Q2 2020 Lawson Products Inc Earnings Call
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Good morning, ladies and gentlemen, and welcome to the Lawson Products' second quarter 2020 earnings call.
This call will be hosted by Michael Decata Lawson products, President and Chief Executive Officer, and Ron Knutson Lawson products Chief Financial Officer.
During this call they will be providing an update on the business as well as covering relevant financial and operational information.
Then there will be time for questions and answers.
Please note that 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 by Lawson products.
Inter Bester relations page on the company's website Lawson products Dot com.
A replay of the webcast will be available on the website through August 31st 2020.
I will now turn the call over to wall some products CEO, Mike Decatur.
Good morning, and thank you for joining the call.
This morning, I'll comment on the second quarter and our actions that we've taken to drive sales and earnings in this challenging economic environment, followed by our plans going forward.
Well I'm convinced that our CFO will provide a more detailed review.
Our second quarter financial results [noise].
How about your questions.
The coldest 19 pandemic had an unprecedented adverse effect on the U.S. economy, starting in Mark. However, Watson is weathering the storm and we believe will come through this a stronger company in the future.
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Our second quarter revenues reflected a drop off early in the quarter and most of our customer categories. We realized a nice recovery in may and have seen continued sequential improvement in the following month.
Our strategy during this quarter was to ensure a safe working environment for employees support our customer and supplier relationships.
Oh protecting the financial position.
The company and long term interest of our shareholders.
I'd be remiss, if I did acknowledge the hard work and sacrifice our team members made good this challenging quarter.
In that respect this quarter was a great example of how the most important asset of the organization our employees stepped up and allowed us to continue to serve our customers all while maintaining the financial strength to the organization.
We have all weren't a great deal during this environment.
Rapidly modifying our sales by employing multiple channels to market.
Testing portion of our sales rep compensation.
Managing our supply chain by working to develop new PBT sources, and reengineering administrative processes will provide future benefits to our organization.
We believe these actions there nurture them result, and long term applications will help position Lawson to reestablish solid growth into the future.
[noise] in the current environment sequential trends provide insight into our current performance and trajectory.
As we mentioned on our first quarter call April was certainly challenging however, we achieved a significant step up in business between April and May and another more modest improvement between May and June we have also achieved mid single digit.
Increase in July versus drilling.
Ron will comment on our results in more detail, but I am pleased with the response and overall performance, especially considering how rapidly the situation evolves and I'll quickly our team responded.
Overall, we achieved 8.7% adjusted EBITDA as a percentage of sales for the quarter.
Gross margin for the loss in the core business came in at 59.7% within our normal range of 59% to 61% and reflected the impact of de leveraging of our fixed distribution center cost over a lower sales.
We have to a lesser extent higher freight cost and the shift in sales mix to lower margin problem categories.
[noise] across the board, we're seeing signs of business returning to more normalized levels.
However, it is important to recognize the risk that continues in this shorter term given the pandemic.
Over the intermediate to longer term our value proposition is becoming more critical to our customer success.
[laughter] I'll now discuss some of our functional areas in more detail.
[laughter] first.
The sales team is now visiting the majority of our customer locations as they did in the past.
The number of order alliance and shipped two locations have been increasing at a sequential basis, starting in may as well.
For example, our lives shipped increased from 17000 lines per day through the U.S. distribution centers in April 23000 lines per day in May and continue to increase through July.
Our services.
And the frequency of our visits are more critical than ever as customers manage through.
The pandemic.
Oh sure distancing.
Within our customer base as high and the need to ensure that their maintenance teams.
As productive as possible.
Given the frequency of our visits we enable customers to highly to become a highly efficient maximizing machine uptime and increasing their productivity.
We have also been able to remotely manage many of our back office functions.
Our dsos are back to pre pandemic levels and bad debt levels increased minimally versus the first quarter of 2020 after 2019.
Our accounts receivable team has done a great job and this is just one example of many of the teams across the organization that a managed their processes as well.
From an end market perspective, our government sector.
You're seeing faster signs of recovery, our military customers were up 15% for the quarter versus the first quarter, but down versus last year due to budget cuts and motor pools at large base is running at reduced capacity due to the pandemic.
The state local and education markets are showing strong indications of recovery, especially in June and were up 13% in June over a year ago.
In April we were awarded an Arrow agreement.
