Distribution Solutions Group, Inc.

Greetings and welcome to the Distribution Solutions Group second quarter 2025 earnings conference call. At this time all participants are in 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. Sir, the floor is yours.

Good morning and welcome to the Distribution Solutions Group second quarter 2025 earnings call. Joining me on the call today are DSG's chairman and chief executive officer Brian King and executive vice president and chief financial officer Ron Knudsen. In conjunction with today's call we have provided a financial results slide check posted on the company's IR website at .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 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 reconciliation 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 a current report on Form 8K filed with the SEC. Lastly, this call is being webcast live on DSG's investor relations website and a replay will be available through August the 12th. I will now turn the call over to Brian King. Brian?

Thanks Stephen. Good morning. We appreciate you all joining DSG's call today. We are pleased to deliver solid operational results with strong top and bottom Our results reflect the dedication and resilience of our teams and the quality of the leading VMI and value-added services capabilities assembled in DSG that propel it forward. Many of our end markets have exciting tailwinds and we continue to focus on what we control in the few pockets of unevenness. Internally, we've set higher, more challenging budgets than the street expects and we hold each other accountable for meeting or exceeding these objectives on a monthly and quarterly basis. For the second quarter, we reported strong sales and realized substantial forward progress, including sequential margin improvements in each of our verticals. There were many important milestones and achievements accomplished in the second quarter as part of our commitment to transform DSG and its business units into a much more profitable and resilient platform for growth. Many of these accomplishments are not yet reflected in the strong earnings progression today. The efforts and successes are the reflection of a dedicated passion across our teams for our work to build a much larger and sustainable engine to compound shareholder value, further expanding over time DSG's culture built around a clear vision of collaboration, accountability, and alignment committed to delivering value embraced by the customers, suppliers, and employees, and exceptional value creation for the shareholders. As a company, our vision is to deliver world-class global supply chain capabilities and services with a differentiated value proposition to our over 200,000 customers across a diverse set of end markets each day. Before we discuss our second quarter results, I'd like to share some background on our newest operating CEO, hired to transform the test equity group, Barry Litwin. Barry has over 30 years of experience in transformational leadership in highly relevant industries, having previously served as the CEO of Global Industrial. Our team has collaborated with and invested behind Barry on various projects before his recent DSG appointment, and we have witnessed his ability to unlock value and drive execution in multiple situations. He is a proven strategic and operational leader who excels at transforming complex businesses, recruiting talent, and driving operational excellence. In addition, Barry has extensive experience in expanding companies through innovative multi-channel -to-market strategies. And many of the end markets that Barry worked with in prior roles overlap with test equity's current customers. Barry did a deep dive on test equity for the board from a consultative perspective and came away confirming his confidence that test equity was well positioned and presented a unique opportunity for him to rapidly unlock and accelerate significant value creation while transforming its uniquely positioned capabilities and scale into the clear leader in its marketplaces. For our next phase of growth at test equity group, the board, DSG, and LKCM Headwater leadership teams and I all believe that Barry is the ideal person to lead this vertical. I also want to recognize Russ Frazee for his dedication and commitment over the past seven years, which positioned test equity combined with Hisco to build and leverage the infrastructure and take test equity to the next level. We asked Russ, who is gifted with a strong operational skill set, to step into the CEO role during a challenging moment as we were presented with the prospect of pulling together several key businesses that today represent the test equity group, which is over three times larger than when he started. With his tireless effort and talents, Russ played a key role in integrating the acquisitions, some of which were tuck-ins, but Hisco was as large as the base of businesses it was blending into. Working with his team, Russ was able to rationalize and capture synergy cost savings and create a cohesive business platform that is well positioned for Barry's complementary talents to leverage for enhanced organic and inorganic growth, profitability, and long-term position in the marketplace. We are very appreciative of how this has all transpired. Now moving to slides four and five. We'll start with a discussion of our key takeaways from the second quarter and then walk through the strategic initiatives for each of our operating businesses. On a consolidated basis, we achieved second quarter sales of $502 million, representing a .3% increase in sales compared to the same quarter last year. Total sales expansion was based on a combination of inorganic revenue and a .3% growth in our organic daily sales for the quarter. Although some seasonality is inherent in this number, we were pleased to see sequential daily sales growth of .4% over the first quarter. Our consolidated adjusted EBITDA margin increased to .7% in the second quarter, which compares favorably to the 9% margin