Distribution Solutions Group, Inc. Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Marketplace Context: Addressed the impact of trade policy changes, emphasizing DSG's role in helping customers navigate sourcing amidst reordering of global trade patterns.
• First Quarter Results: Consolidated revenue was $478 million, up 14.9% year-over-year. Adjusted EBITDA was $42.8 million, or 9% of sales. EBITDA margin increased from the prior year.
• Strategic Initiatives: Progressed with sales force transformation at Lawson, integrated Canadian businesses (Bolt Supply and Source Atlantic), saw growth at Gexpro Services in aerospace, defense, renewables, and technology segments, and TestEquity's initiatives including rental fleet expansion and VMI installations.
• Stock Buybacks and M&A: Repurchased $11.2 million of stock in Q1, with over $15 million remaining under prior authorizations. The M&A pipeline continues to build, with several deals in diligence.

Segment Performance

• Lawson Products: Q1 revenues were $120.5 million. Adjusted EBITDA was $14.3 million, representing 11.9% of sales. Organic average daily sales were down 6.8% year-over-year but up 4.3% sequentially.
• Canadian Segment (Bolt Supply and Source Atlantic): Q1 sales in U.S. dollars were $50.5 million. Adjusted EBITDA was $2.6 million, or 5.2% of sales. Excluding acquired revenue, organic sales increased 5.3%, and were up ~13% on a constant currency basis.
• Gexpro Services: Q1 revenue was $118.9 million, an increase of over 20% year-over-year. Adjusted EBITDA was $15 million, or 12.6% of sales. Organic average daily sales were up 23.3% year-over-year and 4.6% sequentially.
• TestEquity Group: Q1 sales were $188.8 million. Adjusted EBITDA was $12.8 million, or 6.8% of sales. Average daily sales were up 2.5% year-over-year but down sequentially.

Guidance

• Long-Term Outlook: Confident in doubling EBITDA over the next three years and materially lifting current EBITDA margins.
• Quarterly Expectations: Anticipated the first quarter to be the softest, but EBITDA was ahead of budget.
• M&A Pipeline: Believes the current environment creates more M&A opportunities, with a robust pipeline and a measured approach to transactions.

Risks

• Tariff Impacts: Tariffs impact ~5% of direct purchases and a larger but still modest amount of indirect purchases, with potential pricing flow-through to customers.
• Market Uncertainty: Murkiness in the Canadian market and some end markets due to trade policy shifts, affecting sales and margins.
• Working Capital: Managing working capital amidst inflation and tariff pressures remains a challenge, though efforts are ongoing to optimize.

Question and Answer

Q: About daily sales trends and April pacing A: Ron Knutson noted April pacing is tempered compared to Q1 but relatively flat sequentially, with different year-over-year and sequential comparisons for Lawson and Gexpro Services.

Q: Lawson's military sales and sales force rebuild A: Ron Knutson mentioned military sales trends are flat sequentially, and Bryan King discussed the sales force rebuild progress, including rep productivity improvements and investments in sales support.

Q: M&A pipeline and environment impact A: Bryan King stated the current environment creates more M&A opportunities, with a robust pipeline and a measured approach to transactions, noting sellers may be more motivated in this climate.

Q: Path to 20% ROIC A: Ron Knutson and Bryan King discussed numerator levers (cost synergies, sourcing, market normalization, network effect) and working capital management as key to reaching the 20% ROIC target.

Q: Source Atlantic margins A: Ron Knutson and Bryan King discussed Source Atlantic's margin compression, with plans for gross margin improvement and branch consolidation, but top-line pressure affecting the timeline to reach expected margins.