ron Knutson, Lawson Products' Chief Financial Officer. They will open the call with an overview of the second-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 September 9, 2012.

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 are subject to risks and uncertainties that could cause actual results to differ materially from those described.

In addition, statements during this call are based on the Company's views as of today. The Company anticipates that future developments will 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 disclaim any obligation to do so. I will now turn the call over to Lawson Products CEO, Tom Neri.

Thank you, Maureen and good morning, everyone. I want to thank you for joining us to discuss our second-quarter 2012 results. As we have previously discussed, we continue on a significant transformation of our business. Our goal is to develop a broader base of customers and 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. Let me provide you with an update on the progress on our strategic restructuring plan announced in June. First, we have taken action on the reduction of our cost structure by eliminating approximately 120 positions in the quarter.

Second, we continue to make progress on other initiatives to achieve our $20 million annualized cost-savings target, including areas such as freight recoveries, reduction of promotional goods expense, improvement of operating efficiencies in our distribution centers and other overhead costs.

Third, we have finalized our new credit facility that will provide us with a new five-year $40 million facility to fund our continued investments in the business.

And fourth, we have taken various noncash nonoperating charges in the second quarter that will provide us with a cleaner picture of our true operating results going forward. Ron Knutson will provide more detail on specific charges taken during the quarter. We recently passed the one-year anniversary of the implementation of an enterprise resource planning system. We have continued to work through operational issues that are not uncommon with this kind of transition.

While our second-quarter 2012 results in part reflect the carryover of the difficult nature of this implementation, we have made significant progress in our service to customers. Our ERP system is a critical component of providing us the necessary systems and processes as the backbone of our transformation.

We are now utilizing information within the system that gives us additional visibility to manage our business more effectively. While our second-quarter results were disappointing and the MRO marketplace remains challenging, I believe we are taking the critical steps necessary to move the business forward and keep us competitive.

With that, I would like to ask Ron Knutson to review our operating results in more detail and then I'll come back to give you some insight on our initiatives for the second half of 2012. Ron?

Thanks, Tom and good morning, everyone. Let me first address the nonrecurring items that Tom referenced. During the second quarter, we took charges for the following -- first, a non-cash goodwill impairment charge of $28.3 million related to a 2001 acquisition; second, a severance charge in the amount of $6.6 million for the positions that we eliminated related to our restructuring plan; third, an additional noncash inventory reserve in the amount of $3.9 million for inventory items that we will no longer carry in our stocked inventory, but will have access to through our vendor network.

These items were partially offset by a gain of $2.1 million on the sale of three properties as part of our Illinois headquarters and distribution center consolidation plan. Excluding the above mentioned items, our operating loss for the quarter was $4.8 million.

In addition to the previously mentioned special charges in Q2, the Company was also required to record a non-cash valuation allowance on its deferred tax assets of $33.5 million due to uncertainty on the future realization of these assets.

In terms of sales, we finished the quarter with $74.3 million compared to $84.2 million a year ago. Approximately one-third of the decline is due to a decrease in our government segment as a result of lower sales to military bases that previously supported troop deployment. The remainder of the decline is primarily due to higher customer attrition within our smaller account base, fewer new customer acquisitions, lower freight revenues and a decline in our sales representatives from a year ago.

Our strategic and automotive segments grew by 5% and 3% respectively and partially offset the decline in sales. From a sequential average daily sales basis, April sales finished at $1.198 million, May finished at $1.160 million and June finished at $1.127 million. For the quarter, average daily sales were down 2.1% sequentially over the first quarter primarily driven by the decline in our government segment and customer attrition with the lower new customer signings.

We continue to pursue larger strategic accounts. For the quarter, our strategic accounts increased approximately 5% to $8.9 million from a year ago as we increased our penetration with existing customers and signed new locations. Strategic accounts now make up approximately 13% of our sales compared to approximately 10% a year ago. This area continues to be an area of opportunity for us and we have solid prospects that we expect will continue to provide growth in this segment.

For the quarter, gross margins were 49.5% versus 57.4% a year ago and 54.4% in Q1. The decline over a year ago was primarily driven by total inventory reserves of $5.9 million for the quarter and is we reserve for items that we are moving from our core stock offering to our core non-stock offering.

Excluding inventory reserves, gross margin for the quarter was 57.4%, equal with that a year ago and an improvement over the first quarter as a result of gradually improving our freight recoveries and lower labor costs.

Selling, general and administrative expenses were $45.5 million for the quarter compared to $46.7 million a year ago, excluding the $6.6 million of severance in the quarter. Selling expenses decreased on lower sales, while general and administrative expenses increased $409,000 as the 2011 ERP implementation costs were offset by post go-live expenses, increased bad debt expense and higher depreciation and facility costs.

Excluding the impairment of goodwill, severance, inventory reserves and the related tax valuation increase, loss per share was $0.39 as compared with earnings per share of $0.12 a year ago. Our net loss, including the nonrecurring items, was $61.2 million or $7.12 per diluted share.

From a balance sheet perspective, we ended the quarter with $14.8 million of outstanding debt. This increase from year-end is primarily due to catching up on the processing of outstanding invoices to our vendors as a result of our ERP implementation 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 primarily to fund the remaining capital on the equipment for our new McCook facility. Our forecasted net CapEx for the full year is in the range of $4 million to $8 million consisting primarily of equipment to support the opening of our new consolidated facility in Illinois, investments in the launch of our new website and capital for our new headquarters location. This amount is net of sales proceeds from 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 5% at our current stock price. I will now turn it back over to Tom.

