Q2 2021 Lawson Products Inc Earnings Call
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Ladies and gentlemen, thank you for your continued patience the conference call will begin momentarily. Please do not disconnect at this time once again the conference call event will begin momentarily.
Entirely we thank you for your continued patience.
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Good morning, ladies and gentlemen, and welcome to the Lawson products second quarter 2021earnings call.
This call will be hosted by Michael of Takeda Lawson products, President and Chief Executive Officer, and Ron Knudsen Lawson products, Chief Financial Officer. During this call they will be providing an update on the biz.
As well as covering relevant financial and operational information. There will then 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 and underlying assumptions.
<unk> 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 these 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 via the Lawson products Investor Relations page on the Companys website Lawson products Dot com.
A replay of the webcast.
Of the available on the website through August 31st 2021, I will now turn the call over to Lawson products CEO, Mike Jakarta.
Yeah.
Good morning, and thank you for joining the call. This morning, I'll comment on the second quarter and Joseph.
There are some thoughts about how the year's progressing.
Additionally, I'll update you on the parts of Master of integration the majority of which is behind us.
I'll also comment on some investments that we're making to growth several market segments and product categories. Lastly, I'll comment on the business environment and our plans.
<unk> will be the prosper over the coming quarters and years.
On convincing our CFO will provide a more detailed review.
<unk> results followed by your questions.
Before I begin my prepared remarks.
A number of investors have asked for an update on the proposal disclosed.
Growth in a schedule of 13, the amendment filed by Luther King Capital Management on May 17, 2021.
During the quarter the board of directors of established a special committee of disinterested independent directors 2.
To evaluate the transaction proposed by.
<unk> HCM as disclosed in that filing.
The Special Committee has engaged legal and financial advisors to assist in its evaluation.
We will not be commenting on the status of that evaluation today.
Overall, our consolidated business performed well.
Benefiting from the continued recovery from last year's pandemic.
We are seeing continuous incremental improvement in customer activity across all market segments, though.
Both customers and suppliers of struggling to find labor to enable them to return to full capacity and fully service demand.
This is producing headwinds on our supply side of our business and the likely affecting our customers' ability to fully service their demands.
Overall Lawson has navigated this channel and successfully as ever.
Relates to our internal labor needs.
On a consolidated basis we.
We achieved 47, 7% sales growth as compared to the second quarter of 2020, including the parks Master acquisition, and 2.9% growth as compared to the first quarter of 2021.
Consolidated sales were $106.5 million.
And part of Master generated sales of $15.3 million in the quarter.
While park Master sales were down slightly from the first quarter to the second quarter. Most of this was timing on the military sales and overall, we're very pleased with their performance.
While supply chain disruptions.
<unk> has proven to be challenging.
We have successfully navigated through this environment and achieved a 2.9% growth in sales from the first quarter to the second quarter with 1 additional selling day in 2021.
Despite the supply chain challenges.
Watson core business has been able to.
To achieve growth in 9 of the last 12 months.
The consolidated business achieved 8.3% adjusted EBITDA for the quarter.
Our core Lawson gross profit percent temporarily stepped the below our normal band due to supply chain.
Colleges that I just mentioned.
However, we're pleased with the realization of price increases, which have recently been enacted.
We're satisfied with our ability to manage overall gross profit margins working directly with customers, who recognize that Lawson is the lowest.
Cost of option to ensure maximum productivity in their businesses.
With so many customers facing labor challenges Lawson service intensive vendor managed inventory model is more critical than ever and customers are depending on us more than in the past.
Beyond price increases some of our suppliers.
Chapter of going to keep up with demand due to several factors, including labor shortages raw material shortages and transportation challenges.
We're working with our supply base to manage through these challenges.
This includes the acceptance of partial shipments and in some.
Buyers are developing alternate suppliers.
We're beginning to see movement of products through the supply chain and we're optimistic that inbound inventory will accelerate over the coming weeks and months.
Now I'd like to take a moment to discuss the integration of parts of master.
On July 1.
<unk> all of the parks Master sales reps were moved into the loss of the order entry platform and SAP.
The transition went very smoothly.
This is of Great Testament to our IP organization sales operations team sales force and the integration team overall.
There.
There are a few planned open items to complete the last stage of integration. However, the heavy lifting is behind us and the integration to date has been unplanned.
Looking at our operations and distribution centers.
Making good progress updating our Suwanee, Georgia distribution center with a new conveyor system.
Just on preparing for a larger location in Calgary, Canada, and moving the former parks Master distribution Center from Greenville, Texas to Dallas.
The Dallas DC will house, our military business the tour.
