Distribution Solutions Group, Inc.

Greetings and welcome to the Distribution Solutions Group first quarter 2025 earnings conference call. At this time all participants are on a listen only mode and 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, Mr. Stephen Hoosier of Investor Relations. Sir, you may begin.

Good morning and welcome to the Distribution Solutions Group first quarter 2025 earnings 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 financial results slide deck posted on the company's IR website at investor.distributionsolutionsgroup.com. Please note that statements made 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 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, and we may elect to update the forward-looking statements made today, but we disclaim any obligation to do so. Management will also refer to certain non-GAAP measures, and reconciliations to the nearest GAAP measures can be found at the end of the earnings release. The earnings release issued earlier today was 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. Lastly, this call is being webcast live on the DSG Investor Relations website, and a replay will be available through May the 15th. Now I would like to turn the call over to Brian King.

Brian? Thanks, Stephen, and good morning, everyone. Thank you all for joining us. I want to start with some high-level comments given the stirred-up murkiness in the marketplace created over the last 100-plus days by the new administration's priorities, of reshaping global trade patterns while prioritizing rebuilding domestic manufacturing and reinforcing trade with allies to improve long-term national security. In the long term, and even in the more medium term, we believe DSG will be rewarded by being very well positioned with trusted resources on the ground and in the plant, alongside our customers, helping them navigate their needs with our expansive global and domestic vendor base and the pricing and geography biases that will continue to unfold. We expect the pressures around the reordering of trade and manufacturing to increase our customer engagement and to drive our profitability. We believe the current noisiness in the marketplace will even out as the year progresses, and we all have a better lens around how to best reshape our sourcing efforts. And as a value-added distributor, much of the value we bring is driven by our procurement team's effort alongside our product technical expertise and the flexibility that allows us to enjoy where the marketplace has flexibility to source from the best partners the most appropriate substitutable products globally at the most appropriate prices. As we review our sourcing efforts and vendor relationships, a very modest amount of our total procurement comes from those that we can see will be the most disadvantaged trade partners based on the administration's reordering, and it is largely products where all the competitive products almost exclusively come from those same markets. Our sourcing capabilities teamed with our on-the-ground capabilities alongside our customers with our real value-trusted employee partners offers us an excellent position to improve our engagement and ability to earn, notwithstanding any nearer-term challenges the marketplace is facing as we all try and decipher what a more steady-state environment will look like in the near future. As we inventory how well-positioned DSG is, to help our customers navigate sourcing and supply chain, technical and onsite product services in this ambiguous time, many of our organic and inorganic investments over the last few years were made to help us strengthen our efforts for this environment. We invested in ways to better serve our customers with expanded value-added capabilities across North America and even put resources closer to the manufacturers in deliberate parts of Southeast Asia, all as part of a lens that expected the pressures that started before COVID under the first Trump administration around encouraging manufacturing and trade partners to shift for global security, supply chain stability and trade and federal deficit objectives, and around a priority to re-energize domestic manufacturing, all priorities that have only accelerated under the current administration's second term. Our analysis has shown that the tariff pressures will impact only about 5% of our total direct purchases, and a larger but still modest amount of our indirect purchases in our businesses. In total, less than 6% of our aggregate product spend, direct and indirect, comes from China. And while we plan to work closely with our customers to offset these potential costs through a variety of actions, including sourcing alternatives and product selection, we do expect pricing to flow through our vendors and our pricing model, even where our alternative sourcing avoids some of the more onerous tariff impacts that other sources in the marketplace are faced with. At the end of the first quarter, we took our first price actions where necessary to protect or improve our margins, where we expect our landed costs will be going up. And to support what we anticipate will be a larger investment longer term in working capital, but with a commensurate opportunity to sustain or improve return on that increased investment. Our products are largely a small percentage of the overall cost to our customers. and our pricing adjustments should not be a tipping point issue for our customers, although other key inputs may have more challenging implications as they try and work those out. We are appreciative of our end market and product diversification as we recognize that different markets will be more choppy than others as they digest this policy shift, but we remain cautiously optimistic that both our customer base and our relationships with them will be better positioned in the long run. once we get a more complete playbook from where things settle out in Washington. While many marketplace participants retreat from chaos, our around-the-clock work on DSG offers us renewed confidence in our business and its improved longer-term positioning. So we've been active in the marketplace buying back our stock as we weighed that option with our cash this first quarter versus the M&A opportunities that we foresee in the near term, while maintaining appropriate leverage on the business. In the first quarter, we repurchased $11.2 million of stock, with over $15 million remaining under prior authorization, and we continue to take advantage of others' anxieties in the marketplace by acquiring more shares in April. Turning to first quarter results, our first quarter financial results were in line with our expectations, with revenue a slight bit softer than our budget, but EBITDA slightly ahead. We budgeted for the first quarter to be our softest quarter based on how much Our many internal initiatives layer up throughout the year. While we feel good about our objectives for the year, we appreciate at this moment that it is hard to anticipate how the economy will digest the current trade policy initiatives. We delivered sales of $478 million, up 14.9% compared to the year-ago quarter. Total sales included $51 million of incremental revenue from our five 2024 acquisitions, and our organic average daily sales growth of 4.3%. We are pleased with these top-line results, especially given the backdrop of trade policy noise during the quarter. While there have been questions around orders pulling forward, we did not see that as much as we believed in some categories. There was slightly more reticence by customers to release POs as the quarter progressed. Currency exchange impacts on our Canadian operations were a headwind in the first quarter. so our constant currency organic average daily sales was 4.7%. Also noteworthy, since each of our verticals measures selling days differently, we compute a consolidated average daily sales metric to add comparability against others reporting total selling days in the quarter. Adjusted EBITDA for the first quarter grew to nearly $43 million, an increase of 18.6% over the prior year. EBITDA margin, measured as a percentage of sales, rose to 9%, up 30 basis points from the year-ago period, and dragged down by our addition of Source Atlantic, where we have a significant renovation of structural profitability project well underway. Notwithstanding our early heavy lift on integrating and building out our Canadian unit with the Source Atlantic acquisition, we are pleased with the first quarter's year-over-year net margin expansion in each of our three core verticals. Based on discipline execution of planned initiatives, Lawson products generated an adjusted EBITDA or a net margin of 11.9%, which was higher sequentially from the fourth quarter of 9.8% and higher than the year-ago quarter. And with the leverage we expect in the future from a larger and maturing field sales team with much better tools, we will expect more and more from Lawson. JetPro services generated a net margin of 12.6%. an improvement over the 11% in the previous quarter. And while we see a path for this to improve over time with more revenue leverage and insourcing, more value-added capabilities, we believe the net margin is within striking distance of our EBITDA margin objectives presented two years ago. Finally, test equity reported a net margin of 6.8% in the first quarter, 60 basis points ahead of the year-ago quarter, but still a significant level below where we expect to drive margins in the nearer term offer the integration and commercial discipline efforts largely now in place after the combination of test equity and HISCO. Marketplace revenue leverage will be important to getting margins over the next year above the 10% threshold that we expected to reach by the end of last year, but where in-market demand has persisted as a headwind. Starting on slide four, I'll review our continued solid progress on strategic initiatives and specifically how we've done in the first quarter, but first, I will summarize DSG's trailing 12-month highlights. Total revenues, including pre-acquisition revenues for periods in 2024, totaled nearly $2 billion. Our adjusted EBITDA margin over the same period was 9.7%, up from the prior quarter's trailing 12-month computation. While we are still in the early innings with initiatives in each of our five acquisitions closed in fiscal 2024, our progress on integration and building leverage out of our prior year's acquisitions is largely where we want it, and they are yielding real benefits for DSG, even if some of their end markets are not yet the more stable and healthy conditions for customers that we expect to prevail. We remain confident in continuing to unlock value through planned actions to improve DSG's structural margins, and we have continued confidence to reach our stated goals to more than double EBITDA again over the coming three years, while materially lifting current EBITDA margins. We are pleased to report that Lawson Products, Jexpro Services, and Test Equity delivered EBITDA margin expansion over the prior year. Ron will walk through the segment's financial results shortly. But first, at Lawson Products, revenues expanded sequentially every month in the quarter for most end markets. The growth was driven by unit volume, an important signal of core strength, and we had minimal benefit from pricing actions in the quarter. Our