Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Lawson Products' fourth quarter 2019 earnings call.
This call will be hosted by Michael Decatur, Lawson products, President and Chief Executive Officer, and Ron Knutson Lawson products Chief Financial Officer.
During this call they will be providing an update on the business as well as covering relevant financial and operational information.
They will then be time for question and answers.
Please note that the statements on this call and in the press release contain forward looking statements concerning goals beliefs expectations strategies plans future operating results in 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.
This call is being audio simulcast on the Internet site Lawson products Investor Relations page on the company's website Lawson products Dot com.
A replay of the webcast will be available on the website through March 31st 2020.
I will now turn the call over to Watson product CEO, Mike Decata.
Good morning, and thank you for joining the call. This morning, I'll comment on the fourth quarter results.
Our continued progress Ron Knutson, our CFO, who will provide more detailed review of the financial results followed by your questions.
Washington products had a solid fourth quarter and a strong fiscal 2019.
Results this quarter were driven by ongoing consistency several factors, including the MRO sales.
EBITDA growth and significant operating leverage complemented by strong sales performance supply.
Consolidated sales grew by 2.7%, including an increase of 1.7%.
The Washington MRO segment.
As a 13.3% increase supply.
These results combined with effective management of our cost structure supported a 240 basis point increase year over year and adjusted EBITDA margin.
With seven point, Threemillion and adjusted EBITDA or.
8.3% margin for the fourth quarter.
Compared to 5.1 million or 5.9% margin in the fourth quarter 2018.
For the year sales increased by 6% with adjusted EBITDA of 34.5 million.
Representing a 37% increase over 2018 levels.
And our adjusted consolidated EBITDA leverage was over 44%, primarily due to our ability to leverage our existing infrastructure.
In sum, both the fourth quarter and a full year results reflected successful execution of our growth strategy.
Our recurring theme to our performance in the quarter.
As well as the year is that coming out of our teammates to identify productivity improvement opportunities, resulting in broad based process improvements.
This commitment has also enabled us to effectively manage our cost structure, while investing in the future.
Overall, we're pleased with our continued progress and we're very confident in our ability to continue to build on the successes that we've achieved over the past three plus years.
Now, let's discuss some of the details.
Our gross profit trends remained favorable.
Washington core achieved 60.9% gross profit for the fourth quarter essentially flat adjusting for the new revenue recognition standard.
Yes, there was a consistent theme here.
Ongoing appeal or value proposition.
This continues to differentiate Lawson products.
For example, our customers continue to experience labor shortages, especially as it relates to maintenance mechanics diesel mechanics shop, Supervisors welders and parts managers. This strengthens the importance of the loss and value proposition. We can blend superior performance products include.
60% private label products, which have been designed to meet the needs of maintenance mechanics, and superior service, including visiting our 70000 customers on average every 10 days.
Our approach also strengthens the barriers to entry as Austin province value proposition becomes more integral part of our customer success.
We have very strong customer retention, we've been rewarded with approximately 92% sales retention and we've discussed in the past we continue to invest in initiatives to increase customer retention, well growing share of wallet and adding new customers.
Our government business continues to achieve significant broke.
Sales increased 10% for the fourth quarter versus the fourth quarter of 2018 and 24% for the full year.
We continue to win proposals at the state level that will help us fuel our government business growth going forward.
The military end market grew 137% for the year. However, we did she has slowed down during the fourth quarter, which was attributed to a delay and reauthorizing. The defense appropriations by Congress. The good news is that in late December Congress reauthorize.
This budget.
Our strategic account business continues to execute on the conversion process, which I've highlighted in past earnings calls.
During the fourth quarter, we added 46, new locations within existing accounts, bringing the year to date totaled 266 new locations.
Another positive indicator of the strength of our value proposition and solid execution several of our words Egypt account.
Continue to bring us into new locations and when they grow through acquisition, we win a disproportionate share of the opportunity.
Our goal continues to be 100% share within existing accounts.
We have also added five new strategic account customers this quarter in the health care environmental services construction and integrated supplies industries.
Overall strategic accounts were impacted by the slowdown to oil and gas customers.
