DSGR - NASDAQ

Greetings, and welcome to the Distribution Solutions Group Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Steven Hooser. 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, Bryan King, and Executive Vice President and Chief Financial Officer, Ron Knutson. In conjunction with today's call, we have provided a financial results slide deck posted on the company's IR website @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 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 a current report on Form 8-K 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 12. I will now turn the call over to Bryan King. Bryan?

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 lines, along with robust cash flows from operations for the second quarter. 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 a 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 to date. 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 TestEquity Group, Barry Litwin. Barry has over 30 years of experience and 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 multichannel go-to-market strategies. And many of the end markets that Barry worked with in prior roles overlap with TestEquity's current customers. Barry did a deep dive on TestEquity for the Board from a consultative perspective and came away confirming his confidence that TestEquity 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 TestEquity 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 7 years, which positioned TestEquity, combined with Hisco, to build and leverage the infrastructure and take TestEquity 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 TestEquity Group, which is over 3x larger than when he started. With his tireless effort and talent, 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 various 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 4 and 5. We will 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 14.3% increase in sales compared to the same quarter last year. Total sales expansion was based on a combination of inorganic revenue and a 3.3% 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 2.4% over the first quarter. Our consolidated adjusted EBITDA margin increased to 9.7% in the second quarter, which compares favorably to the 9% margin in the first quarter. We are pleased to report that all of our business verticals achieved sequential quarterly improvements in their respective EBITDA margins. I will discuss this by business vertical in a moment, but despite the uncertainty and choppy 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 Test and Measurement continued to be soft, as did 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 sales force 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 multi-year process, as it involves a full system upgrade and reset. Specifically, rewiring the tools and productivity opportunity and accountability of a 1,000-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. And 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 10,000 customer visits daily to support a more flexible and expanded go-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 of this magnitude is a multi-year strategic initiative, requiring us to scope it on the front end as having a 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. But 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 focused 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 places existing field sales 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 of 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 2 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 the 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 12.6% in the second quarter. While compressed by recent investments, it 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 2 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 stand-alone 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 to 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 embraced to set it up to be a structurally different earnings engine partnered with Bolt Supply and DSG than it was as a stand-alone 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 6.5% 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 and Bolt Supply teams and the key executives added to bring the companies together as a best-in-class Canadian specialty distributor. 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 at 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 their attractive market presence, strong customer relationships and unique strategic fit with our existing Bolt Supply and Lawson 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 is 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 Gexpro 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 Gexpro 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 in 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 midyear last year. But we remain enthusiastic about the very real momentum Gexpro Services is gaining in the marketplace. We are pleased to report an EBITDA margin expansion for Gexpro 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 acquisitions starting in 2022 are helping drive Gexpro Services EBITDA 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 in 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. Gexpro Services continues to expand its presence as a global supply chain leader at the request of its current customers, incredible best-in-class prospective ones. And we have every reason to expect it will continue to grow and scale its services and C-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 TestEquity Group. As I mentioned at the beginning of my remarks, we recently announced a 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 