Greetings, and welcome to the Distribution Solutions Group's First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Steven Hooser, Investor Relations. You may begin..

Good morning, and welcome to the Distribution Solutions Group First Quarter 2023 Earnings Call. In conjunction with today's call, we have provided a Q1 earnings presentation that has been posted on the company's IR website at investor.distributionsolutionsgroup.com.

Please note that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied.

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 disclaim no obligation to do so.

Management will also refer to non-GAAP measures and reconciliations to the nearest GAAP measures can be found at the end of the earnings release. The earnings press release issued earlier today was posted on the Investor Relations section of our website. A copy of the release has also been included in the current report on Form 8-K filed with the SEC.

This call is being audio webcast on the internet via the Distribution Solutions Group Investor Relations page. A replay of the teleconference will be available through May 18, 2023. I will now turn the call over to Bryan King, DSG's Chairman and Executive Officer.

Bryan?.

Thanks, Steven and thank you all for joining to review our first quarter results. Joining me for today's call is Ron Knutson, DSG's Executive Vice President and Chief Financial Officer. Distribution Solutions Group delivered another record quarter of outstanding financial performance with expansion in both revenue and profitability.

Steven mentioned the slide deck that we're using in conjunction with our prepared remarks. Starting on Slide 4, we delivered strong sales of 28% on a comparable basis, which included almost 14% of organic growth.

In addition, we generated first quarter adjusted EBITDA of $39 million representing our fourth consecutive quarter of expanded EBITDA margin into the double-digits. We believe that our scale and breadth of products and services continue to provide competitive advantages in the specialty industrial distribution industry.

Our DSG operational teams are working well together and we're seeing good evidence of wallet share growth, volume increases and encouraging and validating cross-selling wins as well as continued identification of an initiative to capture cost synergies across each of our verticals.

The first quarter's results further confirm the financial and commercial logic of the combination that took place only a year ago, an improved business model we now enjoy.

The strength, depth and strong collegiality across the combined expertise of our leadership team is enhancing our performance and accelerating building a best-in-class specialty distribution company with strong market leadership across several distinct but increasingly coordinated value-added verticals.

As shareholders, together we will continue to benefit as our team identifies and executes on myriad value creation opportunities. As we highlighted during our fourth quarter call, we continued strong sales momentum in the first quarter.

Our business has successfully captured market share, delivered incremental margin expansion and generated additional cash flow in our first fiscal period of this new year and culminated a strong first full year, 4 season so to speak, working increasingly well together.

We are actively engaging customers with a goal of providing a simple and efficient and even more value-added and customized customer experience as we remain hyper-attentive to reinforcing our value proposition to our existing in markets. We continue to monitor the overall demand environment for our products and solutions.

We believe that further leveraging our strong historic customer relationships adds to organic growth increasingly, through cross-selling our expanding value-added customer-centric capabilities in each of our channels.

Moving to Slide 5, I'm pleased to comment on the previously announced plan to acquire Hisco expected to close during the second quarter of this year. Hisco is a leading distributor of specialty products serving high growth industrial technology applications, with 38 locations across North America and over $400 million in annual sales.

This business most closely aligns with TestEquity, although anecdotally and curiously to me, each of several distribution investment banking friends that called to enthusiastically congratulate on the surprise announcement that we were able to get Hisco to join our vision of building out a scaled up best-in-class specialty distribution platform, each thought Hisco's capabilities fit more closely with different of our verticals, understanding how well it fits overall and how it more tightly binds TestEquity's capabilities to the Gexpro solutions and Lawson verticals.

We are excited that they so strongly saw how it strengthens our DSG value proposition through 4 table stakes.

First, similar to our existing verticals opportunities to expand engagement with historic customers and the inaugural successes we've enjoyed in this area, we see Hisco and its expansion of TestEquity's OEM and MRO efforts around electronic production supply and expansion and extension of cross-selling and wallet share opportunities to further expand how customers are more broadly engaging in and deeply embracing our breadth of value-added and leadership around solutions.

Second, Hisco brings new distinct value-added capabilities across the platform. For example, the business adds specialty materials and products that are not currently included in our DSG offerings.

In addition, Hisco offers vendor-managed inventory and RFID programs with specialized warehousing for chemical management, logistics services and cold storage.

Next, we're projecting with the addition of Hisco's leadership, market knowledge, footprint and close collaborative customer relationships, a meaningful geographic pull-through that spans deeper into Mexico and South America that we believe will create further operating leverage for their resource investment and our platform's distinctive capabilities, leading to sustained revenue and profitability growth and accelerated returns.

And finally, we expect Hisco to accelerate our time line to a higher structural margin profile at the TestEquity Hisco vertical.