in the first quarter. We are pleased to report that all of our businesses' verticals achieved sequential quarterly improvements in their respective EBITDA margins. I will discuss this by business vertical in a moment, but despite the uncertainty in chopping the global macroeconomic backdrop this year, we continue to drive momentum in significant end markets, including aerospace and defense, technology, and renewables, with growing demand in the pipeline for industrial power. Production supplies and testing measurement continue to be soft, as does the industrial demand in the Canadian market in the quarter, and tariff disruptions continue to create noise and hesitation in decision making with customers, which I will discuss more in a moment. In addition to our margin expansion this quarter, we also realized a notable improvement in our cash flow from operations of $33 million, allowing us to continue repurchasing shares, an effort that commenced in the first quarter. Through strong cash management, we ended the quarter with no outstanding borrowings under our revolving credit facility that Ron will cover in more detail. Turning to our strategic initiatives, our Salesforce transformation at Lawson continues with work on talent acquisition and territory planning, which is still in flight. We knew that taking on a transformation of this magnitude for a 70-plus year old organization would be a multiyear process, as it involves a full system upgrade and reset. Specifically, rewiring the tools and productivity opportunity and accountability of a thousand-person sales organization from the ground up requires time and resolve, a consistent and purposeful strategy, and a clear message internally and externally as part of effective change management. What management committed to with the employees, shareholders, and board takes time and requires patience from all. Over the past 18 months since the launch, our deep dive into the quickly evolving data continues to offer key learnings that have been instructing us on how to adjust our efforts around processes, priorities, and people, and we are iterating and reprioritizing as necessary. Although revenue growth and sales rep productivity are some of the best indicators of early success, we also know that driving adoption at a level where results are consistent through the use of new sales procedures, tools, and technology takes time. In early wins, where consistency is shaping up, include the following. One, implementing a complete CRM with adoption rates now exceeding 70%. Recall that the CRM system did not exist a year ago, and we are continuing to customize the user experience to drive better productivity gains. Secondly, driving additional accountability with better data and more manageable dashboards at the sales leadership level with daily and weekly KPI objectives. Third, rebuilding our rep count, adding approximately 90 in the last 12 months in stronger markets, while seeing a decrease in the turnover of seasoned reps. Fourth, implementing a data-based approach on the skill set of successful sales reps pre-hiring attributes. Fifth, first steps and wins on improving the number of reps placing daily orders. And sixth, launching a completely refurbished web platform now realizing over time 10,000 customer visits daily to support a more flexible and expanded -to-market strategy to supplement our leading VMI offering to meet certain VMI customers where they want to engage us. I want to highlight a few of these wins, all of which have real deliverable opportunities still in front of them against continuing execution on KPIs as it's easy to forget how much progress is being made along the way as we all acknowledge this is a long journey to accomplish this transformation. We know that a sustainable sales transformation's magnitude is a multi-year strategic initiative requiring us to scope it on the front end as having real dramatic opportunity for positive impacts on organic growth and scaling opportunities, profitability and margin expectations, and accelerations around returns on invested capital. While we always want to see faster results, we are confident the team is making solid progress and we have insights into how we expect continued improved results across the KPIs. While we are pleased with the progression, we're also refining processes where we've seen less early progress in the data than we hope to see. For example, new rep productivity in the first 12 months remains flatter than we expected compared to previous years and it's prompted us to reprioritize numerous actions to drive more productivity gain on this KPI faster. While we recognize there's a lot of noise in this objective at this early juncture where it doesn't yet reflect the seasoning of many of our initiatives, we're not waiting to see but instead have initiated approaches to refine processes. We are improving the hiring process criteria for the first time in many years, providing better warm leads upon hiring a rep into an open territory, implementing mentoring programs and enhancing training among other initiatives. And still to come, our initiatives focus on route optimization to create better density within a territory as well as additional service reps to supplement the workload of field sales reps. This place's existing field sales reps representatives in a much better position to grow their business and earn more commissions. We purposely invested in our sales team going into this transformation process. Today, our average rep compensation is 25% higher than it was just a couple years ago, even with the new hires bringing our average rep tenure down almost 25%. We have a plan for the total compensation to reps to continue to climb as they embrace the tools and processes provided while also restoring better operating leverage and profitability to the company. After two years of investment in the sales team and tools have deliberately contracted EBITDA and margins a bit. Although Ron will cover this in detail, I would like to note that even with