Distribution Solutions Group, Inc.

Welcome to Distribution Solutions Group fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Stephen Hooser. You may begin.

Good morning, ladies and gentlemen, and welcome to Distribution Solutions Group fourth quarter and full year 2022 earnings call. In conjunction with today's call, we have provided a two-four earnings presentation that has been posted on the company's IR website at investor.distributionsolutionsgroup.com. Joining me for today's call are 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 a financial perspective. Additionally, Brad Wallace, LKCM Headwater partner and DSG advisor, as well as an operating company CEO, Tazar Lanuza, Russ Fazee, and Bob Connors will be joining 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, and future operating results, and underlying assumptions that are subject to risk 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, and we may elect to update forward-looking statements made today, but disclaim any obligation to do so. Management will also refer to non-GAAP measures and reconciliations to the nearest GAAP measures that can be found at the end of the 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 8K filed with the SEC. This call is being audio webcast and on the internet via Distribution Solutions Group investor relations page on the company's website. A replay of this teleconference will be available through March 23, 2023. With that, I'll now turn the call over to Brian King. Brian?

Thank you, Stephen, and good morning, everyone. It is a pleasure to be with you today. Distribution Solutions Group delivered exceptional performance in 2022, which we know demonstrates the power of our strategic transformation from a standalone MRO business at Lawson Products to a leading multi-platform specialty distribution solutions company with the scale and leadership to drive sustainable growth. We achieved sales records in 2022, enhanced margins, and expanded profitability while reducing our net debt leverage ratio creating more firepower for reinvestment in the business and M&A. In addition, we attained our adjusted EBITDA margin target during the second half of 2022. And most recently, during the fourth quarter, we delivered strong double-digit organic sales growth that beat expectations, realizing an adjusted EBITDA margin of 10.3% on fewer selling days. In January and February, our business momentum continues. And this year, I believe our companies will continue to take market share, deliver margin expansion, and generate meaningful free cash flow to support DSG's capital allocation priorities in 2023. Although we are closely monitoring the macroeconomic environment and customer demand, we remain bullish about our business prospects for 2023. Turning to slide four in the earnings presentation, I'm pleased to report that full year gap revenue for the company totaled $1.15 billion, and we generated adjusted EBITDA of $123 million. We believe that our scale and breadth of products and services are competitive advantages in the specialty industrial distribution industry. Although fourth quarter is traditionally impacted by seasonality and fewer sales days, our revenues grew by 42%, which included a strong comparable organic expansion of 17%. While price contributed to this increase, we also realized organic sales wins in 2022 on momentum from growing wallet share, volume increases, and cross-selling among the three businesses. Ron will discuss more on pricing in a few moments. Our teams have identified an increasing number of leads based on cross-selling and the potential for expanded relationships and wallet share expansion for many of our largest strategic customers. We believe that leveraging strong customer relationships set us up for continued strong organic growth in each of our three businesses. In addition, we successfully completed five acquisitions in 2022. These acquisitions produced annualized 2022 revenues of about $204 million and annualized adjusted EBITDA of an incremental $21 million. These acquisitions were acquired for a collective 7.7 times EBITDA multiple and through our internal initiatives have lifted the contribution of these acquisitions where we have cheapened the multiple into the low sixes based upon 2022 adjusted EBITDA. Between our three dedicated corporate development professionals at the DSG level, our operating teams, and the LKCM headwater team, we are actively pursuing acquisitions that make DSG a better business and are also keenly focused on successful integrations after we close. In our pursuit of strategic acquisitions, we not only look for fit within each of our operating companies, but we also seek to find opportunities that have commercial logic for all three business units, bringing them closer together while enhancing each of their organic growth rates and returns on working capital investment. We remain cautiously optimistic in our 2023 outlook and continue to be confident about our ability to manage through cycles for significant value creations. 