Distribution Solutions Group Inc (DSGR) 2015 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Lawson Products third-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 third-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 November 23, 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 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 will now turn the call over to Lawson Products' CEO, Mike DeCata.

Good morning and thank you for joining our call. We appreciate your interest in Lawson Products and we are excited to discuss our performance with you today. This morning, I will comment broadly on our progress overall and specifically on the third quarter.

We continue on the path we set a few years ago. Our three-part growth strategy remains unchanged: add sales reps, increase sales rep productivity, and pursue DNA match acquisitions.

In addition, we are committed to refining our processes including the application of Lean Six Sigma methodology broadly across all of our functions in the Company and increasing profits. I will comment on these topics and others on this call. Ron Knutson will provide a financial update and then we will take questions.

Our focus on topline sales -- first, sales have stabilized during the quarter versus the second quarter. We are seeing a small uptick from oil and gas customers over the second quarter. This was offset by continued weakening of the Canadian dollar and a general malaise in the industrial economy. We continued to gain traction with our non-oil and gas strategic accounts and our Kent Automotive division experienced 3.4% growth versus the third quarter of 2014. We are also seeing continued incremental improvements in overall customer retention, and the number of ship-to locations continues to trend upward slightly.

These are encouraging signs. However, they are not large enough to compensate for the overall softness in the market.

For the quarter, sales were $70.2 million versus $74.1 million a year ago. As in the second quarter, we continued to add sales reps but at a slower pace than we had initially planned. We finished the quarter with 925 sales reps and we are committed to adding sales reps for the balance of 2015 and in 2016.

We've completed the rollout of a Lean Six Sigma project designed to improve onboarding and training of new sales reps. This program ensures continuity and consistency as it relates to the tools and coaching new sales reps receive. Ultimately, the process is designed to ensure their success and improve productivity.

We continue to solicit input from our most successful new sales reps and are making some additional refinements based on their insight and experience. We are now measuring the impact of these process improvements. Since we intend to continue hiring for the foreseeable future, it is important that we continually improve this process.

We also remain committed to our M&A process, which is focused on DNA match acquisitions. I've mentioned that our first acquisitions will likely be small in size to enable us to refine our acquisition integration process.

On September 30 we closed on an acquisition of a small, family-owned distributor in Vancouver, Canada. The company is predominantly focused on the auto industry, similar to Kent Automotive, and consists of a handful of sales reps and revenue of less than 0.5% of our consolidated sales.

We believe that our more expansive product line will enable new sales reps to more broadly service their customers. It's likely that future acquisitions will also share this benefit to customers.

In summary, we continue to execute on the three legs of our growth strategy in the face of a soft market. We are adding sales reps. We continue our efforts to improve sales rep productivity. And we are beginning to gain traction and experience with DNA match acquisitions.

Next, I'd like to turn to operational improvements. We have kicked off the next round of Lean Six Sigma projects. Three of four are focused on sales growth. Our productivity in the distribution centers, measured by lines filled per hour worked, improved by 9.6% during the quarter versus the third quarter of 2014, slightly ahead of the 9% improvement during the second quarter.

Back orders and order service levels continue to improve. There are still many activities underway to improve inventory effectiveness. For example, in the fourth quarter we began using a new inventory optimization tool. Over time, this tool will improve inventory turns while improving customer order metrics.

Let's turn to our drive to improve profitability. Excluding nonrecurring items, adjusted non-GAAP operating income was $3.2 million for the quarter versus $2.2 million a year ago. Our non-adjusted operating income was $2.8 million compared to $678,000 last year and $3.2 million last quarter. Despite challenges in the topline we were able to improve our profitability through close management of gross margin and operating costs.

Even considering the economic softness, we continue to march toward our initial goal of 10% adjusted EBITDA and sustained growth. During the third quarter, we achieved 7.5% adjusted EBITDA while continuing to invest in our organization, primarily as a result of controlling our operating costs.

Our strategy and execution plan remain unchanged: continue to add sales reps, deliver tools and processes to improve sales rep productivity, focus on the acquisition of companies with value propositions similar to ours, continue to invest in our people, achieve operational excellence in every corner of the Company, strengthen relationships with our suppliers to enable more productivity and focus every day enabling our customers to become more productive and more profitable.

Said another way, we enable our customers to achieve the most use of their assets at the lowest total cost.