1.2% for the quarter. Seasonality typically creates tailwinds with active summer projects, which pushed our sequential daily sales lift to 1.7% in the quarter, but some of the lack of consistent revenue uptick in the quarter that we had 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. TestEquity 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 TestEquity 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 TestEquity Group's specialty products VMI offerings, collectively, we enjoy a wide range of significantly higher margin opportunities to grow profitability. Our Conres acquisition late last year gave management, which has been busy with integration efforts across TestEquity Group, a renewed focus on that business and the service elements around it, yielding strong profitability growth and improvement in fleet utilization year-to-date. Reviewing the host of offerings with Barry emphasizes that TestEquity 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 and focus could better optimize total group profitability. Rental and used test and measurement equipment enjoyed the most recent shot in the arm of attention with the immediate success of acquiring Conres into our fleet, adding customers, equipment, geography, and key personnel that more than complemented our larger TestEquity offering. As we've reflected, TestEquity's 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 TestEquity, TEquipment 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 Gexpro Services but in the TestEquity 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 end markets earlier in his career, improved even by the broader DSG support, he is quickly and confidently constructing the strategies and game plan around shorter-term and longer-term opportunities that TestEquity 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 a well-defined purpose and objectives to encourage his sales, products, and supply chain teams on levers to pull. Barry has 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, Bryan, and good morning, everyone. Turning to Slide 6. DSG's consolidated revenue for the second quarter was $502 million. This represents a 14.3% increase, with the $63 million increase being driven by the 5 acquisitions closed in 2024 and organic growth. The company's organic average daily sales were up 3.3% versus a year ago and up 2.4% sequentially over the first quarter. For the quarter, we generated adjusted EBITDA of $48.6 million or 9.7% of sales. As expected, Source Atlantic compressed our second quarter margins by approximately 60 bps, and excluding this acquisition, net margins would have been 10.2%. The 9.7% compares favorably by 70 bps to the first quarter and adjusted for Source Atlantic is essentially flat with the year-ago period. As Bryan mentioned, all verticals realized 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 noncash charges. Adjusted operating income improved to $39.9 million versus $38.9 million a year ago and $34.4 million in Q1. GAAP 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 7. Starting with Lawson, Q2 sales totaled $124.3 million, representing a 2.6% 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 1.6% due to broad-based growth across most end markets. For the quarter, Lawson reported adjusted EBITDA of $15.7 million or 12.6% of sales, up 70 bps 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 8. Second quarter sales for the Canadian segment in U.S. 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 0.7% and were up 2% on a constant currency basis. Q2's revenues increased sequentially by 10.5% 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 6.5% of sales, expanding 130 bps 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 stand-alone basis. As we've discussed in the first quarter, softer sales at Source Atlantic, primarily within their larger accounts, have 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 Gexpro Services on Slide 9. Second quarter revenue was strong at $127.8 million, up 18.2% from the year-ago quarter. Organic average daily sales were up 2.4% sequentially from Q1. Gexpro Services' adjusted EBITDA was $17.1 million or 13.4% of sales, up from 11.9% a year ago and compared to 12.6% in the first quarter. Operating leverage remains strong, and Gexpro Services continues to capitalize on the acquisition in Southeast Asia through wallet expansion and cross-selling. While momentum in most end markets is strengthening, Gexpro Services is up against tougher comps headed into the second half of 2025. Lastly, I'll turn to TestEquity Group on Slide 10. Second quarter sales were $195 million, with average daily sales down 1.2% versus a year ago, however, up sequentially by 1.7% over Q1. We continue to experience flat electronic production supply in the test measurement business. The revenue acquired from ConRes for the period was approximately $1.9 million. TestEquity's adjusted EBITDA for the quarter was $13.5 million or 6.9% of sales, up sequentially by 10 bps from Q1. Net margins were down from 7.8% 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 5 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 3.5x. And through tight cash management, we had no outstanding borrowings under our revolving credit agreement at the end of Q2, representing a net paydown of $28 million from the end of the first quarter. And as Bryan 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 9 acquired businesses since our merger transaction in April of 2022, all while maintaining our leverage in the mid-3s. During the first 6 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 CapEx to be in the range of $20 million to $25 million, or approximately 1% of our revenues. I'll now turn the call back over to Bryan.

