Distribution Solutions Group, Inc.

Greetings. Welcome to the Distribution Solutions Group fourth quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Sandy Martin. You may begin.

Good morning and welcome to the Distribution Solution Group's fourth quarter and full year 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 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 risk and uncertainties that could cause actual results to differ materially from those described. In addition, statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change. and we may elect to update the forward-looking statements made today, but we disclaim any obligation to do so. Management will also refer to certain non-GAAP measures, and the reconciliation to the nearest GAAP measures are available at the end of our earnings release. The earnings release issued earlier today was posted on our investor relations website. A copy of the release has also been included in a current report on Form 8-K, followed with the SEC. Lastly, this call is being webcast live on DSG's investor relations website, and a replay will be available through March 19th. I will now turn the call over to Brian King. Brian?

Thanks, Sandy. Good morning, everyone, and thank you for joining us. As events unfold in the Middle East, we are actively assessing any potential implications for our business, our customers, and impact on the broader supply chain. Our thoughts and prayers are with the military personnel and civilians who are in harm's way and with their families. We will continue to monitor the potential implications for global markets and are committed to operating with resilience, discipline, and care during this period of elevated uncertainty. We are not where we want to be at the end of the quarter, but our confidence and vision for the future remains strong. 2025 was a critical, internally focused, reinvestment, retooling, and digesting year for DSG. as well as one where we managed through some dynamic pricing and supply chain and numerous one-time cost curveballs. While it was at times a dizzyingly dynamic year, through our daily North Star commitment to staying focused on investing in the business with a lens on long-term value creation, our urgency to offset shifting rules in the marketplace sharpened our focus on core fundamentals of building a better DSG. enhanced focus on execution tools and talent on timely accountability across the organization and made us prioritize not delaying targeted significant investments in capabilities and talent to position the company for long-term success. As a result, we go into 2026 with an enhanced perspective on our competitive positioning and long-term levers to drive performance across our North American and global platforms. As I reflected, we navigated challenging headwinds in 2025, including a government shutdown, shifting demand environment, and macroeconomic pressures and emotions, including those driven by fluid tariffs where our diligent and largely effective efforts to recapture margin still left us short. Our financial results fell short of our expectations in the fourth quarter and for the year, and we own that. However, besides progress in our transformative investment, We enjoyed consistent operational affirmations in the marketplace around our value-added lines of business. Our teams delivered important new business and wallet share wins in each vertical, held onto business on the back of service and capabilities, and made meaningful progress in our customer-facing capabilities and partnerships in 2025. We leaned in on improved discipline, heightened institutional adaptability, and enhanced DSGs more broadly presented in refined value-added solutions as confirmed by the marketplace, all of which add up to real 2025 successes and maturity of the business that will make us stronger in the longer term. Turning to slide four, for the full year, we delivered total revenue growth of 9.8% on one less selling day, resulting in $1.98 billion in annual revenue. Organic average daily sales grew by 3.6%, reflecting solid underlying execution. Cash flows in 2025 were strong. We generated $84 million of cash from operations on top of $56 million in 2024. Adjusted EBITDA finished at $175 million, short of our expectations. These results demonstrate our continued focus on cash generation, working capital efficiency, and profitability. Throughout the year, demand remained healthy across aerospace and defense, semiconductor-related technology, renewables, and as the year progressed, industrial power. During the fourth quarter, we began to see demand soften in renewables in North America, which we are actively managing by pivoting growth initiatives in that sector towards the strong renewables demand growth for DSG's improved presentation of capabilities in the global marketplace. and expanding our efforts on other end markets where we enjoy exceptional customer partnerships and strong secular and strengthening cyclical momentum, such as in industrial power, technology, and aerospace and defense. Our expanded platform capabilities and ability to support our historic customers and similarly discerning customers on a more global stage are supporting an expanding and accelerating set of dialogues. As we've discussed on previous calls, our financial results will not be linear. The fourth quarter is a good example of that. However, these results are certainly not indicative of our long-term plans or confidence in the future. While we anticipate some quarter-to-quarter challenges to balance earnings with our recent commitment to accelerate our talent recruitment, transitions and accelerated investments, we are committed to making decisions that prioritize driving a stronger and more profitable DSG in the longer term for all of our committed stakeholders. but recognize, like in this quarter, that the timing of some of those decisions unintentionally lined up with some margin near-term pressure and taxed near-term earnings more than leadership expected. While we didn't want to delay investments and talent decisions to unnaturally smooth earnings at the expense of building a better company, our leadership team still expects much better profitability performance from our DSG platform of capabilities. Let's turn to slide five to discuss our business initiatives. JEXPRO services delivered outstanding operating results in 2025, driven by the strength of the aerospace and defense technology and renewables in markets we serve. Despite some fourth quarter sales softness, full year organic average daily sales increased 12.3%, with full year ADS up 13%. We continue to invest in the technology and industrial power in markets, driven by expanding infrastructure needs and