Q1 2020 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Lawson Products' first quarter 2020 earnings call.
This call will be hosted by Michael the Kato 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.
And there will be a time for questions and answers.
Please note that statements on this call. It 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 could differ materially from those described.
In addition statements made during this call are based on companies views as of today.
The company anticipates that future developments may cause those views to change.
He is considered the information presented in that light.
The company May at some point elect update forward looking statements made today.
Specifically disclaim any obligation to do so.
This call is the audio simulcast on the Internet feel 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 may 31st 2020 I.
I would I'll turn the conference over to Lawson products CEO like the counter.
Good morning, and thank you for joining the call. This morning, I will comment first I'd be actions, we're taking in response to the cobot 19 pandemic and then our first quarter results followed by our plans going forward.
Convincing our CFO will provide more detailed review all of the first quarter financial results and additional details regarding our actions followed by your question.
First.
Washington was seen an essential business by the government and as a result, our sales reps continue to call on our customers and our distribution network has remained open during the pandemic.
That said, the safety and health of our employees customers and suppliers our highest priority.
And we are fully implementing the guidelines set out by the CDC and health Canada.
I'm extremely proud of the dedication and efforts of our teammates across every functional area of the company, including the sales team our distribution centers corporate and multiply.
Every function and group across the company has demonstrated their ability to be nimble and innovate.
We are grateful for their support and dedication.
Let me know provide some examples of the actions that we've taken.
Within corporate the team is largely working remotely and we have supplied the necessary supporting equipment as needed.
Our distribution centers have taken steps to maintain social just didn't change as well as adding extra cleaning disinfecting and using P.P. mask some gloves threw off.
Our sales reps are diligently working to support our customers and continue to provide high quality service that Washington is known for.
We continue to visit our customers locations on a reduced schedule or selective basis, and we're also leveraging.
Customer service function.
Phones.
And web site.
Despite the environment, we continue to win new customers.
Several ceos of large and small customers have reached out to me directly.
And to our executives to personally expressed their appreciation for our continued service and support. One example of this is the president of the landscaping company, who call to express his appreciation for our support.
He made the decision could bring us on as its hydraulic supplier in early April.
We have continued to service is company during the pandemic.
As far as the first quarter results ourselves, we're increasing both year over year in sequentially through the middle of March.
The key metrics, we track, we're all increasing nicely.
However, we began to experience weakness due to the economic impact of cold in 19 pandemic in the second half of March and this has continued into April.
In response to the impact of spoke at 19 pandemic. We immediately took actions to ensure the safety and health of our employees customers and suppliers as well as support our business.
Let me highlight a few of the initiatives that we've already implemented.
Washington sales Representatives, we made in close contact with customers through phone backs Internet based communication and in many locations or in person call cycle continues, albeit wearing P P and practicing social doesn't show up.
Additionally, our customer service Department has taken on a larger role to support our customers and sales reps.
Well branches remain open and our offering curbside pickup for customer orders to maintain socially distinction.
We're also in contact with our current suppliers as well as reaching out to additional suppliers to ensure that orders for inventory are fulfilled a timely manner.
More to other MRO distributors access the P is more challenging dent in the past.
But our supply chain for other product categories has not been interrupted.
Over the past weeks, we've taken numerous additional actions to manage the business. During this period, all exempt employees and the board of directors have taken salary reductions.
We have also spent suspended.
Several performance based awards in addition.
We have furloughed 100, corporate and DC teammates.
Other actions include no new hires reducing discretionary travel as well as reducing capital expenditures and getting better payment terms from suppliers, Ron will discuss our actions in greater detail in a moment.
These actions will significantly reduce our operating costs, while we're working with our teammates customers and suppliers to enable us to snap back as soon as the environment gets back to normal.
In reviewing our customer segmentation.
Most of our customers are in suburban and rural areas versus urban centers I.
I believe these customers are likely to resume operations ahead of our urban customers.
From an operational perspective, we also suspended operations and our Swanee, Georgia distribution Center.
And orders are now being filled from our Mccook distribution center.
We have seen very little customer disruption from this action.
During this challenging time.
Our sales team has worked hard to continue servicing customers and it's developing innovative approaches to meeting our customers' needs. For example, our marketing team has developed marketing tools that enable our sales reps to customize offerings, which meet their specific customer needs.
[laughter] programs that we rolled out several months ago continued to gain traction such as the hydrology program that I mentioned a moment ago.
We have continued to add new accounts and develop new relationships that we expect will produce positive results as we exit the situation.
Considering the overall environment.
Awesome products as.
Performed very well into first quarter and up until.
The last two weeks.
Was inline with our performance expectations.