Thank you, Ron. Our overarching mission at DSG is to invest in exceptional businesses and talented individuals and to 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 a 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 have confidently used some of our free cash flow this year to buy back shares as 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 roadshows 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 roadshow in the Baltimore, Philly area in the fall as well. And with that, operator, will you please open the line for questions?

[Operator Instructions] Our first question is coming from Tommy Moll with Stephens.

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?

Sure. Sure, Tommy. So let me start with just a couple of general comments relative to July, where we've seen it trend out. And 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 the fact, Gexpro Services has 24 selling days, and typically we have more selling days, it naturally just 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 Bryan, 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. Bryan made this comment, as you look at the individual verticals, Gexpro Services is certainly up against tougher comps moving into the second half of the year. Lawson products are actually up against easier comps as we move into the second half of the year. So we'll probably see a little bit of netting effect there as we move throughout the rest of the year. But 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 year-over-year basis moving into the second half of the year. Relative to margins, we certainly don't provide any formal guidance, 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, we have internal targets and a forecast that Bryan referenced as well, that we certainly are holding ourselves accountable to continual margin expansion as the business develops. But there's nothing that we see in the near term, or at least over the next 6 months, that our sense is 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. Hopefully, that helps a little bit.

Yes. As a follow-up, I wanted to ask about the Canada branch consolidation for any kind of operational update you can give us there.

Yes, I can speak to that as well. So we are early in the process, and we've committed to consolidating 4 locations here in 2025. Two of those locations, we've been through the process here, and the other 2 will be completed by the end of the year. There's an additional 2 that we're looking at. When we initially made the acquisition, we had preliminarily identified 6 locations that we thought had some pretty significant overlap. So certainly on target there relative to seeing some of those savings. Those consolidations have gone, I would say, extremely well at this point. No major disruptions. And then the other piece, I just wanted to touch on, as we think about the Canadian branch, the gross margin expansion that we underwrote the business to, we're able to realize that as well. And then lastly, I can't help but call out Bolt Supply, really strong quarter, nearly 16% EBITDA margins, great leverage here in the quarter on solid sales and good execution at the branch level. So I just wanted to place a point of emphasis on really strong performance on Bolt on a stand-alone basis here in the quarter.

Our next question is coming from Kevin Steinke with Barrington Research.

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

Yes. Kevin, I'll start with TestEquity. And I would say that as over the last 6 months in particular, it really started with the ConRes acquisition, and we've been so focused on getting through integration and cost savings and integrating the sales force across the operational platforms that we've acquired. I think that some of the optimization of profitability outside of the rationalization, if you will, of some of the costs 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 TestEquity Group. So I'd say that the ConRes acquisition gave us an opportunity to really do a lot more line-by-line analysis of profitability across our specialty offerings and brought attention to the levers to pull to unlock more value out of just the ConRes side, our rental and used, refurb, 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 TestEquity Group to get to the double-digit EBITDA margins or so. We had one noisiness in the quarter on our EBITDA margins on TestEquity Group. The tariffs and disruption this year have been hard on some of our channel partners, and we had a bad debt allowance that we reserve for a customer that took EBITDA margins down 80 bps in the TestEquity Group just which was a minority channel partner for 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 we see a nice progression there. We see the levers to pull, and we've got a really nice portfolio of much higher earning opportunities. On Lawson, we didn't tackle the Lawson sales force transformation without having a very specific objective to get the structural or get the profitability of Lawson to where we could scale it into the levels that we haven't yet seen in EBITDA 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 sales force, 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 an in-flight process. We are seeing a lot of good granular results. It's not yet flowing through the P&L because of the investment that we've done there, and a lot of the results have not yet reflected the effort and the deliberateness that we put into it. All that should drive structural EBITDA margins up into the mid- to high teens at Lawson over time. I continue to believe that that business should be a 20-plus percent EBITDA margin offering. And there's nothing that I'm seeing that would indicate that that's not what we should be shooting for.

It's going to take time. I don't want anybody to put that in their model for this year and next year, but we have a good line of sight on how to get there. No, absolutely. Understood. Yes.

Also, just following up on Lawson. 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 the military?

Yes. Yes, Kevin, I'll take that one. So as you know, we've been talking about the 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, knowing that it was a drag versus a year ago, though, we had made a comment in our prepared remarks that 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 0.5%. 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, those too. So it can come and go from month to month. I would say that the slight tick up we saw in June, we haven't seen in July. But at the same time, we're starting to lap some of those compressed numbers from a year ago as well. So it's effectively already in our run rate. Certainly, we've not taken our eye off the ball there. We continue to work with the procurement individuals on all bases. 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 at a very compressed level. So I think part of the good news there is that we've not seen any of the individual locations 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 sales force transformation. But our street business, our base business, has finally started growing some. So 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 strategies. But for the last better part of a decade, we've watched our base business be neglected. And we've had a slow bleed out of it over the years as our sales force has both compressed, but also before that, paid their attention more towards the strategic accounts that we were delivering to them. And we've started to see with the sales force 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?

