Distribution Solutions Group Inc (DSGR) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Lawson Products Second Quarter 2018 Earnings Conference 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 be then time for question 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 August 31, 2018.

During this call, 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.

This morning, I will comment on the quarter and our overall progress.

Ron Knutson, our CFO, will provide a more detailed review of our financial results, then we'll take your questions.

Our second quarter performance was strong and represents a continuation of a solid first quarter.

As planned, we grew organic sales and total sales.

During the first quarter conference call, I indicated that our plan in 2018 was to build on the momentum of 2017, especially as it pertains to earnings and leverage.

The second quarter is evidence that Lawson continues to strengthen its customer value proposition, penetration and increase in productivity as we deliver more profitable growth.

Now let's discuss some of the details.

Total sales grew over 20%.

Our organic sales grew 7.5%.

This makes the seventh consecutive quarter of quarter-over-quarter growth.

Every market segment grew.

Our strategic accounts increased 14% versus the second quarter of 2017.

Considering the 45% growth we achieved during 2017, we're extremely encouraged by the continued growth in this segment.

During the second quarter, we added 54 new locations within existing strategic accounts as part of our conversion process.

And we also signed 10 new strategic account agreements.

We remain committed to our conversion process and are confident it will continue to help us drive additional sales growth.

Revenue in Canada grew 136% versus the second quarter of 2017 and nearly 13% organically, excluding Bolt.

Our government segment has improved every month this year, and we grew by 6% year-over-year in the second quarter.

Kent grew this quarter at a slower pace, but momentum is building.

In partnership with one of our largest Kent customers, we also recently implemented a cloud-based Procure to Pay suite called Cooper.

Over time, this will improve productivity for both our customer and the Kent Lawson team.

With these sales increases, earnings for the quarter were also favorable.

We achieved $7.7 million in adjusted EBITDA on incremental sales of $15.4 million.

This represents a 21% leverage on a consolidated basis and over 40% EBITDA leverage on the MRO business.

Based on our solid first quarter leverage and the continuation in the second quarter, we are optimistic that we will exceed our previously stated guidance of 25% to 30% organic EBITDA leverage on sales in the second half of 2018.

For the quarter, we achieved adjusted EBITDA of 8.6% on top of 6.1% earned in the first quarter and compared to 6.0% a year ago.

Ron will provide greater detail regarding our operating leverage and earnings in a moment.

In this inflationary environment, we have also seen some cost increases from suppliers.

However, we managed our MRO pricing and realized other incremental cost reductions to maintain our gross profit margin.

As we have mentioned previously, our MRO margins have achieved approximately 60% gross profit margin every quarter for almost 6 years.

This is a testament to our sales team, our sourcing and supply chain teams, our distribution center teams, who have all played critical parts in achieving this consistency.

It also reflects customers' understanding of our value proposition and that ultimately, Lawson represents the lowest total cost solution to their consumable MRO needs.

From an operational standpoint, Alberta distribution center is fully operational.

As you may recall, this distribution center is serving both Bolt Supply house and Lawson Kent customers in Western Canada.

Essentially, it's 2 independent warehouses under a single roof.

Customers have rewarded us with increased business as a result of local inventory.

And we anticipate strong growth in Western Canada from our Lawson and Kent customers in addition to organic growth from Bolt.

Turning to our growth strategy.

We continue to work on our 3-part growth strategy.

Growing our sales team.

This quarter, we finished with 995 sales reps, including 27 territory managers at Bolt Supply.

We have also seen an improvement in sales rep retention.

We will continue to focus on incrementally adding sales reps for the foreseeable future.

Increasing productivity.

This quarter, Lawson sales reps achieved 9.1% improvement in sales per rep per day.

This represents the sixth consecutive quarter -- quarterly improvement in sales rep productivity.

Growth through acquisition.

We continue to fill the pipeline with a broad range of acquisition opportunities but remain disciplined acquirers.

Speaking of acquisitions, the Bolt Supply business is on plan from a sales and EBITDA perspective.

And we have added 3 territory managers to the Bolt Supply team.

We are planning to grow the Bolt Supply sales team over time.

We also recently announced our plans to expand into British Columbia by adding a branch in Surrey, a suburb of Vancouver.

