Full Year 2020 Lawson Products Inc Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the Lawson products Fourthquarter Twenty-twenty earnings call. This call will be hosted by Michael Day Qaeda Lawson products, President and Chief Executive Officer, and ran to Knutson Lawson products Chief Financial Officer.
During this call and they will be providing and update on business as well as covering relevant and financial and operational information.
And there will be then time for questions and answers. Please note that statements on this call and and the press release contain and forward looking statements concerning goals beliefs expectation strategies plants future operating results and underlying assumptions that are subject to risks and uncertainties that calls actual results to differ materially from.
Those described and.
In addition statements made during this call are based on the company's views as of today.
The company anticipates that future developments me cause those views to change please consider.
The information presented and that light the company me at some point and let the update the forward looking statements me today, but specifically disclaim any obligations to do so.
This call is being audio simulcast on Internet via the Lawson products and 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 lasso products Seal Michael Decatur. Please proceed sir.
Good morning, and thank you for joining the call. This morning, I'll comment on the fourth quarter and the full year I'll also comment and the integration of parks Master and our plans for 2021.
Alright, and can S and R. C. F O will provide a more detailed review of our fourth quarter financial results followed by your questions.
Overall, given the current business environment and I'm very pleased with the fourth quarter results as well as our for your results.
Not only for our earnings nearly the same as the fourth quarter of 2019 and significantly lower sales due to the pandemic.
But the integration of parks Master is going very well.
We have a chance sequential growth month over a month since may except for one month, which was attributed to a slowdown and some P. P items.
This year.
Has also got and I'll have to a good start with organic sales for the first seven weeks of the year above both December and the fourth quarter.
Right and will provide more details and our financial results, but let me hit a couple of the highlights.
[laughter] first hour adjusted EBITDA was $9 million or nine one per cent of sales for the quarter.
Given that the fourth quarter is typically are weakest water. These are really good results and and and improvement or for the eight three per cent itchy and the fourth quarter of last year.
Second.
For consolidated sales were up pinpoint eight per cent over a year ago. This was driven by parts Master acquisition and the third quarter of 2020, excluding the acquisition or organic sales were essentially flat sequentially from the third quarter as most product categories realized increases which were.
Offset by lower P. B E sales and third are adjusted EBITDA, Excluding Partch Master acquisition was one and $200000 of free pandemic levels, demonstrating the continued improvement and our financial performance as the year unfolded.
Considering the business environment, we're very pleased with these results and they give us additional confidence going into 2021.
Now I'd like to take a moment to discuss recent parts Master acquisition.
[laughter], we've made great progress and every aspect of combining Lawson and parts of Master Approx.
Approximately 200 sales reps have joined our company and we are in the process of integrating the Lawson and parts master products.
During the third quarter, a call I mentioned that part's Master had approximately 25000 and excuse.
We are rationalizing the product offering however, we are likely to retain a significant percentage of our private label parked master products.
[noise] several product categories, such as a new line of Cryogenically treated cutting tools and passengers and stayed and the art partch washing system will be a significant and additions to the lawson existing products portfolio.
During 2021, and we intend to make all products available to all 1100 combined sales reps cut.
Customers supported by both teams will benefit from the broader product offering [laughter].
During the fourth quarter arch Master sales and earnings exceeded our initial projections and we're increasingly confident of our growth play and for 2021.
Thank you for the parts Master and Lawson teams for your commitment teamwork and professionalism and we bring the two organizations together.
Well, we have work ahead of us to continue the momentum that we've built at parts and Master. We also remain committed to our acquisition strategy.
We continue to have ongoing discussions with prospective acquisition candidates and we're building a strong team across the company as it relates to due diligence and integration.
Overall sales and line count.
Through I'll wash and distribution centres continues to improve from the low in April due to the pandemic the combination of sequential growth along with lower structural costs give us optimism for 2021.
Our distribution center operations team is that a great job managing to achieve productivity improvements measured by lines picked per hour worked.
Bold supply business continues to perform very well achieving 10 per cent EBITDA for the quarter and nearly returning to prevent that makes sales levels.
Strategic accounts achieved good progress during the fourth quarter.
With average daily sales up nearly 11 per cent versus the third quarter, which was on top of 21.7 per cent increase versus the second quarter.
These numbers include oil and gas, which represented significant headwinds throughout the year.
And and equivalent day basis.
Can't automotive business was essentially flat versus the third for.
Growth and the manufacturing sector through our integrated supply partners continues to move and the positive direction throughout the year.
