Distribution Solutions Group Inc (DSGR) 2015 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Lawson Products second-quarter 2015 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. 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 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 24, 2015.

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 that are subject to the 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.

I would now like to turn the conference over to Lawson Products' CEO, Mike DeCata. Please go ahead, sir.

Good morning, and thank you for joining our call. We appreciate your interest in Lawson Products and we're excited to share our advances with you today. This morning I will comment broadly on our progress overall, and specifically the second quarter.

The Company continues to undergo significant revitalization. We're seeing advances across a broad spectrum, including continuous improvement in operations, the sales process, and our culture. All of these areas, and more, are improving our operating performance and enhancing customer service.

We're also conducting pilot projects to improve several processes concurrently. We're experiencing periods of rapid progress followed by some time to roll out and institutionalize the improvements, then back to rapid progress again. This continuous improvement is making the Company more robust than it has been in many years.

Turning to the quarter, I'd like to comment on three broad areas: growing top-line sales, and our sales process; continued operational improvements; and the drive toward improved profitability.

Ron Knutson will provide a financial update, and then we will take questions.

First, our focus on growing top-line sales. We were pleased with our progress to date and for this quarter. We are experiencing continued headwinds from energy-related customers and from general softness in the industrial economy, along with weakness in the Canadian dollar. However, we have seen stabilization during the quarter from some of our largest oil and gas customers.

On the positive side, we continue to make good progress with our non-oil and gas strategic accounts, such as United Rentals and IDG, and others, which is partly offsetting the oil and gas impact. Our Kent Automotive team continues to win share with new customers and broaden relationships with existing customers. Kent Automotive was up 4% during the second quarter as a result of deeper relationships with key auto dealerships and several of our large auto body customers.

We are also seeing continued incremental improvements in overall customer retention. For the quarter, sales were $70.7 million versus $72.1 million last year. Excluding oil and gas and FX, our sales grew at 1.4%. We continue to add sales reps, but at a slower pace than initially planned. We finished the quarter with 920 sales reps. And we're committed to adding additional sales reps, while, at the same time, refining our processes to help new sales reps become more successful in a short time frame.

We have also applied the Lean Six Sigma process to onboarding and training of new sales reps. We are currently rolling out the improved onboarding and training process to all of our regions, and we've made several revisions to the process which we believe will result in accelerated initial sales and improved retention.

We also remain committed to our M&A process, which is focused on DNA match acquisition, situations which we can add significant value to acquired companies, their employees, and customers. We believe that our overall sales process is improving, and showing improved results in the context of a difficult business environment.

Next I'd like to comment on gross margin. We continue to make good progress working with our suppliers, and distribution centers are delivering improved productivity. Back orders and order complete rates continue to improve. As a result, we had lower freight costs, improved DC labor productivity, and our sales reps are benefiting from these improvements. Since Lawson managed inventory and product putaway is a cornerstone of our value proposition, complete orders improve sales rep productivity and improve customer productivity. Servicing all of our customers' consumable needs is our first goal.

Next I'd like to turn to operational improvements. Our DC productivity, measured by lines filled per hour work, improved by 9% during the second quarter versus second quarter of last year. There are still many activities underway to improve inventory effectiveness, labor productivity, sales rep productivity, and customer productivity.

Over the past few calls, I've discussed several Lean Six Sigma projects. One of our second wave projects involves inventory forecast accuracy. This team has implemented several changes to our forecasting process, resulting in a reduction of $2.4 million from the first quarter to the second quarter, while improving fill rate. Other changes are expected to improve inventory effectiveness further.

I'm also very pleased that across the Company our teammates are focused on cost management. We have seen many examples of $50,000 to $100,000 savings in areas such as [T&E], supplies, overtime, consulting fees, and other areas. For example, as our forecasting improves, we are better able to improve fill rates, which results in reduced outbound freight costs, reduced labor costs, and reduced packaging costs.

Let's turn to our drive to improve profitability. Looking past the current business environment, we're pleased with our overall financial progress. Excluding nonrecurring items, adjusted non-GAAP operating income was $4.3 million for the quarter versus $2.1 million for the second quarter of 2014, and $972,000 last quarter. Our net income was $2.9 million compared to $800,000 last year, and a loss of $1.4 million last quarter.

We continue to march toward our initial milestone of 10% adjusted EBITDA and sustained growth. During the second quarter, we achieved 9% adjusted EBITDA, primarily as a result of improved gross margins and controlling our operating costs. We're controlling what we can control.