the investment taking place from dollars and distraction of this project, Lawson's average daily sales increased by 2.6%, accompanied by a sequential expansion in their EBITDA margins, which rose to .6% in the second quarter. While compressed by recent investments, it's still troughed at a level not contemplated prior to the DSG merger. We are pleased with this average daily sales and earnings margin progression, particularly given all the changes and investments implemented in the sales organization over the past year. However, to accomplish what we know is possible, we fully realize there is still a lot of work to be done under Cesar's leadership. We are enthusiastically committed to it and what it will do for the long-term value of Lawson and DSG. Moving to the Canadian division. We can describe our performance in Canada as if it is a tale of two Canadas. Bolt Supply, located in the western side of Canada, is a legacy MRO business that demonstrated its typical seasonal sales lift in local currency during the second quarter and achieved strong double-digit EBITDA margins, nearly 16% on a standalone basis. Source Atlantic, which we acquired in 2024, is a significantly different business in terms of footprint and offerings. Our new executive leadership team recruited a supplement The capable leadership at Source Atlantic and Bolt Supply to constructively pull all team members together and lead a pan-Canadian lens is working timely and constructively through our underwriting objectives that all embrace to set it up to be a structurally different earnings engine partnered with Bolt Supply and DSG than it was as a standalone business. However, Source Atlantic has been heavily impacted by declines within many of its top customers as MRO and service spending has contracted at the same time as projects have rolled off and have not been replaced with new ones, primarily due to cautious business behavior due to regional economic anxiety surrounding uncertain tariffs. Our results with our customers are consistent with those of other businesses in the region, especially in the eastern Canadian provinces this year. Stepping back and comparing Canada's 2025 manufacturing sector versus the U.S. manufacturing PMI this year, the U.S. index reports a more stable overall operating environment. On the other hand, the U.S. contrasts with Canada's manufacturing sector, which has shown a steep decline in the first half of 2025. Notwithstanding these differences, excluding acquired revenues, our Canadian division's revenues increased 2% on a constant currency basis and EBITDA margins expanded by 130 basis points sequentially from the first quarter to .5% in the second quarter, which has been supported by the early innings of our integration work, as well as helped by the energy and effective leadership brought by the Source Atlantic. We have confidence in our team and all are planning, and I expect, that this business will generate substantial shareholder value over time. We know we acquired a great business with Source Atlantic and a very fair value for our shareholders that we embraced knowing it would require significant effort from management to unlock all the value that comes with what we still very much like about our business. We are also very proud of our Canadian division team for their We are also very proud of their attractive market presence, strong customer relationships, and unique strategic fit with our existing bolt supply and loss in Canadian businesses. Our Canadian division team is meeting objectives in terms of planned synergies of facility consolidations and gross margin expansion, which includes approximately 290 basis points improvement with Source Atlantic since we've acquired it. Many of these profitability enhancements are not yet flowing through the P&L. There's still much of our underwriting objectives to unlock earnings and compounding value yet to be done. Still, we are pleased with the progress and energetic resolve of the team, despite the challenging macroeconomic pressures they have faced in certain Canadian regions almost immediately after our purchase of the business. At JexPro services, we continue to drive momentum in large end markets that include aerospace and defense, renewables and technology. We are also seeing the backlog fill up for industrial power, which is encouraging as that was an area of softness that we highlighted last quarter and is a key historic end market of leadership for JexPro services. Based on our acquisition in Southeast Asia and a number of key hires and facility investments, we are working on a large and growing pipeline of new customer development activities, some of which are already committed to us. Also, there is a growing book of cross-selling business development as we collaborate on these with Lawson. We've mapped a successful playbook to win wallet share and new mandates by including new products and services and are seeing some leverage, securing more of our DSG chemical and MRO capabilities, enhanced by strong revenue recruitment performance in the first half of the year. Our outlook anticipates that sales comps in the second half of 2025 will become more challenging as we cycle through strong sales that began mid-year last year. But we remain enthusiastic about the very real momentum JexPro services is gaining in the marketplace. We are pleased to report an EBITDA margin expansion for JexPro services in the second quarter to 13.4%, representing an 80 basis point increase from the first quarter. And twice what we enjoyed when we started our transformation of the business when we acquired it in 2020. Expanded value added capabilities brought to the vertical through strategically identified and pursued acquisition starting in 2022 are helping drive JexPro services EBITDA margin margins higher than they would have been structurally considered attainable with the capability set in 2020. And are helping bring enhanced credibility with existing and prospective customers around expanding how they think about our value add