<unk> product line, and our cryo surface hardening process both.
Which are highly differentiated in the market.
Our bolt supply business continues to perform very well, achieving an 11, 5% EBITDA for the quarter with sales growing over 30% from a year ago quarter and 12% over the first quarter of 2021.
Both of which as I mentioned, a moment ago, all 3 of our primary businesses units are doing well.
Now turning to sales.
The strategic accounts achieved growth for the fourth quarter in a row at 6.5% versus the first quarter and 50% versus the second.
Quarter of 2020, our kit business.
Achieved 4.7% growth versus the first quarter and 53% as compared to the second quarter of 2020.
We added 315, new strategic accounts locations on the loss in side of the business.
At 165, New Kent locations.
We're also making good progress in expanding our integrated supply customer base.
This customer segment continues to open doors to many large manufacturing locations and represents significant future growth for us.
We're also.
A continued stream of new strategic accounts recently in truck leasing chemical manufacturing and power generation equipment manufacturing.
Sales in our government civilian segment was flat between the second quarter and the first quarter, However, up 6.6.
The 6% as compared to the second quarter of 2020.
Our state local and educational sled segment has been particularly strong.
On the first quarter earnings call I mentioned 3 areas that we're investing in to accelerate growth.
The winning additional channels to market to serve underserved markets.
Sled and the rollout of our newly acquired.
Towards the parts washer line of products.
We've made good progress on all 3 areas the <unk>.
<unk> product line, which is now available for our entire sales.
Eloping cell is beginning to produce the first incremental results with both sales and rental of machines.
We're optimistic about placing several hundred additional units into customers' locations during the second half of this year.
Hiring and process infrastructure associated.
Force of sled and our strategy of developing additional channels to market.
The underserved areas is proceeding well and we expect to report results from these efforts during 2022.
Our 3 of our growth strategy remains unchanged.
Sales rep productivity remains a.
<unk>, we focus area.
We realized a 41% improvement in sales per rep per day versus the second quarter of 2020.
The 3 new investment initiatives mentioned previously will likely be measured in the productivity section of our strategy. However, all 3.
The key also half of hiring component.
We are also continuing to work on our M&A pipeline.
Our recent success with the parks Master acquisition and integration.
As well as the continuing success of bolt supply, which has operated as a standalone organic.
The patient has broadened our horizon of opportunities.
Looking forward.
In 1980, Peter Drucker wrote a book titled Managing in turbulent times, we're certainly managing in turbulent times.
A year ago I don't think most people were thinking about supply shortages.
All of labor shortages.
And they probably werent thinking about inflation.
We were worried about demand and customers shutting their doors to keep their employees safe.
While we will spend considerable time analyzing trends and preparing.
I don't believe we will be able to predict the.
And as challenged with any degree of operational accuracy. However, we've spent many years building a strong resilient and dedicated team across all aspects of the company.
And our customers have benefited from that work.
The team turned on a dime of last March to address the pandemic.
The net while we have limited ability to predict the future I have very high confidence in the Lawson team's ability to thrive and prosper in turbulent times.
Last week I spent 2 days with our newly combined sales leadership team.
They are optimistic about the coming quarters and our ability to.
For rate growth.
[noise] bumps on the road are inevitable. However.
However, our trajectory and value proposition will continue to improve for the foreseeable future.
We're focusing on exciting new products.
As part of the parks of Master acquisition deep.
Deeper penetration to several underserved.
The markets and the development of additional channels to market along with our traditional growth strategy.
These programs will enhance our value proposition and bolster our strong service offering.
Now I'd like to turn it over to Ron for more information on our financial performance.
So Mike and good morning, everyone I will first provide some key takeaways and business trends during the quarter and I'll then discuss some of the details and provide an update on the integration of parts of master.
A few highlights of the quarter.
First consolidated sales improved by $34.4 million to 106.
$6.5 million or nearly 48% over the second quarter of 2020 due to the inclusion of parts master and reflecting our continued recovery from the impact of the pandemic.
Sales also increased $3 million or 2.9% over the first quarter of.
<unk> 2021, with 1 additional selling day in this quarter.
For the quarter, excluding the parts of Master acquisition organic average daily sales increased by 27% compared to a year ago.
On a consolidated basis average daily sales increased.
1.3% over the first quarter with on the same number of selling days.
Second our adjusted EBITDA was $8.8 million or 8.3% of sales.
And third we ended the quarter in a net cash position of.
<unk>.
90.
$1 billion.
During the quarter, we paid the final $33 million payment for the parts Master acquisition.