Growth for the year was 4.5% however, excluding the two customers that I just referred to our yearly growth.
Would have been over 18% versus 2018.
It is important dimension that we still retaining those customers. However, as their machine time utilization slows their maintenance processes have also spoke.
The care strategic account business remains solid with fourth quarter borrowing over 4% versus a year ago for.
Well, so far I had another great quarter with sales growth of 13% in Canadian dollars on top of 17% growth achieved during the third quarter and 18% in the second quarter.
Results this quarter were broad based.
In addition, several construction companies in Calgary were particularly strong we expect continued positive trends from both supply in 2020.
Operationally, we also continue to pursue process improvement in every area of the company. For example, we're nearly complete with an 80 automation project that employs optical character recognition and other invoice matching technologies to improve the departments productivity.
This is just one example of how we're embracing new technologies throughout the company.
Stepping back from the puts and takes of the quarter every year.
Our message is that our three part growth strategy continues to deliver.
First growing ourselves here.
Including both supply we finished the year with a thousand 30 sales reps and plan to incrementally higher for the foreseeable future sales Rep retention has also continued to improve.
Second increasing productivity this quarter, Washington core sales reps achieved 0.3% improvement.
In sales rep productivity versus the fourth quarter of 2018.
Similar to others saw sales in late December deflated this growth rate.
Our MRM average daily sales grew by 1.7% versus the fourth quarter of 2018 and were up 5.6% for the full year.
Sure growth through acquisition, we feel very good about the acquisition pipeline and we'll remain disciplined and are executing the plan.
[noise] grow through acquisition continues to be an important part of our strategy.
As a reminder to support these efforts we recently added bright hoekstra, our VP of M&A in September as well as completed a new banking relationship with JP Morgan CRB C and bank of America in October and some we're optimistic about our EMS.
Hey efforts in 2020.
As I mentioned, a moment ago, even with middle single digit sales growth.
And continued focus on cost management, we were able to exceed our previously stated EBITDA leverage of 25% to 30%.
We are well positioned to further drive the business to our compelling value proposition commitment to continuous improvement and disciplined approach to capital allocation, including executing accretive acquisitions.
We feel confident no previously communicated range of 25% to 30% MRO operating leverage for 2020.
As the quarter in the year demonstrated.
Day to day tactical execution has never been stronger.
Let me comment on the overall business environment.
As forecasted the overall environment did slow in the fourth quarter of 2019 in particular the last couple of weeks of December were soft. We believe this was in large part due to winter holidays fell.
It is also important to note that we continue to hold DNA cost nearly flat well amortizing our excess distribution capacity.
EBITDA and leverage continues to improve.
Process reengineering, the use of productivity enhancing technology and close relationships with suppliers will also enable us to continue to successfully leverage our infrastructure.
One other topic on everyone's mind is supply and customer impacts from the Corona virus.
We have been in regular contact with suppliers and today, we have not experienced any shortages suppliers are also assured us that they have ample supply of our product on the and.
We import approximately 12% of our products from China, and very little of our maintenance engineer private label product.
Having said that we're monitoring the situation closely and shouldn't need arise we will purchase extra safety stock.
Today, we have also not experienced any customer impacts associated with the situation.
Last week, we hosted our sales leadership team in town 43 days of training and planning.
Our team is very optimistic about the state of the company and progress that we're making in the marketplace.
Now I'll turn the call over to run for more insight into the fourth quarter and the full year financial results.
Thank you might be good morning, everyone as Mike mentioned, the fourth quarter of 2019 reflects a continuation of our strong results with our business model continuing to generate solid execution favorable operating leverage and growth in adjusted EBITDA and margin year over year, while maintaining a strong base.
Balance sheet.
Fourth quarter was a solid completion to round out a very strong 2019.
Before I comment on the results for the quarter I wanted to comment on an item in our reported GAAP results.
During the quarter, we were required to record 10.2 million or stock based compensation expense given the type of instruments that we've utilized in the past to ensure management alignment with our shareholders you accounting rules require us to mark to market. These instruments.
And since our stock price increased over $13 in the fourth quarter and over $20 from beginning of the year, we were required to record expense or 10.2 million for the quarter and 17.8 million for the full year.