Not to mention the incremental returns generated from associated cross-selling revenue growth accruing to our other verticals, which collectively has a meaningful effect on the future state of overall DSG profitability, return on investment on working capital and critically, DSG's accelerating ability to generate and grow free cash flow.

Hisco is an exciting addition, bringing DSG closer to the total scale and connectivity we identified 2 years ago that we desired where the flywheel should accelerate value creation and durability of this leading specialty distribution platform we created.

And remixing TestEquity's total revenue to be tilted more significantly towards electronic production supplies focused on OEM and MRO solutions provides a stronger, more consistent ballast for that vertical, while offering us more embedded value-added engagements to daily reinforce our total value to the customer, including more opportunities to collaborate with them on their test and measurement needs.

While we are enthusiastic about what the future will look like, the closing is still subject to certain regulatory approvals, although we are progressing as planned toward a closing in the second half of this quarter.

Before Ron covers the consolidated and operating company financial results, I would like to talk about operational progress and value drivers for each of our business units. First, Lawson Products is a leader in the MRO distribution of C-Parts offering vendor-managed inventory services.

During the first quarter of 2023, Lawson exceeded our initial 2023 plan, realizing significant margin expansion that many of us who have been investors in Lawson for the last decade have been expectantly waiting. I was pleased with how well the team managed pricing, expense control and growth within its customer base.

Ron will dig in a bit deeper, but a large portion of Lawson's growth is coming from long, well-established relationships within their larger or strategic accounts and Kent automotive lines along with attracting new customers, some of which are coordinated introductions from the other verticals.

For example, within both the Lawson and Kent strategic businesses, unique ship-to locations this quarter grew approximately 9% over a year ago quarter.

While experiencing good expansion in the quarter as a leadership team and sales force, we see many more opportunities with the network effect and current internal initiatives expanding and accelerating the vertical. We are focused on a balanced but more aggressive approach to driving growth and engagement with customers.

We're making strategic investments in additional sales channels to support our customers, including inside sales, strategic account managers, web enhancements as well as better positioning our field sales team to drive higher conversion with our high-touch customers that create greater long-term value.

Lawson is also investing in lead generation capabilities and CRM tools, all of which will be rolled out in the second half of the year, with the goal of helping our sales representatives across all sales channels become more productive, better equipped for cross-sell opportunities and to better serve our customers and to help make them more money.

Secondly, Gexpro Services is a leader in the supply chain solutions of largely C-Parts, specializing in VMI programs for high-spec OEM customers. We delivered strong first quarter operating results, driven by growth in many of our diversified end markets such as industrial power, aerospace and defense, Europe and in our recent acquisitions.

In addition, we're starting to see strong year-over-year improvements for renewables in both the U.S. and Europe. Customers are interested in our renewables value proposition to combine expanded electrical, mechanical and hardware product offerings with kitting supply chain services and domestic manufacturing capabilities.

We have won some recent mandates that should accelerate our leadership as a value-added channel partner for the leading OEMs in that marketplace, helping them with solutions not only on the OEM side, but across accelerating demand around the retrofit and upgrade cycle for the installed base.

Specifically, regarding what we are currently seeing in our end markets, aerospace and defense has sustained double-digit growth and we expect this to continue. Additionally, in industrial power, demand remained strong, primarily due to changing dynamics in oil and gas.

Gexpro services value creation initiatives this year are leveraging the synergies of our acquisitions securing cross-sell wins with both Lawson and TestEquity, expanding kitting and project services as well as launching the e-commerce platform.

Additionally, the 5 acquisitions we closed over the last 2 years have cross-selling opportunities within the Gexpro Services vertical, like the increased capabilities I alluded to that secured the expansive retrofit opportunity in the renewable space.

We are also working through an expanded pipeline of opportunities where our customers are engaging us as partners to offer solutions around additional product and service capabilities in a thoughtful and customer-centric way. Winning initial OEM programs where you're embedded with a customer can be a tediously long lead time affair.

However, with our expanded -- and expanding number of customers we now work with, we have found a surprising number of them have celebrated embracing our collaborative approach and the benefits gained through the last year's verticals, combinations and strategic tuck-in acquisitions that have increased our set of resources, geographies and collective expertise.

Third, moving to TestEquity. January started strong with pent-up demand that landed in early 2023. We also saw growth in the VMI sector, somewhat offset by meaningful declines in tech sector capital spend.

First quarter chamber production hit new record highs and continues to grow as supply chains begin to stabilize and we expect profitability to significantly improve after a period of working off backlog priced in a different market.

Overall, digital sales were up 10% in the first quarter, with growth primarily from the new TestEquity and TEquipment e-commerce sites.

We continue to capture cost synergies and production efficiencies by moving our products into distribution centers that are closer to our customers, resulting in what will be improved delivery times and lower shipping costs.

