Distribution Solutions Group, Inc.

Greetings. Welcome to the Distribution Solutions Group fourth quarter 2023 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, everyone, and welcome to the Distribution Solutions Group Fiscal Year 2023 and Fourth Quarter Earnings Conference Call. Joining me on today's call are DSG's Chairman and Chief Executive Officer, Brian King, and Executive Vice President and Chief Financial Officer, Ron Knudson. In conjunction with today's call, we have provided a 2023 financial results slide deck posted on the company's investor relations website at investor.distributionsolutionsgroup.com. Please note that statements on this call and in today's press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results, and underlying assumptions that are subject to risk and uncertainties that could cause actual results to differ materially from those expressed or implied. 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 the forward-looking statements made today, but disclaim no obligation to do so. Management will also refer to non-GAAP measures, and reconciliations to the nearest GAAP measures can be found at the end of the earnings release. The earnings press release issued earlier today was posted on the investor relations section of our website. A copy of the release has also been included in a current report on Form 8K filed with the SEC. Lastly, this call is being 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 March 21st, 2024. I will now turn the call over to Brian King. Brian?

Thanks, Stephen, and thank you all for joining us to review our 2023 annual and fourth quarter results. Let's begin with slide five to review top-level financial results Our 2023 annual sales totaled $1.6 billion, up more than 36%, and comparable sales increased by almost 24%, despite ending the year with a choppier sales environment and a few important end markets, most notably technology and renewables. We did see some destocking of inventory by our customers, mirroring our own efforts to optimize working capital within the channel collectively. which contributed to a 6% decline in organic sales for Q4. While this backdrop did not meet our expectation in the near term, our two-year organic stack sales increased almost 17% for the full year. Our marketplace traction around expanded value-added capabilities offers us confidence that we assembled a platform of complementary specialty capabilities that will enjoy sustained market share growth. We ended 2023 with $157 million in adjusted EBITDA, up nearly 28%, and an EBITDA margin of 10%. During 2023, we generated significant cash from operations of $102 million, translating to a strong free cash flow conversion. 2023 was a successful year for Distribution Solutions Group, with tremendous work to drive long-term value balance, with a mindfulness towards current profitability and cash generation. I congratulate our team on a job well done in what became a more choppy marketplace environment in September. Throughout the year, we invested with confidence in key long-term initiatives while adding critical talent and depth to our leadership teams. Our employees have fostered a culture of collaborative accountability essential for driving revenue growth and achieving sustainably higher profitability a goal shared by all stakeholders. This is being realized through enhanced cross-selling and value-added customer engagements, which are gaining traction in the marketplace. By streamlining processes and optimizing resources, the team is making strategic improvements that support increasing the consolidated EBITDA margin into the teens and ensuring all business verticals operate with a margin above 12% within the next few years, These efforts align with our Investor Day objectives from September to elevate total EBITDA to over $450 million in the next five years. As eager as I am to demonstrate to our shareholder partners over the coming 24 months and beyond how current levers are driving future performance, the progress was not expected to be linear, even though we have strong line of sight on attaining our outlined objectives. As the environment shifted, we exercised additional patience with some process retooling that we knew would result in significant profitability improvements. We were unable to start our DSG test equity HISCO integration and profitability improvement plan until their earn-out window for HISCO eclipsed in November. Despite this, our disciplined execution around our long-term strategy delivered, one, revenue and margin growth, two, demonstrated improved profitability and returns, and three, reaped significant free cash flow that collectively created a lot of shareholder value. Most importantly in 2023, we further optimized the initial foundation created by pulling together DSG, which will allow us to sustain high value creating years through the foreseeable future. While our work to architect and tool DSG for significant future growth and shareholder value creation still leaves much to be done, we accomplished important strategic goals in 2023. I will review some, not the least of which included the major acquisition of Hisco that I will discuss first. We added Hisco into the DSG portfolio, which gives us a strategically important business that more tightly binds test equity with Jexpro Services in Lawson. Since our purchase, our confidence has swelled with better line of sight into an expanded set of cost synergies that we are well into unlocking through the Hisco integration with Test Equity Group and combining that vertical to leverage total spend and capabilities across DSG. To review, the Hisco acquisition added over $400 million of revenue to a base of $1.4 billion, producing an annualized sales lift of more than 30%. Hisco also created significant revenue opportunities across the DSG verticals through geographic footprint expansion opportunities, like in Mexico, and internal value-added capability additions for DSG through their alliance printing and precision converting divisions, as well as their VMI leadership in categories such as chemicals, solders, and adhesives, among others. Lawson InjectPro services are already activating all of these benefits. The Hisco offering is also providing expanded efficiencies in coverage and capabilities for the test equity Hisco combined sales initiatives. Although we closed this acquisition in June 2023 due to the seller's earn out, our initial integration plan was not launched until November when the earn out expired. Our integration plan, which includes optimizing the spending and capabilities between HISCO and the test equity group, is expected to have DSG enjoy significant run rate improvements from the industrial technologies vertical by the second half of 2024. Recall that we already announced a plan to take out $10 million of run rate operating costs from the test equity group, and those actions began in the fourth quarter and were informed some