for them and are leading to wallet share gains and acceleration in new business opportunities. Our deliberate investment and talent largely focused on expanding the dialogues around our enhanced capabilities to solve customer challenges should continue to drive our growth objectives, primarily by focusing on our growing commercial sales pipeline as discussed last quarter. We are also monitoring potential headwinds in the domestic renewable sector even as our international pipeline is expanding. JexPro services continues to expand its presence as a global supply chain leader at the request of its current customers and credible best in class perspective ones. And we have every reason to expect it will continue to grow and scale its services and see parts offering as a VMI provider of choice to the most discerning OEMs. And we will continue at DSG to look for ways to invest in supporting their growth momentum. Lastly, moving to test equity group. As I mentioned at the beginning of my remarks, we recently announced the leadership change and believe Barry is well suited to take us to the next level of growth in this business. As expected, we saw softer electronic production supply sales and lower test and measurement revenues resulting in average daily sales down .2% for the quarter. Seasonality typically creates tailwinds with active summer projects, which pushed our sequential daily sales lift to .7% in the quarter. But some of the lack of consistent revenue uptick in the quarter that we'd expected to see, we and others in the marketplace are now believing was impacted by some customer behavior that could be tied to timing purchases around better clarity on the tariff impact to their businesses and to the cost and availability of products from several of our leading vendors. Of note, Hisco's performance did improve this quarter as evidenced by positive sales growth in the second quarter compared to the same period last year. Sales are also up sequentially from the first quarter at Hisco, which is supported by non-tariff product offerings and a broad range of source selections. Test equity continues to be better and better positioned with more product offerings, with more structural earnings opportunities tied to them, and with more market share gains in their channels reflected to us by our largest vendors. By offering used equipment and rental options and calibration activities at test equity, or expanding our chambers availability that are made in the U.S., or expanding our sales efforts around our attractive printing and conversion businesses acquired with Hisco, or our test equity groups, especially products, VMI offerings, collectively we enjoy a wide range of significantly higher margin opportunities to grow profitability. Our Conrez acquisition late last year gave management, which had been busy with integration efforts across test equity group, a renewed focus on that business and the service elements around it, yielding strong profitability growth and improvement in fleet utilization year to day. Reviewing the host of offerings with Barry emphasized that test equity group has a collection of key high value added business capabilities that enjoy current EBITDA contribution margins in the 20 to 40 plus percent level that need to be more emphasized as part of the allocation of resources and the go to market strategy, where resources in focus could better optimize total group profitability. Rental and use test and measurement equipment enjoyed the most recent shot in the arm of attention with the immediate success of acquiring Conrez into our fleet, adding customers, equipment, geography, and key personnel that more than complemented our larger test equity offering. As we've reflected test equities customer value proposition, which is appreciated by those closest to it, needs a better ability to communicate its evolved commercial message post integration as it is rooted in differentiated products and services where the combined offerings acquired via test equity, T equipment, and Hisco, along with the key tuck in acquisitions have strengthened the opportunity for customer intimacy through the host of value added service offerings, not too dissimilar from what we've done at Jekyll and Hyde. We've been working with test pro services, but in the test equity case, third party engagements offered that we needed a much more evolved commercial effort and go to market strategy to tie together the very logically enhanced and complementary offering to the customers. While the revenue and EBITDA performance in this vertical has been short of our expectations thus far, the synergy cost savings and platform are ready for a leader like Barry to drive a refined go to market strategy and deliberateness around how to emphasize the levers for enhanced profitability. We are encouraged by Barry's early assessments around the very real opportunities to drive a cohesive and aligned strategy in the organization and simplify complexity. He believes that after spending time assessing his team and the resources he is adding to them that he has the tools, offering and people to be successful with tremendous focus and energy and a proven ability to successfully execute with similar products and in markets earlier in his career, improved even by the broader DSG support and the way that we've done it. In his work, he is quickly and confidently constructing the strategies and game plan around shorter term and longer term opportunities test equity group enjoys to accelerate value creation and earnings. And although he continues to learn and evaluate the business, Barry has already accelerated communications and set up meetings each week that have well defined purpose and objectives to encourage his sales, products and supply chain teams on leverage the pole. Barry's brought a fresh perspective and we are encouraged by his commercial insight and energy as he quickly builds ownership alignment and accountability. With that, I'll turn it over to Ron for details on our second quarter financials.