As we reflect on the second quarter, we have continued to see improvement in many aspects of our business.
Sales continue to sequentially improve as does our sales rep.
<unk> productivity.
Most product categories realized sequential increases over the first quarter.
We continue to make great progress in this environment and continue our focus on driving sales cost controls and cash flows all while ensuring the safety of our team.
As Mike mentioned.
And we.
We're not isolated from the global supply chain disruptions. However, we are working closely with our supplier partners and our customers to ensure that we're meeting their needs.
We remained focused on supporting our customers and generating revenue in this environment, while ensuring the safety of.
Of our teammates.
We are performing on site visits to essentially all of our customers.
We continue to offer additional support through phone outreach internal customer service Representatives E mail communication and our website.
However, this is being done to a lesser degree than most of 2020 as.
Tumors have reopened for business and we are able to resume our onsite service in most locations.
Consolidated gross margin for the quarter came in at 51, 3% compared to 53, 1% a year ago and 52, 7%.
Last quarter.
On a standalone basis before the classification of certain service related costs into gross margin Lawson MRO margin was 57, 3% for the quarter compared to 58, 2% in Q1.
Both Q1 and Q2.
Our cost of our gross margins were burdened with additional inventory reserves associated with the rationalization of parts Master inventory as part of the integration process in charges for PPE items in which the current market value dropped below our cost.
Excluding these items MRO growth.
Gross margins were 59, 3% and 58% for Q1 and Q2, respectively.
The 130 basis point sequential quarter decline was due to higher net freight and distribution center labor costs, primarily related to the global supply chain disruptions.
<unk> and cost incurred to migrate the parts master inventory into the loss of network.
For the quarter total operating expenses were $51.2 million compared to $37.7 million a year ago, and $49.8 million in the first quarter.
The increase over a year ago.
Was primarily due to the increase in sales the inclusion of parts master expense of $8.6 million.
Reestablishment of temporary cost savings put in place a year ago during the pandemic and costs related to potential acquisitions, including the evaluation of the Luther King cash.
Proposal disclosed in the schedule of 13D Amendment filed on May 17 of this year.
These items were partially offset by $1.6 million reduction.
In the accounting for stock based compensation.
Excluding nonrecurring items.
<unk> adjusted operating expenses were flat as compared to the first quarter of 2021 on higher sales of $3 million.
Our reported operating income was $3.3.4 million for the second quarter.
On an adjusted basis, including nonrecurring items non-GAAP operating.
<unk> income was $6.8 million compared to adjusted operating income of $4.8 million in the year ago quarter, and $7.2 million in Q1 of 2021.
Adjusted EBITDA as a percentage of sales finished at 8.3% for the quarter.
On.
On an adjusted basis, excluding stock based compensation and other nonrecurring items diluted earnings per share was <unk> 60 for the quarter.
<unk> adjusted EPS of <unk> 37 in the year ago quarter, and 58 in Q1 of 2021.
Expenditures for the quarter were approximately $3 million.
Including $2 million for the improvement of our Suwanee distribution capabilities.
The remaining <unk>.
<unk> of Capex was for the relocation of of bolt supply branch.
Investments and distribution.
The capital maintenance capital.
We expect our total capital expenditures in 2021 to be in the range of approximately $5 million to $6 million, including planned upgrades to our suwannee in mccook infrastructure to allow for increased volume in the future.
Additionally, we will be relocating.
Our Calgary distribution center to a new and expanded location in early 2022.
As an organization, we continue to make investments in the business in particular to areas that have a direct impact on sales.
While continuing to respect the uncertainties and unevenness.
Center of the pandemic recovery, we continue to make investments in the business and balance our cost structure against our current sales trends.
We continue to place focus on improving our working capital.
We ended the quarter net of borrowings and a net cash position.
This of <unk> 9 million, despite making the final $33 million payment for the parts Master acquisition.
We ended the quarter with nearly $92 million of availability under our credit facility, placing us in a great position to invest in the business and support future acquisitions.
This is Mike and I have both previously stated we are managing through this challenging time with the expectation that we will come out of the environment in a stronger position than how we entered it.
The integration of parts master into the organization is progressing as planned and the as of July 1 all reps.
Reps are now utilizing lawson's technology systems with the order fulfillment coming from the loss in distribution Center network.
We will be managing certain pieces of our government business from a dedicated distribution center in Texas.
As with other companies and as Mike.
We have experienced inflationary costs due to the global supply chain disruptions.
We estimate that these disruptions along with the parts master integration costs negatively impacted our EBITDA margins by approximately 120 basis points.