Since this type of expense can cause large fluctuations in both directions in our reported GAAP results. My comments. This morning will largely be on an adjusted basis, which we feel better reflects the strength of the business and is how we manage the organization.
Tables, one anshu included in the press release provides a bridge between our reported GAAP results and our adjusted results.
Here are some of the Q4 financial highlights first adjusted EBITDA was 7.3 million for the quarter, an increase of 2.3 million or 45% year over year.
And a 240 basis point improvement, an EBITDA margin as a percentage of sales.
Second sales were 88.6 million for the quarter up 2.7% and 61 selling days the same from a year ago.
Third consolidated gross margin of 52.9% was in line with our expectations. The organic loss in MRO business segment gross margin percentage was 60.9% essentially flat with a year ago quarter prior to classic find service related costs into gross margins.
Fourth we reported to adjusted diluted earnings per share income of 48 cents for the quarter compared to adjusted diluted EPS of 22 cents in the fourth quarter of 2018.
And bear early in the quarter, we closed on our new 100 million dollar credit facility. We ended the quarter with a cash position net of borrowings of 4 million.
As a result, we are extremely well capitalized to further support acquisition opportunities as well as our organic growth initiatives.
Ill now discuss some of the drivers of the quarter and provide some additional commentary.
We generated sales of 88.6 million in the quarter on 61 selling days. This was three fewer selling days than Q3 2019 in the same number of days as Q4 of 2018.
As compared to a year ago, our fourth quarter sales benefited from the filing.
First both supply generated sales of 10.1 million in us dollars for the quarter, an increase of over 13% driven primarily by favorable broad based demand across its product categories and the development of new customer relationships, primarily in the construction trades.
Second as Mike mentioned MRO average daily sales grew 1.7% driven primarily by growth in the government and Ken sectors.
And third MRO sales Rep per day productivity continue to improve over the year ago quarter.
We ended the quarter with 1030 sales reps, including 24 territory managers in the bolt supply business.
Our focus remains on profitably growing our salesforce, improving sales rep productivity and retaining our talent.
From a sequential average daily sales basis. The Lawson segment October sales were 1.300 million November was 1.284 million and December was 1.247 million.
Similar to others in our space, we saw slowdown in the last couple of weeks of December primarily due to the timing of the holidays.
From a loss and segment standpoint strategic account sales were down 1.5% for the quarter, primarily due to slower sales at two customers in the oil and gas in mining industries.
Excluding these two customers strategic accounts grew 12.3% for the quarter as we expanded our relationships with existing customers.
Government continued to be strong growing approximately 10% along with a 2.1% growth and the Kent automotive sales.
Reported gross margin for the quarter was 52.9%.
The organic Boston MRO gross margin was 60.9%.
Similar to prior quarters. This year consolidated gross margin was impacted by 4.7 million of service related expenses that were classified into cost of goods sold in addition to lower bolt supply and screw products gross margin profiles than the core loss and segment.
Through effective pricing and operational efficiency initiatives in our products are still in process, we continue to drive organic losses MRO margins in excess of 60%.
We also continued to efficiently and prudently manage total operating expenses as a percentage of sales in further leverage our existing infrastructure as evidenced by this quarter's EBITDA margin trends for the quarter and for the full year.
Selling general and administrative expenses were 51.4 million for the fourth quarter compared to 42 million a year ago quarter.
The increase was entirely driven by higher stock based compensation of 11.4 million, which is the result of the 13 dollar increase in our stock price.
Excluding stock based compensation severance and other nonrecurring items total operating expenses decreased 4.2% on increased sales.
Our reported operating loss was 4.5 million for the fourth quarter inclusive of stock based compensation of 10.2 million compared to income of $4.1 million a year ago.
On an adjusted basis non-GAAP operating income was 5.8 million compared to adjusted operating income of 3.3 million in the year ago quarter, a 76% increase.
On an adjusted basis, excluding stock based compensation severance and other nonrecurring items diluted earnings per share was 48 cents for the quarter versus 22 cents a year ago quarter.