2023 has had a strong start as the levers we have been pulling are unlocking value. We continue to build out our roadmap for initiatives to create a stronger, more enduring business without losing the advantages of three separate customer-facing efforts and operating teams that manage discrete channels to market. We are committed to continuously refine and improve on what we believe are the best specialty solutions for their end markets. DSG's trade working capital investment at the end of 2022 was approximately $350 million. We understand that prudently managing working capital is one of the best ways to drive return on invested capital and organic growth rate. The teams at all three companies have a heavy focus on working capital intensity for 2023 and will continue to manage customer receivables, vendor payables, and inventory investments, especially as 2023 progresses. We also appreciate that having a properly managed, robust inventory position across our key categories and confidence in our organic growth strategies reinforces our value-added service delivery models. Our commitment and willingness to a disciplined working capital investment framework is good for our vendors and our customers who want us to grow with them. Our principal goal at DSG is to build profitable scale as a specialty distribution network that throws off significant free cash growth and demonstrates attractively above market returns for shareholders. We are confident that is unfolding with what we are seeing transpire inside of these platforms and with the numerous initiatives and shared learnings and resources that our teams have identified and are currently working on that will accelerate returns. Since we only combine these companies at the end of Q1 in 2022, we have not had the benefit of a full cycle of working capital flow through the P&L that captures measurable 12-month returns. We believe we are still in the early innings at DSG of demonstrating this compounding benefit to shareholders and colleagues alike and are committed to driving significant progress and transparency on these metrics as our platform becomes more seasoned. Before Ron covers the consolidated and operating company financial results, I would like to comment on a few areas of operational focus within each of our three companies. Lawson Products is a leader in the MRO distribution of C-parts, offering vendor-managed inventory services, has realized significant growth with strategic customers, and the Kent Automotive Division. In 2022, we recognized gross margin improvements through enhanced pricing discipline, as well as improved outbound freight recoveries. Lawson is in the early stages of investing in additional sales channels to support our customers, including inside sales, strategic account managers, and web enhancements. Lawson is also investing in lead generation capabilities and CRM tools, all with the goal of helping our sales representatives be more productive and allow us to better serve our customers. During 2023, we will make strategic investments in technology, including new CRM tools, an enhanced ordering platform, and building out our BI capabilities. Cesar and the team are using these investments in technology and lead generation to to build on our momentum for 2023. Jets Pro Services is a leader in the supply chain solutions of largely C parts, specializing in VMI programs for high spec OEM customers. This year, we are expanding Kitting and Services, as well as launching our pilot e-commerce platform. Bob and his team are actively working on capturing synergies from our five acquisitions closed during 2021 and 2022. Regarding our end markets, Aerospace and defense has sustained double-digit growth, and industrial power remains strong, helped in large part by the partial recovery in the oil and gas industry. We expect slower growth in transportation due to reduced in-customer project spend and moderation from the consumer and industrial vertical due to inflationary and interest rates impacting consumer spending. We continue to see the sluggishness of 2022 continuing into 2023 in the renewables vertical as customers await government tax credit guidance for developers onshore and offshore projects, although we expect a reacceleration in this vertical where we continue to consolidate our leadership position. Finally, demand in the technology vertical is likely to remain soft until inventories stabilize. As exhibited in 2022, we were able to more than offset headwinds in certain end markets with growth from a large funnel of new revenue opportunities we are securing from our existing customer base, signing new customers, and focusing on SKU expansion, all growth opportunities that were greatly improved through adding the five tuck-in acquisitions and the association with Lawson and Test Equity. Test Equity is a leading industrial technologies distributor of specialized test and measurement equipment and solutions, electronic production supplies, and customized toolkits from leading manufacturing partners. Russ and the team have accelerated their digital migration and consolidated multiple concepts and brands onto the test equity web platform. We expect continued strong growth in the test equity digital platform in 2023. We've also aligned teams and capabilities across test equity and T equipment to leverage the T equipment outsource solutions more fully across the company. We believe that synergies between T equipment and test equity in the product and digital sales categories will deliver further margin enhancements in operating leverage. The EPS piece of our business now approximates 35% of our test equity revenue, and with our acquisitions made in 2022, this is an expanding opportunity for us, where we believe we have identified more ways for strengthening position in this market and improved VMI and digital offerings to enhance organic growth across the broader DSG's commercial growth initiatives. Now, I'd like to turn the call over to Ron to talk through the financials, and I'll be back with some closing comments. Ron?