Broadly, let me say that our strategy and execution plan is unchanged: continue to add sales reps in underserved areas; deliver tools and processes to improve sales rep productivity; focus on acquisitions with similar value proposition to ours; continue to focus on investing in our people; achieve operational excellence in every corner of the Company; strengthen relationships with suppliers to enable more productivity; and focus every day on enabling our customers become more productive and more profitable.

Before I turn it over to Ron, I'd like to thank our employees. They are blending the best of over 60 years of customer service and dedication with contemporary practices, teamwork, process improvements, and operational excellence to improve the Company every day.

Now, let me turn it over to Ron for a more detailed financial review.

Thank you, Mike, and good morning, everyone. As Mike indicated, while some of the softness that we experienced in the first quarter continued into the second quarter, we delivered very good operating results, given the current environment, all while continuing to invest in the Company. In particular, as I'll comment in a moment, we continue to realize improvements in our supply chain. We continue to benefit from our previous investments, which are now yielding benefits to our overall operating results.

Let me review some of the highlights for the quarter. First, operating income was $3.2 million for the quarter, up $2 million from a year ago. Our adjusted operating income, taking into consideration nonrecurring items, was $4.3 million for the quarter compared to $2.1 million a year ago.

Second, sales finished at $70.7 million. This represents a decrease in our average daily sales of 1.9% over the year-ago quarter. However, excluding the impact of the direct oil and gas customers and the weaker Canadian dollar, sales were up 1.4%. I'll share some further insight into these items shortly.

Third, gross margins continue to improve to 61.9%, primarily as a result of leveraging our distribution costs and focusing on lowering our purchasing costs.

And fourth, we ended the quarter with no outstanding debts under our credit facility, and $5.4 million of available cash. Let me now share some of the details.

As I just mentioned, we finished the quarter with sales of $70.7 million compared to $72.1 million a year ago, and $69.9 million from the first quarter. The second quarters of both 2015 and 2014 included 64 selling days, while the first quarter of 2015 had 63 selling days for the period. For the second quarter, average daily sales decreased 1.9% over a year ago, and were down 0.5% sequentially over the first quarter of 2015.

As compared to a year ago, our second-quarter sales were impacted by the following. First, the weakening Canadian dollar impacted sales by approximately $900,000 or 1.3 percentage points.

Second, similar to others in our space, the slowdown in the oil and gas segment negatively impacted our sales by approximately $1.4 million. This only includes direct customers defined as oil and gas, and does not include customers that are secondarily impacted by that industry. While our customer base is very diverse, energy now approximates 6% of our total business. While the oil and gas portion of the energy segment was down 36% versus a year ago, we are seeing some stabilization sequentially from the first quarter.

And third, similar to others in our space, we have seen a general slowdown in the MRO marketplace.

These factors negatively impacted our second-quarter sales by approximately $2.3 million from a year ago, and $4 million on a year-to-date basis. Excluding the weaker Canadian dollar and our oil and gas segment, sales were up 1.4% for the quarter and 2.4% for the year.

From a divisional standpoint, strategic accounts now represent approximately 14% of our total volume, and decreased nearly 4% over the prior-year quarter. This decrease was primarily driven by a decline in the oil and gas sector. However, it's important to note that many of our strategic relationships realized solid growth for the quarter.

Our Kent Automotive business was up 4% as compared to the year-ago quarter, driven primarily by expanding our existing customer relationships. Kent now approximates 18% of our business. Both the strategic and Kent divisions are up against strong numbers from a year-ago quarter.

From a sequential average daily sales basis, April sales finished at $1.087 million, May finished at $1.119 million, and June finished at $1.111 million. As Mike mentioned, our rep count ended at 920 for the quarter, up slightly compared to the end of 2014. We did purposely slow down some of our hiring efforts in the weeks immediately prior to our first-quarter North American sales meeting to ensure that our training team and district sales managers would be available to the new reps upon their onboarding.

In addition, higher turnover to date has put some pressure on our goal of having 1,000 sales reps on board by year end. And while it is likely that we'll not end the year with 1,000 reps in place, we are committed to expanding our sales force.

As we have previously stated, adding new sales reps will temporarily bring down our sales per rep, per day, productivity measurements as the newly hired sales reps are in the early stages of developing customer relationships in their territories. Adding sales reps will also negatively impact our earnings in the short term. Since we are still adding sales reps, we do not yet have the full run rate of salary expense in our results from quarter to quarter.

Excluding those reps that joined us over the past five quarters, sales per rep, per day, decreased 4.5% versus a year ago, primarily driven by the three factors previously mentioned.

Over the longer term, we fully expect that adding additional sales reps will drive top-line sales and improved earnings. We continue to refine our hiring and onboarding process, which has allowed us to attract qualified sales reps with previous selling experience.

