Distribution Solutions Group, Inc. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Acquisition of Source Atlantic: Excited about the upcoming acquisition of Source Atlantic, a leading Canadian industrial distributor. It complements Bolt Supply House and Lawson VMI Canadian teams, expanding geographic presence in Canada and offering white space for growth. Expected to drive low double-digit EBITDA margins in 12-18 months and be accretive to ROIC by end of 2025.
• Financial Results: Consolidated revenue for the quarter was $439.5 million, up 16.3% year-over-year primarily due to acquisitions. Adjusted EBITDA was 10.3% of sales, a sequential improvement from 8.7% in the first quarter.
• Vertical Initiatives:
  • Lawson: Implemented sales force transformation, including a new CRM tool, and saw sequential sales rep productivity increases. Acquired ESS and S&S Automotive for brand and line extensions.
  • Gexpro Services: Saw end market recovery in technology, renewables, and aerospace defense, with expectations of easier comps and growth in the second half of 2024.
  • TestEquity Group: Integrated Hisco, with focus on margin improvement and cost savings, expecting to reach double-digit margins long term.

Segment Performance

• Lawson: Sales were $121.1 million, up 1.7% on comparable days from the prior year, primarily driven by the S&S Automotive acquisition. Excluding the acquisition, organic sales were down 4.2% from the first quarter. Adjusted EBITDA was $16.5 million, or 13.6% of sales, up 220 basis points from the first quarter.
• Gexpro Services: Total sales increased 8.6% to $107.1 million from the first quarter. Adjusted EBITDA was $12.7 million, or 11.9% of sales, up 90 basis points from the first quarter.
• TestEquity Group: Sales grew 45.1% to $197.5 million, driven by the 2023 acquisition of Hisco. Excluding Hisco, sales were down 9.2% year-over-year but up 5.5% sequentially. Adjusted EBITDA was $15.4 million, or 7.8% of sales, with net margin dollars up sequentially.

Guidance

• Second Half 2024: Anticipates organic sales to be flat to slightly positive as comps ease. All three verticals expected to expand margins from Q2 run rates.
• Source Atlantic: Targets low double-digit EBITDA margins for combined Bolt Source Atlantic within 12-18 months and expects Source Atlantic to be accretive to DSG's ROIC framework by end of 2025.
• Capital Allocation: Continues to focus on strategic acquisitions, managing leverage, and using share repurchases as part of capital strategy to drive shareholder value.

Risks

• Macroeconomic Headwinds: Higher interest rates negatively impacting industrial end markets, affecting sales across verticals.
• Inventory and Market Competition: Impact on Test and Measurement business inventory levels and pricing competition.
• Sales Cycles: Uncertainty in sales cycles for short-cycle MRO in Lawson, with softness in certain segments.

Q: Kevin Steinke asked about the pace of recovery in the Test and Measurement business within TestEquity and inventory/market competition.

A: Ron Knutson and Bryan King responded that there's sequential improvement in Test and Measurement, with efforts to regain customer share and address inventory markdown issues.

Q: Kevin Steinke inquired about softness in short-cycle MRO and organic revenue in Lawson.

A: Ron Knutson explained softness in short-cycle MRO segments like military and Core Street, with cautiousness due to ISM below 50% and military ordering delays, but highlighted ongoing sales force expansion and structural margin improvements.

Q: Kevin Steinke asked about the impact of Source Atlantic on consolidated margins.

A: Ron Knutson stated Source Atlantic, similar to Bolt Supply, is expected to be driven to low double-digit EBITDA margins over 12-18 months, with accretive effects on ROIC by end of 2025.