This will enable us to consolidate our previously acquired warehouse in Surrey into a new and wider location, which will serve both as a warehouse and branch.

From an operational excellence perspective, we are pleased with operations and supply chain metrics.

Recently, we initiated a program to more closely manage our bins and cabinets.

This has resulted in a better return on those investments.

We also lowered inventory associated with organic side of our business, both in absolute terms and as a percent of sales while maintaining our service level as sales continue to grow.

During our first quarter call, I mentioned that we recently established a program to win more share within existing customers.

This plan is designed to enhance share gain through the addition of more SKUs within existing customers.

I am pleased to report that early indications are very positive.

Our sales reps work hard to expand share of wallet within both large and small existing accounts.

For example, we recently won the hydraulics business in one of our largest strategic accounts.

We earned this opportunity to win this business through outstanding service under product categories that we were already servicing.

Looking forward, we've mentioned that sales comps for the remainder of 2018 will be challenging because we experienced strong growth during the second half of 2017.

However, we are confident that we will sustain our overall operating momentum, and EBITDA improvement will continue.

Now I'll turn the call over to Ron for more insight into the second quarter financial results.

Thank you, Mike, and good morning, everyone.

The second quarter resulted in strong sales and a continuation of significant growth in our adjusted EBITDA as we continue to successfully execute our growth strategy.

Our second quarter results reflect a full quarter of the Bolt Supply house, whereas Q2 2017 does not include any Bolt Supply activity.

As I go through our financial performance, I'll comment on both the organic Lawson business as well as the consolidated results that include Bolt Supply.

Now let me share some of the Q2 financial highlights.

First, sales were $90.4 million for the quarter.

Average daily sales were up 20.5% versus the year-ago quarter and up 5.3% from the first quarter.

Excluding the impact of the Bolt Supply acquisition, organic average daily sales increased 7.5% over a year ago.

Second, our adjusted EBITDA for the quarter was $7.7 million compared to $4.5 million a year ago, an increase of 71%.

While the quarter benefited from the Bolt Supply house in the amount of $949,000, our adjusted EBITDA was primarily driven by a $2.3 million improvement in our MRO business as a result of increased sales and associated operating leverage.

And third, our consolidated reported gross margin percentage under the new method of allocating certain service-related costs into gross margin, as discussed in previous quarters, was 54.4%.

Excluding Bolt and the service expense reclassification, our Lawson segment gross margin percentage was 60.4% compared to 60.2% for the year-ago quarter.

I'll now discuss some of the drivers of the quarter in further detail.

We generated sales of $90.4 million in the quarter on 64 selling days, the same number of days as the year-ago quarter but 1 more day than Q1.

As compared to a year ago, our second quarter sales benefited from the following: first, Bolt Supply generated sales of 9.8 million in US dollars for the quarter; second, actions we've taken to drive growth continued to deliver as we realized positive sales growth in all of our segments for the quarter.

We continue to convert new locations for our existing strategic relationships.

In addition, our talent development initiatives are robust as we improve the on-boarding process of new sales reps; drive more accountability to the field management; provide sales reps with forums to support product and technical questions; and invest in technology and rewarding sales reps for growth.

As a result, sales per rep per day productivity continued to improve with an increase of 9.1% for the quarter year-over-year and up 4.1% sequentially over the first quarter.

We ended the quarter with slightly less than 1,000 Lawson Kent sales reps plus 27 territory managers in the Bolt Supply business, with our focus remaining on sales rep productivity and rep hiring.

Also, the 7.5% organic Lawson sales increase was broad-based within all segments growing for the quarter.

On an organic average daily sales basis, U.S. sales were up 6.6%, while our Canada ADS, excluding Bolt, were up nearly 13% in local currency.

Year-to-date, consolidated sales are up 16.9% and in line with our expectations.

From a sequential average daily sales basis, the Lawson segment April sales were $1.235 million, May was $1.272 million, and June finished at $1.271 million or an increase of 5%, 6.4% and 11.1%, respectively.

From a Lawson segment standpoint, strategic accounts sales were up nearly 14% over a year-ago quarter and represent approximately 17% of our MRO volume.

We also realized solid 7.3% growth in our Lawson core business.

From a gross margin standpoint, our performance was in line with our expectations.