For the full year, our adjusted EBITDA improved by 9.3 million to 34.5 million, resulting in adjusted diluted EPS of $2.33 versus $1.39 cents in 2018.
Capital expenditures for the quarter were approximately 636000, putting the full year at 2 million.
We expect our Capex in 2020 to be in the range of three to 4 million.
Let me now make just a few comments on our full year 2019 results.
It was a really strong year for losses.
Thank you to all the Lawson cans and volt supply team members for all their commitment and effort to make 2019, such a success.
Sales finished up 6% for the full year.
We realized growth in all of our sectors.
The strategic accounts governments, Kent, automotive core Lawson and bolt supply, which had a great sales year.
Through managing our gross margins and our operating expenses 2019, adjusted EBITDA increased 37%.
To 34.5 million from 25.2 million a year ago.
This also represents a 210 basis point improvement as a return on sales.
Now some thoughts as we move into 2020.
Current economic indicators in our sector show growth, but at a slower rate.
We continue to drive growth through our internal initiatives, such as focusing on core product categories, expanding our reach into existing strategic customers and growing our state and local government presence.
We continue to monitor inflation and tear trends and we'll take the necessary actions to ensure that we stay ahead of increasing product costs.
We exceeded our 10% EBITDA to sales milestones for two quarters in 2019 and ended the full year of 19 at 9.3%.
An increase of 210 basis points year over year.
While our expectation is to achieve 25% to 30% operating leverage our business does have some seasonality to it in particular Q1 in Q4.
During 2020, we will continue with our sales and operating initiatives to fully leverage our business.
I'll now turn it over to the operator for questions.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please what we pull for questions.
Yes.
Thank you. Our first question comes from the line of Kevin. Thank you with Barrington Research. Please proceed with your question.
Good morning, Mike and Ron.
Good morning, Kevin Good morning, Kevin.
So the.
The operating leverage in the model continues to be outstanding.
We continue to talk about.
Broad based process improvements.
You continue to streamline cost just as you look out over the next few years here, what's the opportunity that you have to continue that process through I know you have lean six sigma initiatives.
Across the company, but did you think theres still.
A lot a a decent amount of runway to continue improving processes and streamlining cost or at least holding them flat going forward.
Yes, Kevin. Thank you this is Mike.
We don't see an end in sight.
Whether we turn our attention to gionee cost process improvements.
Stripping out non value added activities the use of technology, but also turning our attention to sales rep productivity going through the use of lean six Sigma and dissecting.
Sales processes hiring processes.
By the way Tomorrow, I am kicking off another lean six Sigma class for teammates here at corporate so the short answer is we don't see an end in sight, though always be process improvement there'll be new technologies, even years from now so it is a continued process and you have.
The work at our everyday.
But we are very very optimistic about our ability to continue to manage costs and deliver more and more productivity for the foreseeable future.
Okay great.
And Rob just to make sure you're you're reiterating that 25% to 30% operating leverage target for 2020.
That's correct, yeah, we we still feel comfortable with that Kevin even though we were able to.
Outperform it for 2019, I think our all in operating leverage for this year was was a little bit north of 40%, but.
But we feel that the 25% to 30%.
Is the is the flow through from a guidance standpoint.
Okay, Great and then.
You continue to make progress on adding new locations with strategic accounts as well as adding new strategic accounts, but I I think Mike you said your goal is to get a 100% penetration of.
Your your strategic accounts in terms of capturing the locations with them do you have you ever trying to take an.
Deeper dive and looked across your strategic account base and said, okay, where what percentage we're at now and kind of give us a sense of runway that that's still exist to continue penetrating.
Your strategic accounts.
Yes, absolutely Kevin. Thank you. So a couple of thoughts, though the 100%, yes refers to a 100% of the locations.
We then strategic accounts and they range all over the map and the way strategic accounts have workforce throughout our history is in most cases, it's a hunting license. So we develop a relationship with a number of locations.
Then it moves to the corporate headquarters of that company, they help a little bit, but we have to work one location at a time did this place.
Pattern.
And as we bring on new strategic accounts wherever you start theres more to be had.
When I talk about 100%, it's broader than strategic account, what I really mean in that statement is within our 12 broad product categories.