Higher cost of capital are impacting some of our customers' behavior as we have seen a delay or reduction in their 2023 capital spend on new Test and Measurement Equipment, not helped by some of the lead time and supply chain challenges with continued overhang in some of our key channel partners.

We are seeing this influence more of our customers in the current cloudy economic environment and with some lead time challenges around new product, renewing their focus on refurbishing rental equipment, which we expect to be a growth area for us and where it offers us the opportunity for higher margins.

And finally, as we discussed earlier in the Hisco transaction, we expect to accelerate our time line to a higher structural margin profile of TestEquity and expanded engagement around cross-selling initiatives with the other verticals, which will have a meaningful effect on overall profitability and cash flow generation for DSG.

As you can likely tell, our team is very encouraged by our prospects and internal initiatives to improve and expand all 3 operating verticals for 2023 and beyond. Now I'd like to turn the call over to Ron to walk through the financials.

Ron?.

Thank you, Bryan, and good morning, everyone. Turning to Slide 7. We're excited this morning to share with you the first quarter results of Distribution Solutions Group. Let me remind you that given the reverse merger accounting treatment, Lawson Products was not in the prior year first quarter results in 2022.

However, all 3 of the businesses are included for the first quarter of the 2023 GAAP results. For ease of comparing the results, the slides that we're utilizing this morning adjust and include first quarter Lawson's financial results for 2022. But let me summarize the first quarter results.

On a combined basis, we reported strong top line and bottom line results. As Bryan mentioned, we reported total sales growth of 28%, with organic sales growing 13.7% through both price and volume expansion. The first quarter results reflect 4 quarters of sequential margin improvement with Q1 finishing above 11% of revenue.

I'll now walk through some of the specific numbers on a combined basis and most of this is on Page 7 of our presentation.

First, consolidated revenue for Q1 was $348.3 million, with the inclusion of Lawson on a comparative basis, revenue increased 28% or $76.3 million over the first quarter of 2022, driven by organic growth plus approximately $39 million coming from acquisitions.

Second, reported GAAP operating income was $16.7 million compared to $3 million a year ago quarter. On an adjusted basis, excluding merger-related costs, acquisition costs, stock-based compensation, severance and other nonrecurring items, adjusted EBITDA improved by $16.7 million to $39.4 million or 11.3% of revenue.

And third, we reported GAAP diluted earnings per share of $0.28 for the first quarter compared to a loss of $0.25 a year ago quarter. On an adjusted basis, diluted EPS was $0.52 for the quarter versus 0 a year ago quarter. Now moving on to Slide 8.

Slide 8 includes the full run rate of all closed acquisitions as of March 31, 2023, as if they were owned for each quarter presented. For clarity, since we have not yet closed on Hisco, it is not reflected on this page.

As you can see from these charts, our full run rate inclusive of acquisitions has seen nice sequential margin expansion from quarter-to-quarter, reflecting strong performance of each of the 3 operating companies. You'll notice Q4 is historically our slowest quarter given fewer selling days than the other quarters. Turning to Slide 9.

Let me now comment briefly on each of the businesses. Starting with Lawson, recall that since Lawson is the accounting acquiree, it is not in the GAAP reported numbers for Q1 2022. However, for purposes of these slides, we've included the premerger results. Sales were $125.3 million for the quarter.

Please note that this does not include Bolt Supply as they are now included in the -- all other reporting segment. The Lawson segment average daily sales or ADS grew 19.4% organically over the first quarter of 2022 on an adjusted basis, and ADS grew 8.7% sequentially over the fourth quarter of 2022.

The increase over a year ago was driven by strong performance within the strategic business, up nearly 25%; Kent Automotive up 28%, the core business up nearly 14% and government up 40%. During the quarter, unit volume was essentially flat versus a year ago, however, increased approximately 3% sequentially over the fourth quarter of 2022.

Lawson's growth during the quarter was achieved through an increased share of wallet with existing customers and new customer relationships, in particular, within strategic or large accounts in our Kent Automotive businesses. In both of those pieces of our business, we shipped to approximately 9% more unique locations this quarter than a year ago.

Lawson continues to realize steady improvement in its gross margin percentage. While growth within our larger strategic customers is putting pressure on the overall gross margin percentage, we continue to see margin expansion given price realization, lower net freight costs and leveraging our costs over a higher sales base.

Lawson's adjusted EBITDA improved to $18.5 million compared to adjusted EBITDA of $8 million a year ago quarter, primarily driven by the sales and gross margin improvements, partially offset by increased compensation on higher sales. Lawson's adjusted EBITDA as a percent of sales was 14.7% in the quarter versus 7.7% a year ago quarter.

Turning to Gexpro Services on Slide 10. Total sales for Gexpro Services were $101 million for the first quarter of 2023, an increase of $19.3 million over Q1 2022, of which $4 million was driven by acquisitions and $15.3 million from organic growth. In 2022, Gexpro Services acquired Resolux early in the year and Frontier at the end of Q1 of 2022.

