Distribution Solutions Group Inc (DSGR) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Lawson Products second-quarter 2014 earnings call. This call will be hosted by Michael DeCata, 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 2, 2014. 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 made during this call are based on the Company's views as of today. The Company anticipates that future developments may cause those abuse views to change. Please consider the information presented in that light.

The Company may at some point elect to update the forward-looking statement made today, but specifically disclaims any obligation to do so. I will down now turn the call over to Lawson Products CEO, Mike DeCata.

Good morning and thank you for joining us our call. We appreciate your interest in Lawson Products and we are excited to share the progress we have made with you today. As we have done in previous calls, I will first comment in three main areas -- growing topline sales, continued operational improvements, and the drive toward improved profitability. Rod will provide a financial update and then we will take questions after that.

Our focus on topline sales. First, let me say we are very pleased with the progress we have made this quarter. Sales for the quarter at $72.1 million were 5.5% up over a year ago. ADS was 5.5% versus a year ago and 2.6% improvement over the previous quarter -- over the first quarter.

Our sales team continues to drive results. We added 42 sales reps during the second quarter. This is on top of the 30 sales reps we had in the first quarter. The new sales reps are spread throughout North America. For example, we added 15 sales reps in California. We added nine sales reps in Texas; seven sales reps in Louisiana, and 20 sales reps in Canada. We ended the second quarter with 878 direct sales reps.

We are also pleased with the caliber of candidates we are seeing for these positions. The hiring and on-boarding pilot that we conducted a last year enabled us to improve and enhance the processes associated with hiring these new sales reps. For example, we have expanded our training program to include specific product demos as well as lead development skills.

With the 72 additions year to date, we're on track to achieve the 15% to 20% net new sales reps in 2014. We're also pleased to see improving productivity from our existing base of over 800 sales reps. Excluding reps that joined us in the last 15 months, sales reps -- sales of existing reps were up approximately 4%. We anticipate that we will continue to aggressively add sales reps in 2015.

Next, let me turn to our continued operational improvements. We continue to see improvements in many of our daily metrics. Backwaters, line service levels, and order completeness. These have a positive impact on outbound freight cost, customer satisfaction, distribution center productivity, and sales rep productivity.

We continue to refine our operating and inventory processes with a focus on productivity and removing non-value-added activities. For example, we recently implemented an economic order of quantity process, which is helping us drive up customer order completeness rates as well as DC labor productivity, and with a minimal impact on inventory investment.

The Lean Six Sigma methodology, which we had begun developing since mid-2013, is also paying dividends. During this quarter, 31 employees, including four field sales employees, earned green belt or black belt certifications. This will begin to transform our culture and will reinforce our focus on customer service and operational excellence. For example, by using this methodology, one of our sales teams -- our sales districts took their DSO greater than 60 days from $16,000 to $3200.

In terms of other process improvements, our talent acquisition team has used the Lean Six Sigma methodology to shorten the hiring process. We anticipate that we will continue with a set of wave two projects in the second half of this year. McCook is operating more efficiently now that we are a year into it, with less overtime, reduced cycle times, and improved throughput.

We continue to drive improved profitability. We are very pleased with our financial results this quarter. During the second quarter, our operating income was $1.2 million compared to an operating loss of $1.8 million before the Reno impairment in the first quarter. Gross margins have stabilized despite increasing success with strategic accounts. This is positive reinforcement that our customers value the products and services that we provide.

Expenses also continue to be managed tightly. We are continuing to make smart investments in our business and allocating the capital to achieve future growth.

Additionally, we closed on the sale and partial leaseback of our Reno facility in the second quarter. Since the sale of Rutland Tools, we have only used approximately 50% of that facility. Net proceeds were used to pay down our credit facility.

It is important to note that our distribution network is capable of significant growth without any additional brick and mortar investments. Now that we have divested the non-core operations, we are able to focus on our core MRO business.

Lastly, we are confident that our value proposition remains strong. We are seeing broad-based growth from large and small customers. The fundamentals of our business are strong, allowing us to make investments to grow the Company.

Looking forward, we have hard work ahead of us. The second half of the year has two fewer selling days than the first half. However, there is an enthusiasm in the Company that we haven't seen in a while. Now, let me turn it over to Ron for a more detailed financial review.

Thank you, Mike, and good morning, everyone. As Mike indicated, we are very pleased with our operating and financial performance of the second quarter. We are clearly realizing the benefits of our previous investments and have established a platform for growth in the Company.