Our reported gross margin for the quarter was 54.4%, which reflects the reclassifying estimated service-related expenses against gross margin in lower Bolt Supply margins.

Prior to the expense reclassification and Bolt Supply, the Lawson segment gross margin was 60.4% compared to 60.2% in the year-ago quarter.

The increase in Lawson's gross margin percentage was primarily driven by improved efficiencies in our product fulfillment process and lower customer setup costs, partially offset by a continued shift towards strategic customers who typically have a lower gross margin percentage.

And as anticipated, the Bolt Supply business, with gross margins closer to 40%, lowered our weighted average margin percentage.

There remains a significant focus in the marketplace around pricing and margin pressures.

While we are seeing vendor cost increases, we've been able to stay ahead of it from an overall margin perspective.

Consistent with previous quarters, when we look at pricing [to] the same customers for the same product from a year ago, our gross margins have not been compressed.

Selling, general and administrative expenses were $43.6 million for the second quarter compared to $42.7 million a year-ago quarter.

Prior to moving a portion of the selling expenses to gross margin as required under the new revenue recognition standard, total expenses were $46.7 million.

The increase was primarily driven by the inclusion of Bolt Supply in the amount of $2.9 million, higher compensation expense to support our sales increase and $529,000 for a discontinued operation accrual related to a building site that we continue to own.

We remain focused on reducing total operating expenses as a percent of sales to further leverage the business.

Our consolidated adjusted EBITDA leverage was at approximately 21% for the quarter.

The percentage gets diluted by the inclusion of Bolt Supply in the second quarter of 2018 results but not in the Q2 2017 base.

However, on an MRO basis, our adjusted EBITDA leverage was approximately 40%, exceeding our previously stated range of 25% to 30%.

This was primarily due to the 7.5% organic sales growth, some nonrecurring 2017 expenses and managing our 2018 operating costs.

Operating income was $5.6 million for the second quarter.

Adjusted non-GAAP EBITDA taking into account stock-based compensation, severance and the discontinued operations accrual was $7.7 million for the quarter compared to adjusted EBITDA of $4.5 million a year ago.

Of the $3.2 million increase in adjusted EBITDA, the Lawson segment contributed an additional $2.3 million with the remaining $900,000 coming from Bolt Supply.

Net income for the quarter was $3.2 million or $0.35 per diluted share.

This compares to net income of $7.3 million or $0.80 per diluted share in the year-ago quarter, which benefited from a nonrecurring gain on the sale of the distribution center of $0.60 per share.

Excluding the 2017 gain, diluted EPS improved 75% from $0.20 in last year's second quarter to $0.35 this year.

From a balance sheet perspective, we ended the quarter with $16.1 million of borrowings, primarily created from the Bolt Supply acquisition.

During the quarter, our borrowing position net of cash decreased by $3.5 million.

We expect this decreasing trend to continue during the second half of the year.

CapEx for the quarter was $776,000.

We expect our CapEx for the full year of 2018 to be in the range of $2.5 million to $3 million, down slightly from our previous guidance of $2.5 million to $3.5 million.

Let me now provide some commentary regarding the remainder of 2018.

Although sales comparisons are more challenging in the second half of the year, we are optimistic about the second half of 2018, given trends over the past few quarters, current economic indicators in our sector, the impact of the Bolt Supply acquisition and our initiatives to drive organic growth.

Second, we remain focused on improving rep productivity and pursuing accretive additions to our sales force.

Third, we have been active pipeline for acquisitions that is strategically focused.

Fourth, we'll continue to leverage our existing infrastructure to drive adjusted EBITDA.

Due to anticipated sales growth and some nonrecurring costs incurred in the second half of 2017, we expect our MRO leverage in the second half of 2018 to be in the range of 35% to 45%, exceeding our previously stated longer-term guidance of 25% to 30%.

And finally, we will continue to monitor inflation and the potential tariff impact on our business and take the necessary actions to ensure that we stay ahead of increasing product costs.

I'll now turn it over to the operator for questions.

(Operator Instructions) Our first question comes from Kevin Steinke, Barrington Research.

So obviously, very nice results here.

And you talked about that 35% to 45% expected adjusted EBITDA leverage in the second half.