Before I turn it over to Ron, I'd like to thank our employees. They are embracing our process orientation and demonstrating teamwork, which is helping to differentiate us in the marketplace. Thank you again.

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

Thank you, Mike. And good morning, everyone. As Mike indicated, although some of the softness that we experienced in the second quarter continued into the third quarter, we delivered very solid operating results, given the current environments. We continue to invest in the Company, in particular in our sales organization, while driving improved performance.

Additionally, we are benefiting from our previous investments, demonstrated by the improvement in our overall operating results.

Let me review some of the highlights for the quarter. First, operating income was $2.8 million, up $2.1 million from a year ago. Our adjusted operating income, taking into consideration nonrecurring items, was $3.2 million for the quarter compared to $2.2 million a year ago.

Second, sales finished at $70.2 million. This represents a decrease in our average daily sales of 5.2% over the year-ago quarter. 70% of this decline was driven by lower sales to our oil and gas customers and the weaker Canadian dollar.

Third, gross margins improved to 61.7% for the quarter from 60.1% a year ago and were stable with the second quarter of 2015.

And fourth, we ended the quarter with no outstanding debt under our credit facility and $7.8 million of available cash. This is net of the cash utilized for the September 30 acquisition that Mike discussed.

Let me now share some of the details. As I just mentioned, we finished the quarter with sales of $70.2 million compared to $74.1 million a year ago and $70.7 million from the second quarter. The third quarters of both 2015 and 2014 and the second quarter of 2015 all had 64 selling days. For the third quarter, average daily sales decreased 5.2% over a year ago and were down 0.7% sequentially from the second quarter of 2015. About one half of that decline from Q2 was driven by the weaker Canadian dollar.

As compared to a year ago, our third-quarter sales were impacted by the following. First, the weakening Canadian dollar impacted sales by approximately $1.2 million or 1.6 percentage points. Second, consistent with our second quarter, the slowdown in the oil and gas segment negatively impacted our sales by approximately $1.5 million compared to a year ago.

This only includes direct customers, defined as oil and gas, and does not include second- and third-tier customers into that segment. While our customer base is very diverse, energy now approximates 5.5% of our total business. We will continue to be up against tough numbers in energy through year end as that end market did not soften on us until mid-Q1 of 2015.

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

These factors negatively impacted our third-quarter sales by approximately $2.7 million from a year ago and $6.7 million on a year-to-date basis. Excluding the weaker Canadian dollar and our oil and gas segment, sales were down 1.6% for the quarter; however, are up 1% for the year.

From a divisional standpoint, strategic accounts represent approximately 14% of our total volume. The decrease in this segment in the quarter was primarily driven by a decline in the oil and gas sector.

However, many of our other strategic relationships continued with solid growth for the quarter. Our Kent Automotive business was up over 3% as compared to the year-ago quarter, primarily driven 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 as we enter into the fourth quarter.

From a sequential average daily sales basis, July sales finished at $1.087 million. August finished at $1.092 million and September finished at $1.114 million. As Mike mentioned, our rep count ended at 925 for the quarter, up slightly compared to 2014 year end and the end of Q2 of 2015. We continued to refine our hiring, onboarding and training processes with the focus on driving early success and retention. Our turnover rate has improved as we've progressed throughout the year.

As we've previously stated, 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 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 expenses in our results from quarter to quarter.

Excluding the effect of lost reps and new reps hired within the last 12 months, existing sales reps' sales decreased 6% versus a year ago, primarily driven by the three factors previously mentioned. Over the long term, we fully expect that adding additional sales reps will drive topline sales and improve earnings. We plan to continue adding sales reps in underserved territories in both the US and Canada throughout 2015 and 2016.

For the quarter, gross margin was 61.7% compared to 60.1% a year ago and 61.9% in Q2 of 2015. We continued to drive margins through leveraging distribution center efficiencies as well as initiatives to improve our purchasing process.

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

Selling, general and administrative expenses were $40.5 million for the third quarter compared to $43.9 million a year ago and $40.6 million in the second quarter. We continue to tightly manage our ongoing operating costs. As compared to a year ago, expenses during the third quarter were positively impacted by lower performance-based incentive compensation, lower stock-based compensation expense and broad-based expense controls. Excluding severance, stock-based compensation expense and the benefit of a legal settlement in 2014, total operating expenses decreased by $2.3 million or 5.3%.