For the region for area Omniab.
A cooperative purchasing organization for state and local government.
Hey through school of Education colleges and universities Omnia uses co-operative contracts to reduce the cost of goods and services by aggregating the purchasing power of public agencies nationwide and obtains publicly awarded contracts for their members with best thing.
Class National suppliers.
It is one of the largest public sector group purchasing organizations in the country.
[noise] a number of our strategic accounts struggled during the quarter.
As the impact from that pandemic was exacerbated by exacerbated.
By the general slowdown in the oil and gas segment. However, one of our work pipeline customers has informed us that they are ramping up several large locations and we anticipate good growth from that customer during the second half of the year importantly, our strategic account customers our expense.
During the same rebound that we're seeing across the company.
Our Kent automotive market segment.
Experienced the steepest decline as well as the steepest recovery during the quarter.
These customers are more connected to retail activities.
And as that has recovered they're seeing business pick up within increased traffic on higher driven miles reported.
Historically safety represented about 5% of our business, we did see that rise to 10% during a portion of the floor as we work to supply customer requests.
This is a lower margin business for us at this point.
And the demand is back to more normalized levels.
Overall products that we classify as P. E continue to have strong month over month increases.
For the quarter, both supply sales were down about 25% primarily in April they have realized sequential improvement in may and June.
In fact July sales were essentially flat versus a year ago.
Western Canada was not as sharply impacted as the U.S. was however, they were required to manage their branch locations to comply with government imposed safety measurements.
Our operations team.
In the distribution center is doing an extraordinary job under very difficult circumstances.
Social distancing face coverings and extensive cleaning have impacted productivity.
However, the team has risen to the challenge to support our sales reps and customers.
You Western Canadian D. C line counts has sequentially increased along with sales and continue to track on a positive trajectory.
You may recall that as part of our cost control measures, we temporarily consolidated our swanee, Georgia operations into our Mccook, Illinois distribution Center I.
I'm pleased to say that given the recovery and line valuable we will gradually be bringing back swanee back online to fill customer orders within the next couple of weeks.
[noise], our three part growth strategy has certainly been impacted but remains unchanged.
After eliminating some less productive sales rep positions in April our current sales Rep count stands at 940 sales reps.
We continue to add sales reps in underserved territory, even in this environment.
[noise] sales rep productivity remains a key focus area there was a pandemic.
Given the restrictions on sales reps ability to physically meet with our customers early in the quarter. We took actions to continue to support our sales reps and customers through phone email and our web site.
As the quarter developed we also had the ability to get back into customers locations to provide more traditional will be a my services.
From an M&A perspective, we're making good progress on several fronts.
We continue to have productive discussions with potential candidates and are focused on maintaining a strong capital structure through the pandemic that will allow us to move quickly when we identify opportunities that fit our criteria.
Let me know wrap up my prepared comments.
On an overall market and larger trends that we're seeing.
[noise] currently we're seeing growth across all market segments.
Well I don't count is trending positively month on month.
As as we discussed regarding piece count.
[noise] customers are purchasing many of the same skews as they were previously however, since their machine time utilization is down the occurrence of repair is less frequent.
We continue to open new accounts and we're optimistic that overtime. These will become long term customers.
Overall, we're very pleased with the results for the quarter and the progress that we've made under very difficult circumstances.
Our team has demonstrated.
Commitment and tenacity that we couldn't imagine six months ago.
Well the second quarter was certainly been challenging we're confident that we will exit the spend them and as strong were stronger than we entered.
Now I'll turn it over to run for more details.
[laughter].
Thank you, Mike and good morning, everyone I will first provide some key takeaways from the quarter and the trends in the business from April through July along with an update on the actions that we've taken.
I'll, then discuss our second quarter results on both reported and adjusted basis.
A few highlights for the quarter.
First sales improved sequentially month to month throughout the quarter, both in the MRO business and the boat supply business.
On a consolidated basis average daily sales were 961000 in April 1.178 million in May and 1.247 million in June.
After the initial step back in April sequentially, we realized a 23% increase in May and then an additional 6% increase then Jim.
Second the cost controls that we discussed on the first quarter call and put in place in mid April continued for the quarter. We have taken a balanced approach on costs, while continuing to invest in the business in particular in areas to drive sales.
