DSGR - NASDAQ

Greetings. Welcome to the Distribution Solutions Group, Inc. Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press 0 on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Sandra Martin. You may begin.

Good morning, and welcome to Distribution Solutions Group, Inc.'s Fourth Quarter and Full Year 2025 Earnings Call. Joining me on today's call are Distribution Solutions Group, Inc.'s Chairman and Chief Executive Officer, Brian 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 disclaim any obligation to do so. Management will also refer to certain non-GAAP measures, and the reconciliations to the nearest GAAP measures are available at the end of our earnings release. The earnings release issued earlier today was posted on our Investor Relations website. A copy of the release has also been included in a current report on Form 8-K filed with the SEC. Lastly, this call is being webcast live on Distribution Solutions Group, Inc.'s Investor Relations website and a replay will be available through March 19. I will now turn the call over to Brian King. Brian?

Thanks, Sandy. Good morning, everyone, and thank you for joining us. As events unfold in the Middle East, we are actively assessing any potential implications for our business, our customers, and impact on the broader supply chain. Our thoughts and prayers are with the military personnel and civilians who are in harm's way and with their families. We will continue to monitor the potential implications for global markets and are committed to operating with resilience, discipline, and care during this period of elevated uncertainty. We are not where we want to be at the end of the quarter, but our confidence and vision for the future remains strong. 2025 was a critical internally focused reinvestment, retooling, and digesting year for Distribution Solutions Group, Inc., as well as one where we managed through some dynamic pricing and supply chain and numerous one-time cost curveballs. While it was a dizzyingly dynamic year, through our daily North Star commitment to staying focused on investing in the business with a lens on long-term value creation, our urgency to offset shifting rules in the marketplace sharpened our focus on core fundamentals of building a better Distribution Solutions Group, Inc. Enhanced focus on execution tools and talent, and on timely accountability across the organization, made us prioritize not delaying targeted significant investments in capabilities and talent to position the company for long-term success. As a result, we go into 2026 with an enhanced perspective on our competitive positioning and long-term levers to drive performance across our North American and global platforms. As I reflected, we navigated challenging headwinds in 2025, including a government shutdown, shifting demand environment and macroeconomic pressures and emotions, including those driven by fluid tariffs where our diligent and largely effective efforts to recapture margin still left us short. Our financial results fell short of our expectations in the fourth quarter and for the year, and we own that. However, besides progress in our transformative investments, we enjoyed consistent operational affirmations in the marketplace around our value-added lines of business. Our teams delivered important new business and wallet share wins; each vertical held on to business on the back of service and capabilities, and made meaningful progress in our customer-facing capabilities and partnerships in 2025. We leaned in on improved discipline, heightened institutional adaptability, enhanced Distribution Solutions Group, Inc.'s more broadly presented refined value-added solutions confirmed by the marketplace. All of which add up to real 2025 successes and maturity of the business that will make us stronger in the longer term. Turning to Slide four. For the full year, we delivered total revenue growth of 9.8% on one less selling day, resulting in $1,980,000,000 in annual revenue. Organic average daily sales grew by 3.6%, reflecting solid underlying execution. Cash flows in 2025 were strong; we generated $84,000,000 of cash from operations, on top of $56,000,000 in 2024. Adjusted EBITDA finished at $175,000,000, short of our expectations. These results demonstrate our continued focus on cash generation, working capital efficiency and profitability. Throughout the year, demand remained healthy across aerospace and defense, semiconductor-related technology, renewables, and as the year progressed, industrial power. During the fourth quarter, we began to see demand soften in renewables in North America, which we are actively managing by pivoting growth initiatives in that sector towards the strong renewables demand growth for Distribution Solutions Group, Inc.'s improved presentation of capabilities in the global marketplace, and expanding our efforts on other end markets where we enjoy exceptional customer partnerships and strong secular and strengthening cyclical momentum, such as in industrial power, technology, and aerospace and defense. Our expanded platform capabilities and ability to support our historic customers and similarly discerning customers on a more global stage are supporting an expanding and accelerating set of dialogues. As we've discussed on previous calls, our financial results will not be linear. The fourth quarter is a good example of that. However, these results are certainly not indicative of our long-term plans or confidence in the future. While we anticipate some quarter-to-quarter challenges to balance earnings with our recent commitment to accelerate our talent recruitment transitions and accelerated investments, we are committed to making decisions that prioritize driving a stronger and more profitable Distribution Solutions Group, Inc. in the longer term for all of our committed stakeholders, but recognize, like in this quarter, the timing of some of those decisions unintentionally lined up with some margin near-term pressure and taxed near-term earnings more than leadership expected. While we didn't want to delay investments and talent decisions to unnaturally smooth earnings at the expense of building a better company, our leadership team still expects much better profitability performance from our Distribution Solutions Group, Inc. platform of capabilities. Let's turn to slide five to discuss our business initiatives. Gexpro Services delivered outstanding operating results in 2025 driven by the strength of the aerospace and defense, technology and renewables end markets we serve. Despite some fourth quarter sales softness, full-year organic average daily sales increased 12.3%, with full-year ADS up 13%. We continue to invest in the technology and industrial power end markets, driven by expanding infrastructure needs and