Thank you, Ron. The second half of 2012 will be exciting for the Company and our customers. Many of the initiatives that we have been working on ever the past several years will be implemented and we are looking forward to realizing the benefits.

First, we will place our new state-of-the-art facility in McCook, Illinois into production. This will be a phased-in approach beginning in late August, consolidating our three Illinois distribution centers into one and will enable us to consolidate our packaging process under one roof. McCook will be the hub of our distribution network going forward and allow us to not only gain labor and freight efficiencies, but will also be the platform to achieve inventory productivity while also providing improved customer service.

Second, our redesigned website is now available to our customers. We are actively moving existing customers over to the new site, which will allow them greater search, price and ordering capabilities. This site will be the catalyst for our customers having 24/7 visibility and ordering capability with us. We expect to capture more of their unplanned needs, as well as receive orders between our salesforce between the customer contacts.

And third, we have begun the transformation process of our independent agents to employees. The compensation plan will be 100% variable in nature with the ability to earn additional commissions as their sales increase. Given the minimal changes to how they operate today, we do not believe that the transition will be disruptive to our business. Our plan is to finalize the conversion in the US in the first quarter of 2013.

As I mentioned earlier, we continue to make investments in our business to help us drive revenue and transition our business to being a stronger player in the MRO marketplace. We are confident that our recent actions and our future plans will help position the Company for long-term growth and profitability. I will now turn it over for questions.

(Operator Instructions). Ed Marshall, Sidoti & Company.

Hey, guys, good morning. The first question I had was on the tax reversal of the tax deferred asset. Do you plan on reporting any tax rate for the remainder of the year or how should I look at that?

Yes, Ed, this is Ron Knutson. Going forward for the remainder of the year, we do not anticipate that we would be in a taxable position. I would say that we will, under the accounting rules, we'll most likely be required to put up any type of valuation for the rest of the year, similar to what we did for the first half of the year.

Okay. So you're kind of in that weird zone --

Yes.

-- with the losses? All right. The sequentially flattening of the sales line, does it give -- are you seeing the -- and I think you mentioned it in the press release and your prepared comments -- that the ERP implementation is -- you are back to the same service levels. Are you back to the same customer levels as well? And this is more of kind of the demand that we are seeing in the market and not as much of a loss of account or so forth?

I still think that we are still in the phase of rebuilding the confidence with a number of those customers. Clearly, we have shifted our customer base somewhat and we are seeing and we are gaining more business on the strategic side, what we are calling strategic side, which would be those locations or those organizations with multiple locations. Part of our plan is to go back and if you will re-win the loyalty of those smaller customers that we did lose during the service issues that occurred during the ERP transition.

But I mean wasn't it at some point part of the strategy to forgo a lot of the smaller accounts anyway or to kind of phase them out anyway? Wasn't that part of the --?

No, it really wasn't a part to phase out those accounts. It was begin to have the agents call on them less frequently and to move their ordering capability to the Web. But clearly the website was not ready in time during this transition phase, so we never intended to really get rid of those accounts or have those accounts leave us. It was to transition them to a different sales channel, which is now in place, but unfortunately was not in place during this transition period.

That is unfortunate. The July/August trends that you've seen thus far? Would you comment on those? Are they similar?

Sure, this is Ron. As you know, we do not report specifically our monthly sales results or give any formal guidance. I would say that, from a high-level perspective, that the trend that we have seen so far into early August is not that inconsistent with what we saw in the second quarter.

Okay. And then finally the strategic sales you mentioned on a year-over-year basis, do you have them on a sequential basis?

Sure. So on a full -- for the quarter versus a year ago, we were up a little bit over 5%. That's pretty consistent on a year-to-date basis as well. Sequentially over the first quarter of 2012, strategic accounts were up about 9% Q2 versus Q1.

Okay. And I thought the original idea behind those was to expand on those existing -- as you bring those new accounts on -- expand that book of business as well to some probably lesser of the basket that was bid on. How is that transformation going?

I think it is going well. Now very clearly, a lot of these accounts have a number of locations that we still need to go out and win, but we are dedicating more resources. We have increased our focus on increasing the share of wallet, if you will, within those strategic accounts. And we certainly are making progress on a number of those accounts.

Do you have a growth -- you say going well, do you have a growth rate based on kind of the strategic accounts and what they have grown year over year and I think you did give a statistic? Can we look at it from maybe an organic basis say less kind of the acquired sale?

Yes, I would say, Ed, if you look back over the last couple of years, this area of our business has grown typically in the double-digit range, 10% to 15% if you look back over the last few years and we don't see any reason given some of the pipeline and as Tom mentioned the expansion of locations of our existing customers. This certainly will be an area of focus for us going forward and we anticipate to see those growth rates.

Ed, without getting into specific accounts, what we do see is, in addition to acquiring new accounts, we are seeing very good growth I would say in our top 10 strategic accounts. We are seeing good sequential growth within those accounts themselves.

Okay, thank you.

(Operator Instructions). Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Tom Neri for any closing remarks.

I want to thank everyone for joining us on the call today. Hope you all realize that the Company is moving forward. We will begin to realize a number of the benefits that we've been working on over the past several years and we look forward to continued success. Thank you for joining us today.

Thank you, ladies and gentlemen, for participating this morning. That concludes our call.