DSGR - NASDAQ

Good day, everyone. Welcome to the Distribution Solutions Group Third Quarter 2025 Earnings Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Sandy Martin. Please go ahead.

Good morning, and welcome to the Distribution Solutions Group's Third Quarter 2025 Earnings Call. Joining me on today's call 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 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 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 will 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 our 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 November 13. I will now turn the call over to Bryan King.

Thanks, Sandy. Good morning, everyone. I'll start today with overall highlights for the third quarter and share some perspective on our view of the current market environment and DSG's progress on its ongoing strategic initiatives. After that, I will turn the call over to Ron to provide a more detailed review of the financial results. Let's start on Slide 4 with a few key takeaways. Our third quarter results demonstrate the strength and resilience of our business model, even as inflation, tariffs and higher interest rates continue to challenge parts of the U.S. economy. The organization is not standing idle, waiting for market tailwinds to pick up, but continue to push the pace of initiatives that will make DSG a more profitable, durable and growing business in the long run. We delivered 10.7% revenue growth in the quarter, supported by strong organic momentum with an average daily sales increase of 6%, plus solid revenue contributions from our 2024 acquisitions. This represents the fourth quarter in a row that we've realized an organic sales increase and puts our year-to-date organic sales increase at 4% over 2024. Demand remained particularly healthy across aerospace and defense, renewables, semiconductor-related technology and industrial power, where production demand continues to accelerate. With solid top line performance, inclusive of the significant investments we continue to make on the income statement, we're pleased to report an increase in our shareholder returns measured through adjusted earnings per share of $0.40 for the third quarter, an increase of 8.1% compared to the same period last year. We enhanced shareholder returns with more than $20 million of share buybacks in the first 9 months of 2025, reflecting our confidence in the company's trajectory despite a challenging macro environment. We also enjoyed generating strong quarterly operating cash flow of more than $38 million with adjusted EBITDA of $48.5 million. This is on top of strong cash flow generated in the second quarter as well. EBITDA margins for the quarter were 9.4%, primarily impacted by a combination of product and customer mix shifts as well as strategic investments across the verticals. We expect these ongoing initiatives to start realizing returns and improved EBITDA margins in the coming quarters. Importantly, Barry Litwin and the investment we have made in the TestEquity team are moving expeditiously after a comprehensive review of our significant line of business opportunities. This review has led us to refine our go-to-market strategy, which now focuses more on lines of business and capabilities to unlock growth and margin expansion opportunities. Gexpro Services continues to win wallet share while investing in its capabilities and delivered another record quarter. And our Canadian branch division led by Source Atlantic, showed meaningful improvement in gross margin and expense rationalization and are now in line with our shorter-term targets and offering us better line of sight on our longer-term goals. These results reflect solid progress on advancing our focus on disciplined execution of key initiatives while acknowledging we continue to invest in and refine our expanded processes and results to unlock operational efficiencies and improve profitability across the expansive opportunities in DSG. We continue to steadily dedicate resources and investment into the list of priorities around internal initiatives despite recognizing we are in a dynamic environment with pronounced quarter-to-quarter marketplace fluctuations that also impact our priority around our profitability progression. Stacking up these internal investment priorities, while essential to long-term value creation, place demands on leadership while introducing short-term financial performance pressure, particularly when end markets are less forgiven. A large thank you from our Board, investors and me goes out to our DSG colleagues for all the hard work and transformative initiatives they are tackling currently. With a broad portfolio, we are also enjoying a return to solid momentum in numerous end markets. For instance, we achieved much anticipated growth in test & measurement throughout the quarter despite continued softness still in electronic production supplies. Ron will go over other key financial takeaways for the quarter in a moment, but let's first turn to Slide 5 to cover more end market revenue trends and strategic updates by business focus. At TestEquity Group, we are pleased to report strong sales growth of 5.8% in the quarter, driven by test and measurement, rental and refurbished equipment, environmental chambers and modest gains in value-added fabrication services. Electronic production supplies were flat as we maintained pricing discipline. TestEquity product mix shifts created downward pressure on gross margins and higher SG&A reflected compensation adjustments and investments in additional management resources and sales incentives and employee-related costs, including health care. Several specific large new customer programs with competitive pricing in test & measurement weighed on margins. However, our specialty products and VMI offerings continue to represent meaningful higher-margin growth opportunities. The ConRes acquisition completed in 2024 continues to perform well and has unlocked greater focus, utilization and profit opportunity as we drive -- we are driving more rental and used test & measurement interest from our customers, which is prompting us to invest and expand around how rental and used can drive deeper customer relationships, encouraging product depth and geographic reach while further strengthening the broader TestEquity platform with better margin opportunities and customer loyalty. Barry Litwin completed his first 90 days as CEO, much of which was focused around a comprehensive diagnostic of the TestEquity business with the team and a number of resources he brought in -- brought with him. The team developed a unified strategy for the organization that clarified the value proposition across 3 core categories: design and test, build and assembly and maintain and repair, providing a clear framework for growth, customer engagement and expanded accountability around revenue and margin and growth mix objectives by lines of business. Barry has restructured the leadership architecture to strengthen execution, enhance functional ownership and refine roles across digital, merchandising and commercial sales. These changes are designed to accelerate growth, build talent depth and improve organizational speed and agility. Barry has also identified several targeted investments in systems and e-commerce capabilities that will enhance operational effectiveness, unlock company cross-sell, reduce back-office resources and streamline e-commerce sales. The team has undertaken multiple customer satisfaction surveys to pinpoint areas where TestEquity can deliver greater value and is actively developing a refined customer segmentation and go-to-market strategy. On the product front, the team has identified key opportunities for new product introductions and more strategic private label expansion to unlock incremental