Overall, our operating expenses decreased by 11.7 million for the second quarter.
And third we have proactively manage our working capital and liquidity position to ensure we maintain an exit the pandemic environment with a strong balance sheet.
We ended the quarter were 10.8 million of cash and cash equivalents and an additional 97 point threemillion availability under our committed credit facility.
We were deemed an essential business early in the quarter, which allowed us to continue to service our customers.
We quickly adapted our company to a remote work environment.
Our distribution centers continue to fulfill customer orders all while adjusting our cost structure to a so lower sales level as demand. So quickly in late March and into early April.
As we reflect back on the quarter there were numerous challenges that impacted the overall business economy and most distributors.
We were not immune to that situation. It acted quickly in a coordinated matter to operate our business differently.
Some of exhibit some examples of this include training our sales reps on remote selling.
Procuring more safety products, which historically had been about 5% of ourselves.
Adapting to a remote work environment for our corporate employees.
Yeah, and operating our distribution centers in an environment that ensures safety, while continuing day in day out to receive and get product out the door to our customers.
Our team members had been incredible during this itch during this situation.
From our sales Representatives are field management teams to our corporate employees and our distribution center teams.
All have committed themselves to ensuring Lawson remains strong in this environment and to supporting our end customers.
Its business started to reopen mid quarter, we were able to support our customers and their efforts and while many are not yet back to full production. We are able to now the on site with the majority of our customers.
During the quarter, we saw sequential increases in the number of orders and the unique shipped two locations as the economy started to reopen.
For the quarter average daily sales declined by 24.9% compared to a year ago.
From a monthly sequential perspective April was down 29% from March. However may was up 22.6% over April and June was up 5.9% over may.
So far July sales are up mid single digits over june's level.
As Mike mentioned, we remain focused on supporting our customers and generating revenue in this challenging environment, while ensuring the safety of our teams. We continued to perform on site visits to many of our customers locations, while providing additional support through phone outreach internal customer survey.
This representatives email communication and our website.
As businesses began to reopen our commitment to servicing our customers has been well received and we believe this will provide additional loyalty in the long term.
Consolidated gross margins for the quarter came in largely at expected levels with our reported gross margin at 53.1% flat with the same quarter a year ago.
On a standalone basis before service cost Reclassifications.
Do you have our margin was 59.7% for the quarter versus 60.5% a year ago with the decline primarily being driven by the de leveraging effect of our fixed distribution center costs over a small smaller sales base.
Higher net freight expense and a shift in sales mix toward lower margin products for a period of the quarter.
For the quarter total operating expenses were 37.7 million compared to 49.4 million a year ago.
The decrease was primarily driven by lower sales in the specific actions taken in early April to adjust our cost structure.
During the quarter, we recorded stock based compensation expense of 3.2 million with the benefit primarily associated with an increased stock price during the quarter.
This compares to expense of 4.8 million in the second quarter of 2019.
Excluding stock based compensation and severance adjusted operating expenses decreased 9.6 million or 22%.
Our reported operating income was 569000 for the second quarter inclusive of aggregate severance and stock based compensation expense of 4.2 million.
On an adjusted basis non-GAAP operating income was 4.8 million compared to adjusted operating income of 7.9 million in a year ago quarter.
This resulted in adjusted EBITDA as a percentage of sales of 8.7% for the quarter.
Fair to 9.8% a year ago quarter, as we balanced our costs on a lower sales level.
On an adjusted basis, excluding stock based compensation and severance diluted EPS was 37 cents for the quarter versus 62 cents a year ago quarter.
Capital expenditures for the quarter, where approximately 169000 as we eliminated non critical capex to control our overall capital spend.
As we manage our liquidity for the remainder of two 2000 2020.
We expect our total capex.
To be in the range of 1.5 to 2 million versus the previously guided range of three to 4 million.
As an organization, we continue to make investments in the business in particular in areas that have a direct positive impact on sales. For example, we have brought back some individuals that were previously furloughed to drive sales and specific segments or regions.
We will take a prudent cautious and conservative approach on restoring some of the actions given the continued uncertainty in the business environment.
We're also proactively managing our balance sheet and liquidity.
We have reached out to our vendor and supplier community for extended payment terms eliminated non critical capital and continue to monitor our customer credit to manage customer pass due balances.
