Distribution Solutions Group, Inc.

Good morning, everyone, and welcome to the Distribution Solutions Group's second quarter 2022 earnings call. As a reminder, this conference call is being recorded. Now, I'd like to turn the call over to Sandy Martin, three-part advisors, to provide instructions to read the Safe Harbor Statement. Please go ahead.

Good morning, ladies and gentlemen, and welcome to the Distribution Solutions Group's second quarter 2022 earnings call. In conjunction with today's call, We have provided a Q2 earnings presentation that has been posted on the company's IR website at investor.distributionsolutionsgroup.com. Joining me on the prepared remarks for today's call will be Brian King, DSG's Chief Executive Officer and Chairman, and Ron Knutson, DSG's Executive Vice President and Chief Financial Officer. During the call, they will be providing an update on the business from an operational and financial perspective. Additionally, Brad Wallace, LKCM Headwater Partner and DSG Advisor, as well as operating company CEOs Cesar Lanuza, Russ Frazee, and Bob Connors will join the call for the Q&A session. Please note that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results, and underlying assumptions. that are subject to risks and uncertainties that could cause actual results to differ materially from those described. In addition, statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change. Please consider the information presented in that light. The company may at some point elect to update the forward-looking statements made today but disclaims any obligation to do so. Management will also refer to non-GAAP measures, including adjusted EBITDA, adjusted operating income, and adjusted diluted EPS. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. The earnings press release issued earlier today is posted on the Investor Relations section of our website. A copy of the release has also been included in the current report on Form 8-K filed with the SEC. This call is being audio webcast on the Internet via the Distribution Solutions Group investor relations page on the company's website. A replay of this teleconference will be available through August 23, 2022. I will now turn the call over to Brian King. Brian?

Thank you, Sandy, and good morning, everyone. I'm excited to share with you our results of the Combined Distribution Solutions Group organization. As Sandy mentioned, please refer to the slide deck that we have provided on our website to follow along with our commentary today. As you'll recall, we completed the merger effective April 1st, 2022 by strategically bringing together three high-touch value-added specialty distribution companies. First, I'd like to quickly summarize each of the operating companies under Distribution Solutions Group for any of our new listeners. Lawson Products is a leader in MRO distribution of Class C parts offering vendor-managed inventory services through its over 1,000 sales reps. JEXPRO Services is a provider of supply chain solutions of largely C-parts, specializing in developing and implementing VMI and kitting programs to high-specification manufacturing customers. TestEquity is a leading distributor of specialized tested measurement equipment and solutions, electronic production supplies, and customized toolkits from leading manufacturing partners. In a moment, Ron will cover the financial details for the quarter, but let me start by pointing out a few of the highlights from the second quarter and also comment on some operational initiatives within each of the companies. For the combined companies, sales grew 34% to $321 million from both acquisitions and organic growth. Organic sales grew nearly 12% versus a year ago quarter. On an apples-to-apples basis, This organic growth demonstrates the strength of the core businesses before taking into consideration our acquisition revenues. We reported solid organic growth across all three of the operating companies or segments. We generated almost $32 million of adjusted EBITDA for the quarter, which translates to 9.9% of sales. We are encouraged by these results as all three operating companies are performing at or above their expectations. While DSG does not provide formal guidance, We expect 2022 adjusted EBITDA margins to exit the year above 10%, as previously communicated. All three operating companies are experiencing an improvement in both adjusted EBITDA dollars and margins, which we remain strategically focused on. Each of the operating companies made significant progress that give us further confidence in our overall strategy and teams leading those businesses. The company's acquisition strategy continues to be a large part of our growth initiatives. During 2022, JEXPRO services closed on the Resolux and Frontier acquisitions and test equity closed on the T equipment and national test equipment acquisitions. In aggregate, these four acquisitions create annual revenues estimated over $180 million and annual adjusted EBITDA of nearly $20 million. All of these acquisitions are creative and fit nicely into the strategic direction of the operating companies. They also provide important complementary elements to adding incremental customer and Cesar Lanuza. Looking at our pipeline, we are evaluating acquisition opportunities continuously for each of the businesses and the funnel remains full. We've structured them in a team to support each of the operating businesses to identify, diligence and close transactions that meet our criteria. As I mentioned, acquisitions are a significant part of our ongoing strategy. Additionally, the leaders at our three operating companies are collaborating to expand relationships with existing customers, and they are working together and with our teams and theirs to identify cost synergies where it makes sense. During our recent Operating Company Leadership Summit in Chicago, we identified specific work streams with near-term timelines for each of the three companies. The teams left those meetings with specific action items and accountability, meaning that specific leaders or owners are responsible for both delivering sales, Synergies, and Cost Takeout Opportunities. We are seeing near-term evidence of success, and I am confident that these teams will create significant and meaningful results to further drive DSG sales and earnings growth, accelerating value creation and sustainability of earnings growth for all shareholders. Before I turn it over to Ron, let me comment on a few operational initiatives at each of the three companies. First, Lawson Products. Lawson has done a nice job in growing and expanding its strategic customer relationships. This is a great area of opportunity for the organization, which we continue to invest in. Gross margins are on an uptrend given many of the actions taken by the company. Under Cesar's leadership, there is new focus on protecting and expanding our margins, and we are diligently reviewing the best way to deliver high-fetched service to our customers the way they want it while driving operating leverage across our resources. Additionally, Lawson continues to expand its distribution capabilities with upgrading its conveyor systems at the Suwannee, Georgia, D.C. location, doubling the size of its Calgary, D.C. earlier this year, and changing processes within their network to better fulfill customer demand and drive efficiencies. Cesar is an inspiring leader, and he's putting in place a strong accountability and customer-centric sales culture with aggressive strategic growth initiatives and improve profitability objectives. Second, Jexpro Services. Jexpro Services is continuing to drive significant services segment growth with the acquisitions of Frontier, Resilux and SIS. The renewables and technology verticals are well positioned for growth, especially with this Inflation Reduction Act. Jexpro Services completed price increases based on current supply markets impacted by increases in raw materials, labor, and Freight Indexes and Inflation. And the teams have been able to maintain gross margin percentage throughout a tough inflationary environment. Finally, the Jexpro Services team continues to improve supplier rebates and extend payment terms via acquisition synergies. And finally, test equity. The process of integrating the T equipment acquisition into the business is going well. We're seeing sales of combined product offerings gaining traction in the T equipment business. Supply chain challenges are still affecting sales and delivery of the test and measurement product lines. The chip shortage has caused lumpy delivery from our suppliers and continued swelling of our backlog. Projections are that lumpiness in our inventory flowing from key manufacturers will continue into 2023. Inflation has had a positive effect on sales numbers as price increases from suppliers are passed on to customers in a timely manner. Customers are tending to push purchases ahead of price increases which has helped us develop an increase in our customer backlog of orders. Outsourcing of the test chambers project is hitting its stride and we are now starting to reduce our backlog while focusing on delivering products timely to our customers. A secondary production facility was brought online in July and will be shifting product in August. Soon, we also hope to start proactively growing demand versus just reacting to a replenishing backlog from organic demand. The electronic production supply of the business has shown continued growth for the third month in a row. We're seeing consistent demand growth in key areas on that side of the business. Our operating company leaders are keenly focused on improving their operations. We're excited to continue to share these activities with investors and also share our long-term strategic vision and plans as we work diligently to create long-term shareholder return. Now, I'd like to turn the call over to Ron to dive into the financials. Ron.