single most significant initiative for Lawson continues to be the Salesforce transformation. We ended March with about 910 sales reps compared to 860 sales reps a year ago and a low point of 830 at the end of the second quarter of 2024. So in nine months, we've increased our net rep count by approximately 80 individuals. We are pleased to report that about 60% of our fully onboarded sales reps were assigned to new territories in the quarter versus backfilling existing territories. This is a shift from 2024 where most of our reps covered existing open or replacement territories. We saw an increase of 6% of ship-to locations during the first quarter over the fourth quarter as new sellers get established in their territories. This year's commitment to assign sales reps to over 100 new territories is well underway, and our internal goal is to reach 1,000 sales reps in the second half of 2025. While the productivity of our new reps is not yet where we want it, we're confident that investments made over the past 12 to 18 months will benefit our new reps and our longer tenured sales representatives also. The significant investments we have made over the last 18 months in Lawson's customer-centric sales platform now includes our expanding outside sales team, teamed with the highly skilled inside team we put in place a year ago, along with the expanded group of technical sales specialists, and the account servicing field sales support we launched in late 2024 with individuals actively engaging our customers every day. We are also continuing to enhance our customer relationship management system or CRM tool we implemented midway through 2024 where it supports our sales teams by connecting them with customers seamlessly while providing leadership visibility into territory activities in progress. With the CRM and with more ambitious commercial leadership objectives, Our DSMs and RSMs, district sales managers and regional sales managers, have a different level of insight and a very different level of accountability on how they are expected to support our expanded investment in our field service reps. On the product side, our loss in sourcing initiatives that we've been diligently investing in and coordinating across DSGs total procurement spin and broader sourcing capabilities have presented recent opportunities to negotiate with our vendors while reducing our cost per unit, which we recognize with our shorter cycle value-added distribution business model offers us the flexibility to pivot and negotiate on sourcing and even more valuable capability during this period of tariff disruption. Lawson also went live recently in the first quarter with our completely reimagined enhanced and expanded e-commerce website. We've received excellent customer feedback on the site so far. As I mentioned in my opening comments, Lawson's EBITDA margins moved from 9.8% in the fourth quarter of 2024 to 11.9% in the first quarter, reflecting a commitment that while the investments we are making, expensive that they are, will not always drive the improvements linearly, the strategy and solid execution by our team on our initiatives will continue to drive structurally higher margins while increasing profits and returns on invested capital. First quarter revenues in our Canadian division, which combines Bolt Supply and Source Atlantic, were soft during the quarter. This was the result of some seasonality, but also the market disruptions from customers reacting to tariff changes, currency exchange headwinds, and an overall soft project and manufacturing market. It was also disrupted, in my estimation, by Source Atlantic being a recently acquired business from a long-time family owner, and our Canadian leadership team's objective to both reinvest while synergizing the two businesses that we have in Canada into a coordinated best-in-class Canadian distributor. Jared Janke was recruited to lead the Canadian business as its president. His successful track record of leading large distribution businesses in Canada makes him the right leader for the job. Jared hired a seasoned and experienced Canadian CFO to help align people, culture, and initiatives in 2025. Through this leadership investment and ownership transition, Our genuine commitment to having capable Canadians build an exceptional business in Canada has been well received. Jared and the team are accelerating the realization of planned synergies by combining Source Atlantic and Bolt Supply. This includes consolidating four facilities in Western Canada into one, improving gross margins through value accretive initiatives, and implementing planned synergies We expect to realize the synergies between the two Canadian businesses, while most importantly, organizing and investing in our Canadian company to be a best-in-class specialty distribution partner for Canadian companies, which includes driving its own profitability levels consistent with what we enjoyed with our Western-only Canadian business, Bolt Supply. While the marketplace in Canada is more murky currently as the tariff pressures work through the system, we strongly believe having an exceptional presence and commitment to a Canadian business added to DSG's solid commercial flexibility in North America to serve our customers and was particularly attractive as an opportunity given that we paid largely for the working capital of real estate delivered by Source Atlantic. Using our Bolt supply house purchase in 2017 as a framework for success in driving margins and offering an opportunity for Source Atlantic to team up, we reflect that Bolt generated high single-digit net margins when we purchased it, and today, Net margins consistently run in the 13% to 14% range on a constant currency basis. Although the Canadian division's sales in the first quarter were below our internal plans, we have confidence in our team and plan, and expect the value for shareholders of how we bought Source Atlantic and are bringing it into the DSG Canadian fold will result in strong shareholder value creation. Source Atlantic's market presence, strong customer relationships, and highly strategic coverage fit well with our existing Bolton Lawson businesses in Canada. We have seen sequential improvement each month this year, even with the market noisiness, and we expect the coming consolidation in four of our locations to help drive some of the operating leverage we expect later in the year coming into the Canadian DSG business model. At JetPro Services, we continue to drive strong quarter-over-quarter growth in large end markets that include aerospace and defense, renewables and technology. These industries collectively represent over half of our daily sales volume and continue to show healthy growth, leading to the momentum that JEXPRO Services continues to enjoy. If we had to call out areas with softer sales in Q1 for JEXPRO Services, it'd be the industrial power and consumer and industrial segments. However, the activity and bookings for industrial power are improving. We're pleased to report an EBITDA margin expansion in the first quarter to 12.6%, an increase over last year's net margin of 11%. The team has done a great job leveraging its fairly fixed cost structure as in-markets recover. Acquisitions at Jexpro Services contributed significantly to the business's momentum and to the opportunity for margin improvement. We recently hired a new chief commercial officer for Jexpro Services in Eric Wilk. This investment in talent will continue to fuel our growth initiatives, mainly as we focus on investing in our commercial sales pipeline. As a market leader, we will continue to grow and scale as the leading global supply chain services and C-parts provider to OEMs. We also enjoyed a strong lens around additional accretive acquisitions planned for 2025 at Jexpro Services. Moving lastly to test equity group. The core test and measurement revenues grew by mid-single digits over the prior year, while growth rates moderated sequentially. We were pleased to see mid-single-digit increases in electronic production supply revenues compared to last year's first quarter. We're also encouraged by the used and rental equipment business in both the US and European markets. Our core rental business is up, and a number of our customers are increasingly requesting quotes for new and used equipment. We believe we are well-positioned if customers decide to pull back on new equipment due to tariff price increases but would rather rent or purchase used equipment. The value of our rental fleet recently increased significantly with our Conres acquisition, and it's worth a lot more now as the reference pricing is shifting higher due to the tariffs and is driving higher profitability contribution out of our test and measurement rental and use franchise. Our proprietary test chambers revenues, which are made in the USA, remain strong in the quarter with strong double-digit revenue and bookings growth, and also are one of our strongest profitability contributors. Hisco sales are up sequentially and are now positioned to steer customers to non-tariff products through Hisco's broadly sourced selection. Several new VMI installations were also implemented in the first quarter, delivering recurring revenue in 2025 and beyond. Our aerospace and defense and technology verticals remain strong, consistent with what we've been seeing at Jets Pro Services and with new business opportunities for Hisco's offerings in the industrial sectors. Automotive continues to be soft and may continue to be soft given its more sensitive position to the tariff impacts. We believe our increased bookings on the production supply business will translate to higher electronic production supply sales of Hisco products, which are expected to improve business unit margins moving forward, along with visibility around more total revenue. Investments over the last year in our go-to-market and sales strategies to ensure better production supply performance are now positively impacting results. Test Equity's total value proposition provides differentiated products and services by combining the offerings acquired through the Test Equity, T-Equipment, and Hisco acquisitions with other key tuck-in acquisitions that strengthen our ability to more intimately work with our customers, with a host of value-added service offerings. Along with our VP of Integration, my internal team is working relentlessly with the test equity leadership to re-baseline all costs, understand and drive pricing, and allocate additional investments identified to optimize the platform and unlock the profitability opportunity available to this business unit. After two years, a relentless effort by the team, about every bit of our customer-facing efforts and capabilities has been retooled. As we brought these three larger businesses together with their smaller tuck-in acquisitions, and we believe profitability is beginning to benefit as many of the investments and initiatives are complete, our integration cost savings have been largely wrung out at levels greater than our underwriting model, and we are confident that we are seeing early evidence that sales and margins are building as in-markets return after a prolonged period of softness and with the building and conversion of new customer revenue from our reinvigorated commercial sales funnel. With that, I'll turn it over to Ron to walk through our financials. Ron?