Thank you, Brian. And good morning, everyone. Turning to slide six. DSG's consolidated revenue for the second quarter was $502 million. This represents a .3% increase with the $63 million increase being driven by the five acquisitions closed in 2024 and organic growth. The company's organic average daily sales were up .3% versus a year ago and up .4% sequentially over the first quarter. For the quarter, we generated adjusted EBITDA of $48.6 million or .7% of sales. As expected, Source Atlantic compressed our second quarter margins by approximately $60 bips and excluding this acquisition, net margins would have been 10.2%. The .7% compares favorably by 70 bips to the first quarter and adjusted for Source Atlantic is essentially flat with the year ago period. As Brian mentioned, all verticals realize sequential margin improvement over the first quarter. We reported operating income of $26.8 million for the quarter, which included $11.7 million in intangible amortization from acquisitions and another $1.4 million of severance and other non-cash charges. Adjusted operating income improved to $39.9 million versus $38.9 million a year ago and $34.4 million in Q1. Gap net income per diluted share was $0.11 for the quarter versus $0.04 a year ago. Adjusted EPS was $0.35 for the quarter compared to $0.40 in the year ago quarter on fewer shares offset by higher interest and depreciation expense. And lastly, we generated over $33 million of cash flow from operations for the quarter compared to approximately $21 million a year ago quarter as we accelerated our focus on working capital improvements. Now moving to slide seven. Starting with Lawson, Q2 sales totaled $124.3 million representing a .6% increase in average daily sales, which includes acquired revenue. Organic ADS was down 1% entirely driven by lower military sales volume. Sequentially compared to the first quarter, organic ADS was up .6% due to broad base growth across most end markets. For the quarter, Lawson reported adjusted EBITDA of $15.7 million or .6% of sales, up 70 bips from Q1 on a sequential basis. The net margin contraction from the prior year was primarily due to continued investments in sales transformation compared to the same period last year. We continue to manage margins around the tariff impacts and do not anticipate a negative effect on Lawson's margins this year. Turning to slide eight, second quarter sales for the Canadian segment in US dollars were $55.9 million. The business benefits from typical seasonality, which is somewhat offset by noise around the tariffs. Excluding revenues acquired from Source Atlantic, organic sales increased .7% and were up 2% on a constant currency basis. Q2 revenues increased sequentially by .5% from Q1 or 6% on a constant currency basis, primarily due to seasonality. The second quarter adjusted EBITDA for the Canadian segment was $3.6 million or .5% of sales, expanding 130 bips over Q1. Excluding Source Atlantic, the second quarter adjusted EBITDA for this segment would have been 15.9%, which would represent bolt supply on a standalone basis. As we've discussed in the first quarter, softer sales at Source Atlantic, primarily within their larger accounts, has put downward pressure on net margins for the Canadian branch. However, we are making good progress on planned synergies around gross margins and branch consolidations. Turning to Jexpro services on slide nine, second quarter revenue was strong at $127.8 million, up .2% from the year ago quarter. Organic average daily sales were up .4% sequentially from Q1. Jexpro services adjusted EBITDA was $17.1 million or .4% of sales, up from .9% a year ago and compared to .6% in the first quarter. Operating leverage remains strong and Jexpro services continues to capitalize on the acquisition in Southeast Asia through wallet expansion and cross selling. While momentum in most end markets is strengthening, Jexpro services is up against tougher comps headed into the second half of 2025. Lastly, I'll turn to test equity group on slide 10. Second quarter sales were $195 million with average daily sales down .2% versus a year ago, however, up sequentially by .7% over Q1. We continue to experience flattish electronic production supply in test measurement business. The revenue acquired from ConRes for the period was approximately $1.9 million. Test equities adjusted EBITDA for the quarter was $13.5 million or .9% of sales, up sequentially by .5% from Q1. Net margins were down from .8% in the prior year quarter, primarily from deleveraging on a lower sales base. Moving to slide 11 and starting at the bottom of this slide. We ended the quarter with total liquidity of $314 million, which is our foundation for executing a disciplined capital allocation strategy. Starting from the left, we invested in organic growth, which generated positive organic sales through a combination of market share expansion, internal initiatives, and wallet share expansion with existing customers. We have driven scale, added product adjacencies, and footprint through our five acquisitions completed in 2024. We continue to closely manage working capital within each of our verticals. At the end of June, cash and cash equivalents, including restricted cash, totaled $62 million, and net working capital was approximately $491 million. Debt leverage at the end of the quarter was 3.5 times, and through tight cash management, we had no outstanding borrowings under our revolving credit agreement at the end of Q2, representing a net pay down of $28 million from the end of the first quarter. And as Brian mentioned, we generated $33 million of cash flow from operations for the quarter. As a reminder, we have also invested approximately $450 million in cash in nine acquired businesses since our merger transaction in April of 2022, all while maintaining our leverage in the mid-3s. During the first six months of the year, we also returned $20 million to our shareholders through our share repurchase program. And we currently have approximately $6 million still available under our previous board authorized program. Additionally, we are still tracking at approximately 90% free cash flow conversion over the trailing 12 months and have a TTM return on invested capital of approximately 11%. And finally, our first half net capital expenditures, including rental equipment, were $10.6 million. We expect our full year 2025 net cap acts 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. Our overarching mission at DSG is to invest in exceptional businesses and talented individuals and utilize and leverage technology to gather and analyze data, improve productivity, and expand the breadth of our products and services, resulting in compounding returns and driving significant cash flow. We also believe that a well-executed customer intimacy strategy, combined with a team built to drive operational improvements and efficiencies, will enhance our value proposition for customers and drive profitability. Often, financial results are not linear. However, we dedicate an extraordinary level of strategic work and data analysis to our initiatives, driving accountability across the operating companies and their leadership teams that share a passion for achieving targeted results. The teams are aligned through incentive structures that support value creation, and DSG's management team also actively collaborates with the LKCM Headwater Operations team to drive the business toward an inflection point, focusing on short- and long-term targets related to profitability, cash flow, and returns on invested capital. We know that productive work streams and the disciplined execution of our strategic initiatives over time will achieve repeatable and compounding results. This is our proven approach to maximizing long-term value for all stakeholders, and we continue to have strong line of sight on how our initiatives are driving intrinsic value as they unlock an increase in future run rate earnings. Part of the reason we've confidently used some of our free cash flow this year to buy back shares is we digest some of the operational initiatives around our recent acquisitions and deliberately work through securing our next strategic acquisition opportunities. I want to thank our dedicated team for their tireless efforts and unwavering commitment to serving our customers and advancing our long-term strategy, ultimately contributing to our success, especially in an uncertain macro environment. I would also like to thank our supportive board and all of our shareholder partners for trusting me and the entire DSG and LKCM Headwater team with this critical investment. We are focused, energized, enthusiastic, and increasingly well-resourced with talent, and all exceptionally well-aligned. Thank you. We continue to work diligently on our investor relations efforts with an active IR calendar that includes investor conferences and non-deal road shows throughout North America. We will be in Chicago in August for the Ideas Conference and in New York City in early September for the Jefferies Conference with plans for a non-deal road show in the Baltimore-Philly area in the fall as well. And with that, Operator, will you please open the line for questions?