<unk>, while we are actively working closely with our supplier partners. We are implementing pricing actions to offset this inflationary environment.
I will now turn it over to the operator for questions.
Okay.
We will now begin the question.
<unk> net answer session to ask a question you May Press Star then 1 on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing on the keys to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Thank you. Our first question today is coming from Kevin Spanky Barrington at Barrington Research Associates. Your line is live.
Hey, good morning, Mike and Ron.
Good morning.
Good morning, Kevin.
I wanted to start off by asking about.
The price increases.
We're implementing to.
Offsetting some of the inflationary headwinds.
And you mentioned you've had good realization of those.
Price.
The increases thus far how quickly do you think that starts to show up or benefit.
Your margins.
We see it as soon as the third quarter do you think.
Yes, Kevin Thank you.
Yes, we.
The Kevin implement.
The late in the second quarter of price increase we've gotten tremendous price realization. We're in an environment where people are seeing in every aspect of the alive. So certainly customers both of our strategic account customers on our.
Local customers have certainly understood the necessity of that.
Did.
And it will continue to find its way into the third quarter and beyond.
Little bit of an unknown environment as.
Price increases may of our main cost increases from suppliers may or may not continue.
We will continue to respond as necessary.
<unk>.
And I think the reason, we're getting the price realization that we are which is extraordinarily high.
Because customers, especially in this labor market more even than has been in past years, especially this labor market. The last thing customers..1 is the machine down.
For want of a 94.
Part of of what are the $2 of part so it is.
The customers really recognize that we are the lowest cost alternative and the more and more important to them than ever to keep their machines running because while our suppliers of supply chain challenges, which affects us.
And for our customers live in that same environment.
Of our customers are trying to service their of customers, so up and down the chain.
We're into our goal.
To our customers and our suppliers and we certainly expect to continue to respond as appropriate as necessary.
The 2 cost increases as they come along.
Okay got it.
And I'm curious.
It was mentioned a couple of times in.
The earnings release.
Net.
Youre moving forward with the reduced cost structure.
Yeah.
You talked about.
Executing on your the 3.
Part growth strategy on a reduced cost structure, so I'm just trying to get.
To get a better sense of.
The reduced cost structure, you're talking about or.
What is that something kind of.
<unk>.
Newer going forward now that the parks mass or integration is mostly behind you I guess.
Yes, Kevin this is Ron so I'll answer that question.
It's.
Okay.
More from the standpoint of if you look at our cost structure today versus where we were historically.
We took costs out of the organization in 2020.
And those of of.
The big portion of those of remained out of the organization.
It's really.
I think it's evidenced by the fact that debt in the first during the second quarter, we still were able to grow sales.
The 3%.
With 1 of $2.9 with 1 additional selling day. However, our overall cost structure was flat and I think that is just evidence that we're managing.
Managing our overall cost.
We took some actions in throughout 2020 and those actions are.
Stayed with us so.
You look back historically, it's more about.
The cost we've taken out of the organization, we certainly will get some additional cost realization.
<unk> Chen.
As we further integrate parts master.
But we're on what I would call of new run rate today versus certainly where we were even a year ago.
And Kevin. This is again, we're now clearly part of our DNA, it's the way all of us top and bottom in the company think around lean 6 Sigma.
We continue to look at reengineering non value added work out of the system.
The activity is to enhance our distribution centers the investment were making in distribution centers. We will also have the effect of.
Much more capacity out of the distribution centers for example, and more club.
That is a combination of software and some hardware changes carts and conveyors.
It will certainly increase capacity by approximately 20% in that building, but it will also do it with a far more effective labor efficiencies. The same thing is true in Suwanee, Georgia, that's a combination of.
Of software, making it hardware.
Creating a more resilient system, but also of more productive 1.
And as well.
In Calgary that is just about market about the expansion capacity expansion.
But all of this combined with what we.
We've been doing for like the last 10 years is all about continuously refining our cost structure with the idea of reengineering work out while we're growing.
Okay understood that's helpful.
Would.
Possible just the the touch on the.
Monthly trend and sequential trend in average daily sales you saw throughout the second quarter and maybe how things are.
Looking on a monthly sequential basis.
In July here.
Sure so so.
Throughout the throughout the quarter and it should be on a on a consolidated basis.
We were our monthly average daily sales April of million $6.76 may of $1.6.
76 in June was.
$1.642.
And just for reference purposes, we ended March at $1.600, <unk>. So what we saw was sequentially.
A larger increase going from March into April kind of flattened out a little bit in May and then drop just a little bit.
On the month of June.
Relative to July I would say, we're kind of seeing the same.