We continue to invest in them early in their careers with us, and have made significant improvements to the onboarding process and their training schedule during their first 90 days to improve the likelihood of their success and improve retention. In 2015, we plan to continue adding sales reps in underserved territories in both the US and Canada.

For the quarter, gross margin was 61.9%. We continue to drive margins through leveraging distribution center efficiencies as well as initiatives to lower our product [related] cost.

Looking forward, we believe that our plan to increase strategic customer relationships and to pursue more greenfield sales territories may put downward pressure on our gross margin percentage. However, we expect this to be partially offset by other procurement opportunities and efficiencies within our distribution centers.

Selling, general, and administrative expenses were $40.6 million for the second quarter compared to $42.4 million a year ago, and $43.8 million in the first quarter, which included a $1.9 million of expense for our North American sales meeting. We continue to tightly manage our ongoing operating costs. Expenses during the second quarter were positively impacted by lower performance-based incentive compensation and broad-based expense controls, partially offset by stock-based compensation expense as we amortize in the vesting of previously granted awards.

Excluding severance and stock-based compensation expense, total operating expenses decreased by $2.3 million or 5.5% versus a year ago. This was primarily due to lower incentive compensation and other operating expenses, offset by higher rep costs as a result of having 42 more sales reps than a year ago. And while our operating expenses have declined from a year ago, we continue to invest back into the Company. SG&A expenses are also being positively impacted by improved productivity within our distribution network.

For example, as Mike mentioned, our line shift per hour worked has improved by approximately 9% from a year ago, while our reliance on temporary help and overtime has declined during peak demand periods.

Adjusted non-GAAP operating income, taking into account stock-based compensation and severance, was $4.3 million for the quarter compared to $2.1 million a year ago, and $972,000 from the first quarter. The improvement over a year ago was primarily driven by enhancing our margin percentage and controlling our operating costs, all while continuing to incur upfront costs as we invest in our sales team. GAAP operating income was $3.2 million for the quarter, an improvement of $2 million from a year ago.

We had 42 more sales reps than the year-ago quarter, and our newly hired sales reps have a three-year declining base compensation structure. As a result, since we will continue to add sales reps, we do not expect the salary expense to normalize until 2016.

Net income for the quarter was $2.9 million or $0.33 per diluted share compared to $798,000 or $0.09 per diluted share a year ago.

From a balance sheet perspective, as I mentioned earlier, we ended the quarter with no outstanding debt under our credit facility and $5.4 million of cash on hand. During the second quarter, we generated $4.2 million of cash flows from operations. We continue to closely manage our working capital, and now have more flexibility when it comes to investing back into the business.

Year-to-date CapEx was $1.2 million. We expect our CapEx for the full year of 2015 to be in the range of $2 million to $3 million, primarily in maintenance capital for our distribution network and continued technology enhancements.

Let me comment on a couple of items as we look into the remainder of 2015. As previously mentioned, the first and second quarters were significantly impacted by the weakening Canadian dollar and weaker demand in the oil and gas segment. While it's difficult to predict both of these, it is our expectation that both these factors will continue to be headwinds for the remainder of the year, as compared to a year ago results. We will continue to manage gross margins and operating expenses with this in mind.

Second, as Mike and I both mentioned, we will continue to add sales reps in 2015. While we ended the second quarter up slightly from the end of 2014, we will continue with our current strategy to expand our sales force in 2015. We continue to balance our resources between adding new reps and investing in tools and processes to ensure they can become productive quickly.

And third, our adjusted EBITDA percentage was 9% for the quarter compared to 5.9% a year ago, and 4.4% in the first quarter. While the second quarter benefited from some lower performance-based incentive compensation expenses that would normally not be recurring, we are clearly moving in the right direction toward our stated 10% goal.

In closing, given the pressure we faced in the quarter on the top line, we are very pleased with our overall performance for the quarter. The underlying fundamentals of the business continue to strengthen. We remain committed to our growth strategy of adding sales reps, driving productivity of existing sales reps, and continuing to evaluate potential acquisition opportunities.

I will now turn it over to the operator for questions.

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

Congratulations on the quarter. Just really quick, starting with gross margin. I was hoping you could give some additional color on the performance there, a little detail on what went into that. And then more specifically, what we can expect for the remainder of the year. Is north of 61% a bad way to look at it going forward? And is there any reason it's not going to stay up there?

Jack, thank you for your question. I think as we've mentioned on previous calls, we're working hard with suppliers. We're working hard in our operations centers, distribution centers, to drive costs down. And as our operating performance has improved -- things like back orders and fill rates, and so on and so forth -- suppliers also see that we're a more attractive channel to market for them.