increasing AI-driven demand. Our order backlog and new business pipeline remained strong in both segments. While renewables slowed in North America in 2025, we shifted our investment focus towards global strategies with encouragement of exceptional partners across technology, industrial power, aerospace and defense, and the power generation cycle. We are seeing a meaningful growth opportunity in India, while Southeast Asia is progressing more gradually due to the timing of customer qualifications. Both regions remain relatively small today, but continue to show excellent acceleration perspective and current customer engagement across more of our proven value-added capabilities at Distribution Solutions Group, Inc. and Gexpro Services. Our European business remains strong, with increasing diversification across multiple verticals. Gexpro Services is also expanding its value-added service offerings using robotic automation and AI-enabled tools that enhance customer capabilities across VMI, kitting, manufacturing, and ecommerce solutions. Since bringing Distribution Solutions Group, Inc. together, Gexpro Services went from approximately $350,000,000 in revenue to just under $500,000,000 mostly organically. Adjusted EBITDA has expanded from approximately $35,000,000 to $64,000,000 in 2025, with margins expanding nearly 300 basis points to 12.8%. This margin expansion reflects scale, broader geographic reach, enhanced value-added capabilities, and disciplined execution of operational efficiencies that leverage our cost structure. As we confidently lean into further investment at Gexpro Services, we are balancing strong optimism around marketplace pull on us to support growth opportunities with an expectation to drive earnings growth while making the important long-term investments in capabilities, geographies, and talent to support performing for our customers at a level that adds to the reasons we are winning wallet share and new mandates. As a reminder, Gexpro Services launching new customer programs requires upfront investment of significant time and margin, but results in exceptionally sticky customer engagements where we are critical to our customers, and our commitment to doing our job for them thoughtfully and exceptionally reaffirms the partnership between us and our customers. The upfront effort and investment can cause a bit of deleveraging of profits in any given quarter as programs ramp up, or mature programs slow, like the shift we felt on the margin in the fourth quarter as new programs in global renewables come on but domestic programs slow, or as we felt a year or so ago in technology. The great news is that the new business pipeline continues to expand even as mature programs may fluctuate based on each customer's program momentum. We also continue to win significant wallet share. We rarely lose programs. Expanding what Gexpro Services does as a part of Distribution Solutions Group, Inc. allows us to expand our engagement with our customers. Gexpro Services continues to be one of the most exciting growth levers for Distribution Solutions Group, Inc. Looking ahead, we are excited and focused on investing even more deliberately in additional organic and inorganic initiatives to sustain and extend the strong long-term momentum we see at Gexpro Services. Next, Lawson Products. Average daily sales increased 2.7% in the fourth quarter, continuing the momentum from the third quarter when average daily sales grew by 3%. Although new VMI installations and wallet share expansions led to organic sales growth throughout 2025, Lawson’s smaller account local revenue continued to be challenged in the fourth quarter; some of the Salesforce and selling tools transformation over the last couple of years have distracted our resources from doing the exceptional job our customers champion from our unique service model and that we expect. Lots of focus and tools teamed with additional investment in talent and process improvements are focused on getting this right for our customers, sales team, and for Distribution Solutions Group, Inc. EBITDA margins were negatively impacted by a slight customer mix shift, deliberate strategic investments, and unexpectedly elevated health care benefit costs in the quarter and for the full year. Ron will discuss in more detail in a moment. Recently, Lawson has made strategic investments in two leadership roles to strengthen the team through more capabilities and accountability. We brought on Jim Slunka as Chief Revenue Officer and Hillary Bryant as Chief People Officer. Jim joined Lawson in January 2026 and brings a proven track record of commercial transformation, having led sales and operations for a $1,800,000,000 omnichannel enterprise, overseeing more than 2,000 sales professionals, delivering a six-year sales CAGR of 8% and expanding gross margins by 300 basis points. He brings strong discipline around accountability, urgency, process, and commitments to a team-focused enthusiasm for excellence and winning, all consistent with being a former West Point athlete and officer. We are thrilled to welcome Jim to Lawson and Distribution Solutions Group, Inc. and are confident in the immediate impact he will have on the organization. Hillary brings deep global HR leadership experience, most recently managing a worldwide HR organization for a $1,400,000,000 industrial technologies company with approximately 4,000 employees. She offers a great complement to Jim, bringing a renewed discipline and energy to employee engagement and corporate culture while elevating a clear cadence around growth-focused expectation, urgency, and rewards. These important investments, alongside others that have also been recruited over the last years, put in place critical pieces to now have a stronger ensemble of experience, been-there-done-that leadership, collectively adding meaningfully to our sales and operating foundation as we pursue improved growth and execution in 2026. Turning to our 2026 growth priorities. We are focused on continuing to capture market share and expanding wallet share in our national accounts, including Lawson, Kent, and government, while reestablishing our commitment to offering the highest level of consistent service out of our Salesforce for our customers. And with that, a return to growth out of our smaller local accounts, driven by their efforts and the investment we have made in them. A key leading indicator of our growth is in new VMI installations, or internally what we refer to as ship-to locations, which we are currently ramping up after a challenging couple of years as we've been working through our Salesforce transformation. We continue to leverage technology to increase sales effectiveness and are improving the rigor and consistency of sales rep activity supported by