increasing AI driven demand. Our order backlog and new business pipeline remain strong in both segments. While renewables slowed in North America in the second half of 2025, we shifted our investment focus towards global strategies with encouragement of exceptional partners across technology, industrial power, aerospace and defense, and the power generation cycle. We are seeing a meaningful growth opportunity in India, while Southeast Asia is progressing more gradually due to the timing of customer qualifications. Both regions remain relatively small today, but continue to show an excellent acceleration in perspective and current customer engagement across more of our proven value-added capabilities at DSG and Jexpro services. Our European business remains strong, with increasing diversification across multiple verticals. JEX Pro Services is also expanding its value-added service offerings using robotic automation and AI-enabled tools that enhance customer capabilities across VMI, kitting, manufacturing, and e-commerce solutions. Since bringing DSG together, JEX Pro Services went from approximately $350 million in revenue to just under $500 million, mostly organically. Adjusted EBITDA has expanded from approximately $35 million to $64 million in 2025 with margins expanding nearly 300 basis points to 12.8%. This margin expansion reflects scale, broader geographic reach, enhanced value added capabilities, and disciplined execution of operational efficiencies that leverage our cost structure. As we confidently lean into further investment at JEXPRO services, We are balancing strong optimism around marketplace pull on us to support growth opportunities with an expectation to drive earnings growth while making the important long-term investments in capabilities, geographies, and talent to support performing for our customers at a level that adds to the reasons we are winning wallet share and new mandates. As a reminder, Jexpro services launching new customer programs requires upfront investment of significant time and margin. but results in exceptionally sticky customer engagements where we are critical to our customers and our commitment to doing our job for them thoughtfully and exceptionally reaffirms the partnership between us and our customers. The upfront effort and investment can cause a bit of the leveraging of profits in any given quarter as programs ramp up or mature programs slow like this shift we felt on the margin in the fourth quarter as new programs and global renewables come on but domestic programs slow. or as we felt a year or so ago in technology. The great news is that the new business pipeline continues to expand even as mature programs may fluctuate based on each customer's program momentum. We also continue to win significant wallet share. We rarely lose programs, and expanding what Jexpro Services does as a part of DSG allows us to expand our engagement with our customers. Jexpro Services continues to be one of the most exciting growth levers for DSG. Looking ahead, we are excited and focused on investing even more deliberately in additional organic and inorganic initiatives to sustain and extend the strong long-term momentum we see at Jexpro Services. Next, loss in products. Average daily sales increased 2.7% in the fourth quarter, continuing the momentum from the third quarter when average daily sales grew by 3%. Although new VMI installations and wallet share expansions led to organic sales growth throughout the second half of 2025, Lost and smaller account local revenue continue to be challenged in the fourth quarter as some of the Salesforce and selling tools transformation over the last couple of years have distracted our resources from doing the exceptional job our customers champion from our unique service model and that we expect. Lots of focus and tools teamed with additional investment and talent and process improvements are focused on getting this right for our customers. sales team, and for DSG. EBITDA margins were negatively impacted by a slight customer mix shift, deliberate strategic investment, and an unexpectedly elevated healthcare benefit cost in the quarter and for the full year, which Ron will discuss in more detail in a moment. Recently, Lawson has made strategic investments in two leadership roles to strengthen the team through more capabilities and accountability. We brought on Jim Slomka as Chief Revenue Officer and Hillary Bryant as Chief People Officer. Jim joined Lawson in January 2026 and brings a proven track record of commercial transformation, having led sales and operations for a $1.8 billion omnichannel enterprise, overseeing more than 2,000 sales professionals, delivering a six-year sales CAGR of 8% and expanding gross margins by 300 basis points. He brings strong discipline around accountability, urgency, process, and commitments to a team-focused enthusiasm for excellence and winning, all consistent with being a former West Point athlete and officer. We are thrilled to welcome Jim to Lawson and DSG and are confident on the immediate impact he will have on the organization. Hillary brings deep global HR leadership experience. most recently managing a worldwide HR organization for a $1.4 billion industrial technologies company with approximately 4,000 employees. She offers a great compliment to Jim, bringing a renewed discipline and energy to employee engagement and corporate culture while elevating a clear cadence around growth-focused expectation, urgency, and rewards. These important investments, alongside others that have also been recruited over the last years, put in place critical pieces to now have a stronger ensemble of experience, been there, done that leadership, and collectively add meaningfully to our sales and operating foundation as we pursue improved growth and execution in 2026. Turning to our 2026 growth priorities. We are focused on continuing to capture market share and expanding wallet share for our national accounts, including Lawson, Kent, and government, while reestablishing our commitment to offering the highest level of consistent service out of our sales force for our customers. And with that, a return to growth out of our smaller local accounts driven by their efforts and the investment we have made in them. A key leading indicator of our growth is in new VMI installations, or internally what we refer to as ship-to locations. which we are currently ramping up after a challenging couple of years as we've been working through our Salesforce transformation. We continue to leverage technology to increase sales effectiveness and are improving the rigor and consistency of sales rep activity supported by our CRM tool, enhanced training commitment for new FSRs, and a real focus