Thank you, Brian, and good morning, everyone. Turning to slide five, DSG's consolidated revenue for the first quarter was $478 million. This represents an increase of 14.9% driven by $51 million from acquisitions in 2024, along with organic average daily sales growth of 4.3% versus the year-ago quarter. When we exclude the impact of foreign exchange on our revenues, our organic average daily sales were 40 bps higher, or 4.7%. For the quarter, we generated adjusted EBITDA of 42.8 million, or 9% of sales, compared to 8.7% in the year-ago period. This represents an increase of 6.7 million over a year ago, of which 4.9 million was generated from the 2024 acquisitions. As expected, Source Atlantic compressed our first quarter margins. Excluding Source Atlantic in the first quarter, net margins would have been 9.6%, which was a sequential improvement over Q4 and up against the 8.7% from a year ago. We reported operating income of $20.1 million for the quarter, including $11.6 million in intangible amortization from acquisitions and another $2.7 million of severance or non-cash charges. Adjusted operating income improved to $34.4 million, or 7.2% of sales, flat with the year-ago quarter as a percent of sales. We reported a GAAP net income per diluted share of $0.07 for the quarter versus a GAAP net loss per share of $0.11 a year ago. Adjusted EPS of $0.31 for the quarter compares favorably to earnings per share of $0.25 in the year-ago quarter. Now turning to slide six. Starting with Lawson, Q1 sales were $120.5 million, and average daily sales were up 1.9% on acquired revenue. Organic ADS was down 6.8% from the prior year, primarily due to a decline in military sales and sales force transformation efforts that Brian talked about. Sequentially, compared to Q4, average daily sales was up 4.3% on growth in all end markets except for flat military sales. For the quarter, Lawson reported an adjusted EBITDA of $14.3 million, or 11.9% of sales, up sequentially from 9.8% in Q4 and an increase over the prior year's quarter of 11.4%. The net margin expansion was driven by sequentially improving sales as the quarter developed and by closely managing operating expenses. We are continuing to proactively manage margins given the potential tariff impact. However, we do not anticipate this will negatively impact Lawson's margins in 2025. Turning to slide 7, first quarter sales for the Canadian segment in U.S. dollars were $50.5 million, which included a full quarter of Source Atlantic. Excluding the acquired revenue, organic sales increased 5.3%. However, we're up approximately 13% on a constant currency basis. Q1's adjusted EBITDA for the Canada segment was 2.6 million or 5.2% of sales. And excluding Source Atlantic, Q1 adjusted EBITDA for this segment would have been 13.1% for Bolt on a standalone basis. As Brian mentioned, softer sales in the first quarter at Source Atlantic put some downward pressure on their overall net margins. Turning to Jexpro Services on slide 8. First quarter revenue was $118.9 million, up over 20% from the year-ago quarter and essentially flat with Q4. However, given the difference in the number of selling days between the quarters, organic ADS was up 23.3% from a year ago and up 4.6% sequentially from Q4. Jexpro Services adjusted EBITDA was $15 million or 12.6% of sales, up from 11% a year ago and compared to 13.3% in the fourth quarter. Operating leverage is strong, and Jexpro Services continues to cross-sell and realize acquisition synergies with a growing book-to-bill as end markets strengthen compared to the year-ago period. Lastly, I'll turn to Test Equity Group on slide 9. First quarter sales were $188.8 million, with average daily sales up 2.5% versus a year ago and down sequentially, primarily on softer test and measurement sales. The acquired revenue from Congress for the period was approximately $1.9 million. Test equities adjusted EBITDA for the quarter was 12.8 million, or 6.8% of sales, up from 6.2% in the prior year quarter and down versus the fourth quarter, which benefited from some non-recurring items. Moving to slide 10, we ended the quarter with $305 million of total liquidity, which gives us plenty of flexibility to execute on our capital allocation priorities. Starting from left to right on the slide, organic growth continues to be a priority for the company with initiatives supporting market share growth, wallet share expansion, and cross-selling. With more than 200,000 customers worldwide, we have diverse end markets to grow our business. As Brian will discuss in a moment, M&A is critical to our growth strategy, and we remain disciplined with our approach, especially during turbulent times when valuations are being tested. Our working capital management initiatives remain a key focus for our teams and we review these metrics closely during our monthly update meetings. At the end of March, cash and cash equivalents and restricted cash were $80 million and net working capital was approximately $496 million. Debt leverage at the end of the quarter was 3.6 times, which includes nine acquisitions with deployed cash of approximately $455 million since our merger in 2022. Given our asset-light structure, we believe our cash generation is sufficient to manage our leverage in a targeted range of three to four times. As Brian mentioned, we've been proactively repurchasing DSG shares in the first four months of the year, and today we reported 11.2 million of share buybacks in the first quarter. Our trailing 12 months free cash flow conversion was approximately 90% and we are tracking with the trailing 12 months return on invested capital using Notepad in our calculation of approximately 11%. As our distribution assets mature, we expect to generate ROIC in excess of 20% as we scale the business. Finally, the first quarter's net capital expenditures, including rental equipment, were $5.1 million. We expect our full year 2025 net CapEx to be in the range of $20 to $25 million, or approximately 1% of our revenues. I'll now turn the call back over to Brian.