So a big part of what we're seeing in maintaining our gross margins is work with our suppliers, cooperation with our suppliers, thinking more broadly about something more than just price, the total cost of the supply relationship. Also the fact that, again, fill rates -- we talked last call about some of the productivity improvements in filling boxes, and the labor productivity -- all of that is helping significantly in maintaining our gross margins.

Yes, Jack, this is Ron. Relative to the guidance that we provided around gross margin, historically in the past we've indicated the high 50s, really being in the 59-ish range. This is the third quarter in a row that we have been able to exceed 61%. So we feel good about where we're at today.

Is this sustainable, long-term? I think we're going to be -- continue to be faced with some headwinds as we move towards strategic account relationships. Certainly that puts some pressure on the overall percentage. But to date we've done, I think, a nice job in being able to offset some of that pressure. So, 59-ish might be a little low. 61.9% is probably a little high to count on, on a go-forward basis.

Okay, thank you. And then stepping back a bit, could you comment on some of the performance or progress you've made with strategic partnerships, excluding energy for now?

Sure, Jack. Again, I would argue that at its core, as our operating and operations processes improve, all those same things, it's easier to grow within strategic accounts, whether is asset management companies -- even our oil and gas customers, we have a solid relationship with those companies. Now, their demand is down.

But across the board, as we continue to refine our processes, as everything about our relationship is consistent, reliable, and value-add, more and more strategic accounts are attracted to us. And within existing strategic accounts, we're picking up share -- one location, one factory, one branch at a time -- and picking up share of wallet as well.

So we feel good about being rewarded for the hard work we've put in; whether it's hard work as it relates to SAP, or it's hard work as it relates to product management or our distribution centers, small and large accounts are recognizing that. And we believe it's helping us to win share -- again, in the context of a challenging environment.

Jack, I would just add to that, we made the comment in our opening remarks that strategic accounts were down about 4% for the quarter. If you exclude the oil and gas impact on that segment of our business, we were actually up about 4%, and up about -- a little bit over 6% versus the first quarter of 2015. So, to Mike's comments, the underlying business is strong, and particularly in that segment.

Okay. No, that's helpful. And then last question: just turning to the sales force, the hiring is obviously a bit slower than we expected coming out of the year. Can you talk about the key factors that are impacting the slow hiring rate? And now that that 1,000 number for the end of the year is a bit far away, what kind of rates we can look at for Q3 and of Q4 and just going forward.

Yes, Jack. One of the, let me say, challenges, but not completely unpredicted, is that as we hired so many people last year -- and by the way, let me say our plans for continuous hiring for the balance of this year and 2016 -- and while 2017 is an eternity away, likely we will be hiring for the foreseeable future that far out. One of the bottlenecks is as we bring in sales reps, we want to make sure that we're investing in them, we're training them; district managers have time to ride with him; peer mentoring can happen.

So since we hired such a large number last year, we want to make sure that we get them on the trajectory that they need to be on. So, the slowdown, in part, is us pulling back so that we can attend to the ones we brought on.

Now, we've also put some significant effort -- I think I'd mentioned in the last call, also in my comments this call -- that a wave to Lean Six Sigma project that is just now being rolled out is focused on that onboarding process, from your first day on the job to the first 180 days kind of time frame. And what are the very specific actions we can take, and how do we track the fact that this stuff is working with new reps?

So, in a way, it's what I was referring to, kind of the ebb and flow of things. You bring on -- you initiate a new program. In this case, we're talking about sales reps, but it applies to a lot of things. You bring on a new initiative, you pilot it, you figure out which aspects of the initiative are working, you refine and then institutionalize. And so we're now in that institutionalized phase where we're looking at process improvement and refinement. Bottom line is hiring new reps has to be a core competency for us indefinitely into the future.

And as we implement these process refinements, we'll be able to get on a really nice drumbeat of doing this for a very long time to come. So, the long-term strategy is completely unchanged, albeit a little slower at the moment.

No, that's helpful. But any -- are you going to be able to quantify a number for the rest of the year?

It's a little hard to say. It's more dependent on quality of the people we attract. By the way, operational excellence helps attract people, as well. So we don't have a real firm number, but we work at it every day, and it will continue to increase.

All right. Thank you very much for your answers.

Ryan Cieslak, KeyBanc.

Congratulations on a really nice quarter.

Good morning, Ryan. Thank you.