Thank you. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question key, 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 pick 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 thank you for taking my questions.

Morning, Tommy. Morning,

Tommy. To start, just a quick one on anything you can do to frame third quarter expectations for us. Ron, maybe you could give us the July pacing or any insight you have in the quarter to date for daily sales. And then margin-wise, any reason for a meaningful difference on a consolidated basis for that EBITDA margin up or down versus the second quarter performance. Thank you.

Sure, Tommy. Let me start just a couple of general comments relative to July where we've seen a trend out. When we look at it, I would say it's relatively consistent with where we were in the second quarter. If you look at it on an average daily basis, it does get compressed a little bit just because of, in fact, Jextral Services has 24 selling days. And typically, when you have more selling days, it kind of naturally just kind of compresses the ADS a little bit on us. But generally speaking, we've not seen, I would really say, any major movement from the trends that we saw in the second quarter. I think those trends have continued here in July. And I know Brian, through his prepared remarks and some of my remarks as well, talked a lot about some of the end market strengthening. And I would say that those have continued kind of on that same pace as well. Relative to, you know, Brian made this comment. As you look at the individual verticals, Jextral Services is certainly up against tougher comps moving into the second half of the year. Lawson Products is actually up against easier comps as we move into the second half of the year. So, you know, we'll probably see a little bit of kind of netting effect there as we move throughout the rest of the year. But, you know, based upon our sales here in the second quarter, even comparing that against Q3 and Q4 a year ago, we should be able to see some nice increase on a -over-year basis moving into the second half of the year. You know, relative to margins, you know, we certainly don't provide any formal guidance. But, you know, and certainly I would say there was really not anything highly unusual in the second quarter that would impact us either way as we move throughout the rest of the year. Certainly, you know, we have internal targets and forecasts that Brian referenced as well, you know, that we certainly are holding ourselves accountable to, you know, continue a margin expansion as the business develops. But there's nothing that we see in the near term or at least over the next six months that, you know, our senses would swing that one way or another. Keep in mind, Q4 does have 61 selling days, and we just came off the second quarter with 64 selling days. So, we do normally see a little bit of margin compression in the fourth quarter just given the number of selling days. Q3 has 64 selling days as well. So, hopefully that helps a little bit.

Yeah, thank you, Ron. As a follow-up, I wanted to ask on the Canada branch consolidation for any kind of an operational update you can give us there. Thank you.

Yeah, I can speak to that as well. So, we are, you know, early in the process, we've committed to consolidating four locations here in 2025. Two of those locations we've been through the process here, and the other two will be completed by the end of the year. There's an additional two that we're looking at. When we initially made the acquisition, we had, you know, preliminary identified six locations that we thought had some pretty significant overlap. So, you know, certainly on target there, you know, relative to seeing some of those savings, those consolidations have gone, I would say, extremely well at this point. There are no major disruptions. And then the other piece I just wanted to touch on as we think about the Canadian branch, the margin expansion that we've been, a gross margin expansion that we underwrote the business to, we're able to realize that as well. And then lastly, can't help but to call out both supply really strong quarter, you know, nearly 16% EBITDA margins, you know, great leverage here in the quarter, you know, on, you know, on solid sales and good execution at the branch level. So just wanted to place a point of emphasis on really strong performance on both on a standalone basis here in the quarter.

Thank you, Ronald. Turn it back.

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

Thank you and good morning.

Morning,

Kevin. Morning, Kevin. I wanted to just ask about longer term margin goals, specifically with Lawson and also test equity, you know, in light of, obviously, the, you've got some investment going on in Lawson with the Salesforce transformation and now new leadership at test equity. Have you, you know, given a little bit more thought again to how, you know, you think those margins adjust on an adjusted EBITDA basis for those segments can achieve or trend over the long term?