[laughter].
Developing partnerships with integrated suppliers continues to be a focus our strategic accounts team as well as adding new sites within existing strategic accounts.
We added 285, new strategic account locations and the Lawson side of the business and 116, New Kent locations, we continue to add strategic account customers, including too integrated supply customers three.
And the quarter Lawson and can't automotive secured 10, additional 50 and you could help customers.
Average daily sales and our overall government segment or down six per cent versus thirdquarter. However December it was up slightly versus December of 2019.
You may remember that we divide our government business into two primary sub segments state local and educational customers and federal customers.
And our market makes continues to shift toward sled.
Which now represents 81 per cent of our total government business.
Our sleds segment achieved a very high when right for.
Contracts that we've been on.
By contrast, Partch Masters government business is almost exclusively for.
<unk> and military.
Lawson was recently awarded a new federal contract, which is a purchasing platform used by military procurement. This may result, and accelerated military growth and 2021, which combined with a sled focus should result, and good growth trajectory, where our government segment.
I have three part of growth strategy, well impacted by the pandemic remains unchanged.
We ended the quarter with approximately 1100 sales reps, including 200 parked master reps and we plan to continue incremental adding reps and underserved territories and 2021.
Sales Rep productivity remains a key focus area through the pandemic, we realized a for eight per cent improvement and sales per <unk> per day versus the third quarter of 2020.
We've refined the use of new technologies Dirty for pandemic, such as distance learning.
And increase use of Microsoft teams or just in time knowledge overtime. They use of these and other technologies will have the effect of lowering cost of sales, while accelerating sales volume and improving sales rep retention.
Let me conclude my remarks by saying that the integration of park Master is going very well and we are achieving consistent monthly sales increases across the company.
We believe that 2021 is off to a strong start supported by the combination of pent up demand, our operational excellence and our customers need to maximize their productivity.
And I'd like to turn it over to run for more information on our financial performance.
Thank you, Mike and good morning, everyone.
Oh first provides and key takeaways and business Trans during the fourth quarter, all day and jump into some of the details as well as and update I need integration of parts Master.
But first a few highlights for the quarter.
First consolidated sales improve by 7.9 million or 8.7 per cent over the third quarter and also increased nine 6 million or 10.8 per cent over queue for of 2019.
Sales from parts master for the quarter, where 17.2 million.
Excluding parts Master organic average daily sales were essentially flat versus Q3.
Driven by increases and most core product categories offset by a decline and P. P E products.
We extra day 2020, with our organic sales and approximately 92 per cent of pre pandemic levels.
Seconds are adjusted EBITDA improve 1.6 million over a year ago quarter to 9 million for 9.1 per cent of sales versus 8.3% a year ago quarter.
Excluding parts Master adjusted EBITDA was 7.1 million compared to 7.3 million a year ago.
Evidence of our recovery to essentially pre pandemic profitability levels.
Answered we are proactively managed are working capital and liquidity position to strengthen our balance sheet.
We generated 12.5 million of operating cash flow and the fourth quarter and 32.5 million for the full year.
And we ended the quarter with $28.4 million cash and cash equivalents.
It's previously discussed we were deemed and essential business early and the second quarter of 2020, which allowed us to continue to service our customers.
We have adapted our corporate functions to the current environment and continue to work remotely since the end of March.
A return to pre pandemic profitability levels. This quarter reflects our ability to adjust our cost structure, all while continuing to fulfill our customer needs during a challenging environment.
And as we reflect on the fourth quarter, we've continued to see month to month improvement and many aspects of our business.
Sales continue to improve as does our customer service metrics the number of shipped to locations and our sales rep productivity.
Most product categories realize sequential increase is over Q3 offset by lower P. P E sales.
We continue to make great progress and this environment and continue our focus on driving sales for.
Austin Trolls and cash flows all while ensuring the safety of our team.
For the quarter, excluding the acquisition average daily sales declined 8.6% compared to a year ago.
And Ah Lawson MRO basis, while October decreased from September due to some non-recurring P. P. E sales November average daily sales were up 1.1 per cent of October and.
And December average daily sales, which typically as a lighter month for us was up about a half of one per cent over November.
It's my previously mentioned, we remain focused on supporting our customers and <unk> generating revenue and this environment, while ensuring the safety of our teammates.
We are now able to perform onsite visits to the majority of our customers.
We are continuing to offer additional support through phone outreach internal customer service representatives email communication and our website, but to a much lesser degree then Q2 and Q3 is our customers have reopen for business and we are able to resume onsite serve.