First I wanted to talk a little bit about the operating margins in the quarter. Above expectations here, at least relative to my model. And obviously you're still having some headwinds from the hires that you're making. I just wanted to maybe see if you can talk a little bit about what you think maybe the margin headwind is right now from the new hires. And then thinking about what's benefiting the margins right now, if you had to put it in buckets, the top one or two that you are seeing internally with your initiatives, what would you say is maybe the top one or two buckets that's really driving the margins right now?

Yes, Ryan, this is Ron. I'll take the first piece of this. Really as we look at the margin improvement -- and as you know, we measure, certainly, EBITDA as a percent to sales -- kind of break that down into the two buckets that we really saw improvements in during the quarter, the first being our gross margin. The fact that albeit our sales were down a little bit, our gross margin dollars from a year ago were basically flat. So that really helped us from an overall margin standpoint.

The other piece is really what we've done around the operating expenses and the infrastructure within the organization. And I'm sure you saw that our SG&A expenses consistently have been on a flat to downward trend, based upon really everything that we've done over the past few years that can drive some of those dollars down.

So I think as we look into the future, as we think about future quarters, we did get a little bit of benefit, as I mentioned in my prepared remarks about the fact that we have taken down some of our performance-based compensation just because we're off from our sales plans.

But excluding that, most of the other G&A expenses, and, I think, the distribution center efficiencies, are built to the point where they can be sustainable on a longer-term basis. So we continue to reinvest back into the organization. As we hire sales reps, that first 12 to 18 to 24 months truly is a net investment for the organization; although, as we've indicated in the past, clearly that's the first leg of our growth strategy and will provide benefits into the future.

Our P&L continues to be burdened a bit by that from an operating perspective, but we think it's clearly the right investment to make on a long-term basis.

And then can you maybe just highlight or quantify around what you think that drag is on margins right now, in terms of the -- from the new hires?

From a percentage standpoint, I probably really couldn't give you a percentage standpoint. What I would say is that a sales rep for us becomes accretive to the organization in that 12- to 18- to 24-month period. In the first few months, or even in the first year, the sales dollars that we're expecting clearly don't cover the expenses of having that sales rep on board.

For example -- this is maybe one of the pieces that you're looking for -- our compensation for the 42 additional reps that we have in place this year versus last year, for the quarter, the base compensation for those reps is about a $500,000 increase in our operating expenses.

That's not offset by the amount of the sales or margins created, but from a G&A cost perspective that might give you a sense for what's coming through on the expense line.

Okay, that's helpful. And then thinking about going here into the third quarter, maybe what you are seeing so far in July just from an underlying end market standpoint, if you gave some color around maybe some stabilization with the oil and gas customers. But excluding them just from a typical July standpoint, how do things feel out there right now maybe relative to the past quarter or even this time last year?

Ryan, this is Mike. No, it feels like steady-state, but a little soft. Beyond oil and gas -- again, when you think about the nature of our value proposition, and especially us in the consumable MRO space -- our products are such that if our customers are running their machines or their fleet of anything, if they're running their stuff, the stuff breaks. If they're not running it, it isn't being repaired. And so what we're seeing is just general softness. We're not seeing any real negatives, but we're certainly not seeing the excitement of last year across the economy.

Now, we feel great about the fact that we don't believe we're losing share. If anything, where it's easy to measure some of our large strategic accounts, we know that we're winning share. But we're winning share against less demand in the marketplace because equipment is being used less aggressively than it had been last year. It's a long way of saying, moving sideways. It's just general softness.

Now, silver lining around this is we're taking this time to refine our processes. We continue to invest in sales rep productivity. As we've rolled out software for our sales reps, it gives them better tools, Bluetooth scanners, but also better access to real-time order entry.

We're using this time wisely to put in place refinements, whether again it's onboarding new sales reps and getting them up the curve faster, or efforts around making our current sales reps more productive. There's a little silver lining here, but it sure would be nice to go back to the days of real accelerated growth because of accelerated demand.

Yes, I would agree with that. On that last point, Mike, with regard to the sales productivity initiatives and some of the things that you've put in place, does it feel like, as we get into the back half of this year just based on the traction you're seeing with those initiatives, that we could maybe start to see an inflection in sales rep -- sales per rep, per day, if the overall underlying demand environment stays stable? Or is that something that maybe we're still several quarters out until you really start to see that pick up here?

Yes, I think it's going to take a little while to fully work its way through the system. Hard to say at what rate we start seeing it, the inflection point. We feel confident that, little by little, incremental improvements are happening; a little hard to nail down when that happens. But one of the things that has been a gratifying process is continuous incremental improvement. Now, I say incremental because every day on every front we're a little stronger, a little better; whether it's costs or productivity, or so on and so forth.