Yeah, Kevin, I'll start with test equity. And I would say that as over the last six months in particular, as we've really started with the Conrez acquisition and kind of, you know, we've been so focused on getting through integration and cost savings and integrating a Salesforce across the operational platforms that we acquired. You know, I think that some of the optimization of profitability outside of, you know, the rationalization, if you will, of some of the cost to pull together the cost structure into one platform had left us not drilling down into the driving or optimizing some of the profitability by the specialty offerings that we have that make up a big part of the total revenue at test equity group. So I'd say that the Conrez acquisition gave us an opportunity to really do a lot more line by line analysis of profitability by our specialty across our specialty offerings and brought attention to kind of the levers to pull to unlock more value out of just on the Conrez side, our rental use and refer and calibration efforts. And so we did unlock some profitability there. But what it highlighted was how many business lines we have that have structurally very different contribution margins and really by division have operating margins that are pre-corporate that are operating up and over 40%. So we feel confident in what we've said all along, which is that there's a line of sight for what we're trying to accomplish with the test equity group to get to the double digit EBITDAI margins or so. If you we had one noisiness in the core on our EBITDAI margins on test equity group, we have a, you know, the tariffs have been in disruption this year have been hard on some of our channel partners. And we had a bad debt allowance that we reserved for a customer that took EBITDAI margins down 80 bips in the test equity group. Just because it was a minority channel partner for a, you know, a government contractor that we have to sell through. And unfortunately, their business has been very significantly impacted in the way that they run their business by their cash flow available to support paying their obligations. So we would say that kind of we see a nice progression there. We see the levers to pull and we've got, you know, a really nice portfolio of much higher earning opportunities on loss. And, you know, we didn't tackle the loss in Salesforce transformation without having a very specific objective to get the structural or get the profitability of loss and to where we could scale it into the levels that we haven't yet seen in EBITDAI margin. But we knew that to get there, we were going to have to make a significant investment in the sales capabilities or tools. We needed to invest in our Salesforce, both in the tools that we offer as well as the way that we compensate them. And we needed to ultimately recruit as we're adding salespeople, recruit more deliberately the sort of talent that we want to add to new hires. And so all that is kind of an in-flight process. We are seeing a lot of good kind of granular results. It's not yet flowing through the P&L because of the investment that we've done there. And we still don't have a lot of the effort that a lot of the results have not yet been reflecting the effort and the deliberateness that we've put into it. All that should drive structural EBITDAI margins up into the mid to high teams at loss and over time. I continue to believe that that business should be a 20 plus percent EBITDAI margin offering. And there's nothing that I'm saying that would indicate that that's not what we should be shooting for.

Okay, great. Thank you.

I don't want any fight to put that in their model for this year or next year, but we have a good line of sight on how to get there.

No, I absolutely understood. Yeah, also just following up on Austin, any updates on the military market? Does that still continue to be relatively murky? And how did the business perform organically excluding that headwind from military?

Yeah, Kevin, I'll take that one. So as you know, we've been talking about military over the past several quarters. We did see a little bit of a movement upward here in the second quarter as we had some orders ultimately get released. In fact, if we knowing that it was a drag versus a year ago, though, we had made a comment in our prepared remarks that, you know, Lawson organically was down about 1% versus a year ago. If you exclude the military effect out of that for the quarter, we were up about a half of 1%. So it did have an impact on a quarterly basis versus a year ago. And so we're seeing some lights of encouragement there is maybe the best way to phrase it. Again, we saw a tick up in ADS on the military business in the month of June. It's a sporadic business, so it can kind of come and go from month to month. You know, I would say that slight tick up we saw in June we haven't seen in July. So it's, you know, but at the same time, we're starting to kind of lap some of those compressed numbers from a year ago as well. So it's effectively kind of already in our run rates. You know, certainly we've not taken the eye off the ball there. We continue to work with the procurement individuals at all the basis. You know, our sense is that we're not certainly losing market share. In fact, when I look at it by customer and by locations, we're still actively selling into the locations that we sold into a year ago. It's just a very, very compressed level. So I think part of the good news there is that we've not seen any of the individual locations, you know, stop purchasing from us.

And Ron, I would also, I think, add a call out, which I think is important. And it's part of the affirmation that we're getting on the efforts that our team has been trying to drive through the Salesforce transformation. But our street business, our base business has finally started growing some.

So, you know,

we've enjoyed now many years of strategic accounts growth at Lawson. And we've watched our business shift towards strategic accounts from street business or base business, if you will. And so we talk a lot about the military. We talk a lot about the strategic. But for the last, you know, better part of a decade, we've watched our base business kind of be neglected. And we've had, you know, slow bleed out of it over the years as our Salesforce is both compressed, but also before that, paid their attention more towards the strategic accounts that we were delivering them. And we've started to see with the Salesforce transformation, the first signs of our base business growing. And so we had positive core business growth over the course of the last number of months, including for the quarter. Is that fair, Ron?

Yeah, yeah,

that's a great call out.

Yes, it's.

That's a really important data point that we didn't have in our prepared remarks, but it is something that we're watching very closely. You know, we've that we will continue to emphasize with our Salesforce.

Okay, that's good to hear. So I appreciate the comments and I will turn it back over. Thanks, Kevin.

Thank you.

As a reminder, ladies and gentlemen, if you have any questions or comments, please press star one on your telephone keypad. Our next question is coming from Ken Newman with KeyBank Capital Markets. Your line is live.

Morning, guys. This is Ethan on for Ken. Morning. Yeah, for my first question, I kind of want to ask if there's any pricing contribution on tariffs for this quarter and whether price cost was neutral or positive for you guys and then any color you guys can provide on price costs for third quarter or into the second half.

