Distribution Solutions Group, Inc. Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Results: 2024 Q1 sales totaled $416 million, up 19.5% on strategic inorganic growth. Consolidated adjusted EBITDA margin improved to 8.7% from 8.4% in Q4 2023.
• Initiatives: Lawson ongoing sales force transformation, product expansion; Gexpro Services focusing on aerospace and defense growth; TestEquity Group integrating Hisco for margin stabilization.
• Acquisitions: Acquired Emergent Safety Supply (bolstering safety offering) and S&S Automotive (complementary to Kent Automotive). Hisco integration yielding cost synergies and margin improvements.

Segment Performance

• Lawson Products: Sales were $118.2 million, down 4.2% on comparable days. Adjusted EBITDA was $13.4 million or 11.4% of sales. The 2-year stack organic growth was nearly 12%, with a few million dollars from ESS acquisition. Government orders caused delays in purchase orders.
• Gexpro Services: Total sales decreased 2.3% to $98.7 million, but increased 4.2% on comparable days from Q4 2023. Aerospace and defense vertical saw strong growth. EBITDA was $10.8 million or 11% of sales, returning to double-digit margins despite technology vertical pressure.
• TestEquity Group: Q1 sales grew 74.3% to $187.1 million due to 2023 Hisco acquisition. Excluding Hisco, sales were down 14.6%. Adjusted EBITDA was $11.6 million or 6.2% of sales, with margin stabilization despite end-market challenges.

Guidance

• Q2 Outlook: Expect Q2 organic sales to be flat to down low-single digits y/y but up sequentially from Q1. Anticipate sequential margin improvement across all segments in Q2 due to ongoing initiatives in each vertical.

Risks

• End-Market Softness: Continued softness in government orders for Lawson and test & measurement for TestEquity Group.
• Inventory and Capital Spending: Delays in customer capital project spending due to higher interest rates and inventory channel messiness impacting Test & Measurement business.

Question and Answer

• Q: Tommy Moll on S&S acquisition and pipeline A: Bryan King and Ron Knutson discuss S&S as a direct source deal complementary to Kent Automotive, with ongoing integration and emphasis on pipeline of direct-sourced acquisitions.
• Q: Thomas Moll on Q2 margin outlook A: Ron Knutson states Q2 margins expected to be up sequentially across segments, with initiatives driving incremental margin improvement.
• Q: Kevin Steinke on Lawson sales rep head count A: Ron Knutson talks about sales rep head count adjustments, territory rework, and recruitment to drive productivity and margin improvement.
• Q: Katie Fleischer on government orders impact on Lawson A: Bryan King and Ron Knutson discuss delay in government spending and expectation of inflection in government orders later in 2024.
• Q: Katie Fleischer on Test & Measurement inflection signs A: Ron Knutson and Bryan King mention sequential improvement in Test & Measurement sales and market signs indicating potential inflection, though cautioning against overreliance on short-term trends.