Excluding the impact of these acquisitions on the first quarter, organic sales grew by 18.7%, of which approximately 4% came from price. The increase in aggregate sales was primarily driven by new customers and the expansion of existing customer relationships.

Gexpro Services adjusted EBITDA expanded to $11.7 million or 11.6% of sales as compared to $8 million or 9.8% for the year ago quarter. And lastly, I'll turn to TestEquity on Slide 11. Sales for the quarter grew $35 million or over 48% to $107.4 million, primarily driven by recent acquisitions.

During 2022, TestEquity closed on 3 acquisitions, TEquipment and National Test Equipment in Q2 and Instrumex in Q4. Of the $35 million sales increase for the quarter, approximately $34.9 million was generated from the 2022 acquisitions.

Organic sales were essentially flat versus a year ago with a decrease in Test and Measurement sales, offset by an increase in the electronic production supply sales.

As previously communicated, sales in the Test and Measurement business were lumpy throughout 2022 and as expected, slowed in the first quarter of 2023 as customers have delayed expansion projects and we continue to face supply chain challenges.

On an adjusted EBITDA basis, the first quarter ended at 7.1% of sales or $7.7 million, representing an increase of $2.2 million over a year ago quarter, of which approximately $2.4 million came from the 2022 acquisitions previously mentioned. Moving on to Slide 12.

From an access to capital, we have approximately $31.1 million of available cash and $70 million available under our existing credit facility. As part of our credit facility, we have also an additional $200 million accordion feature. We ended the quarter at a net debt leverage ratio of 2.7x, primarily on increased earnings.

Our deleveraging that started in 2022 continued into the first quarter of 2023. For reference, at the time of the April 1, 2022, merger of the 3 businesses, our net debt leverage was 3.6x. This progress is consistent with our intention to prudently manage our debt levels and our leverage in the 3 to 4x range.

Net capital expenditures, inclusive of rental equipment was $5.1 million for the quarter. Before I turn the call back to Bryan for some closing remarks, I wanted to reiterate how pleased we are with the company's financial performance. We said that we are going to exit 2022 with margins exceeding 10%, which we did.

We have maintained double-digit adjusted EBITDA margins into 2023, and we have substantially delevered the company within the first 12 months. As Bryan mentioned, we continue to be pleased with our long-term outlook. However, we are up against tougher sales comps going into the second half of 2023.

All of the businesses continue to execute on their planned initiatives for 2023, which will make us a stronger company going forward. We will continue to prudently manage our balance sheet and financial position.

Thank you to the operating teams at Lawson Products, Gexpro Services and TestEquity for their commitment and drive to deliver these great results in the first quarter. I'll now turn the call back over to Bryan..

Thank you, Ron. Let's turn to Slide 13 for a few additional comments before we get into the Q&A. Our approach to capital deployment and working capital investments are not unique.

Our underlying philosophy is anchored in a discipline to allocate capital to the highest return projects while building the best positioned long-term specialty distributor with the deepest and widest smoke possible around our value-added focus areas of leadership for our customers.

Since we are an asset-light business, our organic growth primarily comes in the form of investment in trade working capital and great people as well as inorganic investments through M&A. We've invested significantly in all 3 over the last year.

The returns on our incremental investments in working capital made to support organic growth or without a doubt, the highest returns on a pretax basis.

They often approximate 80% to 100% or significantly higher, consistent with what we've observed over a long cycle have been and continue to be the returns of our peers of best-in-class specialty distributors.

Our second best return on investment at this point is identifying and buying the most strategically enhancing but accretive acquisitions that make our specialty verticals, both individually and holistically more competitive. These acquisitions should enhance our ability to organically grow at a faster, more profitable rate.

In turn, sustaining and driving higher returns on working capital, all of which will significantly cheapen back the purchase price. We certainly believe that Hisco like others we have done over the last years and others we are currently dialoguing with, will do that.

While we are committed to this approach, we are not in any hurry to buy something that is only accretive. Along those lines, our debt leverage is an important focus, especially given the rising rate environment.

And currently, our leverage remains below 3x ahead of the closing of the Hisco acquisition, which we expect to take us to somewhere between 3 and 3.5x. After the close, we will have approximately $450 million of net working capital pro forma alongside our accelerating cash flow to comfortably support and pay down that debt.

We also have a Board-approved share repurchase program to take advantage of opportunistic buybacks should our stock weaken unexpectedly inconsistent with our current trajectory to unlock earnings and accelerate shareholder value creation.

We are constantly informed about the private value of our business and that a scarcity exists for exceptional specialty distributors with our size and line of sight around growth of revenue and earnings by strategic suitors as well as large private equity firms.