our CRM tool, enhanced training commitment for new FSRs, and a real focus on our DSMs’ consistent cadence with our established FSRs around driving growth and consistency in the customer experience. We are also in the early stages of rolling out across our field customer-facing team a route optimization tool that we have been developing that will give them back expensive and frustrating transit time and more opportunity to serve and grow our customers. Although a smaller piece of our business, our ecommerce channel continues to deliver double-digit growth, and we are encouraged that more than 30% of customers purchasing through the site are new to Lawson. As we move forward, we remain focused on commercial excellence, the customer experience, and technology to accelerate growth and continuously improve how we serve our customers while also providing flexibility to our customers. Additionally, we are working more closely with our vendor partners to deliver solutions to our customers and to support our commercial team. At our recent sales leadership meeting in February, approximately 50 vendors presented their products and services to our sales team. We are working with a number of those channel partners to improve our product costs, as we have in turn invested to support them and our customers with our significant recent investment in our selling and servicing capabilities. We expect some nice progress this year out of our sourcing partnerships. Moving on to the Canadian branch division. The team made solid operational and synergy progress in the fourth quarter and across the full year despite macroeconomic headwinds and tariff-related uncertainty that pressured industrial end markets, especially in Canada, throughout 2025. As expected, fourth quarter revenue declined sequentially due to typical holiday season softness and weather, leading to operational deleverage. In 2025, we completed four facility consolidations, with the final consolidation expected by the end of the first quarter. As we discussed last quarter, because Source Atlantic's purchase price was largely tied to tangible assets, our first full year of transformation meaningfully derisked this investment for us, and we continue to believe this was a strong strategic acquisition to grow and scale our Canadian operations. Although the revenue headwind out of the gate has us a full year behind our ambitious profitability objectives our Distribution Solutions Group, Inc. team embraced when we acquired Source Atlantic in late 2024, and more recently, the recruited Canadian leadership team reaffirmed that underwriting. There's still significant profitability tuning work ahead; we are encouraged by our framework and expanding profitability insight and discipline that we are building, the team we put in place, and the path and significant progress they are demonstrating to us in the marketplace as the first year of ownership is now closed. At the TestEquity Group, we are investing at a renewed, feverish pace in the long-term platform we can better see now in this vertical. A massive investment in additional leadership capabilities and tools was made in the business, especially during the last part of 2025. A shift was made concurrent with these investments around dialing up a more intense focus and intentional allocation of resources, driving a structurally higher margin shift discipline out of a daily cadence around the vertical's growth priorities. And each team member owns specific accountability on discrete levers to impact that outcome. When we committed to these investments, we fully expected a J-curve recovery, with near-term transitions impacting performance, followed by improved revenue growth and profitability as our strategic initiatives take hold. For the full year, average daily sales increased 2%, and organic daily sales grew 1%, driven primarily by Test & Measurement, Rentals, and Chambers. In the fourth quarter, revenue grew 0.9% on one additional selling day, supported by continued momentum in rental and refurb chambers, and TEquip. While Test & Measurement end markets were under in the fourth quarter, we remained focused on disciplined execution of our growth and profitability prioritization initiatives and are beginning to see the tighter strategic lens and accelerated pacing around cadence and accountability at work. The result is we are seeing engagement deep into the organization take place, and the affirming pipeline activity evolving towards our areas of most differentiated capabilities, teamed with our higher margins and return on capital opportunities, including value-added solutions used in rental, Test & Measurement solutions, Chambers, and accelerating the growth and mix around our most value-added elements of our electronic production supply offer. To strengthen our margins and earnings, we are currently seeing some accelerating customer engagement building around our core Test & Measurement expertise, where we have reinforced with a renewed and discrete effort around rededicating resources focused on T&M customer solutions selling, improving our competitive moat, at a time when we believe the marketplace has passed the trough and we are seeing acceleration. We also have major initiatives underway to simplify and unify the digital ecosystem. Enhancing the customer experience through ERP consolidation, customer service, and ecommerce platform integration is foundational to our strategy, and we are actively leveraging AI applications to accelerate execution. At the same time, we are strengthening performance management, incentives, and accountability as we establish new key leadership roles. We're excited about the progress Barry is making to drive a much more disciplined approach to the portfolio of value-added capabilities and products offered across the TestEquity Group vertical. And for the employees, we appreciate their support of his accelerated operational pace and accountability, including the shifting of time and resources towards more differentiated growth areas, to drive his objectives around mix shift rather than only adding incremental costs in elevated areas of focus. Looking ahead, we are actively increasing our account base and deepening penetration among our existing customers while using new product introductions and private label offerings to expand customer choice and enhance margins. Encouragingly, a growing backlog in January and February 2026 signals momentum to come. In 2026, we recognize that the full impact of these initiatives typically takes several quarters, but we are confident they will result in a structurally stronger, more competitive, materially higher margin TestEquity business over time. With that, I'll turn it over to Ron for details on our fourth quarter and full year financials. Ron?