Excluding these and other nonrecurring items, year-to-date operating costs are down 3% as we manage the business through a tough sales environment. And while our operating expenses have declined from a year ago, we continue to invest back in the Company, primarily through adding new sales reps, which is an incremental cost to us in the early years.

Adjusted non-GAAP operating income, taking into account stock-based compensation, severance and a benefit in 2014 from a positive legal settlement, was $3.2 million for the quarter compared to $2.2 million a year ago. 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 teams. GAAP operating income was $2.8 million for the quarter, an improvement of $2.1 million from a year ago.

We ended the quarter with 31 more sales reps than the year-ago quarter and our newly hired reps now have a 3 1/2-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 $2.4 million or $0.27 per diluted share compared to $460,000 or $0.05 per diluted share a year ago quarter. From a balance sheet perspective, as I mentioned earlier, we ended the quarter with no outstanding debt under our credit facility and $7.8 million from available cash on hand. During the second quarter, we generated $3.9 million of cash flow from operations. We continued 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 $1.9 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 now comment on a couple of items as we look into the remainder of 2015 and into 2016. First, keep in mind that the fourth quarter of 2015 had 61 selling days versus Q3, which had 64 selling days. Second, as previously mentioned, the first three quarters were significantly impacted by the weakening Canadian dollar, weaker demand in the oil and gas industry and, more recently, the general slowdown in the MRO industry.

While it's difficult to predict these, it is our expectation that these factors will continue to be headwinds as we move into 2016. We will continue to manage gross margins and operating expenses, keeping this in mind.

Third, as both Mike and I mentioned, we will continue to add sales reps in 2015 and 2016. While we ended the quarter up slightly from the end of 2014, we will continue with our current strategy to expand our sales force in 2015 and 2016. We continue to balance our resources between adding new sales reps and investing in tools and processes to ensure that they can become productive quickly.

And fourth, our adjusted EBITDA percentage was 7.5% for the quarter compared to 5.9% a year ago. We are managing the business in a tough environment while, at the same time, moving in the right direction toward our stated 10% goal.

In closing, given the pressure we faced in the quarter on the topline sales, we are pleased with our overall performance for the quarter. We remain committed to our growth strategy of adding sales reps, driving productivity of existing sales reps and continuing to evaluate acquisition opportunities.

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

(Operator Instructions) Ryan Cieslak of KeyBanc.

Congratulations on another nice quarter here in a difficult environment. My first question -- maybe, Mike, you could talk a little bit about how the topline trended through the quarter and particularly in September, relative to what you saw going into it and then also just some initial commentary on how October is looking right now, relative to the end of the second quarter and your expectations.

Ryan, we continue to see the ongoing trend. Things have flattened out a bit. Ron has some of the specific month-by-month numbers that we can share. But what we see is a continuation of what we have seen. It's especially acute in the consumables space because we are a direct reflection of the usage, the demand usage of our customers. If you are running your injection molding machines hard, the maintenance goes up. If you don't run them at all or you were operating three shifts and now you are operating two shifts, we see that almost instantly in our consumables space.

So what we're seeing is a continued softening, moving sideways, really, in the industrial economy.

Beyond oil and gas and beyond energy, we just sort of see a softness everywhere. But what we don't see is any full stop or the kind of step function we saw in February and I think the whole industry saw in the first quarter.

So we did see -- as I commented earlier, we saw a little bit of an uptick going from July to August to September, nothing substantial, I would say. And to Mike's comments, really, as we sit here in mid to late October, not a lot of change from what we saw in the third quarter.

Okay, that's good. So if I hear you right, there wasn't -- the underlying demand trends doesn't feel like it's getting significantly worse in the last couple of months?

That's correct.

Okay, good color. And then on the sales rep count, you guys had talked about the last couple of quarters some initiatives on the recruiting and the retention side and some changes that you made there. Maybe talk a little bit about the impact from those here in the quarter and, maybe more importantly, into 2016 and then backing into what you think initially the sales rep growth could be for you guys on an organic basis going into next year or maybe what you are targeting.

Yes, so a number of activities -- we'd mentioned in the prepared comments that we just finished rolling out this Lean Six Sigma process. And a lot of people think about Lean Six Sigma in the context of manufacturing. But it's really a systematic way of dissecting a problem and achieving process improvement. So we just now finished rolling that out to the last of the regions.

And what it is at its core is a very prescriptive process of onboarding a sales rep for their first three, four, five months with a lot of checks and balances to make sure that people are on track to do what we have asked them to do. And what we've asked them to do is what has been proven to work.