It is not surprising the interest in DSG by those with the benefit of time as leading specialty distributors continue to be tremendous long-term compounding engines, which is why I have loved the space as much as I have for the last 30 years.

And so much so that I don't want to sell this business prematurely that we have such tremendous line of sight on how to compound.

If the marketplace offers an unnatural price with us generating strong cash earnings, the Board and I believe we should have the flexibility to buy back stock and think about ways to improve the value for the shareholders that want to continue to be partners with us on this journey.

As I just alluded to, at the end of the first quarter, we had $352 million invested in our working capital with another $100 million or so coming with Hisco.

Our investment in working capital over the last year reflected our expectation around many ways to continue to drive organic growth and how that drive is accelerating profitability for our shareholders.

We invested more aggressively last year, especially with the business combination and with opportunities to add working capital that some of the follow-on acquisitions provided and with supply chain and inflationary pressures, it made sense. This year, we indicated that we expect to optimize our investment more than dramatically increase it.

Our operating team understands my intent belief that prudently managing working capital is one of the best ways to drive meaningful return on invested capital and should be that -- and should the economic headwinds get tested, it is also the best way to free up the most liquidity along with timely but prudent cost leveraging opportunities to protect flexibility for growth in calmer environment.

As I mentioned last quarter, our operating teams have a heavy focus on managing our working capital intensity for 2023. I want to continue to maintain a strong balance sheet and prudent financial position by providing ample liquidity to execute on our long-term growth strategies that maximize value for all shareholders.

Our principal goal at DSG is to improve our overall return profile and continue to build profitable scale as a specialty distribution business with significant free cash generation.

We have now cycled our merger transaction completed in April 2022 and are seeing the benefit of our working capital investments, our acquisitions and our collaboration across the 3 business units. We are finding more ways to leverage spend and to drive cross-selling through our embedded alignment with many of our closest customers.

Hisco will significantly enhance both primary objectives. Aside from our work on Hisco, we continue to evaluate an active acquisition pipeline, analyzing opportunities that fit our strategic lens, acquisition criteria and hurdle rates.

In summary, we are pleased with our first quarter results and appreciate the collaborative efforts across our leadership teams to deliver 4 sequential quarters of sales growth and margin improvements.

And although we are excited to report adjusted EBITDA margins of 11.3% and commit to our partners that we have action plans over the coming years to take each of our verticals profitability and internal return metrics significantly higher from current levels.

We also want to manage expectations that while the very discrete operating initiatives we are working on will yield meaningful financial improvements to performance metrics that we are all focused on, the results will not be linear, and we absolutely are not planning for the slope to track the last 4 quarters.

We all can appreciate what some of the leadership teams are now facing with having delivered exceptionally in the last few quarters and me trying to move the goalpost forward on them at a faster clip.

We will get to the next margin milestone threshold soon, but I want to temper all our expectations, mine included, that it likely will not be as linear or as steep as we just enjoyed and we will be comping tougher quarters later this year.

DSG is a specialty distribution solutions company, supporting a leadership position in several key vertical channels where customers rely on us to provide high-touch, value-added distribution solutions for their MRO, OEM and industrial technology needs with a combined addressable market of $57 billion.

Our vertical channels to the marketplace offer customers replenishable industrial parts and products as well as specialized products. In addition, we offer managed solutions for companies that rely on outsourced expertise, labor, specialty capabilities and supplies with secure supply chain management.

It is daily reaffirmed that our unique competitive advantages are compelling to customers and are important to manufacturers, OEMs and businesses that use specialized products in their industrial and commercial industries. And expanding our distinct products and solutions makes the Hisco acquisition a compelling investment for us.

Thank you for your time today. And now we would like to open up the line for investor questions.

Operator?.

[Operator Instructions] Our first question today is coming from Kevin Steinke from Barrington Research..

Ron, I appreciate your comments there about the fact that maybe the margin improvement won't be as when you're going forward as it has been, but obviously, you've hit that and now exceeded that near-term 10% goal that you had discussed. And when you get Hisco layered in, you expect that to accelerate improvement in your structural margin profile.

Have you given any thought about what kind of the next target could be that we should think about in terms of adjusted EBITDA margin? Or is it kind of too early to commit to a particular number?.

This is Ron. I'll take that and then maybe Bryan will make a couple of comments as well. So we've not publicly put out any specific percentages.

But as we indicated in both Bryan's prepared remarks as well as mine, we did exceed our plan that we had initially set up for the first quarter, seeing a nice improvement of 300 bps over Q1 a year ago and also 100 bps over Q4.

We ended Q4 at 10.3%, and we got to the $11.3 million -- what I would say is that, I mean, there were really no, I would say, kind of onetime items that gave us a big benefit in the first quarter. So to Bryan's point, structurally, I think all 3 of the businesses are getting the benefit of a lot of the actions that we took in 2022.