growth and drive margin opportunities. While we expect some near-term wins for various changes, the full impact of these initiatives will take shape over the next 18 to 30 months, resulting in a structurally stronger, more competitive and materially higher-margin business. Moving to Gexpro Services. We are excited to report that Gexpro Services delivered record adjusted EBITDA dollars in the third quarter on organic revenue expansion of 11.4%. The sustained sales growth was driven by momentum in aerospace and defense, renewables and technology with an upward production ramp in industrial power. Value creation initiatives include DSG cross-sell, acquisition synergies and expanded VMI, kitting, manufacturing and e-commerce offerings. Customers are becoming increasingly interested in Gexpro Services domestic manufacturing capabilities to mitigate the tariff impacts. Our Europe business remains strong overall with a growing focus on diversifying across multiple verticals. The Gexpro Services recent acquisition of Tech-Component Resources in Southeast Asia and an expanded investment in people and locations positions us well to continue growing with industrial and technology customers that have encouraged our presence in the Asia Pacific region. Existing global customers are also requesting Gexpro Services global supply-chain management capabilities to support their operations more broadly across the EMEA region. We enjoy the partnership and confidence our customers show us by asking us to grow with them, both locally and globally across multiple end markets. And our expanding diversified business portfolio enables us to capitalize and grow across macro and micro business cycles. Our capabilities improve our customers' ability to succeed in an ever-changing marketplace and their confidence in us is reflected in our extremely low churn and our ever-expanding wallet share. We also see tailwinds from influences like the Big Beautiful Bill and domestic manufacturing opportunities for U.S. customers seeking to avoid or lower the impact of tariffs. While our sales funnel, especially from existing customers feels great, we are making very strategic investments in expanding the sales team's capabilities to drive a longer and larger tail to our strong top line revenue growth. While these investments slightly reduced the near-term profitability available with increased investment in our costs from a year ago, the incremental sales we are enjoying are still driving EBITDA dollars higher, while the investments are enhancing our already strong customer retention and expanding our sales pipeline. Gexpro Services core strength lies in our ability to deliver industry-leading total cost of ownership savings to our valued customers through custom supply-chain management programs. These programs focus on high on-time delivery, quality, lean optimization, supplier rationalization, total working capital improvement and technology. Even with our investments, we are pleased to report sequential EBITDA margin expansion once again for Gexpro Services with a 100 basis point expansion since the first quarter of this year. Expanded geographies and value-added capabilities achieved through disciplined execution of operational efficiencies and the benefit of our strategic M&A over the last several years continue to drive structurally stronger margins. We are excited and focused on investing even more deliberately in several additional organic and inorganic priorities to continue to fuel the momentum at Gexpro Services. Overall, Lawson's total revenue increased 3% compared to a year ago, with increases in the majority of our business lines. We enjoyed robust performance of our recent acquisitions. S&S, our automotive product category, achieved sales growth in the high single-digit range. and ESS, our safety products business, enjoyed similarly strong increases as well. Lawson's legacy business was up 2% and business development initiatives drove higher strategic accounts and government growth in the high single-digit range. Although we are not satisfied with our total sales performance for Lawson this quarter, we know that economic pressures have negatively influenced many of our customers this year. Lawson's primary focus over the past 2 years has been executing on its multiyear sales force transformation initiative. Over the last 12 months, we've added over 60 net new sales representatives, bringing our total field sales reps to approximately 930 at the end of September. Most of our newer reps are still scrambling to build a business that covers our significant investment in them. The current environment, even with our enhanced sales resources and tools we are now providing the sales force has not accelerated the lead time to profitability on new hires at the pace we expected, but we remain committed and optimistic. For instance, while the sales force transformation is still significantly underway, we're encouraged by the positive momentum across all sales metrics. CRM adoption now exceeds 70% and the metrics we are tracking are trending higher. Our CRM tool, which we continue to evolve, now provides valuable analytical visibility by territory and sales rep, enabling much more data-driven decision-making and targeted performance management. We are investing in deeper sales leadership resources, talent and accountability. And sales continue to ramp for Lawson's new 24/7 web platform, expanding our customer reach and enhancing engagement. Although there is more work ahead, Cesar and the team are executing with discipline, and we are beginning to see meaningful traction from our key sales initiatives. In the meantime, we are also investing in additional sales support roles, including business development professionals, inside sales reps, strategic account managers and technical sales specialists, all to help our sales reps become more productive. We are also supplementing our field sales team with service personnel where it makes sense, freeing up more time for our business development. We are balancing our priorities around future investments as we evaluate and refine our processes to better support our sales force to best serve our customers. On a sequential basis, our Canadian branch division sales grew by 7% in local currency in the third quarter, driven primarily by Source Atlantic. We saw better operating expense leverage with fewer restructuring impacts in the quarter. Gross margin sequentially improved as products, services, pricing and mix shift initiatives are well underway. We have improved gross margin almost 300 basis points over the last year. Ron will discuss our solid progress on EBITDA margins this quarter as well. We've completed 2 of the 4 facility consolidations and expect to finalize all major realignments by the end of the calendar year. Although we are still in the early innings, we appreciate that Source Atlantic and Bolt Supply have an attractive market presence, strong customer relationships and a unique strategic fit in the Canadian marketplace. After a tough initial start as the project revenue in Source Atlantic quickly bled off and wasn't replaced as the Canadian economy became softer, sales and steady-state profitability at Source Atlantic has progressed nicely as the year has developed. With much of our purchase price for Source Atlantic defined by working capital and real estate, in the first full year of transforming our Canadian business, its free cash flow will have significantly derisked what we strongly believe was an excellent acquisition to transform our Canadian business. While still chasing the profitability objectives we expect to hit within the first years, it's positive to see the momentum that we're gaining as the year has developed. With that, I'll turn it over to Ron for details on our third quarter financials.