Thank you, Ron. The DSG management team, fully aligned with our LKCM headwater ops team, continues to actively drive the business to maximize long-term value. And while we are focused on fully realizing underwritten synergies for each of our acquisitions, value-accretive organic growth initiatives remain a high priority. We also continue to embrace the tension to drive quarterly performance without foregoing powerful opportunities to compound longer-term profitability and return metrics. Our culture of accountability, collaboration, and continuous operational improvements is at the core of DSG, With five highly strategic acquisitions completed in 2024, our M&A pipeline continues to grow and is vitally important to our long-term growth strategy. As I discuss every quarter, we are building a compounding engine. We set high goals for management's allocation of available capital and high goals for performance from those capital deployments. These actions are what drive that compounding engine. Our leaders in each business unit continue to compete for capital, but also collaborate on cross-selling, expanding wallet share with our existing customer relationships, and capturing market share. We believe that executed well, we enjoy a platform set up to grow EBITDA faster than our competitors with a sustainable long-term growth trajectory, offering a highly compelling opportunity for all DSG shareholders to enjoy this compounding engine with us. We are excited to report our progress each quarter. And although certain investments take time to produce the results we expect, we continue to push forward with persistence and confidence, and we'll continue to invest the time, accountability, and capital in the company to strengthen DSG and to drive shareholder value. Our teams are highly aligned with all shareholders, and we continue to be bullish about our business prospects in 2025 and beyond, consistent with our appetite to buy more shares with our available free cash flow, even while evaluating strategic acquisitions. Thank you for your interest in DSG. We have a proven track record for resilience through business cycles, benefiting from our asset-light model and tight working capital management, which Ron described. Our specialty distribution platform generates significant free cash flow, allowing us to efficiently reinvest at high expected returns to unlock value and return capital to shareholders. With that, operator, let's open the lineup for questions.