So again, probably premature to commit to a percentage, but we're seeing that spillover effect of those actions that we made in '22 into '23. I did in my prepared remarks, I did indicate that we're up against some tougher comps as we enter into the latter half of the year.

And I think to Bryan's point, certainly won't be as linear, and we're making investments within all 3 of the companies as well. So -- but we feel really, really good about the first quarter and not only the net margin expansion, but also the gross margin expansion as well. So I'll pause there and maybe if Brian wants to add some comments as well..

I think you said it well, Ron. What I would add to it is just to what Kevin's question about or alluding to structural margin. We demonstrated to ourselves and I think the marketplace, hopefully, that the business is able to generate now over 11% structural margins, and it's on a continuum that we see continuing to go up over time.

There's going to be elements of -- when we pull TestEquity and Hisco together, we've said in our comments that together, it accelerates getting both of them up to similar margins to what the total company did this year, but coming from a lower level.

And then Lawson has -- we've been talking for years about the contribution margin that Lawson enjoys when revenue is growing and pulling the businesses together is unlocking an opportunity for Lawson to access some new customers and to enjoy some growth that we had struggled with.

And there are some really exciting initiatives that Cesar and his team have been working on to continue that growth and to really free up more opportunities for our salespeople to go hunt new customers or to super serve the customers that they've got where they're continuing to grow wallet share.

So that -- we would expect that as those efforts that we're rolling out more this year and we've been working on at the first part of this year, are getting traction, that loss in structural margin, which was 14.7% this quarter, significantly higher than what we had been seeing in the last few years, but part of the real strategy here that we had pulling DSG together.

-- are going to continue to march forward. So we think the whole is going to get pulled up. I don't think it's going to be linear. The slope was dramatic, obviously, between last quarter and this over 100 basis points in a quarter. And that's what I was trying to make sure that we measure -- have a more measured perspective.

Especially distributors that are out there that are public. We've gone back and studied them through their continuums over the last 30 years.

And to get -- to line up where we would like to and where we want to be, several hundred more basis points is our objective, but it's going to take us 3, 5, 7 years to get to where we think that we can get this business. So hopefully, that's helpful..

Yes, absolutely. Very helpful commentary.

So where are we in terms of the journey with pricing? I don't know, Ron, did you mention the overall contribution to your 13.7% organic growth from price? And if not, what was that? And then I guess that would kind of play into the tougher comps perhaps as you move forward this year in terms of starting to lap some of those price increases?.

Yes, I did not indicate the consolidated number, but out of the 13.7%, about 10 points of that was price related. And the other, call it, 3.5% to 4% was volume on a consolidated basis. And all three of the businesses we're taking -- continuing to take pricing actions and again, kind of the spillover effect from the actions taken in 2022 into 2023.

So yes, you're right. It does play a bit into the tougher comps later in the year. I would say that we're still continuing to see some vendor cost increases come through, although they've moderated a bit from where we were in 2022.

But all 3 of the businesses are keenly managing and expanding their gross margin percentage, not only from necessary pricing actions but other initiatives around freight, rebates, we put a portion of our costs up in the gross profit as well. So we're getting some basis points lift on just the increase in sales there on a higher sales base.

So I think good progress on all fronts and certainly driving to expand that gross margin percentage over time as well. Short answer is about 10% of the 13.7% was price related for the quarter..

Got it. No, great. That's helpful. Just wanted to touch too on Lawson and it seems like some really strong momentum there. And you mentioned the 9% growth in ship-to locations.

Any more just commentary on what's contributing to that? You discussed your expansion to new sales channels and what have you and just trying to get a sense of the momentum that's building there and perhaps could continue to build as you start to roll out some of the CRM tools and build out those sales channels..

Sure. So I can start and then maybe have Bryan jump in as well. So it's -- yes, very, very pleased on the Lawson results for the quarter, the 14.7% that Bryan quoted really nice improvement. And I would say that is primarily coming from sales growth as well as gross margin expansion and really leveraging our cost structure that we knew we could get.

We've talked publicly about getting 30% to 40% flow through on the Lawson business. And I think you saw the power of that here in the first quarter of 2023.

So relative to the 9% increase in unique ship-to locations, that's a metric that we're measuring across the entire business on all the segments and -- as I think about this for the investments that we've made in 2022 and not really just 2022, but even going back previous to that, Lawson has made some pretty significant investments in the strategic account area, where we develop long-term relationships with large customers servicing many of their locations with a pricing strategy and a rebate strategy.

So we have specifically invested in strategic account managers and customer support individuals to support that piece of the business as well as the Kent automotive business. As we look at the trajectory of those 2 pieces of our business over the last 5 years, they've really been the strongest.

And I think it's been not only developing those core relationships with the larger customers that are very sticky slightly less gross margins. So we're up against that from a headwind perspective, but we're still seeing gross margin expansion on a consolidated basis.