Thank you, Brian, and good morning, everyone. Turning to Slide six and starting with our full year results for 2025. As Brian mentioned, consolidated revenues for the year were $1,980,000,000, up 9.8% compared to 2024. Incremental revenue from our 2024 acquisitions was $121,500,000, and our organic average daily sales growth for the fiscal year was up 3.6% over 2024. For the year, adjusted EBITDA was $175,200,000 or 8.9% of sales, and GAAP net income per diluted share was $0.18 for the year versus a GAAP net loss per diluted share of $0.16 a year ago. Non-GAAP adjusted EPS was $1.24 for the year compared to $1.44 per share a year ago. Full year margins in 2025 were 80 bps lower than in 2024, primarily due to sales mix shifts, employee-related costs, and other investments. Fourth quarter revenues were $482,000,000, up 0.2% versus a year ago, which translated into flat organic sales compared to 2024. For the quarter, we generated adjusted EBITDA of $35,400,000 or 7.4% of sales. Each of our businesses experienced lower year-over-year EBITDA margins primarily due to sales mix shifts, some incremental bad debt expense, and higher employee-related costs, namely health care benefits. Cash flow from operations was strong, with $16,900,000 for the quarter and $84,000,000 for the full year, on top of strong results in 2024. Before I move on to the individual verticals, I wanted to comment briefly on the Distribution Solutions Group, Inc. consolidated margin for the full year and for the quarter. For the full year, adjusted EBITDA was 8.9% compared to 9.7% for the full year 2024. I would break the 80 bps compression into two buckets. The first is primarily longer-term people investments of approximately 20 bps. The remaining 70 bps was driven by timing items and nonrecurring items such as health care costs, specific customer bad debt reserves, and some lower margin to win specific customers. From a timing perspective, many of these items hit in the fourth quarter, resulting in a larger impact on our fourth quarter margins of 7.4%. Longer-term people investments impacted the quarter by approximately 25 bps. Other items impacting the quarter that we would classify as timing or nonrecurring include health care approximately 40 bps, customer-specific bad debt approximately 20 bps, recruiting and leadership start-up approximately 25 bps, mix shifts within Gexpro Services approximately 25 bps, and timing benefits realized in 2024 which is about 40 bps. Now moving on to slide seven and starting with Lawson. Full year revenue increased $12,000,000; average daily sales grew by 2.6% and organic average daily sales declined by 1.2%, primarily due to lower military customer sales. Adjusted EBITDA for the year was $51,600,000 or 10.7% of revenues for the full year. For the quarter, Lawson's average daily sales were up 2.7% and its adjusted EBITDA was $7,700,000 or 6.7% of sales. In the Lawson-based business, the margin compression from the prior year was primarily due to sales mix of about 60 bps, higher employee-related health benefit costs of approximately 100 bps, and employee costs and timing of incentive accruals approximately 110 bps. As Brian mentioned, Lawson's most significant sales initiatives focus on new VMI installations and increased share of wallet, which are leading indicators of revenue growth. We are continuing to accelerate the adoption of our CRM platform to improve sales rep productivity and grow the core business, and are currently in the early stages of route optimization planning. We are also expanding our ecommerce platform. This is a cost-effective way to do business, and one third of our customers on the site are new. Although sales are still small on ecommerce, we experienced about an 18% revenue growth in the fourth quarter. Turning to Slide eight. Full year sales for the Canadian segment were $221,400,000 in USD, up $96,300,000 primarily due to the Source Atlantic acquisition included for a partial year in 2024. Fourth quarter sales for the Canadian segment in USD were $55,100,000, reflecting some seasonal softness. Market softness for projects in manufacturing end markets persisted, mostly in Eastern Canada; however, current backlogs have increased meaningfully. Full year adjusted EBITDA was $15,600,000, 7.1% of sales, while fourth quarter margins were 6.6%. Margins were compressed slightly due to items such as first-year Sarbanes-Oxley compliance work. The Bolt Supply standalone business drove sales by 7.8% in local currency and generated a 14% margin for the full year. We continue to make progress on planned synergies around gross margins and branch consolidations between Bolt and Source Atlantic. Turning to Gexpro Services on slide nine. Full year revenue was $496,700,000, representing organic average daily sales growth of 12.3% and total ADS growth of over 13%, driven primarily by end market strength in aerospace and defense, technology, and renewables for most of the year. Recall that we highlighted tougher sales comps in the fourth quarter, which declined 1% on an average daily sales basis, generating $119,400,000. Full year adjusted EBITDA was $63,700,000 or 12.8% of sales. For the quarter, margins pulled back to 11.7% from 13.3% a year ago, on a lower Q4 sales base, the sales mix on lower renewables, and some strategic employee investments. Value creation initiatives for Gexpro Services continue to include Distribution Solutions Group, Inc. cross-selling, acquisition synergies, and expanded VMI, kitting, manufacturing, and ecommerce offerings. Lastly, I'll turn to TestEquity Group on slide 10. Full year sales were $783,200,000 with average daily sales growth of 2%, driven primarily by Test & Measurement, Rentals, and our Chambers business. Organic average daily sales for the year were up 1%. Fourth quarter sales were $192,900,000 with average daily sales up 0.9% versus a year ago. TestEquity's adjusted EBITDA for the year was $51,000,000 with adjusted EBITDA margins of 6.5% versus 7.3% for all of 2024. Margins were pressured by a sales mix shift, higher bad debt expense, and higher employee-related expenses, including the build-out of a leadership team, and nonrecurring favorable items from a year ago. Fourth quarter EBITDA margins were similar to full-year margins at 6.4% of sales. The new leadership team has aligned priorities through performance management, incentives, and accountability. Moving to page 11. We ended the year with total available liquidity of $469,000,000, and for 2025, our free cash flow conversion—defined as adjusted EBITDA less working capital investment, less CapEx—was approximately 85%. In December 2025, we expanded our senior secured credit facility through 2030. The new facility includes $700,000,000 of term debt and a $400,000,000 revolving credit arrangement, an increase over the previous $255,000,000 revolver. This puts us in a strong liquidity position to best drive shareholder returns through our capital allocation playbook. We ended the year with unrestricted and restricted cash totaling $75,300,000 and net debt leverage of 3.5 times. We continue to prioritize growth initiatives that enable cross-channel and collaborative selling across our customer base, expand our digital capabilities across our platform, and drive growth through an asset-light model. We invested $26,800,000 in net CapEx, including rental equipment, and we plan to invest a similar amount of $25,000,000 to $30,000,000 in 2026. As we've highlighted in the past, we have invested nearly $450,000,000 in M&A by acquiring nine highly complementary businesses to expand our portfolio, leverage scale, and grow through product adjacency and services. We closely manage working capital across our businesses, and net working capital was $473,500,000. As we mentioned, Distribution Solutions Group, Inc. generated $84,000,000 of cash from operations for the year, similar to 2024 before retention payments, and a testament to management's close monitoring of our working capital. Our strong cash generation in 2025 positioned us to be more active in share repurchases. In November 2025, the board authorized an increase to our existing stock repurchase program for an additional $30,000,000 in shares of Distribution Solutions Group, Inc.'s common stock, taking the total aggregate authorization amount to $67,500,000. In 2025, we returned $23,500,000 to our shareholders through opportunistic share repurchases and have approximately $30,000,000 remaining in the authorized pool. I'll now turn the call back over to Brian.