The trend feels great, but it's not a step function. It's not a big step. It's a lot of little improvements every single day, which I would argue is more sustainable, and over the longer term will result in a better performance. But I can't nail down specifics.

Okay, fair enough. And then the last question I have, and then I'll get back in the queue is -- just a little bit more color on what you're seeing right now within the acquisition pipeline. If you are any closer today than maybe where you were at the end of last quarter. And maybe just, again, a little more color on what you're seeing out there, maybe potentially into the back half of this year.

Yes, we're very encouraged with the progress we're seeing. Obviously I don't want to go into too much detail here, but we continue to march along. It's very encouraging. We are making progress. And for obvious reasons, I'm going to stop there.

Fair enough. Thanks, guys.

Kevin Steinke, Barrington Research.

I wanted to follow up on the expenses. Obviously the Company is doing a great job here in streamlining G&A costs, and your various initiatives to improve the gross margin line. And at the same time, you also had this natural offset from lower performance-based comp and commissions that acts as a hedge when you are in a little bit of a softer macro environment here.

Is it possible to quantify how much of a benefit that was in the quarter, or for the remainder of the year, in terms of lower performance-based comp and commissions?

Sure, Kevin. This is Ron. Relative to our corporate plan, I should say maybe putting aside the sales team at this point, we did see a benefit of about $0.5 million in the quarter from an operating expense standpoint. Really taking down some of those performance-based incentives.

On the sales side of the organization, tough to comment on that, but we did realize little bit of benefit, just the fact that we are off relative to our overall plan.

As we look forward into the future quarters, given some of the headwinds that both Mike and I have commented on, I think it's going to be difficult or probably not highly likely that we'll be reestablishing some of those accruals. I think we've probably got most of the benefit out of Q2, and probably will not see as much benefit in future quarters.

Okay, thanks. And I wanted to follow up on the rep hiring. You talked about the roll-out of the new rep training and onboarding going on. Just wondering if perhaps also you maybe slowed down the hiring a little bit intentionally, ahead of that roll-out, just to make sure the process was in place before you start aggressively adding more new people again.

Yes, that's correct, Kevin. Exactly as you said. We're directionally committed to the trajectory we are on. We're going to be on that for a long time to come, and yet wanting to make sure that we're refining the process. Again, hiring the rep is the first step in a long process that ultimately results in growing the territory.

By the way, it's important to recognize that 100% of our growth comes from share gain. No one wakes up one day and decides, today is the first day I'm going to ever buy a fastener, or I've never bought an electrical connector before. So the only way we ever grow is by taking share away from some other company or some other channel because of the nature of the products that were in.

So, yes, slowing down just a little bit of the hiring process so that we can fully refine the trajectory that, when we get a new sales rep -- the onboarding process, the training, the mentoring, the district manager handholding that has to happen -- all of those are part and parcel of what we're doing. But again, fully expect to accelerate again in the future.

Okay, good. And could you maybe just walk us a little bit through what exactly the process is involved in rolling out the new rep training and onboarding? Are you going by on a location-by-location basis to the various districts sales managers? And what does it all involve, and how long will that complete roll-out take to complete?

Sure. Yes, we've begun this. Several of our regions have already gone through the revised training. It is a little more structured in that on week one, we want to make sure that that new sales rep is getting exposed to certain kinds of content. On week two, there's different content. Week three, so on and so forth.

The other thing that we did as part of this Lean Six Sigma initiative was we brought in brand-new sales reps that have been very successful with us, and sought their counsel and advice as to what aspects, which aspects of their onboarding they thought was especially effective, and how would they recommend making changes since they were most recently through it.

As an example, we were bringing sales reps into training, about a week-long training here at corporate, both in the corporate headquarters and our McCook distribution center for hands-on training. We were bringing them in about four weeks into their tenure with the Company.

We've now, at their suggestion, pushed that off to a little further out because, to use an expression, it was like drinking from a fire hose. They were taking so much information, some of it not completely in context, because they hadn't yet gotten their feet on the ground. These are the kinds of changes. It's about monitoring and making sure that we're checking progress along the way.

So we've rolled out a couple of the regions in the Southeast already. Next week, we roll out a couple more regions. And by, I think, beginning of October, all the regions have gone through all of the revised training, which means all the district managers have the new process. Of course we will continue to refine. There will always be opportunities for dialing it in a little closer and refining it more.

But the short answer is, by October everybody will have gone through the revised onboarding process.

Okay, perfect. Thank you. And just -- I know you are seeing a bit higher attrition than you would like right now. I assume that's still among newer reps. And obviously the new onboarding and training plan is targeting that.