Consolidated sales contracted by <unk>, 0.3% year over year, and 1.9% on an ABS basis, driven primarily by the decline in the second half of March.
Reported total sales of $91 million.
Versus 91.3 million for the first quarter of 2019.
Despite the flattish sales trends, our adjusted EBITDA margin increased over 200 basis points to 10.4% of sales versus 8.2% a year ago, resulting in an adjusted EBITDA increased nearly 27%.
These results reflect continued leveraging of our fixed costs and cost reduction actions starting in March.
Despite the last two weeks of March we did see some sales success during the quarter.
Strategic accounts achieved 1.7% growth at 14.3% growth excluding to oil and gas customers were negatively impacted the decline in oil prices.
Strategic account customer growth included two equipment rental companies three integrated supply distribution partners, one truck and trailer customer and several other companies.
Our Kent automotive strategic accounts grew 5% for the quarter.
Our national relationships continuing to enrich our government accounts contracted by 1.8% for the quarter. This softness was broad based.
Well supply grew by 8.4% year over year for the quarter.
Well, our Threep our growth strategy remains unchanged, we are making adjustments based on the current environment.
We finished the quarter with 993 sales reps and over the intermediate and long term, we will continue to add celtra incrementally.
However, we have deferred start dates or new reps until at least July 1st.
Our focus on sales Rep productivity also continues though improving productivity. During this period is a challenge sales rep productivity contracted by 3.1%.
On a sales per rep per day basis for the quarter. However actions that we mentioned during previous earnings calls such as our trading and focus on core private label products will continue in this environment. These products include fasteners chemicals abrasives cutting tools.
And electrical connectors.
All our sales managers have also completed training and distance coaching which will pay long term dividends as we exit this environment.
We continue to progress on the acquisition front.
Well, it's likely that the current environment will slow some aspects of our M&A process, our conversations remain productive.
We're committed to exit this environment as strong as we entered it.
I'm confident the actions we've taken will ensure this result.
Now I'll turn the call over to run for more insight into the first quarter results as well as our recent actions.
Thank you, Mike and good morning, everyone I.
I will first provide some key takeaways from the quarter end our actions being taken.
Then I'll discuss trends in the first quarter of 2020 and April followed by various actions that we've taken to date in light of the economic impact of the cobot 19 environment.
And finally I'll discuss in detail our first quarter results on both the reported and adjusted basis.
Let me now provide some key takeaways.
For the majority of the first quarter ourselves show continued improved beds and the economic impact of the Covisint 19 did not manifests itself in our results until the second half of March with the softness continuing into April.
Second effective cost management has been a cornerstone of our operating approach for the past several years and in March we began an aggressive program to gain further efficiencies and have implemented broad based and necessary cost actions, which I'll comment on a further in a moment.
Finally, proactively managing our working capital and liquidity, while supporting our customers is a core part of our operating philosophy.
We ended the quarter with 4.1 million of cash and cash equivalents with an additional 88 million availability under our committed credit facility.
We are very well capitalized and continue to actively pursue opportunities to further enhance our financial position.
It's Mike discussed, we really break the first quarter down into two separate periods.
First January 1st through say mid March and then the second period being from mid March through the ended the quarter.
For the quarter sales contracted by 23% compared to a year ago, driven by the softer last two weeks of March.
Consolidated sales were slightly positive for the quarter, excluding the foreign exchange impact.
Our reported average daily sales were 1.447 million for January 1.468 million for February and 1.356 million for March.
As you can see we were generating a month to month sequential increase for the first two months.
Until the second half of March.
Let me provide some further details.
On the Emerald side of the business March started a little soft with our average daily sales from March 1st to March 13 at approximately 1.34 million.
This compares to MRO sales during the week ending March 20 at a 1.19 million and the weekend being of March 27, a 1.06 million.
So we ended the last week of March running at about 78% of sales as compared to the first two weeks of March.
Both supply saw similar results, but they're decrease occurred more in the fourth quarter of March then the third week of March and in fact, they hit their plan. He asked for March during the third week.
During the last two weeks of March our sales decline was broad based across most of our district territory and customer types.
More specifically as we look at sales for the quarter by end customer we realized increases in sales to our Kent automotive and strategic customers, while seeing declines in our government business and our core loss in segment.
Despite the slowdown in sales during the last week of March for bolt. They ended the first quarter with an increase of 8.4% on a year over year basis in local currency.
From a product category perspective, our sales decline was pretty consistent across our core categories, except for increases realized in our specials orders and our safety category.
Let me know comments on the trends that we've seen for April and then I'll conclude my comments with the results with commentary on our reported an adjusted results for the quarter and the action items that we've implemented.