Can you maybe call out -- I don't recall kind of the nonrecurring items that you had mentioned that might contribute to that leverage.

That's one.

And then also, is the -- a better sales outlook also contributing to that expected leverage in the second half?

Sure, Kevin.

This is Ron.

So I'll take maybe the second half of that first.

And as both Mike and I mentioned, the sales comps do get tougher as we move throughout the rest of the year.

But given the growth that we've seen to date, and given our initiatives, we feel comfortable that we're going to see continued growth.

And I think, as you know, from a leverage perspective, we have the ability to leverage our infrastructure even with modest growth.

And maybe to answer the first half of your question, we did incur some, what we would call kind of some nonrecurring expenses in the second half of 2017.

We did have a special incentive going from a sales perspective that's not reoccurring this year.

Then we also had some consulting dollars and a little bit higher incentive accruals in the second half of last year.

So just being -- looking forward seeing the trend on sales and knowing that we're up against some of these nonrecurring expenses, we feel pretty comfortable with that 35% to 45% guidance, at least for the second half of 2018.

Okay, that sounds great.

And you went through the average daily sales numbers for Lawson, Lawson by month as you usually do.

You also called out the year-over-year growth for those ADS numbers by month, which showed an acceleration in growth as you move throughout the month.

So I was just wondering if you called it out for reason to show the acceleration.

And what does that say about what you've seen so far in July in terms of the monthly ADS growth?

Sure.

So this is Ron, again.

The -- we saw a nice trend really throughout April, May and June.

Although we were up against some little bit lighter June from a year ago, so it made the percentage look a little bit easier.

Relative to July, so far, I would say that there's really been no surprises in July.

As I mentioned, the comparisons do get tougher, but we're continuing to see positive demand from demand trends from our customers.

So again, no real surprises in July as we feel pretty good about the second half of '18 all in.

Okay, good.

Mike talked about the strategic accounts, adding new locations with existing accounts and also called out signing 10 new strategic account relationships.

Wondering if you can talk a little bit more about those new relationships?

How large they are at the outset or conversely, how much room for additional penetration of those new accounts would you have as you move forward?

Great.

Kevin, thank you.

This is Mike.

They -- as most strategic accounts or conversion accounts, which is new locations within existing accounts, they always start small.

In that, you never walk into a customer and have to explain what a nut and bolt actually does.

They're usually getting them somewhere.

So almost everything that we win is through share gain.

Having said that, we generally have to burn through the existing inventory of product that's at the customer's location before we begin to see the ramp of our business.

Of the 10 accounts, they're pretty broad in their spectrum.

One is a transportation company, one is an oil and gas company, one is a mining company.

They're kind of across the spectrum, just like the rest of our strategic accounts.

One is a recycle company.

Time will tell whether these become really, very large accounts or just kind of moderate strategic accounts.

The common denominator is multi-site, where they value a single-source supply, and they recognize that we can be the lowest cost provider, enabling them to keep their machines up and running.

Let me take the other part though, the second sort of implication to your question.

We continue to add new locations within strategic accounts that we already have.

We mentioned, I think, 54 new locations within our conversion accounts.

There's tremendous runway ahead of us, even converting existing locations within existing strategic accounts.

Generally, not always, but mostly these are hunting licenses where, site-by-site, we have to go earn our way in.

Our customers, corporate organizations tend to help but not usually in a mandate.

So there is a very long runway of potential with very significant growth potential associated with existing strategic accounts and just converting more locations.

We feel great about our strategic accounts initiatives, our government initiatives but also not taking the eye off the ball relative to our local and regional accounts.

Okay, that's good to hear.

You also called out improvement in sales rep retention.

I know that's been maybe a bit challenging over the last few quarters.

So can you just talk about that a little bit more, what do you think led to that retention?

If you might be at a bit of a turning point here?

Or what's going on with the retention?

Yes, I would argue that our improving retention is about a lot of process discipline, many small actions, more intense training, district manager spending more time with their sales reps.

The knowledge sharing that we've spoken about in the past, we called it Microsoft teams, and it's a way of connecting all sales reps to all other sales reps so that as a rep -- by the way, new reps certainly benefit from this, but even the most seasoned reps benefit from the ability to ask a question, almost in front of the customer and get very, very quick response.