So yes, it -- we're driving our business really from both existing customers as well as new customers. And certainly, those unique ship-to locations is a big piece of the overall growth for us..

Okay. Great. I just wanted to ask lastly here about what you've seen in April in terms of sales growth trends. And you mentioned some moderation in a few markets perhaps related to the economy, but it doesn't sound like that's a meaningful headwind at this point, I guess. So just any costs on April and the trend and the economy..

So Kevin, yes, I would say for April, we've continued to see pretty positive results. I would say, we've seen a little bit of moderation in some of the end markets. We both Bryan and I commented on the Test and Measurement side within the TestEquity business.

But kind of putting that aside, -- for the most part, I would say our April sales are kind of running in line with where we exited the first quarter on a consolidated basis with a couple of markets being up a couple of our verticals being up, losses being up versus where we exited the first quarter. T&M being down a little bit.

And I would say with injection of services, a little bit of a mix there, but we are seeing some growth now on the renewable side, which we were up against some weaker numbers a year ago. But overall, we feel pretty good about where April is finished from a sales perspective, and don't see any major red flags that sit out there here for the month..

Kevin, I just would add that we're -- we spend a lot of time looking at all of our collective end markets that we're serving and trying to understand how to continue to add balance to them so that we -- between MRO and OEM, which Cisco does some very deliberate things for us.

And so we are encouraged as we kind of look at what we're trying to build longer term in terms of kind of some of the -- I'm about to fall into my CFA talk, but correlation coefficients of the different industries and different economic backdrops.

And so we're -- right now we're seeing things like renewables where a year ago, the one acquisition that we had made at Gexpro Services that was actually -- when we reported last quarter, how exceptionally well, we brought down EBITDA multiples on acquisitions that we've made over the course of 12 months.

The one that was the outlier to the negative, even though our average was very good was the fact that renewables had given us some challenges. And we knew that we had a tough backdrop there. And that backdrop is starting to really open up.

And the strategy that Bob and his team put in place by pulling some renewable pieces together in order to have a much more robust offering for that market to firm up our leadership in that market is taking hold.

And so while we aren't yet getting the benefit of that market being back at peak levels, the acceleration there is comping against much easier comps a year ago. We're enjoying aerospace and defense is a strong space for Gexpro services right now. And so they have some verticals that are stronger.

We went into the year anxious about their semiconductor end market, and it's softer than it was a year ago, and that impacted their first quarter, even though first quarter is great, but it weighed on it a little bit. And yet, it's firmed up a little bit from where we started the year and where we ended last year.

So there's -- even as we look at kind of the cloudiness that's out there, our end markets seem to be performing well. The one area that we've tried to really emphasize on this call is that capital spending is where we're -- all of us across all of our portfolio companies, not just DSG and all of our investments in public companies.

Capital spending is people are cautious about it. And so Test and Measurement Equipment to the extent that somebody can delay making a capital decision that we're seeing and have felt some sluggishness in the first quarter there. We saw a little bit of it at the end of the year.

And so we went into this year expecting that, that could be the most sluggish part of our -- challenging part of our business, and it has been so far this year. Some of that was lead times and challenges with getting product to -- from our vendors to our customers.

And what I did emphasize in the call is that we are seeing at some level, those customers who are well-capitalized large customers are asking more about rental and used, which we have higher margins on but it does impact top line. So that's the one place.

And Hisco doesn't have that -- as we think about Hisco and how it lines up with what we're doing here, it doesn't have that Test and Measurement Equipment exposure in their revenue. But they do have some programs that we had identified that were rolling off.

So when we get to talking about it next quarter, they've picked up some new mandates and we're not seeing real weakness in their end markets. But just like with any other OEM relationships like we would have at Gexpro Services, you can have end-of-life programs like a COVID testing kit, for instance.

And so -- but you're picking up new programs along the way as well more than backfill on that revenue..

And the next question is coming from Brad Hathaway from Far View..

Thanks for an incredible job in the quarter and really impressed with both the organic growth and the incremental margins. I didn't think we'd see 11% this quickly, so well done on that.

I wanted to ask you quickly, though, to double-click on the cross-selling, both between verticals, which I think you've talked about a bit before and also, I think you mentioned a little bit within verticals, I think you mentioned in the Gexpro section, something about with it.

And I'd just love to understand kind of maybe a little more detail on some of the opportunities you see there both from -- between Gexpro and Lawson, but also within Gexpro, within TestEquity themselves..

Ron, I'll lead on this, and then I want you to help me get some tightness on what I'm saying. Brad, the example I used on renewables is probably one of the best examples that we've got to show how -- pulling some of these acquisitions together inside of a vertical has accelerated opportunity.

