Distribution Solutions Group, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Fiscal 2024 Overview: Reported revenue was $1.8 billion, up nearly 15% driven by acquisitions. Trailing twelve-month revenues were ~$1.95 billion, and adjusted free cash flow was $175 million. Doubled revenues and generated $100 million incremental adjusted EBITDA since 2021 pre-merger.
• Lawson Initiatives: Focus on building a world-class sales force, implementing Salesforce CRM, reducing sales force to 830 then growing to 920, targeting 1,000 reps by 2025, and integrating acquisitions like ESS, S&S Automotive, and Source Atlantic.
• Gexpro Services: End markets (aerospace, defense, tech, renewables) rebounded, acquired Tech Component Resources for Southeast Asia growth, and showed strong book to bill in key verticals.
• Test Equity Group: Test and measurement business showed sequential momentum, rental utilization up, end markets stabilizing, and ongoing integration efforts to optimize profitability.

Segment Performance

• Lawson: Q4 sales were $111.8 million. Average daily sales increased 1.8% on acquired revenue. Organic sales declined 10.9% due to soft December, lower rep counts, and military sales decline. Adjusted EBITDA for the quarter was $11 million, representing 9.8% of sales. Rep count rebuilding is underway, with net rep counts increasing from Q3 to Q4, ending the quarter with approximately 900 field sales reps.
• Canada Branch Division: Fourth quarter sales in US dollars were $59 million, including $45.6 million from the Source Atlantic acquisition. Adjusted EBITDA for the quarter was $4.2 million, or 7.2% of sales. Excluding Source Atlantic, adjusted EBITDA for the segment would have been 14.8%.
• Gexpro Services: Q4 revenue grew 27.4% to $118.8 million, primarily from organic expansion. Adjusted EBITDA was $15.8 million, or 13.3% of sales. Full year EBITDA margin expanded by 160 basis points, and the fourth quarter expanded by 380 basis points.
• Test Equity Group: Q4 adjusted EBITDA was $14.8 million, or 7.8% of sales, up from 6.2% in the prior year quarter and 40 basis points from Q3. Test and measurement business showed sequential momentum, with rental utilization rates growing in the fourth quarter.

Guidance

• 2025 net CapEx is expected to be in the range of $20 million to $25 million, approximately 1% of revenues.
• Lawson expects sales growth in 2025, with margin progression towards high teens as sales force rebuilding and integration efforts progress.
• Gexpro Services sees continued growth in key end markets, optimistic about Southeast Asia expansion from the acquisition of Tech Component Resources.
• Test Equity Group expects sales and margins to build as end markets recover, with ongoing optimization efforts.

Risks

• Military Sales Uncertainty: Uncertainty around the timing of military sales recovery and federal government spending, which had a significant drag on revenues in 2024.
• Tariff Impact: Potential impact of tariffs on indirect and direct procurement, though minimal impact currently identified.
• Integration Challenges: Margin compression from Salesforce transition, rep turnover, and integration of acquisitions like Source Atlantic, requiring near-term investments with long-term payoffs.

Question and Answer

Q: Color on quarter-to-date sales levels across DSG as compared to end of Q4?

A: Lawson started strong in Q1, with sequential sales growth over Q4 levels. Consolidated sales were flattish relative to Q4 trends, but margin profile is expected to lift as 2025 progresses, especially with realization of synergies from acquisitions.

Q: Fourth quarter organic revenue growth 3.5%, any positive surprise?

A: Organic sales trend was better than expected, with some verticals showing above-forecast momentum. Key end markets were cooperating more than not, contributing to the better-than-forecast organic growth.

Q: Lawson margin trajectory, military sales impact?

A: Lawson expects margin progression in 2025, with efforts to address rep turnover and Salesforce integration. Military sales recovery is uncertain due to federal spending delays, but local/state government business is growing organically.

Q: Source Atlantic margin target timeline?

A: Margin target to double-digit is expected through facility consolidation in Western Canada, completed by the end of the second quarter, with margin progression over time as synergies are realized.