We want 100% share of all customers, whether its local accounts just one location, one small location or a very large strategic account.
When our sales rep is in servicing that location, we want to service all that we can and the reason we want to do that.
Is that because of our operational excellence superior performance and the fact that are sales reps are visiting with the customer on average every 10 days, which is usually every week or every other week, averaging 10 days, where their reliably never let the customer run out of product Theyre consuming and also because we.
Are there so frequently we never overstock the customer so when I see a 100% share I'm really we've heard the all 70000 customers, we want a 100% share within the bounds of our consumable products. There is huge huge potential and let me say I have.
Never ever been more excited about the state of the company and our underlying value proposition and bear and very recently, we've even had a large number of potential strategic accounts reach out to us and invite us to begin broader dialogue with them. These are not customers today.
But they reached out to us and invited us into talk about broader relationships. So on every dimension, whether its cost management lean six Sigma our sales rep productivity.
Cost supply chain suppliers and every dimension to the company I have never been more confident in the future of this company that I am at this moment.
Okay. Good good that's good to hear.
So you.
Looking forward to 2020 I would assume the plan is to continue adding.
Sales reps, it kind of a modest pace and maybe talk a little bit more.
About the sales Rep retention you mentioned there continues to improve that seems like it's been kind of a multi quarter trend there and.
How much more room do you see the to improve there.
Yes. It is it's you know it's small contiguous incremental improvement in retention, we will continue to higher incrementally.
And of course, the hiring number.
Gets a little less pressure as you're able to retain and when you're retaining they.
Track, along the way the curve of growing their book of business and growing the profitability of the sales rep.
But it is continuous improvement of retention by the way lean six Sigma here has helped US several years ago, we started talking about a lean six Sigma project due in a very systematic way onboard reps trained reps and then help them. This most of the the weight of this work.
Sales on our district sales managers, but help and coach and monitor them.
So they can start tracking initially successfully no other initiatives we have in place that will we think pay dividends for us. This year is a focus there are foundational products that are extremely important to our customers, they're very sticky to our customers and so a real FFO.
I guess, just starting recently on these core foundational products from which to build.
They are the bedrock of the relationship with customers and if you had those core products. The long term retention of the customer and the profitability of the sales rep and customer relationship is far higher all of these things serve to improve sales rep retention customer retention.
And profitability of that specific customer.
Okay got it.
Baby.
Let's switch to just the operating environment.
As you see it now.
You mentioned, a a slowdown among.
Two years oil and gas customers strategic customers.
And the impact that had a in the fourth quarter.
And they kind of shared with you their plans for for 2020 or how do you see those two particular customers.
Impacting your overall growth outlook.
As you move throughout this year.
Yes. So of course, we captured all the details relative to specific customers, but.
They are in the oil and gas industry. However, it's important to recognize those but the oil and gas industry represent less than 5% I think mall at 4% of our total business.
So we call them out in general because theyre relatively large customers, but they are relatively small as a percent and how industry is relatively small small as a percentage of our total mix.
It's likely that those specific customers by the way it's important to recognize we retain those customers.
As their demand that goes down and is really about how hard they are running their machines.
As you idle machines, the maintenance cost goes down because of you don't run them they don't break.
Those two customers are probably going to move sideways this year, they might tip up but but the likely move sideways. However, there are so many other opportunities we have four new strategic accounts that we are very very excited Kevin the other the other point I would I would add on top of that is.
We look at call. It the first eight weeks of of Twentytwenty, we have seen a.
Sequential increase.
Over December night in my prepared remarks, I commented on Ats for October November and December. So we've seen a nice increase in our average daily sales going from December into January and February and are also trending.
The first couple of months of the year higher than where our full Q4 EPS ended up and volt has gotten off to a strong start as well so even though we continue to see a little bit of softness in these couple of customers.
Weve continued to see nice sequential increase over Q4 2019, as we start out this year.
Okay, well, that's that's held it because it was actually going to be my next question about what you've seen thus far through the first.
Couple of months a year here, but it sounds like even though you mentioned indicators for the industry show growth, but maybe at a slower rate that it hasn't.
Material and.