Level of sales that we saw on the month of in the month of June.
There are I think a number of factors that are probably contributing to that 1 the bank and I both touched on on our.
The prepared comments is some of the.
The chain disruptions certainly is having a little bit of the impact on on our sales and then also <unk>.
<unk> I would say on the parts master of business relative to their military sales is probably the other the other component of that so.
So it's kind of flattish as you think about.
Supplier in the latter half of the quarter.
But to Mikes point earlier.
We do have.
Plans for.
We implemented late in the quarter of price increases which should help.
Third quarter.
And then we also should see some of this timing reversal.
On some of these other military sales.
Great No that's very helpful.
In in.
And kind of thinking about the.
The various supply chain issues, you and your customers and your suppliers are managing through.
Yeah, I think of a very broad and diverse base of suppliers is there are you seeing any meaningful variation among your supplier base, where maybe some of our operating better than others are able to or are able to access inventory better than.
Than others, and therefore, maybe you can.
I agree to some of those.
Of players that are operating better in the current environment to offset some of the.
Bottlenecks you are experiencing.
Yes, Kevin.
A little bit of debt, we see sudden.
Suppliers more capable than others.
The 1.
1 of our area on their particular challenge as chemical suppliers small quantity chemical suppliers.
Excuse me.
That's been.
Challenge in particular, but you know that the.
<unk> between the supplier and the customer is about <unk>.
10 day.
10 day, calling cycles. So we really have very little of backlog as customers are consuming we are replenishing, so theres not a lot of opportunity to.
Shifting categories.
Have we have found the necessity to shift too.
A functional equivalent products in some cases chemicals in particular because of the unique challenges that industry is having at the moment.
But in general our team has done an extraordinary job of managing inventory buying ahead, where it's possible, which is generally a challenge as well.
But.
Day on closely with customers to manage their functional need even though we've had some products substitution that keeps them operating.
Before we can get back to the products that we really prefer to be selling them that.
Those suppliers are struggling but across the board we're seeing this challenge.
Worked for US the board of our team is doing an extraordinary job of managing to the challenge with existing suppliers and developing new supply relationships.
And our customers are responding.
Well I believe we will see is as 1 that it will have to be borne out.
Many quarters from now on even years from now I believe.
We're building tremendous loyalty among our customers in an even stronger reputation coming out of COVID-19 than we went into COVID-19 because of the extraordinary commitment of our sales team has made to our customers and up and down the company everything from accounting and finance to.
And of purchasing and.
Our distributions that our folks I believe this is winning even more of the loyalty in the marketplace than we went into Covid and as you know we went into COVID-19 with better than 90% revenue retention I believe it'll be better than that in the future and.
The market I believe is expanding and we will get a disproportionate share of that expanding market.
Great and related to that.
Kind of the longer term.
Growth outlook.
You've talked about the labor challenges.
Debt youre customers are facing.
You've been able to manage that relatively well internally I mean are you.
Starting to see that bubble up more in your conversations with customers or potential customers, where your value proposition should become even more.
The valuable going.
You had given some of the the labor constraints that the customers are facing.
Yes, we are in fact.
We were last week, we had all of our sales managers in the combined new team of sales managers.
And many of them talked about challenges that come.
For aid to them about labor by the way, they're very optimistic going forward. Both in the shorter term and then over the longer term of both.
Comments from customers.
New and potential of strategic account customers that were working on new.
State business.
And the.
The government business that we're bidding on that we're very optimistic about so there is a real optimism out there of constrained a little bit by supply chain, but again managing through it I believe I believe in statistics, you will have to bear it out in our numbers will have to bear it out over coming quarters and years.
Or is that were seeing an expanding market and accelerating.
The issue as it relates to labor.
And more and more people who today in the source.
The inventory management will turn to outsourcing inventory management to folks like us.
And again because of our operational excellence our footprint.
All of that we do.
100 percentage, 100% sure we will win a disproportionate share of an expanding market.
Okay, great well, thanks for the commentary and insight.
I'll turn it over now thanks, Thank you Kevin base Kevin.
Thank you. Our next question today is coming from Carl Schemm at Keybanc capital markets. Your line is live.
Hey, good morning, Good morning, Kevin Carl Good morning.
Wanted to start out with the gross margin I think last call you talked about.
<unk> gross margin would be back to that 59% of 60% range throughout sort of FY.
FY 'twenty 1.
This quarter it moved in the opposite direction with some of the headwinds you called out earlier on the call.
I wanted to get a sense of what was the biggest change.
To your prior expectations from the time of the <unk> call to today.
Carl Thank you first let me say that our previous guidance in that.