The other thing that we did was we brought in, a number of months ago now, I think it was 14 or 15 of the most successful brand-new sales reps that we'd hired over the last year and sought some advice and counsel from them as to ways to improve the process, ways to improve the onboarding. We changed our compensation plan in a small way but, again, at their suggestion. So there are a number of activities that we've engaged in.

Very optimistic about the effect, but it's relatively early to start measuring quantitatively the impact of those changes. We have seen a modest reduction in initial attrition of sales reps, which is, again, encouraging. So what it says to us is the process refinement is happening. As you would expect, when you start a new initiative there are things that you want to dial in. We have now dialed them in. There will be always opportunities for more process improvement.

Now, we're committed to continuing to add sales reps in 2015. And it's a little early to nail down numbers for 2016 because we are in the budget and planning process. And our challenge is to find the balanced use of resources that includes adding sales reps, technology which drives sales rep productivity, and some of the other initiatives that we have planned. So it's a little early for us to have a really clear, detailed understanding of exactly where we are going to be next year. But we will be adding sales reps next year and likely beyond that.

Okay, great. Fair enough, good color. And then on the gross margins, Ron, again, very nice year-over-year improvement. I think this continues to trend above maybe some of the longer term targets you've laid out there. How much do you think is sustainable here going forward into the fourth and maybe into 2016 as well, in terms of really what's still in your control that you guys can target and improve on to maintain these type of levels?

Sure, Ryan. So as we released, the quarter ended at 61.7%. And a pretty significant improvement, up 160 basis points versus a year ago but relatively flat with the second quarter. And on previous calls, we've talked about some of the headwinds that we will continue to face, being increased in our strategic account relationships, just the competitive market that's out there from a pricing perspective.

However, so far what we've been able to do is we've been able to offset some of those headwinds which is really improving our overall purchasing process.

So as we look forward into the rest of 2015 as well as 2016, we are not seeing anything that would cause that number to move dramatically one way or the other. A couple years ago, we were saying margins in the high 50s, 59-ish. And given the trend and given some of the improvements we've made over the last four to five quarters, in that 60 to 61 range is not an uncomfortable place for us to be.

Okay, great color. And then -- go ahead.

We also continue to focus on our supply relationships. As they see us investing in sales reps and process improvement and order delivery cycles, all the things operationally that are improving, it encourages our suppliers to work more aggressively because they see growth opportunities with us as a channel for them. So we put real emphasis on the supply relationships and continuing to work with them. And as we continue to grow and penetrate the large strategic accounts, suppliers are beginning to help us keep that in balance, as Ron had just mentioned.

Okay. You know, that's great color. Then the last question I had -- congratulations on the acquisition. I know this is something you guys had been talking about and good to see it finally come to -- one come to fruition.

Mike, talk a little bit about is this now where you maybe wait and see and integrate this or get this acquisition through and maybe wait until next year for another acquisition? Or maybe talk a little bit about the pipeline and what you are seeing there and your receptiveness this to continue to do this for the balance of this year and certainly into next year.

Yes, sure. We feel good about -- as I had mentioned and we had mentioned on previous calls, it's a get your sea legs; it's make smaller acquisitions and understand the process of working with a small team, the unique characteristics of small companies; as well, the integration process and all that goes into it.

But it's a little opportunistic, you know. If the world really worked to our beck and call, we might do things slightly differently.

But we would like to see more acquisitions, and we are ready to do them as quickly as they come along. We feel great about the process we've engaged in, in doing the first phase of the acquisition. And so far, though we are very early into it, the early indications are that the integration is going smoothly, no surprises, no unforeseen developments. So that gives us some confidence that we are capable of doing this and will want to do more of it.

Some of it is a little out of our control. We like the idea when people come to us and say, we think we are better together than competing against each other. And certainly, we agree that with our infrastructure, with our physical and technology infrastructure, we can benefit people who come join us. We can benefit their sales reps by giving them a broader product portfolio to sell, which in turn benefits the customers that come with us associated with that acquisition.

So no, I don't think we have an artificial timeframe to say we are going to stop the process for three or six months or nine months. Whenever the next one comes along, it will come along. And sooner is better.

Okay, great.

And there is a pipeline that is developing that we feel good about as well.

Good to hear. Well, lastly, just being from Cleveland I feel your pain with the Cubbies. And hopefully we will beat them next year. I guess, go Hawks. Right?