Thank you, Ron. Despite external headwinds and periods of demand volatility in 2025, we have a clear line of sight on initiatives well underway to drive sales growth and structurally higher margins. We delivered total revenue growth of almost 10%, reaching just under $2,000,000,000, supported by mid-single digit organic growth despite the burden on profitability of macroeconomic and policy challenges and an ISM remaining below 50 for all of 2025, and our deliberate investments into the business in 2025. As we enter 2026, our focus is firmly on execution and demonstrating a return to improved profitability with our expected growth while balancing critical long-term value-unlocking investments. Our revenue growth strategy prioritizes high-margin businesses, strong and sustainable cash flow generation, disciplined capital allocation, and operational excellence. We are investing to be a company that is easy to work with and for, leveraging digital and AI-enabled capabilities to respond faster to customer needs, improve operational efficiency, strengthen sales rigor, and capture margin opportunities. These efforts are supported by an accelerating level of data-driven insights that guide and improve decision making and enable us to deliver our differentiated products and solutions, enhancing our customer experience. Operating across more than 50 countries, serving over 220,000 customers, and approximately 760,000 unique products requires agility and focus. We remain nimble, ready to pivot when needed, to sustain growth while focusing on delivering improved profitability. Our leadership teams are renewing our confidence to shareholders and our colleagues that we are driving and expect growth with enhanced profitability, and with a commitment to further tune capabilities and consistent service and culture that emphasizes from our field team around volume and revenue growth for both existing and new customers. I am confident in our enhanced leadership teams and our recent investments in them across all of our verticals and their ability to execute on their re-underwritten priorities and value creation initiatives as they enjoy line of sight on building structurally higher margin and more defensive and growing businesses, with a commitment to generate strong free cash flow and an aligned incentive structure around driving accelerating long-term value for our shareholders. Our teams remain highly aligned with the shareholders and each other, collaborating and competing together to continue to win more often. Each is accountable and appropriately incentivized to deliver results for our shareholders and for Distribution Solutions Group, Inc. and all of our colleagues. We will continue to evaluate acquisitions that strategically fit and enhance our long-term competitive position to win in our current focus areas and end markets, or that complement them, as well as opportunities that can accelerate our growth and profitability objectives to enhance and accelerate driving long-term shareholder value. In addition to strengthening leadership within our verticals, after a thorough evaluation on ways to improve and enhance our corporate strategy and M&A capabilities, we recruited Sean Dwyer to lead Distribution Solutions Group, Inc.'s efforts and dedicated team while working closely with the vertical leadership and our LKCM Headwater teams. Sean comes to us with a background in investment banking and experience leading similar efforts at large public companies. Through his public company roles, he has led over $30,000,000,000 in 36 transactions. It's great to have Sean on board to add structure, perspective, and to collaboratively lead this critical component of Distribution Solutions Group, Inc.'s growth strategy. As we look ahead in 2026, we're excited about the added capability, discipline, and prioritization we've invested in across all our verticals. While most of this comes at a cost, we are confident in these investments and in the improved performance returns the investments will deliver. The first couple of months of 2026 have seen sales growth. We expect the first quarter to remain under margin pressure as we continue to digest initiatives, and then we expect to see an improved margin expansion trajectory consistent with our longer-term objectives as we move into the middle of the year. I'm proud of the heavy lifting from our colleagues and what it accomplished in 2025. And as I reflect on where we are versus the much smaller and less evolved Distribution Solutions Group, Inc. that we pulled together four years ago, we remain focused on building a better Distribution Solutions Group, Inc., on its many commercial growth initiatives and ongoing process and structure optimization. We celebrate working together to build a more valuable enterprise—one that consistently generates cash flow and long-term shareholder value. Finally, I want to thank our employees for their dedication and hard work throughout the year. Your commitment and the strength of our culture have enabled meaningful progress across our strategic priorities. We will continue to push, test, and adapt as we improve long-term performance. I also want to thank Distribution Solutions Group, Inc.'s board, our shareholders, our shareholder partners, and the LKCM Headwater team as we continue advancing our specialty distribution model together. And with that, operator, will you please open the line for questions?