Thank you, Bryan, and good morning, everyone. Turning to Slide 6. DSG's consolidated revenue for the third quarter was $518 million, a 10.7% increase. The $49.9 million increase was driven by a combination of strong organic daily sales increase of 6% and $23.3 million in revenue from our 2024 acquisitions. On a sequential basis, organic daily sales were up 3.1% over the second quarter. For the quarter, we generated adjusted EBITDA of $48.5 million or 9.4% of sales. Source Atlantic compressed our third quarter margins by approximately 11 bps. Adjusted EBITDA dollars were essentially flat versus the second quarter and 30 basis points lower, primarily due to product and customer mix shifts, strategic investments in the business and higher employee-related costs. Cash flows from operations was $38.4 million for the quarter. This is on top of $33.3 million generated in the second quarter. GAAP net income per diluted share was $0.14 for the quarter versus $0.46 a year ago, which benefited from a substantial tax benefit. Non-GAAP adjusted EPS was $0.40 for the quarter, an improvement of 8.1% from $0.37 per share a year ago and a sequential increase of 14.3% from Q2 of $0.35 per share. In the first 9 months of 2025, we've repurchased approximately 670,000 shares, which is positively impacting our EPS return to shareholders. Moving to Slide 7. Starting with Lawson, Q3 sales totaled $121.5 million, representing a 3% organic sales increase in average daily sales. Compared to Q2, organic average daily sales were down 2.2% pressured across most of our segments. For the quarter, Lawson reported adjusted EBITDA of $14 million or 11.5% of sales, down 110 basis points from Q2 on a sequential basis. The net margin contraction from the prior year was primarily due to continued investments in our sales transformation and higher employee-related costs, in particular, health insurance costs compared to the same period last year. We also saw some vendor price increases this quarter from tariff impacts. However, the margin impact was minimal due to strategic pricing actions that we took earlier in the year. As Bryan mentioned, Lawson sales rep counts have increased to approximately 930, up from 860 a year ago, driven by expanded roles that continue to boost growth and productivity. We also continue to leverage our CRM platform to connect our sales reps with our customers more efficiently. We are also pleased with the activity and engagement of Lawson's enhanced e-commerce channel, which we launched earlier this year. As we work through modifications to the site, we are realizing improved customer conversion ratios. Turning to Slide 8. Third quarter sales for the Canadian segment in U.S. dollars were $60 million, which included $20.1 million of incremental revenue from the Source Atlantic acquisition, which was in for the full quarter this year and only a partial quarter a year ago. Q3 revenue increased sequentially by 7.4%, which is encouraging despite tariff-related market softness for projects in manufacturing, in particular, in Eastern Canada. Excluding revenues acquired from Source Atlantic, organic sales for Bolt Supply increased 6.5% over a year ago. The third quarter adjusted EBITDA for the Canadian segment was $5.8 million or 9.6% of sales, a significant increase of 300 basis points over the second quarter. We are making good progress on planned synergies around gross margins and branch consolidations and are well on our way to how we underwrote the business. Turning to Gexpro Services on Slide 9. Third quarter revenue was strong at $130.5 million, up 11.4% from the year ago quarter from strength in renewable energy, aerospace & defense and industrial power. Organic average daily sales were up 3.7% sequentially from Q2. As Bryan mentioned, Gexpro Services adjusted EBITDA was $17.8 million, representing a record quarter. This is a 20 basis point improvement from Q2 to 13.6%. Similar to the second quarter results, operating leverage remained strong. Gexpro Services continues to invest in its business to capture top line revenue growth and incremental EBITDA dollars, albeit at slightly lower margin percentages. Gexpro Services continues to capitalize on the acquisition in Southeast Asia through wallet share expansion and cross-selling. And just as a reminder, Gexpro Services is facing tougher sales comps heading into the fourth quarter of 2025. Lastly, I'll turn to TestEquity Group on Slide 10. Third quarter sales were $206.5 million with average daily sales up 5.8% versus a year ago and up sequentially by 5.9% over Q2. The test & measurement business improved. However, competitive pricing weighed in on margins. Revenue acquired from ConRes, which was acquired in the fourth quarter of 2024 was approximately $2 million for the quarter. TestEquity's adjusted EBITDA for the quarter was $12.4 million or 6% of sales, down sequentially by 90 bps from the second quarter. Net margins decreased from 7.4% in the prior year quarter, primarily due to shifts in customer and product mix as well as higher employee-related expenses, some of which are nonrecurring and others that are longer-term investments to improve the business. Key operating initiatives in flight currently include the expansion of service offerings, acquisition integration, pricing disciplines, sales force optimization, digital expansion and cost containment. With over 34,000 customers, our go-to-market strategy will continue to evolve to better service our customers with expanded offerings. Moving to Slide 11. Our diversified business model has been structured to benefit from scale, product adjacencies and geographic footprint, leveraging 5 acquisitions completed last year. Since the merger of these businesses in 2022, we have invested nearly $450 million of cash and debt across 9 acquired businesses. And at the end of the quarter, our debt leverage remained at 3.5x. Starting at the bottom of the slide, we ended the quarter with total liquidity of $335 million, providing us with flexibility for accretive acquisitions and investing into organic growth initiatives. This foundation continues to underpin our disciplined capital allocation strategy. Again, this quarter, we achieved positive sales lift through our investment in organic growth. As a management team, we closely manage working capital within each of our verticals. At the end of September, cash and cash equivalents, including restricted cash, totaled $82.7 million and net working capital was approximately $486 million. Consistent with the second quarter, at the end of the third quarter, we had no outstanding borrowings under our revolving credit agreement. And as Bryan mentioned, we generated $38 million of cash flow from operations for the quarter as we closely manage our working capital. We continue to look opportunistically at share buybacks and returned $20 million to our shareholders this year with approximately $6 million still available under our previously Board authorized program. Our free cash flow conversion is approximately 96% over the trailing 12 months, and we compute our ROIC on a TTM basis at approximately 11%. Finally, our first 9 months of net CapEx, including rental equipment was $19.3 million. We expect our full year 2025 net CapEx to be in the range of $22 million to $25 million or approximately 1% of our revenues. I'll now turn the call back over to Bryan.