by the capabilities brought by Hisco. Our 2024 cost realization for the industrial technology group also includes additional cost capability and facility optimization, much of which will also be enjoyed during 2024, but an equal amount that we don't expect to realize until 2025 or even 2026. Some additional key accomplishments by big business segment include Our MRO-focused business, Lawson Products, had a standout year. We launched an important Salesforce transformation in 2023, engaging 900 highly productive field sales reps and expanding our inside sales team to about 45 people from a de minimis size. Our plan in 2023 was to minimize the disruption of the rollout and fortify the Salesforce through the change process. We increasingly are leaning on data to optimize our Salesforce network and how to drive the productivity and opportunity to earn for our salespeople. And we are in the early stages of this effort. Most importantly, this is allowing us to get better at focusing resources where we can add the most value for customers, which is critical as we continue to refine having more product, more expertise, and more value-added tools and capabilities to engage with those customers. and having a more optimized and consistent Salesforce focus on those customers will be critical to getting our improved capabilities in front of them. This approach is working well, with good improvement in rep productivity realized in both the third quarter and fourth quarter. We committed in 2022 that the DSG merger to significantly invest in Lawson's Salesforce infrastructure, which started in earnest in 2023. Although this is a multi-year, longer-term project, the early double-digit productivity lifts indicate a solid trajectory for the return we expect ahead. Across DSG, we are committed to execute on disciplined, inorganic growth through an acquisition model with tuck-ins that are both accretive financially and capability-wise. That said, some have taken longer than we expected to close. so we were excited to announce the purchase in early 2024 of the acquisition of Emergent Safety Supply as a strategic extension for Lawson products in the safety category. Brand and line extensions in safety and power tool categories, as well as continuing to expand offerings in key product and private label categories, will collectively allow our business units to grow, improve margins, and scale into new geographies and markets with limited risk. We expect this to improve our cross-sale value proposition to existing customers of JEXPRO Services and the industrial technology customers of test equity, Hisco. JEXPRO Services continues to assume the leadership role in our synergistic cross-selling and upstreaming opportunities. Our JEXPRO services customers, and more broadly, DSG customers, can now gain exposure on how to maximize the full range of DSG products and our expanded suite of value-added capabilities for our customers. In 2023, we saw the first efforts of a more robust cross-selling message evolve from the 2022 initial successes into a more thoughtful and cohesive approach to engaging the markets. This demonstrates credibility to customers and expands our offering with more product categories and more value-added capabilities. Jexpro services enjoyed bringing home the first wave of successful engagements with some of our commercial and industrial customers, as well as championing wins in our aerospace and defense vertical, which translated into several million dollars for each broadened DSG engagement. Downstream synergies, Selling more products and capabilities to existing customers, including customers from the acquisitions we made, opened up most significantly in our renewables category. Our 2022 acquisitions of Frontier, Resilux, and SIS set this up as those acquisitions allowed us to take former competitors and convert them to suppliers in 2023. These key channel partners coming together now offer a more comprehensive, differentiated offering to a much broader set of customers coming from all of the acquisitions and JEXT Pro services as well. This has set up an opportunity to further drive margin improvements at JEXT Pro services, although much of the opportunity is in front of us in the renewables end markets. These end markets are still extremely sluggish and drag EBITDA margins down from prior year for those acquisitions below the JEXT Pro services during the last half of 2023, where we are now addressing integration cost-out opportunities. We anticipate that the renewables marketplace will open back up in 2024, a perspective reinforced by our book-to-bill, which is trending significantly positive. Finally, with the benefit of DSG, JAXPRO services started to benefit in capturing e-commerce revenue, adding several million dollars of incremental revenue from e-commerce orders originating from large established accounts in our aerospace and defense end markets. Despite the choppy environment in the technology market that delayed several customers' projects into 2024 and that created a drag on EBITDA of over $8.4 million for the year, and over $2.3 million for the fourth quarter, backlogs are building and we are seeing margin improvements. While it is early, JEXPRO Services has started the year with a healthy book to bill. The previously mentioned HISCO acquisition for our test equity group added significant scale to its North American operations, including Mexico. In 2023, Consistent with committing to getting the industrial technology vertical up to double-digit EBITDA margins over the next couple of years, we worked on setting up the margin improvement initiatives. And as I mentioned, we indicated we had taken initiatives in November to take out over $10 million of 2024 run rate costs from the test equity group, informed by the imminent opportunity in November to start the combination of capabilities, facilities, and leadership with Hisco. Today, we understand more about the opportunity to leverage spend and resources and optimize capabilities at Hisco. Examples of these include some of the following actions. We've rationalized facilities, restructured go-to-market, including headcount reductions, made changes to our sourcing and supply agreements, rationalized unprofitable business with customers, and streamlined e-commerce efforts that allow for optimized search engine optimization and marketing spend. There's a lot of spend opportunity yet to be unlocked here, and it won't happen overnight. But most importantly, the commercial opportunity brought by Hisco, its people, products, capabilities, and position in the marketplace to DSG is even more impactful. And I'm pleased with the rapid progress and collaboration out of the team since they were able to start tackling commercial initiatives together, and together affecting cost and process rationalization after the earn-out window expired in November. With that, I'd like to turn the call over to Ron to walk through the financials. Ron?