Certainly. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your phone at this time. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Your first question for today is from Thomas Allen Moll with Stephens.

Good morning, Brian. How are you? Thanks for the time. Brian, I want to start on the comment you just made regarding the sales pacing year to date. I think I heard you say sales are up year over year in January and February. So maybe just can you confirm that? And if you're able to give us the daily sales pacing and the number of selling days for the quarter, that'd be appreciated as well.

Yeah. We'll let Ron do it. He's got them in front of him.

Yep, Tommy. Good morning. This is Ron Knutson. Just to add some commentary around Brian's notes relative to the first couple of months of the year: we have seen growth—really, I would say, in the low single digits—if we look at January and February versus a year ago. ADS so far for the first couple months is kind of flattish versus Q4, but up against a year ago. We're seeing a little bit of pressure continue within our Canadian branch business that both Brian and I commented on in our prepared remarks, but the other three pieces of the business are seeing some growth here in the first couple of months. Relative to the second part of your question—number of days—on a quarter-over-quarter basis, it shifts a little bit just because of the weighting, and we've got Gexpro Services on a 4-4-5, but essentially it's relatively consistent. 2026 has 63 selling days versus 2025 having 63 as well.

And I’d just add—one of the things I was referencing when I said that was on the TestEquity vertical. We were seeing some backlog build there in orders and RFPs—momentum—and it's really around the Test & Measurement side, as we've seen some messaging from manufacturers about a little bit of accelerated activity in that space. January—quite transparently—I wasn't happy with the flow-through on profitability relative to how we budgeted or what I expected. As the fourth quarter came together and the first month of the year, we saw some revenue lift, but we still suffered some of the same challenges of adding expenses around leadership and otherwise in the first month. We're seeing improvement on that, we believe, in February and expect that again in March—the releveraging of our cost structure with the pickup in revenue. But there were changeover expenses and some one-times and things that created noise in the fourth quarter and in January.

Brian, you anticipated my follow-up, which was on margin. Going back to the numbers that Ron gave us in the prepared remarks, there were a series of one-timers in Q4; I just added up all those basis points, and it was about 150 basis points. So my starting point on bridging was I just took the 7.4% you reported in Q4 plus 150 bps, which gets you to 8.9% as an implied baseline to start to think about the first quarter. That would be up a little bit year over year, though. Based on what you just said, that makes me think perhaps that's a bit too aggressive of a baseline. Anything you can do to help?

That number would be consistent with how margins flowed through for the year last year. When I look at it, the first quarter's still going to have a little bit more margin degradation from our average last year. Whereas the second and third quarters, we would expect that the EBITDA margin will be back towards—above—what last year's average was. If that's helpful.

If I go back to 2025, we were sitting at about 9%. And, Tommy, we do get burdened with some other items that we didn't call out specifically—payroll taxes reset on us, which typically drags our margins a little bit going from Q4 into Q1. The other area I would point to is we do have some resetting of some incentive accruals, as you can imagine—lower dollars in '25 based upon performance—and we certainly budget to hit higher goals going into the next year. So we'll have to reestablish some of those accruals as we work throughout the year as well, and those typically get spread pretty evenly throughout the year until we start to reforecast to a greater degree later in the year. So we do have some offsets that'll probably push our way through here yet in the first quarter.

But I would say, Tommy, the exercise you did is the same one I did yesterday when I was preparing my remarks—adding up Ron's remarks and then double-checking it against where we were for the quarter so far. Directionally, you're right on. I think it's just going to be a little below—January's not indicating to me that we're going to get to the level you said.

Understood. Shifting to some more strategic questions on TestEquity: you have new leadership there, and you've talked before and again today about refining the customer value prop, go-to-market, centralizing some functions, etc. What can you share about the progress to date and what's ahead in 2026?