Thank you. At this time, ladies and gentlemen, we'll be conducting our question and answer session. If you have any questions, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue and you may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to lift up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question is coming from Tommy Moll with Stevens. Your line is live.

Good morning, and thanks for taking my questions.

Morning, Tommy.

Morning, Tommy.

I want to start with a quick one on daily sales trends, and then we'll pivot to a more strategic discussion. But just looking at the Q1 performance, you were up almost 5% constant currency organic sales. Any change to that trend if you look at your April pacing? Anything even maybe not yet reflecting in your sales, but just anecdotes as it's a pretty rapidly evolving marketplace here? Just anything you've picked up that'd be worth calling out as we calibrate our own expectations would be helpful. Thanks.

Yeah, Tommy, I can comment on what we're seeing here so far in the month of April. Yeah, I would say that compared to a year ago, it's tempered a little bit versus what we reported in the first quarter. Although, if I look at April kind of sequentially versus the first quarter, relatively flat versus what we reported here in the quarter. So, I would say no major, you know, kind of movements one way or another. You know, we are impacted a little bit just by number of daily sales. And for example, Jacks Pro Services has more selling days in April. And that typically kind of compresses, you know, the ADS number a little bit. And we see the same thing on the Lawson side, you know, when we get more selling days in a particular month. But I would say no major moves as the month of April has developed in terms of what we saw in the first quarter. I think you're aware of this. I would say for the first half of the year, Lawson is up against tougher comps versus a year ago and up against easier comps in the second half of the year. And then when you look at Jexpro services, it's really kind of the opposite of that. They're up against easier comps. I think you saw some of that, you know, in the comparisons that we just reported. But they're certainly up against tougher comps in the second half of the year. So we've kind of got two different, you know, opposite scenarios within each of those two verticals. So I'll pause there.

If we went to the other vertical, you know, Tommy, you know, When we ran into each other, we haven't been seeing a lot of accelerated order flow at all, and I went back and spent some time looking at it. In fact, what we've been more worried about is that, like on test and measurement equipment, some of the POs have been held up. Those capital spending decisions are a little bit bigger than kind of just reloading inventory. And so while we've been seeing a lot of picked-up interest in test and measurement equipment coming out of the end of last year and the first part of this year, there has been the OEM side of test equity, HISCO, has been seeing some strengthening. But the test and measurement business, which we expected to see a real recovery in, you know, and our backlog looks good, the POs have been slower to get released.

So... Thank you both. Yeah. I wanted to then pivot to a Lawson discussion. I guess there's two pieces of it. Where you described the trends you saw in the first quarter, it was down high single digits. There were two factors, the military sales and the Salesforce rebuild. So my question is for more detail on both of those. On the military side, any visibility to those trends picking up. I realize it's beyond your control, but any update would be helpful. And then on the Salesforce rebuild, maybe a broader discussion just around how the progress is unfolding there. You noted you added, I think, 10 reps net from year end to March end. But how is that progressing versus your original plan? Thanks.