Thank you, Ron. We plan to continue navigating our businesses through market noise and volatility, remaining highly focused on making strategic data-driven decisions that generate long-term value and success through every business cycle. As we look at the fourth quarter, we're maintaining a cautious outlook given tougher year-over-year comparisons. That said, business activity remains steady, and I remain confident in our leadership teams and their ability to execute on their respective value-driving initiatives on their journey to build structurally higher-margin businesses that generate strong free cash flow and create accelerating long-term value for our shareholders. Our teams are highly aligned, competing together to win more and each is accountable and highly incentivized for their progress. We are investing in internal and external resources at every turn to drive an enhanced financial outcome for DSG's investors. Many of our investments in the prior years are driving solid improvements to the business. That is evidenced by our ability to report 4 quarters of sequential top line revenue growth and have well more than doubled EBITDA by reinvesting our free cash flow and holding leverage flat since we created DSG 3.5 years ago. While some of our 15 acquisitions made over the last 4 years or so, where we continue to track our underwriting and integration performance have taken more time and required more heavy lifting to get them to the targets we underwrote, we are confident that all offer strong strategic and financial accretion value to the platform we are creating and will long drive earnings and value for DSG consistent with how we underwrote them. Based on more recent investments we've been making on the income statement, just like the acquisition investments on the balance sheet, we should be held accountable on continuing to perform and drive shareholder profits and unlock improved key performance metrics. You should continue to expect more from us through unlocking enhanced operational performance, continued market share gains, longer-term enhanced profitability unlocks and improved business momentum relative to whatever economic end market cycles we face as we look forward to 2026 and beyond. We have a clear line of sight on how our initiatives drive intrinsic value and unlock additional value through increased future run rate earnings and deserving of a higher value assigned to the earnings we enjoy. We will continue to listen to our customers and deliver the products and services that they want and need. We, informed by our customers and our colleagues [ learned ], have identified and are strongly pursuing a number of key strategic inorganic opportunities that will strongly enhance our position to serve some of our key markets. We want to personally thank everyone across DSG for embracing our performance-driven culture based on the core values of transparency, accountability, effort and empathy. I'm equally grateful to our Board and our shareholder partners for their trust in me, our DSG leadership and the LKCM Headwater team as we continue advancing this important investment together. We continue to engage actively with the investment community, and we'll participate in 3 conferences this November, Baird, Stephens and the Southwest IDEAS Conference. And with that, operator, will you please open the line for questions.