Yes. Yes. That's a great color. Yes.

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 that we will continue to emphasize with our sales force.

[Operator Instructions] Our next question is coming from Ken Newman with KeyBanc Capital Markets.

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

Yes. So I'll take that initially here. So from an overall tariff perspective, we've communicated this over the last couple of quarters, just given the multiple different changes that are happening through the process. Generally speaking, we're not expecting any compression from a margin perspective when we look across the 4 verticals, including the Canadian business. We've been able to manage our way through that on some of the tariff pieces already. We have the ability to work really closely with our customers, not only from a pricing perspective, but also from a sourcing perspective. If you look at some of DSG's really strong capabilities across all the verticals. It's on the procurement side. And so we proactively reach out to our customers when we see their purchasing from certain products that are coming from certain countries where the tariffs may be going up, and help them manage their way through that process. So we're not seeing any net-net effect from a margin perspective. And certainly, we have a model that keeps getting updated almost on a weekly basis, as changes are being made that give us pretty good insight into where some of that exposure may sit, and the specific customers we need to work with, and the specific countries of origin as well. So hopefully, that answers your question without getting into too much detail. If you look at probably the largest -- so I think we made this comment on the last call as well, about, call it, 6% of our product purchases are coming from China. So it's not a huge piece. And certainly, that's where I think some of the tariff -- 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 product acquisition.

Then for my follow-up, I know you guys touched on Gexpro earlier, but what are your guys' expectations ramping into the back half? I know the comps get harder, but is a 20% incremental EBITDA margin still the right way to think about things?

Yes. I'm not sure I would try and quantify the overall EBITDA margins. We saw a nice flow-through here in the quarter, getting to, call it, 13.5%, 13.4%. Again, even though they're up against stronger comps in the second half of the year, many of their end markets are on an upward trend. We feel we've got some good visibility into backlogs. And our expectation is that piece of our business will continue to be really strong in the second half of the year. And I think Bryan had mentioned there's one end market in particular, where it was a little soft, that even that market has started to turn positive on us. So we feel good about where that business is at today. Again, it gets impacted a little bit based upon the number of selling days in the quarter and so forth, but we feel good about the progression of that business and more specifically, just kind of the upward trend of the majority of the end markets that they operate in. So Bob and the team have done a phenomenal job around wallet share expansion within existing customers, winning new business. It's performing really, really well.

I'd just add this color, just like with the sales force transformation initiative at Lawson, we have made and will continue to be making significant investments in Gexpro Services that are flowing through the P&L. So we compressed margins at Lawson, leaning into the sales force, if you look at the last 2 years, and those investments took EBITDA margins down before now, they're starting to climb back up. Gexpro Services has had the benefit and continues to have the benefit of really good momentum on the top line, which has allowed us to still have EBITDA 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 kind of senior selling professionals, as well as adding a lot of square footage around, like our Asian effort. So even though we've 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 lift on EBITDA there because we've been leaning so hard into it on investing. And that's built a very large revenue funnel of future revenue for Gexpro Services. So there's a tension on timing around how EBITDA is going to continue to progress and also the core offering of Gexpro 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 Gexpro Services would normally enjoy, which I've said before, when we bought Gexpro, it was a 6.5% EBITDA margin business, and that was in 2020. And we've unlocked a lot of structural margin that's about double 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. 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 what we've enjoyed even with a lot of the investments we've been doing, but that has some to do with the mix shift to where the revenue is coming from. So we do feel a lot of momentum in the business there.

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.

Well, 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 3 years ago. It's more than twice the business that it was, and we've continued to believe that it will be twice the business it is today, hopefully, 3 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.