Yeah, Tommy, so I can jump in on both of those, and then I'm sure Brian will jump in on the second one as well. So on the military, more specifically, here in the quarter, we were still up against some pretty tough comps versus the year-ago quarter. But what I would say is that that trend, if we look at it on a sequential basis... has been relatively flat. So if we look at that 6.8% that we were down just in terms of raw dollars, about 40% of that versus a year ago was sitting within the military. And then the other pieces which we've talked about are just really a lot of the tougher comps that we're up against here in the first quarter. You know, and, you know, what I would say, though, on the Lawson side more specifically is if you look at our sequential sales, really from month to month to month, over the last, you know, three to four months, we've seen that improving nicely, you know, on a sequential basis. So, you know, really, you know, I would say positive trend as the quarter was developing, which was great to see. But then still up against some of the tougher comps. And military certainly is not a driver of that. As I said, military is flat. But we saw sequential improvement within our strategic accounts as well as our core accounts where we saw some more pressure on that in 2024. our core accounts were growing nicely as the first quarter developed as well. And then I'll just maybe open up the comments here a little bit around Lawson in terms of Salesforce transformation. As Brian mentioned in his prepared remarks, we continue to make a lot of investments to support our sales reps and help them drive overall productivity, The CRM that Brian mentioned, technical sales specialists, on-site service reps, core business development reps to provide additional leads and so forth. And we were up, you know, call it a net 10 here in the first quarter. You know, we've continued to expand that here in the month of April as well. So we're still, you know, we're growing even in number of sales reps here. as April has finished out as well. Our goal is to get back to that 1,000 sales reps by the second half of the year. That's probably not a linear movement either. It's probably going to bounce around a little bit on us. But in 2024, I would say we were really putting more of our reps within kind of define territories, and here in 2025, where we're placing reps has shifted more towards what we would classify as greenfield or newer territory. So those are always a little more challenging, right, when you're not inheriting a book of business. So we've seen some some higher turnover in some of those, which is generally expected. And Brian mentioned this as well. We're still working hard on out-of-the-gate, more productivity within our newer sales reps. We all recognize that it's not where we want it to be right now, but we're confident that a lot of these investments that we're making ultimately will have long-term you know, value in that regard. So let me, I'll pause there. I'm sure Brian.

I'll just add Tommy that, you know, rep productivity is a real focus for us. And so the CRM has helped us a lot. We're getting, you know, kind of linear, we're getting kind of grinding out better performance, but it's been, you know, much more metered or much more slow than, than I would have hoped. But we're picking up one point or more a month, if you will, in rep productivity. We did from February to March. And while we'd hoped to get two or three points in rep productivity more than we got in the quarter, we still ended the quarter in a better spot than we certainly had started the quarter and picked up about half of what we'd hoped to get. And that's an important part of driving higher structural margins is in the business, higher margins like we generated in the first quarter, even though we added reps that were a real cost to us. So anytime these reps are not profitable for us in the first year or so, two years really, and what we're trying to do is shorten that. And so the investment that we're putting into the sales force is weighing down our profitability, but we're seeing, I highlighted it in the call, that we've seen an increased number of ship-to's We're seeing a better level of productivity and it's moving up. And we've got a lot more accountability out of our DSMs, you know, where if they're underperforming and the CRM has given us a leading lens on that, you know, there's a lot more active conversations about, you know, how we can help them. And then with all the support that we've put into the corporate office in terms of inside sales and business development efforts, and customer retention efforts and technical selling to personnel, all that we think is making our field reps more productive.

Thank you both. I'll turn it back. Yep.

Thank you. Our next question is coming from Kevin Steinke with Barrington Research. Your line is live.

Thanks. Good morning. Morning, Kevin. Morning, Kevin. I just wanted to ask about the M&A pipeline. You mentioned that that continues to build, and just wondering if this environment creates more opportunities for you, if it impacts valuations at all, or your overall thoughts on the M&A landscape.

Yeah, I'm happy to tackle that. So Kevin, we would say that this sort of environment you know, will ultimately create more opportunity. In our pipeline, we had several things that we were, we have several things currently that we're contemplating and that we're deep in diligence on or at least looking at. And this is also a good time to be, you know, to slow down a little bit and see exactly what, you know, kind of what the rules of engagement are going to be out of Washington. And I think that You know, that's the case for sellers, and it's also the case for buyers. While we're transacting right now across broadly our, you know, distribution franchise and across our private investment effort, it's with, you know, certainly measured lens. And we took a more measured approach on a couple acquisitions just recently for DSG, where I felt like the right thing to do is we're in the throes of continuing to integrate some of our more recent actions that we've taken, particularly on the loss in front. I think we've got most of what we wanted to get from an integration perspective out of our efforts on Jets Pro Services and over at Test Equity Hisco. But I don't want to dive in and add complexity to our business model right now at a time when we're also getting complexity added to us by Washington. So Robust pipeline, plenty of opportunity. We expect that we're going to tackle some of those most desirable opportunities over the next 12 months. But I don't think that there's any urgency on our side to spend the money right now or to add the complexity. I think sellers are anxious as well. So in some levels that can cause for some opportunities in the marketplace. So if the right opportunity presented itself, the right seller who was motivated to, um, transact, um, um, in this environment and offered the right reason to step in, we would do it for sure. But right now we think the right thing to do is to let some of the complexity settle down. Um, but as we look at our business model, you know, that gives us, you know, an opportunity to buy back our stock. So, um, uh, that's the good news is that, uh, we think that the cheapest acquisition we have right now by far is bond shares.

Well, thanks. That makes sense. So I know it's kind of still early days and lots of uncertainty around tariff policy, but are you detecting anything in the market around potential reshoring, onshoring of manufacturing, that could potentially be of a longer-term benefit to you?