I commented on one yesterday on the network.

I think the turnaround was like 6 minutes.

Pretty technical question.

And so it's a combination of training, knowledge sharing, process.

I think we're sharpening our focus on the nature of people we bring on board.

Can't attribute it to one thing, but we will continue to work hard to hire the right people.

And then once they're here, do everything in our power to make them successful so that they're with us 5, 10, 15 years.

That is the plan, and we work hard to get there everyday.

Okay.

And sales per rep per day continues to grow nicely.

That's one of the key legs of your three-pronged growth strategy that improving sales rep productivity.

So can you talk a little bit more what's going on there?

What you're doing internally to drive that in addition to obviously the market being good right now?

Yes, let me start with that, and maybe Ron wants to jump in, in a moment.

Same answer or similar answer to the retention question.

And that is all the things that come together, programs to win more share of wallet within existing customers, whether they are large or small customers, operational excellence, which differentiates us in the marketplace, in the eyes of the customer.

It's training of reps, it's a -- again, this knowledge sharing with hundreds of thousands of items and applications and 70,000 active customers, 30,000 ship to locations per month.

We see a lot of unique problems every single day and every single month.

And a sales rep's ability to solve those unique problems is a very significant part of our value proposition.

The fact that we're so closely connected to the customer, visiting them every week or every other week, all of these things coming together.

Now I will say, there is a backdrop.

Time utilization for the construction equipment rental industry is good, steady state.

Oil and gas is good, again, steady state, broad-based economy over-the-road trucking miles.

As we see a steady state but at a good place economic backdrop, it gives us the ability to go win share and demonstrate our value to our customers.

I think underneath it, that's a little bit of what you're seeing, is sort of all the actions and all the investments we've taken over quite a few years now coming together at a moment in time, and it seems to be working quite nicely now.

Yes, Kevin, the only thing I would add to that is, in my mind, it's really a culture and a mindset change.

And the message we're really sending to our sales team is that all sales reps must grow.

And Mike hit on a lot of these, but it's about accountability, it's about the fact that we have individual scorecards that our district sales managers can utilize to help our sales reps.

It's the MS teams, it's retention specialists that we've brought on board.

It's the conversion process.

It's our training that now our sales reps are required to go through that we're rolling out.

It's changed the quota-based compensation plan.

So it's really a culmination of many, many factors that we believe are all driving that rep productivity that we've been after.

Okay.

Yes, that's helpful color.

I guess, lastly, here on Bolt, $9.8 million in sales in the second quarter, up from $8 million in the first quarter.

Is that just kind of the normal seasonal trend you would expect sequentially?

Or are you seeing just the overall sales fixture strengthened for Bolt in general?

Yes, Kevin.

So this is Ron.

So yes, typically, their second quarter is a bit stronger than their first quarter.

So we did anticipate that we would see a bump up here in the second quarter.

Although I would add that the Western Canada market has been relatively strong.

And our -- in fact, our -- on the MRO side of the business, our Canada sales were up almost 13% over a year-ago quarter.

So Bolt is seeing some nice increases.

They are -- not only are they up second quarter versus first quarter, but they've seen a nice increase versus where they were even over the second half -- I'm sorry, over the first half of 2017.

So to Mike's point earlier, they are clearly performing on plan and really at our expectations, both in sales as well as in terms of EBITDA.

Our next question comes from Brad Hathaway, Far View Capital Management.

Congrats on the strong quarter, the incremental margins and the guidance on that are really exciting to see.

So congrats on that.

Thanks, Brad.

One question you didn't mention or anything in the call is, how do you view the acquisition environment right now?

Are you still seeing opportunities to continue to roll up smaller [players]?

Yes, we are -- Brad, this is Mike.

Yes, we are filling the pipeline as we had.

It's very much opportunistic.

We feel great now about our ability internally, our bandwidth.

We've now done 5 acquisitions.

We've learned a lot from them.

And so we feel good about the pipeline, and we feel more confident in our ability to more seamlessly integrate them, though I will say that every one of the 5 has gone very, very well for us from an integration perspective.

They range in size.

We're looking at the larger acquisitions at the upper end of our range.

But opportunistically, there's still some very nice, smaller acquisitions that make perfect sense.