In 2014, we are focused on growing revenues by expanding our sales team and by investing in the productivity of our existing sales reps and, at the same time, we are managing our costs closely. I will now share some of the highlights for the quarter.

First, our operating income was $1.2 million for the quarter. This compares to an operating loss of $201,000 from a year ago and a loss of $4.7 million in the first quarter of 2014. Second, sales finished at $72.1 million for the quarter, during which there were 64 selling days. This represents an increase of 5.5% over the year-ago quarter and an increase of 2.6% over the first quarter.

Third, we added a net 42 direct sales executives from 836 at the end of the first quarter, ending the second quarter with 878 direct sales reps. This is on top of the net 30 sales reps we added in the first quarter and puts us on target to meet our 15% to 20% rep growth as previously communicated.

And, finally, we completed our previously announced sale and partial leaseback of our Reno, Nevada distribution center for $8.6 million. As you recall, since we sold our Rutland Tool subsidiary, we have only been utilizing less than one-half of this facility. These proceeds, along with managing our working capital, allowed us to end the quarter with $2.4 million of outstanding debt under our credit facility, a decrease of $9.2 million for the first quarter.

Let me now share some of the details. We finished the quarter with $72.1 million in MRO sales compared to $68.3 million a year ago and $69.2 million from the first quarter. The second quarters of both 2014 and 2013 included 64 selling days, while the first quarter of 2014 only had 63 selling days.

For the second quarter, average daily sales increased 5.5% over a year ago and were up 2.6% sequentially over the first quarter. This is on top of the 1.9% Q1 over Q4 of 2013 increase. This also represents the fourth consecutive quarter that our sales increased versus a year ago.

Both the increase over a year ago and over the first quarter were primarily driven by additional productivity from existing sales reps and higher average rep count. Our rep count has now increased for five consecutive quarters. New reps will have a positive impact on our average daily sales in 2014 and future years as they build out their respective books of business.

However, as you might expect, adding new sales reps will temporarily bring down our sales per rep per day productivity measurement as the newly hired sales reps are in the early stages of building up customer relationships in their territories. We felt this impact in the first two quarters of 2014 with our aggregate sales per rep per day decreasing 1.6% in the second quarter from the first quarter. Excluding those reps that joined us since the beginning of the prior year quarter, sales per rep per day increased nearly 4% versus a year ago and were also positive over the first quarter.

Over a longer term period, we fully expect that adding sales reps will drive topline sales. We have rebuilt our hiring and on-boarding process, which has allowed us to attract qualified sales reps with previous selling experience, and many with in-depth product knowledge. We are making early investments in this team to ensure that they can ramp up quickly. As we move throughout 2014, we plan to aggressively add sales reps in underserved territories.

From a segment standpoint, strategic accounts now represent approximately 14% of our total volume, and increased nearly 10% over the prior year quarter. This increase was driven by a combination of signing new accounts and the expansion of existing relationships.

Our Kent Automotive business was also up approximately 20% as compared to the year ago quarter, properly driven by new business. Kent now approximates 17% of our business. These increases were partially offset by a decline in our government segment as government spending continues to contract.

From a sequential average daily sales basis, April sales finished at $1.116 million, May finished at $1.136 million, and June finished at $1.127 million. Average days -- daily sales have been trending up over the last three quarters.

For the quarter, gross margin was 60.8%, which was slightly ahead of our expectations. This is up over year-ago margin of 59.5%, primarily due to improved freight operations and distribution center efficiencies. We continue to take advantage of margin opportunities wherever possible.

Increasing strategic customer relationships will continue to put some downward pressure on our gross margins. However, we expect this to be partially offset by other procurement opportunities in operating efficiencies.

Selling, general, and administrative expenses decreased as a percent of sales from 59.8% a year ago to 58.9%, and were $42.4 million for the second quarter compared to $40.8 million a year ago and $43.1 million in the first quarter. The increase over a year ago was properly driven by higher recruiting, on-boarding, and salary cost of new sales reps, and severance expense, partially offset by lower compensation and McCook efficiencies. We continue to tightly manage our ongoing operating costs.

Adjusted operating income taking into account stock-based compensation, severance, and the impairment of Reno, was $2.1 million for the quarter versus $54,000 for the first quarter of 2014 and a loss of $123,000 from the year-ago quarter. This improvement was primarily driven by improved sales, enhancing our margins, and controlling our operating costs.

Net income for the quarter was $798,000 or $0.09 per diluted share compared to a net income of $397,000 or $0.05 per diluted share a year ago, which also included a positive tax benefit.