First similar to other distributors sales for the month of April have trended lower than the latter half of March.
In the MRO business. Our April average daily sales is currently trending at approximately 61% themselves versus the first two weeks of March resulting in a decline versus April 2019 of approximately 35%.
For bolt supply, we're seeing gotta results with April Ats trending at approximately 73% or the first two weeks of March, but we are down approximately 33% as compared to a year ago.
As Mike mentioned, we remain proactively focused on supporting our customers and generating revenue in this challenging environments.
We continue to perform on site visits to many of our customers locations, while providing additional support through phone outreach internal customer service representatives email communication and our web site.
There've been some great success stories on our reps being able to support our customers as well is reaching out to new customers. In this environment that Mike is already shared with you.
Gross margin for the quarter came in largely at expected levels with our consolidated gross margin at 53.7% versus 53.6% in the same quarter a year ago.
On a standalone basis before the service cost reclassification MRO margin was 60.8% for the quarter unchanged with a year ago.
For the quarter total operating expenses were 30.3 million compared to 43.4 million a year ago.
During the quarter, we recorded a benefit for stock based compensation of 10.7 million with the benefit primarily associated with the stock price, which declined during the quarter.
This compares to expense of 408000 in the first quarter of 2019.
Excluding stock based compensation and minimal several severance expense.
Total operating expenses decreased 2 million or 4.6% on slightly lower sales as we closely managed our fixed operating expenses as well as reduced performance based awards travel and award trips late in the quarter.
Our reported operating income was 18.6 million for the first quarter inclusive.
Oh, the stock based compensation benefits it a 10.7 million.
Compared to income of 5.5 million a year ago.
On an adjusted basis non-GAAP operating income was 7.9 million compared to adjusted operating income of 6 million and a year ago quarter, a 33% increase.
This resulted in adjusted EBITDA as a percentage of sales at 10.4% for the quarter compared to 8.2% a year ago quarter.
On an adjusted basis, excluding stock based compensation and severance diluted EPS was 52 cents for the quarter versus 48 cents a year ago quarter.
Capital expenditures for the quarter were approximately 551000.
As we manage our liquidity for the remainder of 2020, we expect our capital expenditures in 2020 to be approximately 2 million.
Merely for maintenance capital versus the previously guided range of three to 4 million.
I will now comments in greater detail some of the specific actions that we've taken from a cost and liquidity perspective.
While some benefits were realized in the first quarter from these actions the majority of the savings will be realized in April and go forward months.
With sales at the current run rate, we've effectively taken out on the average monthly cost.
Four to four and a half million throughout the organization.
In terms of costs. Our actions include but are not limited to the filing.
Consolidating our swanee, Georgia distribution center operations into our more cook facility capacity.
Reducing salaries for all salaried individuals ranging from 10% to 30% depending upon their role in the organization as well as reducing board compensation.
In addition, we've eliminated many of our performance based awards.
Furloughing approximately 100 employees throughout the organization and deferring new hires start dates.
Eliminating approximately 40 sales rep positions with slower end markets.
Yeah, you, eliminating all non critical travel, including sales award trips and district sales meetings.
We're also proactively managing our balance sheet and liquidity.
We've reached out to our vendor and supplier community for extended payment terms you eliminated non critical capital and continue to monitor our customer credit to manage customer past due balances.
We ended the quarter with 4.1 million of cash and cash equivalents and an additional 87.5 million of availability under our 100 million dollar committed credit facility led by JP Morgan Chase.
As of today, we essentially have the same level of availability under our facility from four weeks ago.
While we've taken actions to date, we are prepared to take further action if the environment worsens.
As we manage through these interim periods, we look to coming out of this environment is strong as we entered into it.
Before I turn it over for questions, Let me Echo Mikes comments about the strength and commitment of our team members over the past six weeks.
Actions that we have taken have put additional pressure on our teammates in every one of them is stepping up to the challenges in this difficult environment.
They are committed to the organization and its humbling to me the confidence that they put in a leadership team to make the necessary, but difficult decisions to ensure that Boston comes out of the stronger than what we entered it.
As one of our regional sales director said, let the tough get tougher.
Thank you to the entire Lawson.
And and bowl teams for their commitment over the last six weeks.
I'll now turn it over to the operator for questions.
Thank you.
We will now begin the question answer session.
To ask a question you May Press Star then one on your Touchtone phone.
They are using a speakerphone please pick up your handset before pressing the star keys.
Withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Our first question today is coming from Kevin Frank Can't Barrington Research. Please proceed.
Hey, good morning, Mike and Ron.
Hi, good morning, Kevin.