59 to 61 range is unchanged we fully expect.
So just more time to get back there.
Sure Ryan is going to want to jump into the some of the details as to what happened this quarter, but some of them have to do with fully planned processes around integrating.
Appropriate Park Master, New Skus, and the labor associated with that as well.
As the parts of master of the the parts that didn't come over because they are completely redundant so.
There were a number of moving pieces, yes of course supply chain was part of it transportation was a little bit of it but a large part of it was also fully plans in.
The parts of the master of integration.
Yes, Michael I'll, just jump on top of that.
The if you look at the at the movement from in my prepared remarks from 58% 59, 3% to 58% exclude.
Excluding the.
Inventory reserves that we had on the parts of masterpiece.
If you break that down further debt 130 basis point movement about 60 of that is.
Is it related to some of the freight increases that we've seen.
And then say another 30 of that is relative to some of the additional labor dollars and we attribute both of those 2 really.
Really the the supply chain.
Disruptions that we saw so.
Those 2 on a standalone basis account for the majority of that of that decrease in fact, if you look at our straight product margins sequentially from month to month to month we.
We dipped a little bit of.
In May, but then June with some of the actions that we took we saw a little bit of recovery again. It was only a partial month, but we saw a little bit of recovery in our straight product.
<unk> margin so.
Putting aside these these freight and some of the labor challenges.
We.
Kind of right back to where we were in the first quarter the.
The other point that I would make and it really maybe ties more to.
The overall impact of that on our on our.
Reported EBITDA of the 8.3% I mentioned that we attribute about of 120 basis points.
To the expense.
Expenses incurred around the parts of master integration as well as some of the supply chain disruptions. So that gets us right back to 9.5% call. It adjusted EBITDA and from an earnings per share perspective, if you tax effect that that impact.
We are.
It's 9% to 10 cents a share so.
Again, we don't have complete visibility into when some of the supply chain disruptions will go away I think that will be.
On a headwind as we enter into here in the third quarter.
But we.
But we clearly.
<unk> expect for some of these items to the Tempur.
For the remainder of the year.
Okay understandable.
Maybe back to the parks Master Reserve point.
Are we through parts of masters sort of risk.
The inventory reserve write downs are.
Do you think that there is anything else that could.
The impact that for the rest of the year, yes, we should be through it. So we have now completed the full evaluation of those that SKU offering on a go forward basis.
He added partially completed in Q1 finish that in Q2 effectively.
With all of the sales reps now, placing their orders through the loss in technology and being fulfilled out of the loss of distribution Center network and we now have.
All of those reps really.
Coming through the loss of distribution network. So we are as you can imagine we're moving.
We're moving a lot of inventory around to make sure that we can fulfill those customer on.
Orders in moving inventory from the Greenville distribution Center, Greenville, Texas DC into our forward loss in Dcs to make sure that we can.
Hit our line service.
Moving on a level of goals to our customers. So moving around a lot of inventory right now some of that of that'll take the majority of that will take place here in the third quarter. So we'll probably still have some some expenses related to that but not necessarily reserves around.
The.
Future sell through of the inventory.
Service, Carl if I could just add I.
Probably cannot overstate how pleased we are with how the integration has gone smooth.
On a more bumps on the road both.
The sales team integration, but all of the incredible people that we brought over really exciting new products.
When you do an acquisition you do all kinds of due diligence in the research upfront.
And the only later the you fully appreciate the most subtle aspects of what's going on in there on a large handful of products that we acquired.
With the parts of the Master acquisition that are going to be really exciting to.
When you don't seem already embraced in many cases and now the full.
Both legacy and point of.
Sales team and the new sales team have access to all of the combined products and many of them are truly exciting we will uniquely serve some of our most important market segments.
Our sales so I just can't overstate, how pleased we are with the progress that the teams have made in pulling themselves together and the <unk>.
Seamlessly, becoming 1 team rather than 2 teams.
It's been quite quite pleasant hard work hard hard work, but very.
Pleasant to see.
Alright.
So along that line.
Kind of sticking with parts of master here.
I know you mentioned the sequential decrease I think correct me if I'm wrong, but this is the second sequential decrease in parts of master.
I think you mentioned that Thats military I, just kind of curious how we should be thinking.
About.
Sort of the sequential cadence of parts of master going forward and when when that kind of military.
Lumpiness may be smoothed out.
Yes, there is 1.1 specific customer its an important customer that is retooling for our new technology.
<unk>.
And that for that customer has been a little bit of the challenge. We are optimistic that that customer will get back to fully servicing their customers by the way we still have the relationship it's nothing like that its about.