<unk> and many locations.
Consolidated gross margins for the quarter came in at 53.1 per cent.
On a standalone basis before the service cost reclassification Lawson MRO margin was 59.6 per cent for the quarter compared to 58.8% and Q3 and 60.9% the year ago quarter.
The decline from a year ago quarter was primarily driven by the deleveraging effect, a fixed distribution center costs over a smaller sales base.
Higher net for eight expense and a shift and sales mixed towards lower margin product categories, including P. P E.
For the quarter total operating expenses were 52.7 million compared to 51.4 million a year ago.
The increase was primarily driven by the inclusion of parts master of 8.9 million.
A goodwill impairment of 1.9 million related to a 2018 acquisition.
For your severance of 343000 and acquisition cost of 325000.
These items were offset by lower stock based compensation expense of 5.4 million and cost actions taken earlier and the year that continue to benefit our financial performance.
Excluding stock-based compensation severance acquisition cost the goodwill impairment.
And parts Master adjusted operating expenses decreased 8.5%.
For 3.5 million over a year ago quarter.
Are operating loss was 658000 and for the fourth quarter and.
And and adjusted basis inclusive of aggregate stock-based compensation and other non recurring expenses of 7.6 million non-GAAP operating income was 6.9 million compared to adjusted operating income of 7.7 million and two three of 2020 and five.
Point 8 million and the year ago quarter.
Keep in mind that queue for a 2020 at three fewer selling days and it Q3.
Adjusted EBITDA as per cent of sales was 9.1 per cent for the quarter compared to 8.3 per cent a year ago as we adjusted dark cost and lower sales <unk>.
Additionally, parts Master contributed 1.8 million of adjusted EBITDA to the quarter.
And and adjusted basis, excluding stock based compensation and other non-recurring items diluted earnings per share for 60 cents for the quarter versus 48 cents and queue for a 2019.
Capital expenditures for the quarter, where approximately 400000 as we eliminated 90 central Capex to manage our cash flows.
We expect our total capex and 2021 to be and the range of approximately five to 6 million.
This includes plant upgrades to our Sewanee and will cook infrastructure to allow for increased volume in the future.
Yeah as an organization, we continue to make investments and the business and particular and areas that have a direct impact on sales.
While there is still uncertainty and the marketplace, we continue to make investments and a business and balance our cost structure against our current sales trends.
We continue to manage our balance sheet as evidenced by our positive net cash position of 28.4 million at the end of the year.
While we took on that of 33 million and the third quarter related to the acquisition of parts Master from the sellers. We ended the quarter was 66 million availability under a credit facility.
This is net of the 33 million dollar and let her credit issue for the acquisition to secure the payable to the parts Master sellers do and May of 2021.
Is Mike and I have both stated previously we are managing through this challenging time with the expectation that we will come out of this environment and a stronger position and how we entered it.
The integration of parts master into the organization is progressing as originally planned.
And since the acquisition parts Master results have outperformed our original pro forma making us feel even better about the strength of our companies on a combined basis and additional grows opportunities and 2021.
Before I turn it over for questions, Let me comment on the strength and the commitment of our team members.
It's hard to believe that we're coming up on the one year Mark when your organization was forced to make some dramatic changes in a very uncertain environment.
Our team members have been through significant changes over the past year and the entire team has stepped up and every aspect of the business and.
Not to mention taking on a significant acquisition.
Thank you to the entire Lawson cats, bold supply stroop products and parts master teams for proving White Lawson products is a world class organization.
I'll now turn it over to the operator for questions.
Thank you.
We will now begin to question and answer session to ask a question you may print star than the one and get Touchtone phone.
If you're using a speaker phone please pick up your handset before press and just Darkies.
To withdraw your question please press the star and it too.
At this time and what policy momentarily to assemble out roster one moment. Please.
And the first question comes from Kevin's. Thank you with Barrington Research Associates. Please proceed with your question.
Hey, good morning, Mike and run and congratulations on the nice results from this environment.
Thank you for having a good morning.
I wanted to start off by asking you about you mentioned that organic sales for the for seven weeks of 2021 or above.
December levels, and and I believe the fourth quarter and it should we just think about that is.
Slow steady incremental improvement as as we've been seeing here you know.
Anything more significant just trying to characterize the rate of improvement, we're seeing as we head into the new year.
Sure Kevin and this is Ron Knudtson I'll I'll take that and make me want to jump on as well. So January for US really was it a pretty strong month, I would say and the high single digit increase over where we exited December February tempered off a little bit.