Hey, Thanks for all the a detail on the sales trends you've seen.
You know second half a mark going into April.
That was very helpful. I'm, just wondering is as you move through April you.
You know if you had this level of detail kinda avant a week by week basis have you seen any stabilization is the month progressed.
Yeah, I can oh, yeah, I can I can jump in on that.
Kevin So yeah. We've got we've had we have seen a stabilization threw out or the the weixin in April and as you can imagine work, we're looking at the trend not only weekly, but but on a daily basis.
In our our business can be a little spiky from from time to time, but you know on a daily basis, but overall from a weekly perspective.
Its been pretty consistent for most of the weeks of a of April.
Did you want to comment as well I know, but.
Yes, that's.
We are we are seeing a consistency.
For the last couple of weeks.
Okay. Yeah. Thank you that's helpful and then.
On the other cost reductions, yeah, obviously pretty aggressive actions you.
Four to four and a half million a month I believe you said, so you know 12 million plus on a quarterly basis.
How should we think about you know those costs.
Being distributed across your various the various categories cost of goods sold selling expenses Gionee expenses.
Yeah, Kevin This is Ron again, so most of those costs sit within both the selling in the Gionee lines as as we report them separately on our on our financial statements.
And certainly a a portion of those expense reductions are variable you know relative to our our sales.
Coming down, but there's a there's a significant portion of those expenses that are that are fixed as well and the actions that both Mike and I commented on I'm really are across the organization. So.
The.
The salary reductions and the Furloughing and so forth.
That's that's across the entire organization I'm, it's not solely within just the sales organization or just corporate or just the dcs. So from a a flow through perspective as to where you'll see those you'll see the you'll see the reduction in expenses in both of those lines the margins gross margin.
Not really don't include that much from a from an operating expense standpoint, but so some more on the on the direct expense lines.
Okay got it and then.
You mentioned you consolidated the the Georgia distribution Center.
Into Mcculloch do you see that is a permanent action going forward.
No we don't Kevin that's its volume based and [noise].
Again, we seamlessly shift so [noise] excuse me, we seamlessly shifted over excuse me [noise].
As we shifted over.
You are being because of volume we didn't wait no customer disruption.
And as volume rebuilds will really got basically our intention is to bring back all of our furloughed employees likely an incremental bases as they as things ramp up the demand will ramp up you need will injuries.
Okay got it.
You know it's good that you have a a pretty diverse customer base, you mentioned that you know more weighted to suburban.
Locations for your customers, which might come back sooner, but.
Do you have any sense as you look at your customer base I know you were deemed in a central business, maybe like roughly how many of your customers or what percentage might be.
Also deemed a central.
You haven't we don't really track it that way certainly [noise].
There are a great any trucking companies that our customers of ours food production companies.
Manufacturers of all kinds of [noise].
But up until this most recent circumstances environment, we would never have thought about that concept of critical comp you know critical infrastructure companies in the past so.
It's not part of our normal.
Kind of customer database as to what those what that ratio of customers would be but again.
Very large percentage of them our company they trucking companies food production companies manufacturers of all kinds of products.
And because it's all BBB.
Most of the baby products.
I would gather is my guess is the vast majority is not consumer.
Ladies b to B product not one one exception is Kent automotive.
Where there's a where you have an auto body repair if its discretionary certainly we would expect that to be a little softer going forward, where you can put off.
A minor re care until things get a little bit back to normal that that is the one area. That's a little closer to consumers, it's still BBB plus a little more discretionary.
For the most part.
You know more of our customers on our.
Probably towards the critical ended the worlds.
Okay that makes sense yeah. That's helpful. And then I you know encouraging that you mentioned you continue to.
When new customers.
Do you think that can think can continue kinda during the worst worst of this downturn you know how would how is the process change for winning new customers.
Do you think it could slow down materially I read that.
I wouldn't doubt that it would slowed a bit but just maybe a little about winning new customers in that process in this environment.
Yeah, So I mean <unk>.
Everything is a little hard to predict with any any kind of clarity these days.
And this is a difficult environment and many of our competitors have been hurt in this environment.
So when when I was referring to new customers I was specifically, referring to a comp conversations we have with our field sales managers and they've talked about.
Companies that they've been truck sales reps have been trying to open up as new customers for quite a while our office and reaching back out to us and reporting that their existing suppliers.
Aren't able to service them or in some ways in some places where they are more geographically remote.
Our being under served this is part of the benefit of the critical mass of sales reps that we have.
For us geographically remote is less likely that for summer someone with a smaller number of sales reps. So I think yeah.
That's the underlying.