The common denominator continues to be the same as it always has been: consumable MRO-type products, service intensive, and the ability to share knowledge and differentiate ourselves through all 3 of those is sort of -- is the umbrella.

Now having said that, there's a fair amount that fits under that umbrella.

And I will say lastly that the more successful we have been, and we like to use the management teams or the owners of the companies that we've acquired as references for the next one in the docket.

So everything we communicate, that we live up to and -- so there are no surprises for the owners and the integration process.

And we're very proud of the process we use, both at the very first discussion, along [the] 1 year or 2 into the integration, that we're completely consistent in what we say we're going to do versus what actually happens are the same thing.

So feeling great about the pipeline.

Okay, great.

And are you seeing any more competition from other players?

I mean, I know on their second quarter call, MSC, who owns Barnes, obviously one of your competitors, mentioned that they had an appetite to acquire more in the Class C space.

So are you seeing kind of more competitive intensity when it comes to potential acquisitions?

You know, we really aren't.

Not to say there isn't competition, but [they're] not changing competition.

Whether there are smaller acquisitions or larger acquisitions, we have to go out there and on the interest of the seller.

I think our values, our culture, how we go about things does differentiate us.

Of course, we have to pay a fair price like everybody else would have to.

But very often decisions aren't made solely based on the purchase price but that plus what's going to happen after the acquisition.

And I think we clearly differentiate ourselves in the eyes of potential sellers based on our track record of people we've actually already acquired.

So seems like it's a steady state from a competitive environment.

(Operator Instructions) Our next question comes from Steve Barger, KeyBanc Capital Markets.

This is Ryan on for Steve.

Yes, just wondering if you can give an update on the pricing environment.

Are you starting to see inflation come through at a more rapid pace?

And if so, what steps are you taking to manage that?

Yes, let me jump into -- this is Mike.

I'll jump into the first part of it, and Ron can fill in a few more details.

We are seeing cost increases from suppliers.

We've been able to manage that well.

It's certainly a dynamic environment, then moderate and rational price increases.

We're also seeing some capacity constraints from suppliers that's driving price a little bit.

And just general inflation.

We see some labor shortages being talked about from our suppliers.

So it seems like underneath it all, it's just a general inflationary environment.

Now we have been able to keep on top of that.

And let me say again that we've gone almost 6 years with a very narrow variation in our gross profit percents.

A lot has happened in 6 years, and we look at this number on a quarterly basis.

We've added very significant growth in strategic accounts.

A lot has happened in the broader world, and yet through it all, including this quarter, we've been able to maintain our margins.

I would argue that is in large part because our customers recognize that we are the lowest cost solution.

And our ability to improve the productivity of their machines and their mechanics and enable them to produce on a consistent basis rather than waiting 1 day or 2 for an interruption of a downed machine, underneath it, that makes us more and more valuable.

And customers have been willing to work with us, even in this environment, to help us with price increases where appropriate.

Okay, okay.

Good.

And that leads up to my next question.

That real nice gross margin performance at the legacy business, and I know a lot of that's due to the initiatives you guys have taken there.

So I'm just curious, how much more opportunity or leverage do you have to pull for those benefits to continue to outweigh the mix headwinds from growing strategic accounts?

Yes, as we have in previous years -- again, this is Mike.

There are a lot of forces in play.

We continue to work on global sourcing, our suppliers have worked very well with us.

Our customers have worked well with us.

We are not trying broadly to raise prices, that is not what we're doing opportunistically -- or I shouldn't say that.

More out of necessity and in small ways, occasionally, we have to.

But for the most part, the combination of operational excellence, LEAN, Six Sigma, all matter of initiatives, we're working hard to keep it where it is.

We are not trying hard to increase it.

Yes, what I would add to that, Ryan, is that we're really going after additional gross margin dollars versus the percentage.

And it's been great that we've been able to manage that percentage and keep that number north of 60%.

But as exhibited this quarter, we threw off significant gross profit dollars, which really helped the overall profitability for the quarter.

So I agree with all of Mike's comments.

And our expectation going forward is that we would be able to remain in that 60-ish percentile range.

But I would say that getting additional dollars is really our main focus, absolutely.

Okay.

And then it's nice to see an increase in sales rep this quarter.