Yeah, so I so I'll take that initially here. So, you know, from an overall tariff perspective, you know, we, we've communicated this over the last couple of quarters, you know, just given the multiple different changes that are happening, you know, through the process. You know, generally speaking, we're, we're not expecting any compression from a margin perspective. When we look across the four verticals, including the Canadian business, you know, we've been able to manage our way through that on some of the tariff pieces already. You know, we have the ability to, you know, work really close with our customers, not only from a pricing perspective, but also from a sourcing perspective. If you if you look at some of some of DSG's really strong capabilities across all the verticals, it's on a preferable side. And so, you know, we've been able to, you know, we proactively reach out to our customers, you know, when we see their purchasing from, you know, certain products that are coming within certain coming from certain countries that that the tariffs may be going up and help them manage their way through that process. So we're not seeing, you know, any net net effect, you know, from a from a margin perspective. And certainly we're, you know, we we have, you know, a model that keeps getting updated almost on a weekly basis, you know, as changes are being made. That gives us pretty good insight into, you know, where where some of that exposure may sit and the specific customers we need to work with and and the specific countries of origin as well. So hopefully that answers your question without getting into too much detail. There's, you know, you look at probably the largest. So, you know, I think we made this comment on the last call as well. About call it 6% of our of our product purchases are coming from China. So it's not a it's not a huge piece. And certainly that's where I think some of the the tariff. You know, it seems like that's where we're seeing probably the biggest swings in terms of exposure. And it's a relatively small piece of our of our product acquisition.

That's helpful. And then for my follow up, I guess touching Jax Pro earlier. But what are you guys' expectations kind of ramping into the back half? I know the comps get harder, but it is kind of like a 20% incremental margin kind of the still still the right way to think about things.

Yeah, I would.

I would. So I would. I'm not sure I would try and quantify the overall EVA EVA dot margins. You know, when we you know, we saw nice we saw nice flow through here in the in the quarter, you know, getting to, you know, call it 13 and a half 13.4%. Again, even though they're up against stronger comps in the second half of the year, you know, many of their end markets are are on an upward trend. You know, we feel we've got some good, you know, good visibility into into backlogs. And our expectation is that, you know, piece of our business will will continue to be really strong in the second half of the year. And I think Brian had mentioned, you know, there's, you know, one end market in particular where it was a little soft that even that that market has started to turn positive on us. So, you know, so we feel good about, you know, where, you know, where that business is at today. You know, we again, it gets impacted a little bit based on number of number of selling days in the quarter and so forth. But, you know, but we feel good about, you know, the progression of that business and and and more specifically, just kind of the upward trend of the majority of the end markets that they that they operate in. So, you know, Bob and team have done a phenomenal job around, you know, wallet share expansion within existing customers, winning new business. It it's it's performing really, really well. I just

call out, you know, we've made just like with the Salesforce Transformation Initiative at Lawson, we have made out made and will continue to be making significant investments in Jets Pro services. We've did are flowing through the P and L. So, you know, we compress margins at Lawson leaning into the Salesforce. If you look at the last two years and those investments to take took even die margins down before now they're starting to climb back up. Jets Pro services has had the benefit and continues to have the benefit of really good momentum on the top line, which has allowed us to kind of not still have, you know, even down margin progression. While at the same time as we're really leaning into some investments, particularly on the commercial capabilities, I mean, the sales leadership and a number of selling executive kind of senior selling professionals, as well as adding a lot of square footage around like our Asian effort. So even though we've, you know, quadrupled the amount of capacity that we can support off the little TSR acquisition that we did in Asia last year and not realized any incremental left on EBITDA there because we've been leaning so hard into it on investing. And that's built a very large revenue, you know, kind of funnel of, you know, future revenues for Jets Pro services. So there's, you know, there's kind of a tension on timing around how EBITDA is going to continue to progress. And, you know, also the core offering of Jets Pro services outside of the specialty elements that we've added to it, which are performing very well right now on those acquisitions we did in 2022 who are really most all if not all of which are EBITDA margin accretive to the structural margin that Jets Pro services would normally enjoy, which I didn't, you know, I've kind of said before when we bought Jets Pro, it was a .5% EBITDA margin business. And that was in 2020. And we've unlocked a lot of structural margin that's, you know, about doubled that EBITDA margin at the core level. But then it was the incremental acquisitions, the strategic inorganic efforts that we did that blended that margin up to the 13.6 or so that we enjoyed this quarter. And so depending on where we're getting the revenue growth is going to dictate how that flows through the EBITDA margin line. And also depending on our pacing of investing in the business is going to create some noise in the contribution margin that you might see. But the contribution margin that you alluded to at 20% has been, you know, what we've kind of enjoyed even with a lot of the investments we've been doing. But that has some to do with the mixed shift to where the revenue is coming from. So we do feel a lot of momentum in the business there.

Got it. Thank you guys. I'll open it up next. Thank you, ladies and

gentlemen. This concludes today's question and answer session. So I would like to hand it back over to Mr. King for any closing remarks.

We appreciate everybody's time today. We know it's a busy day for earnings and we appreciate the time that everyone offers us. We continue to be very optimistic about what we're building at DSG and the progress that we've made since we brought the business together three years ago. It's more than twice the business that it was and we've continued to believe that it'll be twice the business it is today, hopefully three years from now. So with that, I'll look forward to taking calls from people or seeing you all on the road. Thank you for your time. Have a good summer.

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.