on our DSMs consistent cadence with our established FSRs around driving growth and consistency in the customer experience. We are also in the early stages of rolling out across our field customer-facing team a route optimization tool that we have been developing that will give them back expensive and frustrating transit time and more of an opportunity to serve and grow our customers. Although a smaller piece of our business, our e-commerce channel continues to deliver double-digit growth, and we are encouraged that more than 30% of customers purchasing through the site are new to Lawson. As we move forward, we remain focused on commercial excellence. the customer experience, and technology to accelerate growth and continuously improve how we serve our customers while also providing flexibility to our customers. Additionally, we are working more closely with our vendor partners to deliver solutions to our customers and to support our commercial team. At our recent sales leadership meeting in February, approximately 50 vendors presented their products and services to our sales team. We are working with a number of those channel partners to improve our product costs, as we have in turn invested to support them and our customers with our significant recent investments in our selling and servicing capabilities. We expect some nice progress this year out of our sourcing partnerships. Moving on to the Canadian branch division, the team made solid operational and synergy progress in the fourth quarter and across the full year, despite macroeconomic headwinds and tariff-related uncertainty that pressured industrial and markets, especially in Canada, throughout 2025. As expected, fourth quarter revenue declined sequentially due to typical holiday season softness and weather, leading to operational deleverage. In 2025, we completed four facility consolidations with the final consolidation expected by the end of the first quarter. As we discussed last quarter, because Source Atlantic's purchase price was largely tied to tangible assets, our first full year of transformation is meaningfully de-risked this investment for us, and we continue to believe this was a strong strategic acquisition to grow and scale our Canadian operations. Although the revenue headwind out of the gate has us a full year behind our ambitious profitability objectives, our DSG team embraced when we acquired Source Atlantic in late 2024. And more recently, the recruited Canadian leadership team reaffirmed that underwriting. While there's still significant profitability tuning work ahead, we are encouraged by our framework and expanding profitability, insights, and discipline that we are building, the team we put in place, and the path and significant progress they are demonstrating to us in the marketplace as the first year of ownership is now closed. At the test equity group, we are investing at a renewed feverish pace in the long-term platform we can better see now in this vertical. A massive investment in additional leadership capabilities and tools were made in the business, especially during the last part of 2025. A shift was made concurrent with these investments around dialing up a more intense, focused, and intentional allocation of resources towards driving a structurally higher margin shift discipline out of a daily cadence around the vertical growth priorities. And each team member owns specific accountability on discrete levers to impact that outcome. When we committed to these investments, we fully expected a J-curve recovery with near-term transitions impacting performance, followed by improved revenue growth and profitability as our strategic initiatives take hold. For the full year, average daily sales increased 2%, and organic daily sales grew 1%, driven primarily by test and measurement, rentals, and chambers. In the fourth quarter, revenue grew 0.9% on one additional selling day, supported by continued momentum in rental and refurb, chambers, and T-Equip. While test and measurement in markets were under pressure in the fourth quarter, we remained focused on disciplined execution of our growth and profitability prioritization initiatives. and are beginning to see the tighter strategic lens and accelerated pacing around cadence and accountability at work. The result is we are seeing the engagement deep into the organization take place, and the affirming pipeline activity evolving towards our areas of most differentiated capabilities teamed with our higher margins and return on capital opportunities, including value-added solutions used in rental, test and measurement solutions, chambers, and accelerating the growth and mix around our most value-added elements of our electronic production supply offering to strengthen our margins and earnings. We are currently seeing some accelerating customer engagement building around our core test and measurement expertise where we have reinforced with a renewed and discreet effort around rededicating resources focused on T&M customer solutions, selling, improve our competitive moat at a time when we believe the marketplace has passed the trough and we are seeing acceleration. We also have major initiatives underway to simplify and unify the digital ecosystem. Enhancing the customer experience through ERP consolidation, customer service, and e-commerce platform integration is foundational to our strategy and we are actively leveraging AI applications to accelerate execution. At the same time, we are strengthening performance management, incentives, and accountability as we establish new key leadership roles. We're excited about the progress Barry is making to drive a much more disciplined approach to the portfolio value-added capabilities and products offered across the test equity group vertical. And for the employees, we appreciate their support of his accelerated operational pace and accountability, including the shifting of time and resources towards more differentiated growth areas to drive his objectives around mix shift, rather than only adding incremental costs and elevated areas of focus. Looking ahead, we are actively increasing our account base and deepening penetration among our existing customers while using new product introductions and private label offerings to expand customer choice and enhance margins. Encouragingly, a growing backlog in January and February of 2026 signals momentum to come in 2026. We recognize that the full impact of these initiatives typically takes several quarters, but we are confident they will result in a structurally stronger, more competitive, materially higher margin, test equity business over time. With that, I'll turn it over to Ron for details on our fourth quarter and full year financials. Ron?