Materially impacted you at least as of now it sounds like any just those two specific customers not in the industry. Those two customers I think I think January the the Irish them was 50.9 and that was the first month and.
And five months that it ticked up above 50.
And we saw some of that increase we saw some that lift here in January as well.
Okay, great well.
That's all I had for now so thanks for taking all the questions.
Sure. Thanks, Kevin.
As a reminder, if you would like to ask a question press star one on your telephone keypad.
Our next question comes the line of Carlson with Keybanc. Please proceed with your question.
Hey, good morning.
Good morning, I want to girl.
I'm just curious first just kind of you mentioned the acquisition pipeline.
If you could kind of expand on that what you're kind of what you're targeting.
What what areas you're looking at specifically.
What.
What kind of leverage you're looking to get too.
Let me comment this is Mike Carl Let me comment on the first part of that in Enron content of the second part.
We continue to pursue a broad range of opportunities from you know.
We call it $10 million, a revenue up too much much much larger well over $100 million of revenue.
And now that we have even more financial capacity.
We feel good about that we have been developing relationships for a number of years certainly our vice president of M&A is having a very positive impact than is thorough approach, we're very very pleased with.
So we feel good about the pipeline across that spectrum by the way and.
And we're very optimistic that during 2020, we will succeed along that dimension.
The other thing is that as we've gone through the acquisition process that's behind us.
That has enabled us to build the integration process and our integration team and all the functional leaders that participate after we succeeded by the way even any analysis prior prior to doing an acquisition. So we feel great about our ability after acquisition to integrate successfully.
So we feel like here all the past all the hard work of the past couple of years.
We will pay dividends here in 2020 on that you want to come at the moment.
Carl I would just add on top of that is Mike and I. Both mentioned in our comments that putting that the new credit facility in place in the fourth quarter with JP Morgan Chase and CDC and Bank of America really gives us the wherewithal to.
To make those acquisitions that were looking at that combined with the free cash flow that that we throw off on our base or our core MRO business puts us in a really really good position going forward to be able to make those acquisition. So we feel really good about not only the pipeline, but also our.
Financial.
Wherewithal to be able to financials organization those acquisitions.
Great. Thanks, and then just a couple of housekeeping questions.
What are you expecting for number of business days sales days by quarter. This year.
Sure so for 2020.
We pick up one additional day the way that the calendar fell going from 18 to 19, we picked up one day and going for 19 to 20, we pick up an additional day so by quarter.
2020, Q1 has 64 days Q2, 64, Q3 64, and then Q4 is 61 days again and then if you will further out into the calendar out to 2021, we actually lose two business days so.
But we pick up that extra day here in the first quarter.
Okay.
And lastly.
What's your expectations for your tax rate for fiscal 19.
Our 20, sorry, yes for 20 sure so for fiscal 19, we all in for the year, we're at 25.4%.
And that that's about where our expectation is moving into 2020 as well what I would say is that.
We will be.
A pack a taxpaying entity in 2020.
DNL wells that we were carrying forward.
Most of those will.
Expire throughout 2020, so we will be using some of our cash to pay taxes were historically, we've not had to.
And to cut check so I just wanted to highlight that but the effective tax rate should still be in that 25 to 26, 27% range.
Great. That's all I've had thanks.
Sure. Thanks, I'll say Carl.
Thank you we have no further questions at this time, Mr. Takeda I would now like to turn the floor back over to you for closing comments.
Thank you very much.
Thank you for joining the call today Lawson products had another great quarter integrate year.
Sales EBITDA gross profit and leverage all continued positive trend that began in late 2016.
Share gain and customer retention highlight the increasing value that customers place on our ability to improve their productivity.
More customers and potential customers are recognizing our value proposition. This is especially true of potential strategic account customers.
We're confident that park the productivity related actions will continue and produced earnings growth, while improving the quality of workday for our teammates.
I would like to extend thanks to our teammates I'm grateful for their dedication the customer service and the knowledge that their work is enabling 70000 customers to prosper.
Thank you again for joining the call today, we look forward to speaking with you again shortly when we released our first quarter results. Thanks again have a wonderful day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines. This time. Thank you for your participation and have a wonderful day.