I'm, primarily due to some of the the storms and weather conditions throughout throughout the entire U S in particular and and the southwest.
But when we look at kind of on a combined basis for the first call at seven weeks or so six to seven weeks.
And you were and that it single digit increase over where we finished December so again I think we've seen a little bit of a bounce back here. Even this week I think a little bit of ketchup and unfortunately, with some of the weather and and the southwest and.
We were physically had to close one of our distribution centers for three to four day. So we're seeing some catch up there, but uhm, but overall pretty pretty strong start to.
Kevin and I'll I'll just go as we have spoken to many customers strategic account customers. They continue to reiterate that they're depending on us more and more I think we've made a great and pressure on a huge number of customers our sales reps have been so dedicated.
And <unk>, even though they're the most challenging circumstances early on and the pandemic and it continues to be my belief that we will see market expansion as more companies turned out source there there for their managed inventory or they're or they're consumable inventory processes and with our opera.
Racial excellence and the reputation we have and the marketplace, we see the market expanding and again that has been reinforced by specific conversations with with with customers. So we're really optimistic on all fronts looking forward.
So that's good to hear.
You you called out specifically.
Lower P. P E sales impacted the sequential comparison and the for core although most other park and agree through this.
For this kind of a sense of.
And packed of that Uhm change and P. P sales on the sequential.
Sales soon.
Yeah, we we saw Kevin we saw some some very large orders and the second quarter and the third quarter real spikes. When you know what that was just a run on everything in October we had some supply chain disruptions suppliers that we're just really tapped out since then.
And those supply disruptions I've been renegotiated and settled and we feel like we're back onto a good trend and.
Uhm the P. P items that we're talking about a representative about 4% of our total revenue prior to the pandemic now we do expect P. P E B, a slightly larger segment for us and the future and putting aside the second quarter and a third quarter, which were huge spikes we have now.
<unk> code and about 35 to 40 per cent increase over where we had been and these items and he's P. P E items prior to the pandemic. So you know we step forward more people more of our customers recognizes as a P. B a supplier. It still is not our primary focus you know fasteners.
Our core items are foundational items are really what differentiate us, but we do have the ability and we have seen a step up and.
And the long term trajectory of P. P.
But the but the specific disruption October has been cleared.
[laughter].
Okay.
Alright, uhm. So so there's no meaningful I was just wondering how much of a head and when it was sequentially uhm. So we can kind of get a.
Sense of you know kind of the underlying trends excluding P. P. E. Again, if you don't have if that's okay and just trying to.
See see if we can call it out.
Yeah, So Kevin and just to my point and we're up about 35 per cent year over year on our average daily sales versus queue for a year ago. When we look at and and a D. S basis Q3 of this year R. R. P. P E.
And and and a D. S basis was about $87000 a day and queue for was about $60000. A day did impact US you know you and as you spread that that decrease from Q3 and the queue for but to Mike's point, Jimmy we saw we saw elevated demands and bowls Q2.
And and two three and it seems like it's kind of settled and now okay uhm the queue for activities and so it will will provide as you know some up some opportunity for you know and the first quarter and and to your point, we'll have a we'll have some headwind against it.
And to the second and third quarter of 2021.
Okay. No that's fine that's helpful. I appreciate that.
How should we.
Think about uhm.
Incremental adjusted EBITDA margins on a consolidated basis and.
As we head into 2021.
You know, obviously, including parts master and used to talk about that obviously you know and.
This assumes <unk> continued sales roll with and improving organic sales or what but he used to talk about that.
25 to 30 per cent target for the organic Lawson MRO business, but just wondering how we should think about that and a consolidated basis.
Yeah, So Kevin and this is Ron and I'll I'll take that one so I I would say first of all we and my <unk>, both Mike and I commented on this.
Overall results for for 2020, we were very pleased.
You know adjusted EBITDA of.
34.1 million or nine per cent of sales you know historically, we've talked about shaving that 10 per cent, Mark, which certainly we did for some quarters. During 2019, so to be able to achieve the 9.7 and.
It's challenging environment, Yeah, we feel really good about about it about that percentage and being able to to get our way back to pre pandemic profitability levels, but look looking into 2021, and you'll get 25 to 30 per cent, where we are still we're still very comfortable with.
That from from and operating leverage and from a slow flow through standpoint, So I know that that that number is one that we publicly have discussed in the past and we're we're still committed to to achieving that would say that historically kind of putting 2020th side and.