Thank you.

Beth Lilly of GAMCO Investors.

I wanted to drill down a little bit on the acquisition. Can you just provide a little more insight into what was so unique about this acquisition? Mike, this is the first deal that you've done since you joined Lawson. And the attractiveness of this specific company and the market that it serves and such.

Sure. Well, first and foremost, what we've tried to confine ourselves to is what we are referring to as a DNA match. When we talk about that, we are talking about companies that have the same kind of value proposition we do. They are servicing the same end markets. They are going to market in the same basic way. And so at its core, the Western acquisition that we made was that value proposition -- same kind of channel to market.

Now, as it turns out, this one lines up more in the automotive industry, looks exactly like Kent only much smaller, of course. Whether it's Kent or Lawson, the value proposition is the same. And it's nice in that it's small, in that it gives us the opportunity to walk our way into the smaller ones in preparation for larger ones. Again, same kind of business Kent is in, automotive-focused.

And can you just talk about the metrics, what you paid for it and -- you've mentioned in terms of revenues. Can you go over those numbers again?

Sure. So, Beth, from a purchase price perspective we paid approximately 60% of revenues, of their revenues. And from an overall revenue standpoint, they are relatively small. They are less than 0.5% of our consolidated sales, so again relatively small.

But one of the items that we looked at very closely was the overlap of their product mix. And what we found was that essentially they were selling heavily on the distributors or on the actual parts, the clips and rivets and so forth. And so part of, I think, the lift that the sales reps will have that we acquired during this process will be the availability of the Lawson product and the Kent product. So they will be able to have a much wider range of SKU availability, and I think that will be a real positive for both our new customers that came through that acquisition as well as the sales reps that joined us as well.

The other thing we see, Beth, that is a common denominator -- and I'm speaking very generally now -- we tend not to share customers with our competitors. Either our competitor has all of the customers' business in the product categories they serve or we have all of the business. So in general, more often than not we are picking up all-new customers to us. Now, again, to Ron's point, with our 12 product categories we can offer or the acquired sales reps can offer a broader solution to the customer and more broadly solve customer problems, which is a huge benefit for the sales rep that we acquire and is a huge benefit for the customer. And that seems to be a common denominator in everything we are looking at and everything we aspire to work on.

And how -- this may seem like a pedantic question. But how did you find them? Is it just because you were in the market competing, or did you have a banker that was out there looking for deals for you?

In this case -- well, it's a little bit of both. Yes, we have a relationship. Someone is doing some research for us. But more often than not, because our industry is so fragmented -- and by the way, very often that fragmented industry of competitors is also where we are acquiring sales reps, though not in this case. But our district managers, our sales reps come in contact with competitors in every city, everywhere in the US and Canada, because, again, our product is so ubiquitous and so necessary. So a lot of these leads come from our sales reps and district managers and region directors.

And then we follow up and do a little bit of research and reach out to them and have a discussion. But there are hundreds and hundreds of small competitors out there.

Yes. Okay, great. Well, thanks so much. And congratulations on a great quarter.

(Operator Instructions) Kevin Steinke of Barrington Research.

I wanted to talk a little bit more about the sales force. Good to hear that you got the new onboarding and training program rolled out. I think you talked about last quarter that you, in part intentionally, slowed down the hiring a little bit to just get all the reps you hired in 2014 better integrated and onboarded. Just wondering how you are feeling about that process and getting the people that were already on board up and running and productive.

Well, the early indications -- again, one of the metrics is attrition, which we believe is directly tied to their success. As you may know and we've communicated in the past, the long-term attrition is pretty low, below 10%. So once you are a sales rep and you enjoy the work and you are successful, you are likely to stay with us for a very long time.

Now, it's very hard, as in a lot of other industries, to start with a greenfield territory and build a book of business from scratch. But the early indication is that the process is working. We've made some other changes like a small change, for example, that came out of our meeting with the most successful new sales reps is we've pushed off the initial corporate training, where they come to Chicago and the McCook distribution center for a week. That was happening in about three weeks or four weeks into a person's employment.

We've now pushed that off to five or six weeks. That small change enables the new sales rep to have a better understanding of what's being taught. They used the expression drinking from a fire hose. We throw a lot at them very quickly. And by giving them just a couple extra weeks in the field with their district manager and their peers, they have a better understanding of what's actually going to be taught in the course.