Without a doubt, we think that there's longer-term, that there's opportunities that this environment's creating. I'm a firm believer that when you are great at sourcing, JetSpot Services is as good of a sourcing engine as there is. We've continued to refine and improve our ability to source resources more nimbly, as well as at better pricing, landed prices at Lawson. We've got a really strong sourcing and broad lens on our OEM side for Hisco. And so this sort of murkiness, especially for where we play with as partners with our customers, allows us to create more value. And we think ultimately not only play a better or more important role for our customers, but also make more money. it's early to see how the trade patterns are going to shift manufacturing. I think that initially what you're seeing is anxiety around cost of raw materials and products that are going into manufacturing and instability of supply chains for our customers that are here. And so that's Um, now longer term or in the medium term, you know, we were already believing after the first administration of Trump, uh, that there was a strong force towards reshoring and nearshoring. And we obviously have continued to build our business around that. We also believe that there was going to continue to be anxiety and pressures around global sourcing and instability around supply chains. And so we'd spent a lot of time over the last five years. studying how to address that inside of the business that we put together here. So we feel like we're well-positioned. We're not caught off guard on this transaction, or I'm sorry, off this policy shift at all. We expected some elements of it. Is it more murky right now than we expected it would be? Yes. But murkiness in some ways can allow somebody who plays in our role with our customers some advantages. The disadvantage is that our customers are, you know, have anxiety. And when they have anxiety around, you know, the stability of their supply chains for the products that they need or the parts that they need to make their products here, you know, or if they're worried about their own profitability, then they're, you know, measuring their POs more carefully right now.

Okay, that's helpful. Thanks for the comments. I'll turn it back over.

Thank you. Our next question is coming from Brad Hathaway with Fairview Capital. Your line is live.

Good morning, Brad. Hi, everyone. Good morning. Hope all is well. It's foggy outside.

That kind of feels like it's foggy in Texas today. Maybe that's the reason. Maybe Washington dialed it in for us.

It's foggy and rainy here as well. So I was pleased to see the commentary around the target of 20% returns on invested capital. And I was wondering if we could just talk a little bit about the path to that. So obviously one key part of the path is increasing the numerator, which is NOPAT. But the second part is clearly obviously managing the denominator very well. So I was just curious to kind of sum your thoughts you know, maybe more qualitative views on how we get from where we are today to that kind of 20% target.

You want to start, Ron?

Yeah, I'll start, Brian. So, thanks, Brad. So, you know, we feel, or we know that, you know, that calculation today is getting compressed, you know, based upon the acquisitions that we've made, you know, over the last couple of years. And, And we have our underwriting synergies that we're certainly working towards on all the acquisitions of which five of them were made in 2024. So I'd say that the biggest opportunity for us to drive that towards the 20% is on the numerator side. And it's, for example, like on Source Atlantic, you know, getting them from, you know, mid-single digits to, you know, 10% that, you know, that we've talked about in the past. And so now they're facing some, you know, bigger, I would say, kind of market headwinds, you know, within the Canadian market. But, you know, I think that's the largest opportunity in terms of, you know, getting those acquisitions to where we underwrote them to as they develop out. On the numerator side, certainly managing working capital is a key, key priority for us. I think I've mentioned this on previous calls. We have really every individual that participates in an annual plan within all three companies with very specific targets as to where we want working capital as a percent of sales to make sure that we're managing those investments. And there's still some opportunity there in terms of, I think, you know, making sure that, one, we continue with the high service levels to our customers, which is number one priority, but also, you know, balancing that against, you know, primarily on the inventory side in terms of the inventory that we're carrying. So, you know, if you look across DSG, you know, it varies. That working capital varies significantly. You know, JEXPRO is, you know, call it, you know, about 30%. Test Equity Group and Lawson are in the kind of low 20s. And again, we think that there's still, you know, some opportunity there, but I think the biggest creator of getting towards that 20% is on the numerator side. So I know, Brian, you probably want to jump in on that as well.

Well, yeah, I mean, I think you're right. It's the numerator. There's four levers that we're working on on the numerator side, Brad. There's the cost synergies, and savings and kind of continuing to drive efficiencies out of the network of DSG, which we have gotten a lot of the underwritten synergies out of the acquisitions pre-last year. At this point, in fact, a lot more than we originally underwrote. We think that there's more yet to come, but most of that's done. We've got last year's cost synergies that we're working on taking out. And then there's just kind of a re-underwriting of all of our spend. which is just more broad across DSG and how we can be more efficient there. Some of that sourcing. So on the sourcing side, we think there's opportunity to continue to buy better. At the same time, we think that the environment that we're in is not only going to allow us to create value by buying, but we've taken some pricing initiatives in the marketplace, and we expect that some of our vendors are going to be repricing their own products to us and It's consistent with the way that we've operated in the past to be able to pass that on and to pick up some margin along the way, incremental margin. And so that's a lever. The third lever is going to be the market normalization. I mean, we've got some in markets that are still not where we want them to be on those businesses. We've highlighted some of them. Obviously, the electronic production of the devices the electronic manufacturing, uh, like electronics manufacturing for Hisco has been a week in market. It's shown some life again for us, but it's not, um, where we expect it to be. Um, there's the test and measurement business has been obviously a lagging part of the business for some period of time. We've talked about industrial or CNI, um, for, uh, Jets pro services and, uh, Obviously, the military spend for us at Lawson are ones that jump off the paper. And now we've got some of the drag in the Canadian market right now as they're trying to digest the relationship with the U.S. and their trade partner. And then the last one is going to be the network effect that we think we've created. And as we look at the business, we really do have ambitious objectives around organic revenue growth. We'll get some out of layering on $100-plus. more sellers at Lawson, you know, we expected that, you know, we're seeing increased ship twos, we're seeing efficiency. We know the natural maturation of those hundred plus sellers that we're going to be adding this year. Um, and, uh, and we know how that drives organic revenue. We just hired an exceptionally strong commercial chief commercial officer at JetPro services. He was a long time member of their leadership team. Um, he went away, had a big roles in the marketplace. and wanted to come back to help build out Jets Pro Services where the team that he used to work with is still there. That was a great recruitment. We've got strong recruitment that we did inside of Canada for our Canadian operation. All that bodes for strong organic revenue opportunities for us to completely reimagine and redesign test equity, HISCO sales, an effort we expect, you know, to get back towards organic revenue growth there, not just normalization in markets. So those are the four levers, and those four levers drive the top. I think that we've done a good job on the denominator. The denominator is tricky in the environment that we're in. So while we can drive more efficiency on kind of percentage of revenue intensity of our working capital, which we expect to continue to do, we know that our working capital investment is likely going to go up with inflation and with tariffs. And so that's, you know, we just got to continue to do better there. But more importantly, as we make those investments against, you know, inflationary pressures or tariffs and we're repricing that product, you know, our expectations that we're going to make more money.