They're ebb and flow, it's a little hard to predict when they get through that bottleneck debt.
Reengineering of technology, they are going through.
But we're optimistic underneath all of that the putting aside that specific customer the military business over time will become very strong is by nature more volatile than state local and educational and Thats. The reason.
Reason, we invest in both separately.
The state local and educational has 90000.
Retention of buying entities every.
Library of America every police Department Fire Department Department of Transportation and Snow plow on.
You name it parks and Rec.
Everywhere.
Where and state local and educational is more diverse and as a result of less volatile by contrast military by definition is more concentrated fewer number of buying locations large basis.
So it would inherently be more volatile we're investing in both.
And fully expect both to do well.
But it's a little hard to predict that 1 market segment, just because of the the nature of the segment.
Putting that aside.
The Park Master sales reps now have access to all kinds of products that they did not.
Access to before in particular.
1 that comes to mind is are extremely strong and highly differentiated fastener of private label Fastener line.
The parts of Master of Fastener line was not probably quite as broad or as strong as our fastener line.
And.
Immediately when we gave that product line of bank.
That product line available to the sales reps the immediately jumped on it because they viewed there the sales reps on talking about view of their product line is a little bit narrow in and not as robust as ours. So I think over time, you're going to see organic growth.
Across a broad diversity of products.
And sales reps.
Great. That's helpful on that kind of wanted to touch more on that debt sales Rep point.
Just.
Yes.
I was reviewing some prior transcripts and you talked about.
Visiting sales reps on average visiting locations every 10 days on average.
I'm, just curious of that sort of create a physical limit to how productive the sales rep can be in bad debt I mean, the sales rep can all the visit so many locations is it cash from a revenue standpoint, or Theyre just way more capacity.
Left kind of in the tank for sales Rep.
There's tremendous capacity right.
Yeah tremendous capacity in the sales reps there is a huge diversity.
Many sales several sales reps the bunch of them, so way more than a $1 million some more than $2 million in their territory.
The average is far lower than that so depending upon the composition of customers. The nature of the individual site locations. It can be all over the map geographically diverse remote areas are more challenging and by the way. That's 1 of the reasons, we've talked about investment in.
<unk> other channel to market. It is predominantly the service geographically remote areas.
Think I mentioned on the last earnings call that out of about 42000 ZIP codes in America.
We service about 20000 of them and the reason, we don't service the other ones.
<unk> is there geographically remote theres a lot of aggregate business in those areas, but they're not it's not concentrated business. So we see tremendous growth.
Growth potential and building parallel channels of the additional channels to market and that doesn't speak to the other.
On this hyper which is the process of outsourcing inventory management versus currently many companies that buy our kinds of products in source it and just buy the products. So I think there are a number of drivers some of our in our control.
Our market expansion of our channels to market.
The dry.
The investments, we're making and some are just demographics that hugely favor us.
Great. Thanks, and then just 1 quick modeling.
Question here I noticed it looks like tax rate sort of.
Ticked down quite a.
A bit this quarter, how should we be thinking about tax rate for the rest of the year.
Yes, I would I wouldn't go ahead and utilize the full year to date tax rate that debt is there for our second quarter I think it was 24, 2% we did see a slight decrease here.
It is you know I think Karl that you have to estimate that right and then you record the rate on a quarterly basis. So you can use 24% to 25%.
For the remainder of the year as well.
Great. Thanks.
Sure. Thanks Carl.
Thank you.
Our next question today is coming from Brad Hathaway at far view your line is live.
Hi, Mike and Ron.
Just a quick question.
The M&A pipeline, obviously the company is already back to net cash again, even after the parts of that sort of deal.
So im curious as to how you think about kind of M&A going forward and what you're seeing on that side.
Yes, Brian Thank you very much for the question.
Unchanged look we have been.
We generate a lot of cash.
We feel great about the acquisitions that we've done I think importantly.
To us in the state of mind as much as anything else certainly strategy of course, but now we have 2 very different kinds of large acquisitions that we've been incredibly successful with 1 being the bolt supply house.
It's a slightly different value proposition branch based.
For and it's done very well over an extended period of time and we feel great about that acquisition now at the other end of the spectrum parse master of we've completely and totally integrated in every way over time seamlessly connected to Lawson.
We refer to legacy loss of the new Lawson.
That will be so interwoven as the be indistinguishable. So 2 very different approaches and I believe that the success in both approaches enables us to move forward with an even broader opportunity set than we had previously.
We're always filling the pipeline.
We're very pleased with the current state of the pipeline.