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

Cautious is the word that I think I heard you say regarding your look into fourth quarter. And so I'm curious, can you share what October looks like just in terms of the organic pacing? And when you say cautious, are we meant to take that as more likely than not, you could be down year-over-year organic? Or just help me parse that a little bit.

Yes. Tommy, this is Ron. I'll jump in on that one. So just a couple of points relative to the fourth quarter. First, when we look at the number of selling days within the quarter, keep in mind that we had 64 selling days in the third quarter of '25, and we go down to 61 days in the fourth quarter. And if you look at what we did a year ago in the fourth quarter, all in, our sales were a little bit north of about $480 million. And certainly, this quarter posted $518 million. So as we think about it sequentially, we're -- even though we're up against tougher comps, even flat sales here in the quarter results in kind of mid-single digits looking at it sequentially going from Q3 into Q4. I will say, when we look at October, October is a little -- it gets a little skewed because there's 23 selling days in the month of October. And typically, our ADS normally gets compressed a bit when you have more selling days within a particular month. So I would say we're not seeing any dramatic shifts, although as the third quarter developed, September was our strongest month within the quarter as well. So we saw acceleration, improving average daily sales as we went from July into August and then into September. So I'd say that it's tempered a little bit, but nothing dramatically. The other piece I would just state and maybe it's a little cautious as well is a lot of our customers go through various types of holiday shutdowns and so forth around some of the holidays and later in the year. So it's not that we're anticipating that, that would be anything more than normal in terms of what we've experienced in previous [ four ] quarters. But just keep that in mind as well where there's always a little bit of -- we're always up against a little bit of a tougher situation just given what some of our customers are doing around the holidays.