No opportunity for US is to continue to service our existing customers when share of wallet, we more share within existing customers, but again customers we've been trying to win over.
Our all the Sun, a fair amount more receptive, especially where they're being under served and we picked up a number of new locations. Both very large from large competitors and small from small competitors across the spectrum what happens in the future is a little hard to say, but we fully intend to keep the customers we've won.
And to continue on the trajectory that we were on prior to this you know we were.
Under underneath our core business is absolutely solid on the tremendous trajectory.
Just little sideways motion that we're in a will abate and we'll get back at the trajectory that we were on.
End up coming out of the stronger more resilient more creative more innovative with I believe better customer loyalty, even done we went in which as you know with 92%.
Revenue retention.
Oh, it was already tremendous and it is certainly our aspiration and hope that we will have even better employee loyalty and commitment and our employees have just been extraordinary during this challenging done.
Okay, great. Yeah, that's an interesting market dynamic sounds like you're Oh, really well positioned competitively a both within this environment in coming out of that so that's all I had for today. Thanks. Thanks for all the comments.
Thank you Kevin Thanks, Kevin.
[noise] settlement that a star one to register a question at this time.
Our next question is coming from call some of Keybanc capital markets. Please go ahead.
Hi, good morning.
Good morning, Carl Uncork morning, one question around I think you mentioned you eliminated.
40 sales rep positions.
Just an underperforming areas was that at the end of the quarter to that occurred in April I'm, just trying to get a sense the timing there.
In April late April.
Okay.
And we are able again this is one of the benefits of [noise].
Critical mass of sales reps 993 sales reps.
We are able to reassign those customers to existing sales reps to our inside sales people in customer service people and we do not anticipate any disruption whatsoever.
And customer service or the service intensity that we're able to provide those customers.
Got it thanks.
What about just in terms of I know you guys have focused a lot on retention or you are you evaluating how well you're going to be able to retain sales reps at this point given that your.
Got you have that fire hiring freeze.
Yes, yes.
Yeah. Yeah go ahead, Mike Yeah. Yeah. This is Ron I'll jump in so you know we have really through 2019, we were seeing some gradual improvement in our retention rates and I would say that that really extended into the first quarter of 20 Twond.
He is well and even into April. So you know, albeit you know our sales reps are art, you know commission based as well as some of them have a a salary plus commission plus they all are incentivized.
So we were I mean, we feel pretty good about the retention I think where I'm certainly making moves.
To treat I'm all of our employees fairly yeah, and and we've seen tremendous engagement by our team as well so.
What we've seen so far for the first quarter and even into April.
During this difficult time is is that our retention is actually gotten a little bit better.
Great and then just kind of lastly on the sales Rep side I know you mentioned the hiring freeze going through July 1st potentially is that just dependent on maybe moving that forward or backward is that dependent on market.
Market conditions improve or is there how are you kind of evaluate.
[music].
Yes, it is a little bit market conditions, but the real driver. There is the ability of the district sales managers to ride along with the new hires.
And to start the intense training that you know is kind of a one on one thing that we have trained all of our district sales managers and distance coaching which will pay very long term, well, hey long term very significant.
Productivity benefits and the district managers ability to touch more people other existing teams leverage their time were effectively so we're very excited about the the commitment district managers have made it is distance coaching concept, but that's a little bit of a stretch for a literally brand new and.
We you do want to spend some more than one time in person with a one on with the new employees. So it's more about that Dan availability of customers are markets are opportunities, it's more about the mechanics of training.
But as soon as we can resume that and as you remember it was continuous incremental.
Increases of sales reps, and we don't foresee that changing anytime in the future just as a short pause until we can get back to the several trading that new new employees need.
Got it that's all I had thank you.
Thank you Carl.
Thanks Carl.
Thank you. This concludes our question and answer session I would like to turn the conference back over to make the Canada for closing remarks.
Thank you bye.
Thank you for joining the call. This morning over 68 year history Lawson products as face many challenges.
Not quite like this one.
I am 100% off of it that we will emerge better stronger and more resilient than we enter.
This quarter, we demonstrated that with flattish sales, we could still deliver improved EBITDA and generate cash.
More customers potential customers are recognizing our value proposition, especially in these challenging times.
This quarter and more recently, we also demonstrated that we can be nimble and innovators.
We're focused on safety of our teammates and we'll continue to take the necessary actions to remain strong financial position.
[laughter].
I would like to take this opportunity to again, thanks, our teammates their innovation has been tested and they continue to demonstrate their commitment to our customers. Thank you again for joining this call have a wonderful day.
Thank you. The conference has now concluded thank you for attending today's presentation.
<unk>.
Yeah.
[music].