Distribution Solutions Group, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Record quarterly sales of 6.6% growth y-o-y, though organic sales were down 2.1%. Gexpro Services showed traction with new customer wins and growth in renewables, technology, and aerospace/defense.
• At Lawson, progress on sales force transformation with goal of 900 sales reps by year-end and 1,000 midway through next year; identified 134 new sales territories. The Canadian operating unit via Source Atlantic acquisition is a new reportable segment.
• Acquisitions: Source Atlantic provides scale and geographic expansion in Canada; ConRes Test Equipment adds Northeast calibration lab and sales support in key growth markets; TCR acquisition offers a beachhead in Southeast Asia for Gexpro Services.
• Gexpro Services sees resurgence in technology, renewable, transportation, and aerospace/defense end markets. TestEquity Group sees uptick in Test and Measurement sales and improving metrics in aerospace, defense, technology, and R&D.

Segment Performance

• Lawson: Sales were $118 million. Adjusted EBITDA was $15.5 million, or 13.1% of sales, down 50 basis points from Q2. Organic average daily sales were down 10% due to lower sales rep counts and end market/customer headwinds, including federal government impacts.
• Canada Branch division: This new segment had sales of $39.1 million, including $24.7 million from the Source Atlantic acquisition mid-quarter. Excluding acquired revenue, sales increased 6.2% y-o-y. Q3 adjusted EBITDA was $4 million, or 10.3% of sales.
• Gexpro Services: Total average daily organic sales were up $12.9 million, or 12.5% from the year ago quarter and up 10.1% sequentially. Adjusted EBITDA expanded by $4.8 million to $16.4 million, or 14.1% of sales, up from 11.2% of sales a year ago and 11.9% of sales in Q2.
• TestEquity Group: Third quarter sales were $195.2 million. Adjusted EBITDA was $14.4 million, or 7.4% of sales, up from 6.9% as a percent of sales in the prior year quarter. Sequentially, net margin compression was due to sales mix shifts from lower consumable sales.

Guidance

• Committed to driving elevated value creation through disciplined capital allocation and M&A. Expect continued active M&A with a robust pipeline of opportunities. Anticipate maintaining double-digit consolidated EBITDA margins in Q4 despite fewer selling days. Aim to restore 2022 growth trajectory and compound returns for shareholders.

Risks

• Lackluster industrial backdrop, particularly in electronics manufacturing. Government order entry shifts impacting military sales, causing delays in kit and product delivery. Macroeconomic uncertainties, such as U.S. manufacturing PMI below 50, indicating potential contraction in the intermediate term.

Q: Tommy Moll asked about the shape of Gexpro's recovery and visibility going forward.

A: Bryan King mentioned renewables and semiconductor markets that were laggards last year are improving, and Gexpro's acquisitions, which faced soft markets last year, are now seeing earnings leverage as end markets spool back up. Ron Knutson added aerospace/defense has been strong, technology is recovering, and renewables are marching up.

Q: Tommy Moll followed up on Q4 pacing and margins.

A: Ron Knutson stated sales levels are relatively consistent with Q3, and they expect to remain in double-digit EBITDA margin range in Q4 despite fewer selling days.

Q: Kevin Steinke asked about Lawson's new sales territories and rep hiring.

A: Bryan King and Ron Knutson discussed new greenfield territories, targeting 900 reps by year-end and 1,000 midway next year, with initiatives to support rep growth despite past hiring delays.

Q: Brad Hathaway asked about return on invested capital.

A: Bryan King explained returns are impacted by acquisitions initially but improve as synergies and earnings accrete, with focus on growing EBITDA from acquisitions and managing working capital to drive higher ROIC