And I would just say, Tommy, I was probably the culprit on using the word cautious as much as anybody, and it was mostly just thinking about the number of selling days for the quarter. But it doesn't reflect on how I feel about October relative to September. It was just a statement that I was making relative to thinking that we had really -- we did have strong performance out of Gexpro Services last year in the fourth quarter. And so we knew we were going up against a good number there. And while we had volume and we had both average daily sales and revenue organically were all up in the third quarter as were volume finally across all the verticals. And so that was a nice thing to see in the third quarter, and -- but we were just being cautious in our language.

Fair enough. And on the consolidated EBITDA margin percentage side, any big callouts that should drive a variance, whether positive or negative versus the 9.4% that you just reported?

Yes. The only thing I would say there, Tommy, is that -- and I think both Bryan and I covered this in our prepared remarks to some degree relative to some of the investments that we're making into the organization, if I break down the movement either sequentially or from a year ago, even 110 bps from a year ago, I would say that probably about 30 bps of that are investments that we're making into the -- that we continue to make into the organization. And really, I would attribute probably 80 bps of that more towards, I would call it timing or nonrecurring type of items around incentive accruals or start-up of some customer -- attracting customers initially at a lower margin to us purchasing -- advance purchasing some inventory last year. So as I think about kind of that bridge from quarter-to-quarter, clearly, there are some items that are permanent that we continue to invest in the business, but there's also quite a bit of movement on some of these items that I would call more timing. And that pretty much holds true even looking at it sequentially as well. There's nothing in the fourth quarter that we have visibility to that is anticipated significant large onetime items or positive or negative that we have visibility to today that we would see coming through in the fourth quarter.

Yes. On Gexpro, the momentum here is nice to see. You called out some of the drivers. And I'm just curious how durable does this -- does the contour of the recovery feel?

Look, Tommy, Gexpro has got a pretty broad base of wallet share and new customer wins that it's continuing to enjoy and its backlog or funnel is larger than it's been in the past of new business opportunities that they're pursuing. We've invested significantly both in being able to address some existing customers' needs in locations that are costing us some money that we've spooled up as well as some employees that we've added that are prior to getting the benefit of revenue, but where we have good visibility that there's a spooling up of more organic opportunity there. The acquisitions that we've added to Gexpro Services over the last 4 years, going back even right before the merger are adding to the capabilities that particularly with the environment that we're in on the tariff side are allowing us to improve the supply-chain opportunity, both kind of domestically as well as more broadly for a number of the customers that we've served for a long time. And it's getting attention from customers that we haven't served for a long time. So the sales cycle in Gexpro Services is long. As we know, it's the longest that we've got. The retention is very high. But we've made a lot of investments there besides just the acquisitions that are adding talent and capability and some relationship sellers that are helping continue to build out the pipeline. Now, there's 3 or 4 of the verticals that are hitting on cylinders and then there's the industrial power vertical that's getting stronger. And when you have 2 or 3 of your verticals that are firing on those cylinders, you look at those relative to what you've got in your backlog in the verticals that are not performing at peak level at all and you try and assess where you're going to be a year or 2 from now. And I don't have enough of a crystal ball there, but it feels very good, and it feels resilient.

Last question for me on the Lawson sales force initiatives. You mentioned that there are still some in-flight pieces there. So maybe just give us a state of the union?