We ended the quarter were 10.8 million of cash and cash equivalents in it and an additional 97.3 million of availability under our 100 million dollar committed credit facility.
During the quarter, we generated 14.7 million of positive cash flows from operations, primarily as a result of lower working capital needs and extended payment terms for various tax liabilities under the cares Act.
As Mike and I, both commented as we manage through these interim periods, we look to coming out of this environment as strong as we went 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 few months.
We have placed additional work load and financial pressure on our teammates and they have all stepped up and have remained committed to the long term success of the organization.
Thank you to the entire Lawson, Ken and bold supply teams.
I'll now turn it over to the operator for questions.
We will now begin the question and answer session.
Yes. Good question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the star Keith.
Withdraw your question. Please press Star then Q.
At this time, we'll pause momentarily to assemble our roster.
Thank you. Our first question comes from the line of Kevin's day, He with Barrington Research. Please proceed with your question.
Hey, good morning, Mike and Ron.
Evan.
So.
You talked about with the rebounding trend and sales.
Gradually bringing some of that cost back I think last quarter, you talked about about a four to five four to four and a half million.
The cost reduction or with about two thirds of those reductions occurring naturally.
With the change in sales Oh, the specific cost actions you took in terms of.
Salaried ducs trends furloughs et cetera.
How much of that has come back and you know I know you talked about brings some furloughed employees back but.
How much of that has come back and you know what's your approach to bring the rest of those costs back overtime.
Yeah Kevin.
This is Michael I'll start and Ron can jump in with some more data the way, we're bringing up swanee as an example, or furloughed employees back is as transaction volume and what I'd say transaction volume could be a P.A. are of course, a distribution center line volume.
As those volumes come back and the workload increases were incrementally, bringing one person back at a time and that's the way we intend to do it on a go forward basis.
Get into Ron's point and to mine as well earlier. The team has just done a truly extraordinary job of working longer hours a under difficult circumstances. Many cases working from home to conduct their work and you know at some point and that we are getting to that point we are increase.
Mentally bringing people back because the workload continues to increase and.
And again, our team has done just such an extraordinary job, but at some point you just can't keep up with the transaction volume considering the actions. We've taken so that's how we're rolling people bat run did you want to add to yes, I would like and Kevin I would just to add to that as you saw for the for the quarter, our overall operating expenses.
Decreased by about $12 million. So so we were able to.
She's a the savings throughout the quarter into Mikes point, a you know some of those costs are coming back into the organization, but it's really a balanced approach on how the economy is recovering as well as.
What we see from a from a business recovery on our customer side as well.
Okay understood.
And I think Mike in your prepared comments you mentioned one of the.
Steps, you're taking here to come out of the downturn stronger just as strong as that you protected a portion of sales force compensation, maybe just talk a little bit more about that strategy and you know.
Your your thoughts on retaining the team and.
What what or how do you think they'll benefit you coming out of this.
Well you know it under these circumstances, we learned a lot from the environment from the challenge. That's up you know everybody is based across the globe really things like our the fact that for the last several years, we've been talking about embracing technology one of those technologies Microsoft teams.
Enables the knowledge of a thousand sales reps to be resident real time with every sales Rep. Every day. That's an example, where people have embraced that even more distance learning is another example, which over the long term will cut a travel costs.
US working from home has opened doors to a different level of productivity. So what we're looking at internally is we feel like we're on a great trajectory. Prior to this our challenge today is how we come out not on that trajectory, but an even steeper positive.
Trajectory because of our commitment to lean six Sigma our commitment to technology, how our team has evolved over the past several years to embrace change in new technologies. All of these things will have a structural impact on our on our future, which should deliver better results than the trajectory.
We were on before so across the board you know under adversity.
You know you learn to adapt but some good has come out of this and some good in the way of innovation in examining how we do things is coming out of it which will have long term positive effects for our earnings for our productivity for a labor productivity and for our customers, especially.
Okay got it.
I know you you have a.
A lot of data that you kind of get on a daily basis.
Insight to the business are you able to.
Dig into specific geography.
Branches and see how they're trending relative to others I asked that just in relation to.
We've seen a flare up in covert chases uncertain.
Country, and maybe a are you able to dig into how.
Hello.
Others, just maybe that if some of the taken a step back because of that or any other.
Hi, Linda I laid out the geographic basis.