You know, we we actually outperformed that guidance, a little bit, but going into 2021, and we're still comfortable on a consolidated basis, achieving that level of of operating flow through.
You know if you have and if I if I can also and just be beyond just add a little card cause it to the the numbers that Ron just mentioned.
From my perspective every company aspires and stripes can be nimble and this year I'm very short notice and the middle of the pandemic, where we were able to respond aggressively and assertively at the same time and can currently we completed the largest acquisition that we've done.
And and so the combination of two sort of very big parallel activities happening you know pandemic with with very little prior experience any of US haven't lived through this kind of and environment before and the sort of and and very quick Atkins, we cook.
At the same time, we were making a large acquisition, which has gone extraordinarily well.
Gives us even more confidence looking forward and our ability to manage the future accommodate whatever happens and still prosper and any environment really and and we're more confident about that now because we've been tested recently and we have ever been.
Great Yeah, that's helpful color.
And how much would rethink about underlying G and and expenses, turning and 2021 or are there any.
Meaningful cost that.
And that's still need to come back into the business as you recover here and demick or you know any comments on that.
No Kevin I I would say that Q for is a pretty good run right for us and in particular on the on the gene a type of items most of that and the activity around the for low activities and so forth are are behind us.
Yeah, and and certainly I mean, you know I mean, the selling expensive certainly will will vary as a as a as sales increase uhm, but if you look at that historical selling expenses as a per cent of sales that continues to March down as a per cent of sales. So we are getting some some leverage.
Awesome some of the fixed costs within that budget, but on the G and a side we.
You know, we are about a million and and a half dollars lower and where we were a year ago. Just on the M. R. O side of the business you know versus cute you know Q for of this year versus queue for last year. So so I think that that's a pretty good benchmark.
You know, we used to talk about G&A expenses, being and $20 million per quarter and I'm just on the M. R O side of the business and and and and now a year ago, we were at about 18 million and and for this quarter Weird about 16, and a half million. So we we continue to March that number down.
And.
Feel pretty comfortable with the run rate that we saw and the fourth quarter.
Okay and hope you have and we are talking about we've talked about lane six Sigma all along since 2030 and and since 2013 R. G and a head count has come down sequentially. Every year, you know again 20 being a real step back for for Covid reasons beyond and.
Yeah. This has become part of our D N a and our team really stepped up and this challenging environment and because of lean and six Sigma they had the ability to prioritize the most important and work and shed non value added or redundant work and the underpinning of the.
<unk> six Sigma process mapping all the things we've been through for all these years and everybody and the company has gone through it really enabled every individual to step up and do what was important and is very cup environment, and we feel great about the structural cost savings that we will it'll be able to achieve.
<unk> and again, we think about this as a per cent of sales that yes absolute numbers too but per cent of sales is is really the primary measure of our G and a effectiveness at least for Ya.
Right, Yeah that makes sense.
And can I, just <unk> I'm gonna ask quickly about the the goodwill impairment churches should we just kind of think of that as a function of <unk>.
Lower sales related to that piece of the business driven by the pandemic, you know and and still kind of feel good about the long term out and look for the that portion of the business.
Yes, Kevin <unk> that that's that's exactly right. We're very much committed to the business. We feel good about the business. It was affected by the pandemic get and just like and so many other aspects of the <unk> the broader nature of our value proposition when customers slowdown their hours of operation and your machine time utilization.
The production and the case of screw products, and we see an ebb and flow based on our customers production volume, whether it's machine time or units produce and that's what we experienced a screw products underneath it we've dedicated some very strong resource to screw products.
And and people were for that are very capable and very committed and we have great faith and them and they've got a lot and tracker crack record with Lawson. So yes. The short answer is we feel good about the business and it's just the nature of Covid that the affected the goodwill impairment.
Yeah, Kevin and I was just and yet.
I think we're and I think my Kid and hit it spot on we you know we have a tremendous confidence and in and that and the business and we did we did acquire and the accounting rules around just get a little complex relative to you know when to take and impairment charge and so for so you know unfortunately, we.
We found ourselves and and the case that many other organizations did this year as well and you know and making sure that we complied with the technical accounting rules, which required the impairment, but you know feel good about the overall a piece of the business.
Okay. Good thanks, I'll I'll leave it at that for now thank you.
Thanks for to have it.
They can kind of take once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad. Our next question comes from calls him with Keybanc capital markets. Please we'll see.
Hi, good morning, and <unk>.
Uhm.
Thanks, Uhm, a leading distributor focused on vending and M R vending and V and my <unk>.