Yes. I would say there's a lot still in-flight there. I think we've been trying to build the plane in the air. And so for sure. So we probably took too long to start focusing on growing our sales force again because we were trying to get more of the internal process improvements and tools available to the sales force. And so that gave us more of a J curve on our volumes and our ability to serve our customers at the level that we want to. And so now that we've been adding and filling back in territories that were open, we've been able to return to positive volume growth there. And so that's been a while coming. But we are still putting a lot of dollars against the transformation. So there's dollars associated with resources that we are adding to support the sales force that we've called out in the call and we've talked about for some time, and we're continuing to put more of those resources in place. We're doing some pilot initiatives to try and look at how adding more selling leadership talent as well as tools and support personnel in key markets might be able to help us drive both a better customer service and more wallet share growth and to turn back on a number of the customers that we see in different markets that are not as actively using our solutions. So that's -- there's a lot still going on there. The good news is that the metrics like CRM and sales or order flow per day or salespeople that are participating on making orders every day. Those metrics are still moving in our favor. They haven't moved as fast. The ability to spool up our new sellers and to get them to a level of profitability at the pace that we had expected 2 years ago when we were starting this initiative and part of the reason why we held off hiring new outside sellers or growing that sales force again was that we thought that we would be able to add a bunch of tools and get the sales professionals to the level of revenue that carried them much faster. That's been slower than we would like for it to have been. And while we're seeing some positive movement there, we're not seeing it at the level that we expected 2 years ago. And we don't know whether or not there's more tweaking that we need to do, which we believe and more sales leadership resources that we're putting in place to drive more support of those new sellers and how we onboard them. But also we're looking at whether or not the sluggish environment that we're in for a lot of the customers that are the smaller job shops that Lawson sells that are much lower dollar per revenue per year relationships than we would have in a Gexpro Services, for instance, that part of our customer base has been more sluggish than the other parts of our customer base where we've got larger relationships, including the larger relationships that we have at Lawson, where those larger strategic accounts are continuing to grow.

Your next question is coming from Ken Newman with KeyBanc.

I ended up joining the call a little bit late. So sorry if I missed it. But did you speak to how much tariff-based pricing benefited sales this quarter? And just any thoughts about how you think about price cost into the fourth quarter across the businesses?

We didn't. But what I would tell you is that this quarter was -- had strong volume growth, not just revenue growth. And so that was for the first time across all of our verticals, we enjoyed volume growth again. Lawson, in particular, has struggled with pricing being to our benefit, but volume being against us. And so we returned to volume growth at Lawson. And we had volume growth at the other verticals. The pricing is -- Ron, can probably speak specifically to that. We didn't take any new initiatives this quarter than we did have some tariff activity that we did at the beginning of the year. And we've been very transparent with our customers, like particularly at Gexpro Services where we have large relationships and contracts where we're being very open and transparent in showing exactly what the specific dollar impact is on a relationship. And we don't have full capture on all that we -- of the tariff costs that are flowing through. But the impact to our business has not been as dramatic as it's been for some of the other companies that we own. In fact, it's been much more manageable for DSG than it has been on a lot of the businesses that I'm associated with. Well, Ron, any other additions there?

No, I think you covered it, Bryan. The only thing maybe just a layer deeper, just that overall 6% organic sales increase. If we look at price volume mix there, about 1/3 of that was price and about 2/3 of that was volume. So I think to Bryan's comment, all 3 verticals saw volume -- unit volume increase this quarter, which is positive. And we have taken some pricing actions certainly earlier in the year at Lawson and then throughout as the tariff pricing or the cost increases are coming through, but nothing significantly that's burdening our overall margin percentages.

Got it. No, that's very helpful. Maybe for my follow-up, I think I saw Lawson and TestEquity margins saw some mix and labor-related headwinds this quarter. Curious, how long do you expect those higher labor costs to stay on? When do you expect those to roll off? And any visibility on kind of mix normalizing within those 2 businesses?

Yes. Look, I'll take it first. We've had some additional investments that we've made on the sales side on both those 2 businesses, be it commissions or support to higher revenue on the test & measurement piece of the business or the specific tools and capabilities that we're adding to our sales force support and as well as adding a significant number of sellers at Lawson that are not yet profitable or contributing to the P&L. So -- and then we've also had investments on the SG&A side in talent or senior leadership across those 2 verticals. We also had some expenses there that related to health care and some severance and other things that we had that flowed through. So I wouldn't say that it's specifically inflation across more broadly across our costs. I mean we are taking compensation actions at times over the last couple of years to support our team across those verticals in all of our verticals. But the real step-up in SG&A has been very deliberate, and it's focused on trying to drive revenue growth and customer service in the future.

Okay. Maybe to ask this in a different way. And obviously, I know the crystal ball is clear as mud right now. But if you think about a normalizing upcycle, at what point do you kind of get back towards your targeted operating leverage? How much volume do you think you need in order to kind of support that 20% -- 20%, 25% EBITDA flow-through?