First of all, is it safe to assume it's among newer reps? And also would you attribute any of it to perhaps just the general slowdown in the MRO market, or maybe just the lower overall unemployment rate and other opportunities for people? Anything like that?

Yes, I would say you've nailed it. It is among the newer reps. Clearly it's among the newer reps. Our long-term reps, the attrition has really not changed. And yes, I believe in part it is because the general softness. The rate at which -- again, there are multiple components of their compensation: a base salary, which starts and then the ratchets down over three years; and then a second component which is the same commission structure as all other reps. And that was dialed in with an understanding of the target compensation.

As we've seen a softness in the economy, that's made that variable comp part of it a little more challenging. And certainly we believe some of the attrition is directly attributed to this moment in time, and we continue to work on that.

But I think you're right. It's a combination of -- it's certainly the new reps, and it is also, in part, the economy. This is a lot of what we're targeting, at getting them further along the curve, which means more commission dollars to the sales rep more quickly.

Okay, great. And just one last question for me. You've talked about in the past also an initiative to identify some of the characteristics that make a new rep successful. And I think you were still earlier on in that process. Just wondering if you've made any more progress there in identifying characteristics of new reps that are successful, and how you can integrate that into your future recruiting efforts.

Yes. We continue to look at -- what are the characteristics of people that enable them to be successful? One of the most obvious characteristics, I would argue, of almost all sales reps, is people who are high-energy, committed, self-confident. Again, because all of our success revolves around share gain, what that really means is people have a fairly thick skin who walk into customer. And, because the customer is already being serviced somehow with these products, there's an awful lot of rejection rate. It's the nature, I think, of any sales rep job. But for our greenfield sales reps, they are displacing existing competitors.

We are beginning to see some characteristics that suggest some sales reps will be more successful than others. A lot of it is just self-confidence and tenacity that goes into it, and we're trying to model that more.

Now, the other thing we do in onboarding reps is we make existing reps available, so that as a candidate -- now, if the candidate would like to -- and certainly we encourage a candidate to ride along with our existing rep for a day so they really understand the nature of the job.

Because the vendor-managed inventory, Lawson-managed inventory process, is substantially different than others in the MRO space, we really encourage the candidate to go and ride along to see that it's a slightly different kind of a sales job than others in the MRO space. We believe that's helping as well.

And there are a number of the other things that we're doing that help identify the right people, as well, once we get them to -- get them on the ramp more quickly.

Okay, great. Well, thank you for the update on all the progress that you're making.

Ben Terk, Active Owners Fund.

Appreciate the color on the savings you generated from the decrease in the bonuses for the sales reps. Hoping you can provide a comparable granularity on the G&A savings. Noticed that on an absolute basis that that number came down as well, and was curious as to the make-up and whether or not that was sustainable.

Yes. Good morning, Ben; this is Ron Knutson. Let me just comment, maybe in a grander scheme, as to what our operating expenses are versus the second quarter of 2014. In total, our operating expenses decreased about $2 million. And we did have additional stock-based comp expense of about $500,000 for the quarter. If you look at it on an apples-to-apples comparison, we're down about $2.5 million versus a year ago.

What I would say is, of that $2.5 million, about $1.5 million is -- on a combination -- would be lower performance-based incentives, as well as lower commissions because our sales were down a little bit as well for the quarter. Of the $2.5 million, we've got $1.5 million, $1.6 million benefit coming from those items.

The other $900,000 to $1 million are really the other components that Mike and I have talked about relative to the productivity at the distribution centers, ongoing cost control measures that we have in place. I would say that those -- that $900,000 to $1 million, those are expenses that is really the hard work of everybody throughout the entire organization to just be cognizant and to have tight control over that, given the environment that we're in.

We don't see a lot of that reversing in the future. But clearly as our performance improves, and particularly on the top line, we would certainly see some of that performance-based compensation come back into the financial plan.

Ben, this is Mike. Let me also add, and maybe a clarification. We have not in any way restructured the bonus compensation structure for our sales reps; since our sales reps, the vast majority, are paid 100% on commission, that just tracks with revenue. We haven't consciously restructured that plan or the bonus plan or anything like that, nor would that be our intention. It just tracks with sales, so that's a little bit of what you're saying in your question.

It sort of implied that we've taken down the bonus structure. And in fact it's really not a bonus; it's just commissions. And again, it tracks directly with sales.

Very helpful. That makes all the sense. And so then just pressing a little bit more on the productivity enhancements, should we expect incremental, absolute dollar reductions in G&A despite an increase in sales? Do you expect incremental absolute dollar reductions, or was this a one-timer?