The pacing on the team and the depth of our leadership bench is just very different than it has been. Adding Barry was critical, but it was not just adding Barry—Barry brought with him an ensemble of other executives, and we were able to really keep so many of the people that had key institutional knowledge and that we had a lot of confidence around. We did double some of our leadership expense. The total burden at the top of that company is different than it was four or five months ago. But with that has come a high level of cadence and drill-down insight. After we made the Conres acquisition, we were able to get a lot more accountability around the efficiency in our rental and used business, our calibration strategy, and our Chambers business has been taking off, so we've been trying to build out our Chambers offering and portfolio and our inventory and stock. We've been working through a more cohesive strategy around the total Test & Measurement go-to-market value proposition to the customer—so it's not just isolated to margins on new product. On top of that, we have a lot of smaller value-added capabilities inside of the TestEquity Group—some which came with Hisco and some which we had acquired. By breaking them each apart and drilling accountability and ownership on each of those verticals, we're able to see very different contribution margins among different ones. Within our EPS business, we've got parts of it that are more commodity—volume-oriented—but our channel support to that can be similar to our more discrete specialty parts of the same EPS business. The flow-through margin on those looks quite a bit different. The team is reenergizing the Salesforce on how they're spending their time and how we're delivering our messaging in the market and to our employees, around where the levers are to pull a lot more attention and acceleration through the parts of the business that have very different structural contribution margins. That focus kind of started 100 days ago, but it's trickling down through the organization more recently. Our Chief Commercial Officer who's been important to the business we made President of Mexico for all of DSG, so we could bring our cadence together across all three of our verticals in Mexico, enabling more cross-sell wins and total revenue growth. That's the business he had built for Hisco. Then we added another Chief Commercial Officer at the senior executive level to really focus on these lines-of-business efforts. Barry's got a lot of confidence in all the specialty businesses that we have and how it all rolls together, and some of the profitability inside that business has been masked by areas that have been whipping around—where we've either had too high cost to serve relative to contribution margin, and not enough focus by our Salesforce on the much higher contribution margin opportunities. We're seeing that shift.

Appreciate the insight.

Your next question for today is from KeyBanc. We'll go to Katie Fleischer for Ken Newman.

Hi, everyone. Was wondering if we could start on tariffs and if you're anticipating any material impacts from the recent news, and how you're thinking about price/cost as we go into 2026?

I'll start it off. I know we've talked about tariffs in the past relative to the value of the imports that we do and our ability to pass along the majority of those from a customer relationship standpoint. I think your question is more pointed towards the recent news. I would say it's probably too early to tell yet in terms of what direct impact that may or may not have on Distribution Solutions Group, Inc. Certainly, we're evaluating the situation, trying to stay current with it. At this point, we're moving the business forward assuming that a lot of these costs that have come through to us the last 12 to 18 months will probably continue to be out there until we get further direction on where this may end up.

Katie, we've got a consulting firm we're using across our portfolio companies at LKCM Headwater, and we have some businesses that have been much more significantly impacted than Distribution Solutions Group, Inc., but it's allowed us to be informed on ways and levers that we should pull and also how to navigate or engage on the recent SCOTUS ruling. We ended up leaving some dollars on the table last year, for sure, but our team did a great job managing both pricing as well as sourcing costs and where we source things across Distribution Solutions Group, Inc. Much of it was mitigated by the end of the year, but we did end up with a drag on earnings; much of it was mitigated as we look prospectively for this year by actions taken throughout last year. Now we've got to see whether there are additional moves we need to make or whether there will be additional shifting in where the tariff burdens are going to be—and whether that informs any of our sourcing or pricing decisions this year, or whether we're contesting or protesting that we believe we should get any refund. Right now, it's really early to know how that's going to work.

That's helpful. And then just revisiting Tommy's question a bit on trends year to date—any other color you're able to provide on the segments? And then maybe for Lawson specifically, how are you thinking about these mix impacts within that segment, and should those normalize as we move through the year?

I'll start with Gexpro Services. That one's pretty easy. Gexpro Services has several key end markets that are spooling up. The power generation space has gotten a lot of attention; it's a key area for that business and its history coming out of GE—so it'll enjoy some positive leverage there. The aerospace and defense vertical is very important to it; we know what's going on around the world, and we expect a firm year there with growth. The domestic renewables business—historically about two-thirds domestic, one-third international—the domestic business is down. We really started to see it tick down mid fourth quarter, and that trend is continuing. At the same time, countries like India—where we had ~$4,000,000 of revenue in renewables in 2024—are tracking toward ~$14,000,000 this year. We're backfilling with our capabilities, manufacturing/vendor partners, and renewable developers’ programs around the world. That is backfilling, but not entirely, and there are different contribution margin dynamics as you spool up new relationships versus mature engagements. As we're taking on more opportunities at Gexpro Services, there are launch costs associated with that. We believe that Gexpro Services' margins seen throughout last year are consistent with how we think that business will continue to operate—we don't expect significant deterioration in EBITDA margin there this year. On the TestEquity side, we're seeing strong interest in Test & Measurement equipment. Our EPS business continues to see some softness. A key area is tech manufacturing—it's been soft, saw some firmness last year, and it's the biggest part of TestEquity Group’s EPS business. The Chambers business is very strong. The rental and used market is getting more attention and focus for us; it has a lot higher contribution margin and was a source of strength last year—with renewed strength now—part focus, part acceleration in demand in T&M.

Relative to Lawson, we continue to see an increase in what we call ship-to or VMI installations, particularly in our larger locations within strategic relationships and within our Kent Automotive business. There’s a renewed focus on the core local business where, historically over the last couple of years, we've seen the most pressure. We've seen flattening out in ship-tos there, but as Brian mentioned, we had our sales leadership meeting in mid-February and there is a ton of focus being put on reallocating resources to grow that piece of the business. That core local business is about 45% of Lawson's total revenue. Overall, Lawson is seeing some increase moving through January and February. We’ve got great insight into a number of locations around specific customer wins, and with Jim coming on board in January, there’s renewed focus around making sure those sites get installed on a monthly basis.

Got it. That's it for me. Thanks.

Thanks, Katie.

Your next question for today is from Kevin Steinke with Barrington Research.