Yes. Lawson, I think that we probably -- and Ron, you may more specifically be able to address this. But the investments that we've been making in Lawson at the personnel level, I think that we are probably in a spot where we would expect that the leverage there to start working back in our favor. Any time you spool up a significant number of new sellers and you add a lot of resources around them or above them to support them, that level of expense has been very much a drag on operating leverage. And historically, the operating leverage at Lawson has been in that 20% to 30% or higher. And we would expect that over the next year as we see the performance and the maturity -- maturing of the sales force that we'll start enjoying that sort of leverage again in that business. That's certainly the way that we're modeling it. On TestEquity, it's been a little bit of a different. You've had 2 dynamics there. One, we've got our apps now where it's flat. It's been negative, and we've had a return to growth on the test & measurement unit volume side, but there's been a mix shift there that has impacted the operating leverage of the business at the same time as we've been investing in SG&A. So it kind of muddies up as you put it, the ability to try and extrapolate what our operating leverage is at the TestEquity Group because we've been putting a significant amount of deliberate expense into the SG&A line to try and with the leadership change at the top to try and get that business organized in a way that we think is going to offer significantly better operating leverage than that business had historically operated around. There's parts of the TestEquity group that have really significant contribution margin associated with it. And then there's parts of it like the test & measurement new business that's not going to have as much operating contribution margin, but has good stickiness associated with our customers as well as returns on invested capital on that business unit. So I guess that's about an answer that may be about as muddy as the question, I apologize, but that’s it. Ron, any other offerings there that you could help me on?

Yes, I think that's all you [ explained ] it, Bryan. And when I look at it even across DSG in total, most of some of these other items around health insurance, for example, most of that drag happened at TestEquity and at Lawson. And so that's -- those are typically pretty spiky. It's just some quarters you get favorability, other quarters, it goes the other direction on you. And this quarter went the other direction. And if I look at that kind of across the DSG platform, it's a 20 basis point drag on our EBITDA margin just for this quarter. And so -- and then the mix piece that Bryan referenced, if you look at test & measurement, they went from about $30 million in sales in the second quarter to about $35 million here in the third quarter. And so that piece of the business certainly operates at a lower margin percentage for us, and that's putting a little bit of downward pressure along with getting into some larger customers from a pricing competitive standpoint as well, which put some drag, I would say, more specifically on the TestEquity business this quarter than on the Lawson side. But this is adding to the muddiness of it, right? And Lawson’s shift -- customer shift in -- more larger strategic customers is putting a little bit of pressure on the Lawson margin...

Your call out there is a fair one. We would note that TestEquity had both a mix shift issue or mix shift dynamic. I would call it an issue because we like the fact that we were -- we saw a nice recovery in the test & measurement activity. But we did have a relationship there that we were spooling up a new relationship with them and it had a drag initially on the gross margins for the quarter in the test & measurement part of the business. And then we also had -- you had -- you called out health care. We had -- we've made a bad debt or receivable allowance there for a customer that's not been paying. We had some severance, we had some additional expenses to spooling up new leadership. And so there were a number of moving parts on the SG&A line that were -- and there was an inventory allowance there. So I think that there was maybe 4 buckets that added to a lot of the dollar delta there.

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

I wanted to just follow up on the Canada branch margin, really nice sequential improvement there. It sounds like you still have a couple of facility consolidations to go. But I'm just trying to think about the sustainability of that margin going forward as well as if there's still a little room for additional uplift there.

Go ahead, Ron.

Yes, I'll jump in on that. So, Kevin, yes, if we look at -- we typically break that business into 2 separate pieces, right? The legacy Bolt Supply business and then also the Source Atlantic business as well. And I would say Bolt continues to perform really well in that 13%, 14% margin rate. It's getting a little muddy because of combining the branches and so forth. But we clearly when we underwrote the acquisition of Source Atlantic, we had a path to exceeding 10% on that business on a stand-alone basis. And so even on a weighted basis between Bolt and Source, we should be above 10%. Again, we -- it's -- we're well on our way. We're not where we want to be yet. And so we would certainly look to see margin expansion there. I think they'll see some of the probably lumpiness a little bit in Q4 results as well. If you look at typically really across DSG, but inclusive of the Canadian operations, Q2 and Q3 are the strongest quarters typically. So, you get a little bit of deleveraging effect on slower sales as based upon some of my comments earlier just around holiday timing and so forth. But I'd say well on our way, but not where -- we're not at the end state there for sure.

Okay. Great. That's helpful. I had to jump to another call here but appreciate you taking the questions.

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Bryan King for closing remarks.