Got it. Excellent. That's really helpful. So I guess mainly the main levers are still some of the kind of getting the businesses to the profitability you expect them to, acquisitions mature. And obviously there's a little bit on the working capital side, but it's mainly a numerator question. Understood. That's right. I appreciate kind of, yeah, I appreciate you're putting that kind of 20% number out there. And I think as you kind of discuss more of the path from where we are today to that, that'll be very helpful. Thank you. Thanks, Brad.

Thanks, Brad.

Thank you. Our final question today is coming from Katie Fleischer with KeyBank. Your line is live.

Hey, good morning. You guys have covered most of my questions, but I just wanted to ask for a little bit more color on how we should be thinking about source Atlantic margins going forward. Just any... any color you can provide on how to think about that compression in coming quarters and if, you know, it should improve a bit. I understand the visibility is limited, but anything you can share there would be helpful.

Yeah, so I'll jump in on that, Katie. It's, you know, when we look at Source Atlantic, I mentioned, you know, one of the other questions, you know, kind of being in that mid single digit range. When we underwrote the business, a path to 10% is really where we're striving towards. I would say that, and that is a combination of many factors, gross margin improvement, consolidation of some of the locations with bolt supply. I think you're aware of that. We are combining that business with Bolt Supply under Jared's leadership that Brian commented on earlier. But on a standalone basis, and I would say as we have those plans and we're executing, we're seeing the gross margin improvement. You'll see some of the branch consolidation that will take place mid-year this year. on a few of those locations that we identified early on during the underwriting process. I think that the top-line pressure there in terms of just overall sales is probably going to push out getting to that double-digit EBITDA out into next year versus initially thinking that we would find our way kind of exiting 2025 there. I think the reality is it's going to be pushed out a bit given the sales levels I would say, though, that we are actively, you know, taking, you know, other actions around cost controls to make sure that we've got our cost model there synced up with what we're seeing from a revenue standpoint. But, and, you know, we've been, you know, the visibility around that, you'll be able to, you know, primarily, you'll be able to see most of it, you Bolt Supply continues to operate in the 13% to 14% margin range, and we'll continue to show visibility on the break out of those two companies as to how it's rolling up. So I'll stop there and see if there's any follow-up.

I'll just say that when we underwrote it, there's probably two or three critical things to understand. One is we've nicely paid for working capital and real estate. And we got a really nice book of business with some great employees, with a lot of good customers, and we covered more of the geography of Canada than we were currently covering with Bolt Supply House. And we had a lot of Lawson and Kent sellers in Canada that we felt like could leverage having a stronger on-the-ground presence that Source Atlantic was going to give us in the eastern half of the country. They had opened up operations in Western Canada, and so their earnings were unnaturally depressed at that mid-single-digit EBITDA level because of the costs that they were bearing on these greenfields that they'd opened up in Western Canada that were losing money. We were consolidating those locations into our bolt supply locations that were down the street. And so that takes out a bunch of overhead and expenses that significantly would improve their profitability kind of in the back half of the year. That's the reason why we felt like that move alone was the biggest move to get to, you know, from 5% to 10% in rough terms on their EBITDA margin. The challenge is right now Canada has some deleveraging going on on the top line. which is just right now with as murky as the backdrop is for the Canadian economy, we don't want to be prognosticating what's going to happen with the Canadian marketplace right now. There's been some delayed purchase orders there. It's a time of the year in winter where some of that's going to get delayed anyway. But we would expect with the thaw and post-thaw that we would see how their economy is really – um, set up, uh, to perform. And right now, uh, there's some anxiety in Canada and, uh, they've just got through an election. Um, hopefully some of the anxiety settles down and purchase orders are released. Uh, but you know, that it's harder to get to that 10% number, even with the cost savings and the very modest gross margin, um, work that we're doing, uh, by, uh, uh, that we all, that we underwrote to that we thought were easy leverage or easier levers to pull. if you don't get stability out of the top line.

Okay. Thank you both. That's very helpful. I'll turn it back.

Thank you. As we have no further questions on the lines at this time, I would like to turn it back over to Mr. King for his closing remarks.

I appreciate everybody's interest in DSG and taking time out of their busy morning. We are excited to continue to be your partner. And we have a strong perspective about the value we're continuing to build for all of the shareholders, and that's the reason why we're out there in the marketplace. Hope you're doing well. Thanks. Bye.

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.