Great, thank you, and good morning. I wanted to follow up on the earlier margin discussion. I believe in a response to one of the earlier questions, you mentioned that you thought the second and third quarter adjusted EBITDA margin could be above the full year 2025 average of 8.9%. So you're thinking kind of a similar or better cadence for second and third quarters?

I think we believe it's going to relever up higher than that. If you look at last year, our second and third quarter EBITDA margins were above that 8.9%. We expect it will be consistent with that or above.

Where we're going to see the most pressure is really here in the first quarter. Then, as Brian noted, second and third would be an acceleration north of what we posted for the full year. Typically, for us, the second and third quarters are the strongest quarters. That uplift generally starts in March—a longer month in terms of selling days—so we get additional operating leverage there, and then Q2 and Q3 both have 64 selling days.

Looking back at last year, Q2 was 9.7%, and Q3 was 9.4%, versus the 9.0% in the first quarter and the 7.4% that we posted in the fourth quarter. That gives you some sense of how the quarters fit together.

Got it, that's helpful. I wanted to also follow up on Lawson. You mentioned continuing challenges in the small account side—maybe some loss of focus during the transition period. I know you've been experimenting with various things to serve the small account customer base—inside sales, service reps who do the unpacking, ecommerce. Are those still the areas you want to continue to work on, or is it more about getting the actual sales rep back more frequently? Any more thoughts on how you're approaching that?

You just walked through all of them, which is great. The shift of some tiny customers—too small to service with the cost to serve of having a rep—toward inside sales and ecommerce has helped. Our revenue there is not where we've really lost volumes. We may have lost some ship-to locations, but we've seen pretty good traction out of that total effort. Where we saw pressure was with the compression of our Salesforce two years ago as we were getting set for new Salesforce initiatives and technology tools. We saw some of our smaller core customers not get the level of service we'd expect. We had fewer salespeople, and as you might imagine, they covered bigger customers or strategic/national accounts first. That caused a natural trend of losing some ship-to locations with less volume and raised concern about whether our salespeople were spending as much time on the smaller street business that used to be a lot of their earnings. Our strategic/national account initiative grew from zero to being as large as our street business. Feeding our salespeople those national accounts may have created some behavioral challenges we didn’t fully appreciate until we got more insights out of the CRM. With better data analytics and feedback surveys, we heard a consistent market message from smaller accounts asking us to come back out and provide consistent service. Now we’ve got a very proactive initiative around it, and we're seeing a relift back in those base accounts—at least the ship-to number—after several years of significant declines in locations. You don't see it in the top line as much because you're picking up the strategic accounts. But at the profitability level, mix shift matters—premium pricing out of smaller accounts versus bigger accounts—and the flow-through contribution margin hit, combined with deliberate investments in the Salesforce, created deleveraging. There was a swing in profitability we felt more acutely in Q4. We knew there would be a J-curve as we reinvested in the Salesforce and got sellers back into territories that were open or consolidated. We're also investing in field support—service reps and focused new-account or reengagement sellers—to support FSRs so they have more time to get back in front of customers. For higher volume relationships, a service tech can efficiently scan bins, place orders, and handle restocking, freeing up the sales rep to develop accounts and drive wallet share. It's a cost center we've layered in, but we’re seeing strong early indications that it’s a model we want to continue to lean into. It allows our FSRs to make more money by increasing total revenue throughput and serves customers at a higher level. This dynamic has been a drag of several percentage points of growth a year in recent years—offset in part by national sales efforts. Military was another area with a real shift in buying behavior; we're working on reengaging given it’s historically been a strong end market for us.

Two quick additions. First, our strategic business is really sticky—great customer relationships servicing multisite locations—so it drives solid, sticky gross margin dollars. We love that part of the business and continue to expand it and invest to win new accounts. Second, within core local customers, ship-tos over the last year or so have been flattish—most of the decrease took place prior to the beginning of 2025. Now, with core local at about 45% of revenue, it’s a renewed focus on getting that base growing again—changes in incentives, focus, and a lot of emphasis at the recent sales leadership meeting on where that business historically had been, where we sit today, and where we need to take it.

Great, thank you for all the color. Lastly, on the M&A pipeline—given your strong liquidity and the extension and expansion of your credit facility, looks like you'd be set up to explore and maybe execute on some opportunities.

We highlighted that Sean joined us maybe 100 days ago or less—a critical addition. We've spent the better part of the last year to year and a half evaluating our business development/M&A and corporate strategy function. Sean has significantly increased the funnel in just 100 days and has strong buy-in from the vertical leaders and our team about where we want to spend our time and effort. We had a few things last year that were high priorities we hoped to get done that didn't get done—none are off the table, but we just weren't able to get them over the goal line. Right now, we’re focused on some smaller tuck-in acquisitions that significantly bolster areas of strength or focus in a few verticals. We would expect some small tuck-ins over the first half of this year. The three we’ve prioritized would add significantly to the margin construct of those verticals, though they are small tuck-ins.

Got it. Understood. Thanks again for all the insight.

Thanks, Kevin.

We have reached the end of the question and answer session, and I will now turn the call over to Brian King for closing remarks.

Appreciate everybody's engagement and your time this morning. We look forward to stronger quarters in the future, and I appreciate everybody continuing to be supportive and engaged with us. Have a great next several months.