Using technology to reduce the direct labor and costs to serve.
I think you guys have talk a bit about via my and and parts of Master managed and inventory, but it was just hoping you would dig a little more into what initiatives laws has and place to stay competitive there.
Yes. Thank you Carl for that question. Yeah, we are very much committed to optimizing the vendor manage the inventory and we call it service intensive and or manage inventory because a lot of people use that term and it can manifest itself and different ways, depending on how it's being executed when we say that we mean that our sales rep for.
For our 85000 now customers with the addition of of parts Master and visit the customer about every 10 days, but having said that there is still a place and we're very much committed and are deploying vending machines and there's a there's a certain kinds of products that are well placed and.
Vending machines and again vending machines as an example, it <unk> can strange supply. So if you have items that are I theft items, that's ideal for venting or if you have items that you need to track like P. P E and safety someone's injured and they're taking bandages or band day is out of a machine and you want to know that because you may have and Oh.
Sure recordable. So there is a proper place for the technology and we have embraced it we're using it we've got a bunch of them deployed and yet you would not ideal to use the vending machine for a quarter cent flat washer. It's a piece of currently spends a piece of capital equipment and book, you know <unk> flat washers and it it's probably not.
<unk>. So generally we would use that technology optimize for the products that makes sense and the circumstances locations that makes sense and still even and and then they <unk> someone has to open the vending machine and replenish the content, whereas some parts are not ideally suited for pending beyond vending.
Modeling re punishment cycles, and I'm looking at how frequent sales reps should be visiting customers based on the frequency of consumption and that varies by C. As in it varies by project. That's the analytical orientation that Lawson brings to how we do everything and and <unk>.
And that analytical orientation combined with lane six Sigma has become part of our DNA. We we look at it every day in every way. So it's a combination of analysis for you so vending machines and the appropriate use of <unk> of people and by the way our sales reps many times we we.
Talk about our sales reps and the context of replenishment, but because of a sales rep for and visiting customers on average every 10 days.
Customers know that we're there to solve problems for them and as all the executives, we all make sales calls a little bit different and Covid, obviously, but we all make sales calls and inevitably our customers waiting for our sales rep with a list of new of problems to solve not only that but our sales rep is translating best.
[noise] application practices across the industry. So you know how to use a specific tool or a specific technology is something that our sales rep brings to customers not you know food's specific but rather application specific or not and automobile specific the broad base use other.
The best practices, so well we punishment is an important part of what they do <unk>.
Problem solving that customers problem solving our customers bring to us and every visit and.
And as well our ability to share a best application practices are also part of the value add not just the mechanical process of replenishing parks. That's the reason that we consider ourselves at least as much a service company as a product company, even though we are approximately 60 per cent private Lee.
Abel and that private label is optimized for the special needs of the maintenance mechanic. So the combination the optimization of products that's optimized for the needs of the maintenance mechanic and the service intensive aspect of what we do is really what differentiates us and it's really the reason that we.
You've been able to retain our gross profit margins every quarter for eight years and a very narrow band.
Great. That's that's a lot of really good caller. Thank you for for that Uhm and I think that's a good transition you've talked and obviously parts matter parts Master added.
Head count, but it looks like headcount was down quarter over quarter was that just duplicate of territories with parts Master and how <unk>. How are you thinking about sales head count them maybe.
Sequentially into <unk> and the rest of 21.
Yeah, we.
So at the moment, we're stabilizing headcount from the actions we took in Covid that that that's really what you're saying we are very much committed to incrementally, adding sales reps and undersheriff territories and as we pick up share both share of wallet within existing customers and we're always focused on adding new accounts.
Mentioned and strategic accounts and with new strategic don't locations. So we will always be focused on adding incremental no incremental sales reps and underserved territories or where there's just too much business for a given sales rep to pursue it but you know with such and incredibly huge and fragment and <unk>.
<unk>.
And again for.
Early evidence and I wanted to say early evidence is that are served available market is expanding and I say that because some significant percentage of customers, who are buying consumable nuts and bolts electrical connectors, you know hydraulic fittings. They in the source and they do it themselves, but we are.
Seeing a trend because of their maintenance mechanic productivity and during Covid day needed to cut shop Supervisors stock boys and stuff like that.
We believe the market is expanding to more outsourcing and it had been before and with our sales rep footprints and with our operational excellence.
We believe we can win disproportionately more share and our competitors can because of those two primary drivers now the overarching driver has been a shortage of maintenance mechanics everywhere and every industry, which is the primary driver of our growth because customers.