So, these are very small changes. Again, these all happened in the last couple months. So we certainly measure everything. So we will have a better understanding of the quantitative impact of these process improvements over the next couple months. It's a little early to tell yet, but the early indication is it's encouraging.

Okay, good. And does the 925 rep count at the end of the quarter include the small acquisition that you made?

Yes, it does.

Okay. I think last quarter, Ron, you separated out the benefit you got from the lower performance-based comp and maybe also commissions. I think you said operating expenses excluding some of the one-time items were down $2.3 million year-over-year. Just wondering how much of a benefit you got from the lower commissions and lower base performance comp on a year-over-year basis.

Sure. So there's quite a few puts and takes within the comparison between Q3 of 2014 versus Q3 of 2015. Certainly, severance and the stock-based comp and then the favorable legal settlement we had in 2014. So if you back all of those items out, being nonrecurring, you are right; we are sitting at about a little bit north of $2 million from a total expense reduction standpoint.

Of that, about $1 million of that is just commissions on lower sales. So we haven't changed our commission structure, but it's variable with our sales. So we did see a reduction there. And then versus -- again, versus Q3 from a year ago, about $500,000 is a reduction in performance-based compensation. So the combination of those two is about $1.5 million. The other close to $800,000 really came from other cost savings that we've created throughout the organization when looking at where we are in our current run rate on operating expenses versus a year ago. And that's -- you name it, overtime is down, temp labor is down, consulting is down, T&E is down. So it's really, across the board, just better expense management.

All right, that's good to hear. It sounds like there's still room for some incremental improvement too on just expense management with all the initiatives you have on the table. So, would you say that's fair and that you can hold that G&A stable or even coming down a little bit going forward?

Yes. I think, when I look at it sequentially versus the second quarter, again taking into account those nonrecurring items, excluding a little bit of the performance-based incentive items, we got a little bit of a lift in the second quarter versus Q3. But excluding those types of items, we are relatively flat Q2 to Q3. And I think we made that comment in the second quarter, that we felt that the current run rate from an expense standpoint was a good number and that we didn't see any major movements that would cause that to go dramatically up or down.

So, we feel pretty good about where we are on the overall expense run rate today. And as you know, this is a day-in and day-out effort by everybody on the entire team, just as we manage our way through a tough environment on the topline. So I think we are pretty comfortable with where the run rate is at. Again, I don't think we would see dramatic movements in either direction off of that.

Okay, great. And I think you said that you saw, actually, a slight uptick in your oil and gas customers from going from the second quarter to the third quarter. Does that add anything meaningful or just is that to more indicate some stabilization on a sequential basis?

It's really not meaningful. Our largest oil and gas customer has ticked up a little bit relative to third quarter but quite far off versus last year. So it's more about stabilization. It's definitely not a meaningful uptick. Probably the better takeaway is it's not a down tick; it's moving sideways. Not a lot of encouragement yet in oil and gas.

Sure, and that's not a surprise. Well, thanks for taking my questions and congratulations on the nice profitability in the quarter.

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

Just a quick follow-up on Kevin's question -- with the acquired reps being in the total sales rep number for the end of the quarter, how many reps would you guys have been at, ex- the acquisition?

The acquisition brought on three reps. Two of the reps had more than 10 years' experience. One of the reps has about two years' experience. So again, this is the reason we say it's a very, very small acquisition, a means to an end. And that end is, you know, start the process. So it would be a difference of 3.

Okay, great. And then how many reps did you guys hire during the quarter?

So if you look at, on a gross basis, we were sitting at about 55 reps that were hired, and we lost about 50 reps. And that's -- the lost rep number has gone down versus where we were in the first and the second quarter. So that's to Mike's comments earlier about we are seeing some improvements in the retention as we progress throughout the year.

Okay, great. That's all for me.

Part of that, Jack, is a reflection that we hired a net 110 last year who are working through the process and climbing the hill.

Okay. Thanks, guys. Appreciate it.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mike DeCata for any closing remarks.

Thank you. And thanks again for your interest in the Company and for joining our call today.

In closing, let me say I'm confident that we are on the right path. Our value proposition is sound and customers recognize that we enable them to maximize their profitability and their profits and their productivity.

I believe that we are executing on our value proposition better than anyone else in the VMI consumable MRO space. Our teammates have a renewed commitment to excellence and customer service. Our growth strategy is balanced and beginning to produce results.

Thanks again for joining the call today and have a great day.

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