How should we think about headcount going forward?

Is the single digit range per quarter kind of a good run rate?

Yes, as we've said for the last kind of 1.5 year or so, you'll see a consistent but very moderate trajectory upward.

There are untapped territories as we grow.

There's just more work per rep and at some point, you've got to divide up territories as they see appropriate.

So a moderate, continuous increase in sales rep headcount, offset by our sharp focus on accountability.

We work very hard to enable our new sales reps, and of course, our seasonal ones as well, to be successful.

If they can be, then they have a very long and prosperous career with us, but it's not for everybody.

It's hard work, a lot of positives, a lot of gratification that our sales reps get from their customers every day, but the long and short of it is, you'll see more of the same going forward: slow increase in numbers.

Okay.

And then going to your Alberta DC now stocking Lawson and Kent products.

I think you said in your prepared remarks, you saw some growth in that region within those product lines.

Would you be able to break out the growth from existing customers to new customers?

Or is that just too early to tell right now?

I think it's a little too early to tell.

We are seeing -- we had customers in Western Canada, and we had a lot of sales reps in Western Canada.

The challenge they had in the past was along more to the delivery cycle.

Now with the Alberta DC, they have a very short order to delivery cycle.

And we are being rewarded from existing customers.

And it's a little early to see material increase in dollars from new customers.

We're quite confident that we will pick up new customers at an increasing pace.

And we are also very, very pleased with existing customers giving us a lot more business.

Of course, we're dialing in the inventory, the needs in Western Canada, the inventory needs in Western Canada and the mix of product is a little different than Eastern Canada.

So all of that is being sort of lined out as we speak.

Okay.

And then just a couple of more for me.

Last quarter, I believe oil and gas was flat for you.

It sounds like it was this quarter as well.

Can you maybe give a little bit more color on what you're hearing from customers in that end-market?

And what's driving the flatness, is it just more so -- just tougher comps?

Again, this is Mike.

It is tougher comps, yes, for sure, no doubt there.

But I'm fairly confident that because of operational excellence, we are beginning to win more customers and more share of wallet within existing customers in the oil and gas and energy sector.

So longer term, we feel very good, and I'm not speaking about [market] so much and yes, very tough comps.

But underneath it, we are differentiating ourselves in the marketplace.

And I'm very optimistic that we will pick up more oil and gas customers and more share of wallet over the longer term with existing customers.

And again, I'm not so much speaking to market, that seems pretty steady state.

Yes, Ryan, as defined by SIC code, it still represents about 3.5 of our overall business.

And kind of flattish second quarter versus the first quarter.

And down a little bit versus a year ago.

But to Mike's point, we saw a pretty nice increase in that sector in Q3 and Q4 of '17.

So we are up against tougher numbers as we move throughout the rest of the year.

Okay.

And then last one from me.

Tax rate was about 29% this quarter, about 34% in 1Q.

Look forward, how should we think about the tax rate?

Yes, overall, I think for the year, we're sitting at about 31%, and we feel like that's a pretty good rate.

The first quarter rate -- the effective rate was a little higher just because we have some fixed items within there, and our pretax income was lower, so it drove the percentage up slightly.

So 31%, I think, on a go-forward basis, is a good rate to use.

Our next question comes from Kevin Steinke, Barrington Research.

Just one follow up here.

You had mentioned wanting to open a new Bolt branch outside the Vancouver area.

Do you have a timeline set for when you might launch that new branch?

Yes, Kevin.

This is Mike.

It's probably early fourth quarter.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

And I would like to pass the call back to Michael DeCata for closing remarks.

Great.

Thank you.

Thank you for joining the call today.

Lawson Products had a great quarter.

Sales [productivity] was up 9.1%, and this is the sixth consecutive quarterly increase in productivity.

We achieved 40% organic leverage in our Lawson MRO business.

The Bolt acquisition is doing great, and we added over $900,000 in EBITDA, which is why we do acquisitions.

And excluding the sale of a building in the second quarter 2017, our EPS was $0.35 per share, up 75% over the prior year's quarter.

Lastly, I like to thank our teammates, our customers and our suppliers.

We're optimistic that the remainder of 2018 will be very strong for Lawson Products.

Have a great day, and thank you.