Distribution Solutions Group, Inc. Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Sales Force Transformation at Lawson: Ongoing with talent acquisition and territory planning. CRM adoption exceeds 70%, rep count rebuilt, and web platform refurbished. Despite investments, average daily sales increased 2.6% and EBITDA margins improved.
• Canadian Division: Performance mixed with Bolt Supply showing strong 16% EBITDA margins. Source Atlantic impacted by customer spending contraction, but progress on synergies and gross margin expansion. Organic sales up 2% constant currency.
• Gexpro Services: Momentum in aerospace, defense, renewables, and technology. Backlog filling for industrial power. Adjusted EBITDA margin expanded to 13.4%, up from 11.9% y-o-y. Investments in talent driving growth.
• TestEquity Group: Leadership change with Barry Litwin appointed. Softer electronic production and test measurement sales, but Hisco showed positive growth. Focus on margin optimization and go-to-market strategy refinement.

Segment Performance

• Lawson: Q2 sales totaled $124.3 million, with a 2.6% increase in average daily sales (including acquired revenue). Organic average daily sales (ADS) were down 1% due to lower military sales volume, but up 1.6% sequentially. Adjusted EBITDA was $15.7 million (12.6% of sales), up 70 bps from Q1.
• Canadian segment: Second quarter sales in U.S. dollars were $55.9 million. Excluding Source Atlantic revenue, organic sales increased 0.7% and were up 2% on a constant currency basis. Adjusted EBITDA was $3.6 million (6.5% of sales), expanding 130 bps from Q1. Bolt Supply on a stand-alone basis had nearly 16% EBITDA margins.
• Gexpro Services: Q2 revenue was $127.8 million, up 18.2% from the year-ago quarter. Organic ADS were up 2.4% sequentially from Q1. Adjusted EBITDA was $17.1 million (13.4% of sales), up from 11.9% a year ago.
• TestEquity Group: Q2 sales were $195 million. Average daily sales were down 1.2% y-o-y but up 1.7% sequentially. Adjusted EBITDA was $13.5 million (6.9% of sales), up 10 bps from Q1.

Guidance

• Q3 Expectations: July pacing consistent with Q2 trends. Gexpro facing tougher comps in second half but end markets upward. Lawson benefiting from easier comps in second half. No major near-term margin swings expected.
• Long-Term Margins: TestEquity Group sees potential for double-digit EBITDA margins through optimization of specialty offerings. Lawson aims for mid- to high teens adjusted EBITDA margins over time through sales force transformation.

Risks

• Tariff Disruptions: Impact on customer decision-making and margin uncertainty. Approximately 6% of product purchases from China expose to tariff changes.
• Macroeconomic Pressures: Canadian market softness, especially at Source Atlantic, due to regional economic anxiety and tariff noise.
• Military Business Volatility: Fluctuations in military sales volume affecting Lawson's organic ADS.

Question and Answer

Q: Tommy Moll asked about Q3 expectations, July pacing, and margin differences.

A: Ron Knutson stated July pacing consistent with Q2, Gexpro facing tougher comps but end markets upward, and no major near-term margin swings expected.

Q: Kevin Steinke inquired about long-term margin goals for Lawson and TestEquity.

A: Ron Knutson mentioned TestEquity Group focusing on specialty offerings to unlock margins, and Lawson aiming for mid- to high teens adjusted EBITDA margins via sales force transformation.

Q: Ken Newman asked about tariffs and Gexpro expectations.

A: Ron Knutson said no net margin impact from tariffs, and Gexpro's end markets upward with good backlog, though facing tougher comps in second half.