The last thing they want is a machine shut down for a 90 for sent and part or hydraulic fitting so even coming out of Covid. When we're seeing the pent up to be and beginning to spring loose we fully believe that the last thing a customer wants is to have a machine or a line shut down.
For a five dollar hydraulic fitting that's where we come in and so the long and short of it is we will continue to add reps one at a time to hiring we will continue to add reps through acquisition of companies and we will continue to take share because we're optimized for the service intensive vendor and.
Manage inventory that we specialize and and again customers and told US even recently and the last weeks and months that they're depending on those even more coming out of Covid and they were prior to COVID-19.
Great Thanks for that color.
Maybe just transitioning a little bit to margin good color on them yesterday, and a but I wanted to maybe dig and a little bit more on the gross margin side. If if I remember right you guys talked about sort of the fixed cost leverage from lower sales increase and for a and the P. P. E mix is kind of the the three headwinds.
To gross margin and order. So I was just wondering if you could maybe break out how much each of those contributed I'm I'm speaking, maybe X parts mastered by the way and I'm just if he could break out how much each of those contributed and what if those kind of carry into <unk>, how much how much of that kind of headwind and carries into one too.
Sure. So this is Carla this is Ron so uhm, we mentioned and our in our prepared remarks that the and I'll I'll talk about kind of the the base MRO business I think that's what your question is <unk>, putting a parts master a combination we did see from a gross margin and this is for the.
A reclassification of of service costs that you're counting rules now required R. R. M. R O margin lost and tomorrow margin for the quarter was 59.6%.
And that compares to 58.8 per cent versus Q3. So we we did see a little bit of of of and increase for the corner and as I you know as I look at you know the components of that for the corner we did.
Some margin points around some vendor rebates they came in and a quarter.
Yeah, and and then we actually got hurt a little bit by even some of the the fixed costs over a lower sales days, because we have three fewer selling days and queue for versus versus queue Q3 of 2020, you know versus a year ago and this might be more of your question in terms of cute for.
For a year ago, we were at 60.9 per cent versus the 59.6 per cent this quarter and as I look at the components of that about half of that decrease about 50 Bips is just the fact that we're spreading some fixed costs over and over lower sales.
About 25 to 30 beds are is related to the mix on on P. P and E. And then the remainder is is some other movement within inventory reserves and and freight and and those types of items that fall into the into that line, but what I would say is that and we feel comfortable.
I'm moving forward and a 2021 you know in the same range. You know, we've always talked about kind of between 59 and 60 and we feel like 2021 and will remain within that within that pretty narrow band. So you know we have the ability to.
Certainly is sales increase that'll help us on the leveraging and the sixth cost and certainly we'll keep a close eye on inflation and 2021, and we're anticipating that that might be a little bit higher than what we saw and 2020, but but overall, we've been able to manage that within a pretty narrow band.
And you know Carl we we use that kind of you know separating out for.
Rice cost of goods sold revenue retention at all as proxies for the value proposition. So the fact that we've been able to maintain and is very narrow band every quarter for eight years gives US you know great confidence again combine.
And with revenue retention and a number of other metrics that all our value proposition is sound and customers are willing to pay us for the value proposition for the value that we deliver gives us even more confidence based on again demographics labor demographics and other drivers that whether it's and expand.
And the market or not we can take and we are taking share and the marketplace. So underneath all of this gives us great confidence and our value proposition our ability to generate cash are leverage and all aspects of the business again combined with and incredibly strong pain gives us.
Real optimism for the future.
Great very helpful. Thanks, I guess, just maybe the last point and I wanted to touch on here was you're kind of mentioned M&A uhm, you've got that other team that's conducting due diligence on the pipeline can you can you just talk about like what is that team for Ya.
Up and running are still sort of ramping or what what what stage are you out there.
No you know what I. This is an area that again I'm, so proud of the team and they they they use our folks within the company all the functional areas specializations and they have just done an incredible job and now they've got a lot of practice at and we've done seven acquisitions, we've acquired $112 million of revenue. So you know the same.
<unk> <unk> <unk> <unk> you know the postmaster is a little more complex, a little larger, but very deliberate and and systematic process of functional leaders and teams looking at all of their functions, including H R Finance I T U and I'll products pricing sales of.
Of course, and and and even in the beginning middle and end of every acquisition going through lessons learned best practices Sorta plus the help of what to change for the next one and these are a large you know a large sort of groups of people with real candor and trying to improve.