Yeah, Kevin do you have to your point, yes, we do look at data if anything has happened to our culture over the last handful of years. It is that we've become very analytical and very process oriented and you know dig into the data, yes, we do look at a geographic data.
Every week, we get geographic updates for all the territories at all the states. So we are able to look at as things are trending up or slowing down we are seeing an across the board increase.
It's possible that that increase will vary by state and again, we are looking at at the state level at of course at the sales rep level, we provide even more data than we used to two sales reps and district sales managers. So that they can manage both new accounts, which we are aggressively working to win.
As well supporting our customers under the same frequency that we were before so the short answer is here again technology in a pragmatic use of technology has been incredibly effective in driving sales rep productivity, winning new customers and just overall, enabling us to get back on that trajectory.
As soon as possible and they get I keep saying at an even steeper trajectory is our goal.
Okay, Great and then.
You said you you're starting to add sales reps again.
Selectively an underserved markets I was wondering in this environment.
You are seeing the opportunity to maybe add some more seasoned sales rep.
Due to competitive dislocation or are you still hiring newer inexperienced reps and trying to ramp this up ramp them up in this environment, that's kind of the approach on adding reps now.
Yeah, we've seen a real availability of people are high caliber capable people.
Still adding a new sales rep to a new territory is a long term investment. So in this environment, we're being a little bit prudent about the number of Greenfield sales reps were bringing on but there are also territories.
Military bases for example, or strategic account managers that we've brought back where they can jump in very very quickly and produce very quick short term results. So for us at this moment, it's a little bit of a balance between the long term investment of bringing on.
Field reps are dividing up territories as district managers see appropriate and bringing back you know capable season people, where they can jump in right away. However, fundamentally our strategy or three park. Our strategy has not changed we will continue to add incrementally add sales reps for the foreseeable.
Future will continue to drive through technology for all manner of analytics and leadership and training sales rep productivity and we are absolutely focused on growth through acquisition and M&A. All three a activities are unchanged in this environment.
Okay and following up on that last point there that leads me to my next question you mentioned.
You're making good.
Chris on the M&A front, you're you're having a number of discussion.
I was just wondering in this environment.
The likelihood.
The big acquisitions increases or decreases our targets.
Maybe a little.
Apprehensive about selling when their numbers are down or.
Contrast are you seeing more.
Businesses, maybe willing to engage in discussions because of this environment.
I.
I guess the answer would be a little of all that we continue to see a very robust pipeline, including new discussions that.
Or new within the last water or six months that continue on track. We also there've been a couple that have said, hey look I want to lets take a little pause.
Because of the environment and we continue to nurture the long term discussions that we've had and in many cases, we've had discussions with orders of companies and often family of companies for several years and those discussions stay alive and well and are even more frequent then.
They had been in the past so it's a little bit of all of that but underneath it. All we are deeply committed and very confident in our process and our strategy and and also the disciplined Doe around you know, how we use our capital and the the you know the prices we pay and.
Multiples that.
That we pay for all that stuff. So you know all at all we feel great about where we are and where we're going on that dimension as well as the other Joe.
Okay. That's helpful. That's all I had and I thought the execution was a very good in this difficult environment. So congratulations on that so I had thanks.
Thank you Kevin Thanks, Kevin.
As a reminder, if he would like to ask the question Press Star one on your telephone keypad, well take a moment to repos any questions.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Mr. indicator for any closing remarks.
Thank you and thank you for joining the call today as its pandemic hit we took aggressive immediate action to protect our employees and our customers.
On an ongoing basis, we also work hard to protect our balance sheet.
To do this we needed the entire Lawson team, both together and I can say unequivocally that this has been the case across the board.
We have supported our customers and we're grateful for their loyalty and support in return.
On our long term initiatives ambitions may have taken a momentary pause.
With the value proposition, which is growing and importance everyday operational excellence and outstanding team and essentially no debt, we're in great position moving forward.
Finally, we're all encouraged with the strong sequential improvement that we've seen that we've achieved to date and we're working hard to ensure that this trajectory will continue.
Thank you again to the Watson team.
You've often heard me say that our values are sometimes test it under challenging circumstances your commitment to our values as it has been inspiring and on behalf of the management team customer fires and our investors. Thank you.
We look forward to speak to all of you again on our next call have a wonderful day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.