Let me start, and Ron can comment as well. Lean Six Sigma is enabling us to take non-value-added work out of all of our activities. Our intention is, and goal is to free up our resource so that as we grow they have the capacity to grow without adding costs.

Now, of course, things like packaging costs or outbound freight costs, as we improve our operating processes -- fill rates and back orders and inventory effectiveness, all of those are things that -- where costs may be able to come down. But from a structural perspective, putting those specific examples aside, our goal really is to hold costs while we grow, rather than cut those kinds of costs.

And Lean Six Sigma gives us some optimism that we are freeing up non-value-added work, reducing cycle time, and enabling our people to get more production with the same or less hours worked.

Excellent.

Then I would just add to that, that in the past Mike and I have commented about our goals of keeping G&A flat, and the improvement in our operating margin really coming from leveraging those existing costs that we have in place today.

If you look at the past few quarters, particularly on the G&A line, we've been a little south of $20 million, kind of $19-ish million, for the past few quarters. And that's a pretty comfortable rate for us to operate at. Again, we are not proactively going out and taking direct costs out of the organization. It's just tighter management.

To Mike's point, our plans haven't changed. And our improvement in our margin really will be reliant more so on growing the top line and seeing the leverage off of the G&A costs, versus actively going out and purposely removing G&A costs.

Thank you for your detailed answer. Very helpful.

Ryan Cieslak, KeyBanc.

Just a really quick follow-up, if you don't mind. I just directionally wanted to get a sense -- I know it's still early -- but how you're thinking about how CapEx might look into 2016, just from the standpoint of is there anything incremental that you feel you'd be taking on next year, as you think about the overall infrastructure going forward?

Ryan, this is Ron. For the rest of 2015, I mentioned in my prepared remarks that we feel like we'll end the year between $2 million and $3 million, which is primarily maintenance capital within our distribution centers, as well as some technology investments as we continue to invest back into the organization.

As we look into 2016, we typically plan CapEx somewhere in the $3 million to $4 million range from a plan and budget perspective, and we typically come in slightly less than that. It's probably about the best guidance I can give you at this point, probably in that $3 million to $4 million range.

But what I would say is that there's not any major capital expansion plans, relative to distribution centers or huge technology enhancements that we have to make that would spike that number above our normal run rate.

Okay. That's helpful. That's all I needed. Thanks, guys.

Charles Hoeveler, Norwood Capital.

Just a quick question on pricing. Your competitors have been talking about the challenging pricing dynamic and the challenging macro backdrop. Can you just talk about what you are seeing out there in terms of pricing?

Yes, Charles. Thank you very much for the question. We are holding pricing. We are not trying to increase price. What we are doing is getting cost reductions through cost of goods sold and productivity, and so on and so forth. We feel that we're at a good point.

Again, as you know, our business is as much a service business as it is a product business. Our customers continue to reward us by valuing the blend of service that we provide with the products, 60% of which are private label. The quality of the products differentiate us. And customers are ready to pay us for superior-performing products.

But the short answer to our GP results is not price. It is cost. And I would argue that cost is coming in the form of distribution center productivity, and suppliers coming to the table because they see and they judge that we are a good channel to market for them. And they've decided to jump on board and help us to be successful in their own self-interest.

Okay, great. And then just a quick follow-up on capital allocation. Given the strong performance in the business, net cash on the balance sheet, is it tempting to think about repurchasing shares here? Or maybe you can just talk broadly about what the strategy is with the cash on the balance sheet.

Charles, thank you again. We're investing in our people. We are adding sales reps. We've talked about our aspiration to continue that third leg of the stool, which is the growth through acquisitions. Having a little bit of dry powder feels like the right strategy at this time. We're just at the very beginning of that, the acquisition part of that.

And as I've mentioned, we're going to continue to invest in sales reps for the foreseeable future. And as Ron had mentioned, that's a net investment for a little while until they come up the learning curve and start selling. So, we feel like having that dry powder is the right strategy at this moment in time. I don't have any plans to change it at this moment.

Okay, thanks. That's all for me.

This concludes our question-and-answer session.

I'd like to turn the conference back over to Mike DeCata for closing remarks.

Thank you again for your interest in our Company. As I'd mentioned in my prepared comments, our systematic and methodical approach to revitalizing and growing the Company is working. We're making advancements across the Company, from operations process improvements to sales process improvements. Our culture continues to serve us every day. Our focus on cost management and productivity, and our continued focus on superior customer service is being rewarded every day. Our strategy is unchanged. And we're working hard to continue to accelerate results.

Thank you again for your interest in the Company, and have a great day.

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