And our very very much committed to progressing the pipeline generally is filling with the larger opportunities than the ones. We made initially when we started on this path and as you remember.
We talked about wanting to.
The small acquisitions, so that we can develop our integration team test our paradigms around.
Products and processes it worked right.
Did develop the knowledge base and the bandwidth the human resource bandwidth.
To do what has been done since then moving forward we.
Sure prefer to be doing larger acquisitions than small acquisitions not to say that we would reject of small 1 that was a beautiful fit.
But the goal is larger acquisitions and going forward. They may be integrated like parts of master or they may not be integrated like the bolt.
Sales and again the good track record we've had on both of us.
The very encouraging to us and the strength of the team the integration team and the analysis team that we built internally also gives us.
<unk>, but the financial capacity is critical but the human resource capacity is equally critical.
So very pleased on both fronts.
Got it and does the kind of the.
On the Luther King potential transaction does that cause any hiccup in terms of your ability the force you'd be kind of a pause on your acquisition strategy.
No.
Okay.
Alright, Thats it guys. Thank you very much.
Thank you.
Thank you once again, ladies and gentlemen, the floor is open for questions. If you have any questions or comments. Please press star then 1 on your Touchtone phone to withdraw your question. Please press.
Alright, thank you.
Our next question today is a follow up from Kevin Stankey. Your line is live.
Yeah.
Hi, just 1 quick follow up.
Ron I think you mentioned in the prepared comments.
But on 120 basis points.
The stone into it.
Adjusted EBITDA margin from a combination of.
Relation in the parts Master integration. So I was wondering if you kind of could kind of break that down like you did for the Lawson MRO gross margin into those those pieces.
Headwind.
I guess, if we should think about any of <unk>.
Headwind from the parts Mr integration being passed US now is that correct.
Yes.
Yes, well I think so in terms of the 120 bps. If you look at it relative to the entire quarter.
<unk>.
Yes.
Broken down for Carl on the MRO side so.
I mean, you could think about about 40 of that.
Being.
Freight.
Or a combination of freight and labor that we experienced.
On the.
Morrow side of the debt primarily on the MRO side of the business of about of about 70 bps.
The debt 120 doesn't include.
The reserve that we took on the I'm sorry. It does not include the inventory reserve, we took on the rationalization because.
Because it's already added back into our adjusted.
There is.
We have experienced.
Labor around.
Moving some of the inventory that I commented on before.
On the parts of Masters' side of the business. That's another 10 to 15 bps.
And then.
And.
The other piece that I would say is that we attributed to that was really just.
Some of the lost sales dollars that we saw in the relative margin on those just due to.
Inability to get product in the door from our suppliers.
And Thats about another 30 basis points so the.
Combination of those along with some additional inbound freight.
Experienced from our supplier so what's happening to some degree is that if.
Of our suppliers cannot.
Send a complete order to us they are.
<unk> partial shipments to us.
That ultimately.
Drive some additional touches and additional put away and just the additional movement of product within our distribution network. So we are incurring some additional labor costs around that so hopefully that helps on the 1.
Hundred 20.
Relative to the aggregation and as I said, we saw a little bit of slippage in just our straight product margin, but.
But not a lot.
Between customer and sales mix.
That was the remaining portion of of.
Spending of some of that movement that we saw within our gross margin percentage.
Alright, Thats really helpful. I appreciate that thanks, yes, the problem. Thank you Kevin.
Thank you. This concludes our question and answer session.
I would like to turn the conference back over to Mike Takeda for any closing remarks. Thank you Kate.
Lawson products is uniquely positioned to prosper in these turbulent times.
Over the past few years I've discussed labor demographics, as a driver of our value proposition and the relationship that.
Debt, we have with 90000 customers, we've discussed that again today.
The pandemic has accelerated this trend greatly.
Our operational excellence.
Geographic coverage and blend of service intense of vendor managed inventory is enabling us to win disproportionate share.
Share of debt expanding market.
Our 3 part growth strategy, and specifically the investments and accelerating productivity through new product introduction, New channel development state local and educational are beginning to show great results.
Our investment in.
1 process is enabling us to navigate through the landscape and become more integral to our customers' success.
At every level of the company our teammates are becoming more capable and they are turning that capability to winning share and accelerating growth.
Thank you to both our legacy.
And new Washington teammates as well as the bolt supply teammates.
Our ability to be nimble during turbulent times is making a huge difference to our customers on our suppliers.
Thank you.
We look forward to speaking with you on the next call have a wonderful day.
Thank you ladies and gentlemen, this does conclude todays event you may disconnect at this time and have a wonderful day. Thank you for your participation.