From a balance sheet perspective, we ended the quarter with $2.4 million of outstanding debt under our credit facility. The $9.2 million decrease from the end of the first quarter was primarily driven by the net $8.3 million proceeds received on the sale of Reno and close management of our working capital.

Year to date CapEx was $917,000. We expect our CapEx for the full year of 2014 to be in the range of $3 million to $4 million, primarily in maintenance capital for our distribution network and planned re-profiling of the space being leased in Reno.

In closing, we are very pleased with our financial progress over the past few quarters. We continue to strengthen the operation -- the operating fundamentals of the business. We are excited about the business and the progress that we have made, and our ability to improve the operations of the business and execute on the initiatives that are driving the Company forward.

As we look into the second half of the year, we feel confident that our initiatives will continue to grow our business. I will now turn it over to the operator for questions.

(Operator Instructions) Jack O'Brien, CJS Securities.

Congratulations on the quarter. You guys have been talking about the success you have had with existing sales reps. I was hoping you could give us some color on what the driving factors behind this productivity has been.

This is Mike DeCata. Thank you for that question. There are a number of factors. First, as we have taken away any of the, let me call it, friction: the inefficiencies around order fill rate, backorders. It is important when a sales rep makes a promise to the customer that the promise can be delivered seamlessly and flawlessly.

When there is anything that doesn't work, that takes time for the sales rep to attend to fixing it. So, operational excellence is a big part of driving sales rep productivity; as well, market segmentation, including tools in the hands of sales reps and training in the hands of sales reps. All of that drives productivity of the sales reps.

And just sort of better alignment, better treatment training, and operational excellence all have that impact on driving sales rep productivity. And our actions we are taking in the future to continue to drive more sales rep productivity.

Okay. And, while you guys are adding new reps, it sounds as if you are hiring pretty high-quality people. With that in mind, I was wondering if you could give us any insight of how the new rep sales are measuring up against your initial expectations for them.

Sure. This is Ron Knutson. Great question. So, as you know, we have been hiring sales reps -- actually have grown on a net basis for quite a few quarters. And I would say that there is a wide variation between the reps. Some of them are hitting grand slams and others are continuing to build out their market.

So, right now, we feel comfortable with the trend rate that we are on as a whole with the new reps that we are hiring on a quarterly basis. As we look forward, I know I have made this comment in the past, there is a ramp-up period. That is certainly our expectation and it is just reality.

And the fact that the reps that we are hiring in 2014, really the benefit of those reps from a sales perspective to the Company will really come probably more so in 2015 and 2016 and future years. So there's certainly is an investment in the first year, and we are looking for more growth in year two and year three as they build out their book of business.

And, let me add, as we have gone through this process, now that we are back on to the trends of hiring sales reps, the pilot that we conducted in 2013 around the on-boarding, the training, even the selection process, the interview process, all of that now, we are through this Lean Six Sigma process. We are looking at the time it takes to fill the rep's job, both from a replacement rep where there is an existing book of business as well as greenfield rep. But all of this sort of the systematic approach to bringing reps on, we believe, will have the impact of compressing that period until they become more profitable. So if we can compress a month or two out of it, they become profitable that much quicker.

Great. And then last quick question. You guys addressed this a little bit in your prepared remarks, but looking at sales rep hiring for next year, can we expect it to be on kind of the same track that we are on right now, or any color you can give?

Yes. We are in the beginning stages of thinking through the on-boarding process. Certainly, there is vacant territory out there in every market with such a large available market to us, so we are clearly on a path to add more reps. The absolute number will be depend on the ability to bring them on, district sales managers' ability to train them and onboard them. So, all of those are considerations.

We don't have a really good sense, but it will be a material number again next year. I'm not sure if it will be as large as this year or not.

(Operator Instructions) This concludes our question and answer session. I would like to turn the conference back over to Mike DeCata for any closing remarks.

Thank you, Kate. Appreciate that. Thanks again for your interest in the Company. We are pleased with the second quarter results. Clearly, the Company has turned the corner and it has enabled us to focus on three primary areas, which will continue to be our focus in the future: first, topline growth; second, operational excellence; third, improving earnings. We are making progress in all of these areas by improving customer service and also by investing in our teammates.

Lastly, I would like to take this opportunity to thank the hard-working and dedicated people at Lawson Products. Their dedication and professionalism has enabled us to grow and improve the service we provide our customers. Thanks again and have a great day.

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