The process for the next acquisition. So we do have a pipeline. We are you know for been successful at small and large acquisition for very open minded about the range of possibilities out there and.
Yeah back to discussions going on now a little hard to predict like all acquisitions are when when we pull one into the boat, but we're feeling great about.
Went to integrate when not to integrate how to integrate and to do it and a way <unk>.
<unk> my goal for US is when we make and acquisition.
For the <unk>.
Company, we've acquired we want to use them as a reference for.
For the next acquisition that everything we said was going to happen does happen that we weren't casual and our discussions with people and sellers and acquired teammates. So a very deliberate and systematic process. So just last week, we had a you know a.
Really great lessons learned session with 25 people in the middle of parks Master of course, including Postmaster people to dissect, what's going well and what to improve for the next one.
So this is becoming a real strength of our company.
[noise] that's helpful. And then maybe just just to dig a little further there and and this will be the last thing for me can you just talk about where you're focused at the end and emanate at this stage or you and.
Expanding geographically, adding excuse and product lines looking for synergies, adding headcount like what kind of a primary focus or any color around and like what what some of the drivers for what might make you pull the pull the lever on the deal.
Right right well it it's a lot like it has been there are you know <unk> and such and incredibly huge I mean by some estimates 20 billion dollar for.
Regnant and market of people consuming and the maintenance and repair mode. R 12 product categories. So yeah, we feel like and and and we've just added a number of new product categories or specialized products with parts master, but we feel it from from a product perspective, we've.
Pretty well got the waterfront cover doesn't mean that there aren't opportunities for product expansion as we just realized with some really exciting and unique products that we are acquiring from parts master and of course, the parts Master people are picking up all of the broader product categories that Lawson has to offer now does it parked the master of.
Customers. So there there's all of that we also feel that with 1100 sales reps, we have the U S and Canada, well covered but but having said that it is a huge untapped and fragmented market, so more likely than not <unk>.
Acquisitions will fall into two or maybe three categories. One is companies just like us billing and more and more spot acquiring sales reps.
With which have a very high retention rate.
Because they bring a book of business and they just keep going, albeit with a broader product line so acquiring.
Companies that are a lot like us and go to market. The same as US then there are very near Adjacencies like bold supply is slightly different still.
50 per cent fasteners, so and many ways very similar to us, but in case of bolt and Western Canada. Our branch based business. So there that that is a separate kind of a platform for us and then there are other near Adjacencies like screw products.
For Us acquisition will fall into those three categories.
And their overarching ideas as well if we if we can acquire companies that rod and the solution for the customer base, you know customers have Ah Ah abroad and <unk>.
Set of needs for all kinds of products and some of it goes into OEM and some of it is traditional MRO. Some of it is service and pensive vendor manage inventory MRO. So everything we do we look at from the customer's perspective, how do we broaden the solution make our customers life easier, but today and we have found.
<unk> pieces and all areas and so more likely. It's addition to the basic foundational pieces that we already have.
Alright, and credit card of thanks, guys.
They can and Carl.
Once again, ladies and gentlemen to ask a question. Please press star one and your telephone keypad.
[noise]. This concludes our question and answer session and I would like to turn the conference over to Mister <unk>, Michael dictator for any closing remarks.
Thank you very much and thank you for joining the call today.
You know well 2020 20 has been a really challenging year. The Lawson team has demonstrated the ability to respond quickly and assertively, so and unprecedented business environment starting in March without the new technologies and our sales team has demonstrated their commitment to over 85000 customers who <unk>.
And on us.
We enter this pandemic and.
<unk> good growth and earnings trajectory. We also entered with a very strong employee engagement and customer loyalty.
We're exiting 2020 and a stronger position and then we entered.
We're excited and optimistic about resuming the strong growth trajectory for many years to come.
Along with organic growth the parts Master acquisition and future acquisitions continue to accelerate growth and broaden our reach in and extremely fragment and market.
Are strong balance sheet gives us the resources, we need to accelerate our plans and and and culture gives us the ability to focus on what's important.
Lastly.
Safety of our teammates customers and suppliers is paramount.
We have put in place protocols and are managing the business with that in mind.
Thank you for all of our teammates including are parked master team and our bold supply team.
As our and our customers and suppliers, we're grateful for Ya and dedication and loyalty to wash and products.
Our underlying value proposition as strong we have a great and are you sure ahead of us and we look forward to speaking with you and the next earnings call have a wonderful day.
This conference has now concluded. Thank you for attending today's presentation, you may know and disconnect.
Okay.
Okay.