But then in addition to that, it's pulling what Bob coined early on, the power of three, which is the way that he's been really firing his sales force at the Gexpro services to go out and engage with their embedded relationships. And so there's the renewables piece, we needed to land the -- some of the hearing a little bit of feedback.

But we were -- we needed to land some of those major OEMs in the renewable space. We had some of them. We didn't have all of them.

And so the acquisitions themselves are bringing deep engagements with certain customers that we knew that we had a broader product offering that we could set of solutions that if we could get tightly coupled with them that we could broaden out our engagement with.

And so on the renewable side, there was one of the major OEMs in the wind space that we did not have as much of an engagement with or relationship with.

And one of the acquisitions brought that relationship with then several of our acquisitions that we made on Gexpro solutions were deliberately mapped out to significantly expand our solution -- our ability to provide solutions for not only the OEMs that we were working with, but the OEM that we landed through an acquisition.

And that has given Bob and his team an ability to take a much more robust set of offerings to them. We've led with being able to help solve for all of the guts inside of the towers connecting the base to the turbine and on their retrofits and their overhauls.

And that -- we would not have had all those elements brought together had we not pulled those acquisitions together. So that's one way to think about it. But what that also does is that we're putting MRO elements or we're putting pieces of what Lawson does into that dialogue.

And so there's an engagement there that is pulling some of the products of TestEquity on the electronic production supply side and the MRO SKUs that Lawson had.

And then to the extent that we are working inside of a facility, we're trying to pull some of that loss in capability, and we're getting good traction with some really key OEMs to -- where we had jet services specifically had very deep relationships, and we're basically able to pull in and unseat on those MRO and DMI pieces folks that were there before.

And I think it's really how collaborative and the relationships already were and then being able to take that collaboration lens. And I think about it on a micro level, we're trying to work with the customers very -- in a very engaged way on a micro level on what their needs are.

And it's not as -- while we're working in our back office and our warehouse to try and improve automation, we're not taking a lot of that automation lens to the experience of some of these customers. And that's been successful. So and we think it will continue to be successful. We're just scratching the surface on some of the cross-selling candidly.

The dialogues are expansive. The wins are more narrow, but the wins are still material to the financial performance. It's just the funnel is a lot larger. 40,000 more customers that we're picking up with Hisco..

I would add, Brad, just there's an excess of 300 active leads. I think we talked about this on the Q4 call, where we are incentivizing our sales teams across all of the companies to bring these leads that Bryan referenced into the other organizations. So we're actively working in excess of 300 leads.

And it has been realized sales multimillion already coming through. Now some of that happened in 2022. But I would say it's on a steeper scale as we enter into 2023. So I mean, it's not an 8-figure number yet from a sales perspective, but it's a few million dollars that we've been able to realize on top line growth..

And the next question is coming from Katie Fleischer from KeyBanc Capital..

On for Ken today. I wanted to follow up on your pricing -- or on the pricing question from earlier.

Can you clarify if price cost was positive to margin? And what's the expectation for the rest of the year?.

So yes. So Katie, yes, so the -- you're referencing back to the 10% pricing that I commented on. Yes. So we've seen more of that. I would say, here in the first quarter, given that we are lapping some of the price increases we put through during 2022.

So we wouldn't expect as we enter into the latter half of the year for that pricing to stay at 10% of our combined increase on a quarterly basis for every quarter on a go-forward basis. I'd say as we think about timing in terms of some of those actions we did in 2022, they were probably later in the year versus even in Q2.

So I think we're probably up against less headwinds from a pricing standpoint here in the second quarter, but probably more so in the latter half of the year. So I don't know if that answered your question or not. I mean we've not come out with any kind of formal guidance relative to what we think pricing will be from an overall perspective.

But what I will say is we're still taking pricing actions in 2023 across the businesses. We're still, as I mentioned earlier, seeing some vendor increased cost increases coming through. And so we're certainly not sitting on those and absorbing those internally. We are passing -- continue to pass those -- that effect along.

So -- and generally speaking, the customers have been understanding and willing to take those increases certainly in 2022 and so far here in 2023. Certainly, some conversations with some customers about tightening up a bit on that. But generally speaking, I would say that the customers are supportive in understanding those actions..

I mean, your question, I think, was pretty straightforward and that are we -- are our price actions more than eclipsing the inflationary pressure that we're feeling from our cost of goods sold to our vendors. And the short answer is absolutely.

And then the longer answer is there's -- so yes, we have more than been able to capture margin and we're continuing to.

The difference between specialty distribution and broad-line distributors or commodity distributors is that in periods like this, even our other services and capabilities are giving us flexibility with our customers to not only make sure that we're protecting margin on the product side, but also on the value that we're bringing with the other capabilities and the people that are supporting it.

And so we're absolutely continuing to look at and make sure that we are more than being rewarded for the total capabilities besides just the cost of the actual product that we're selling through. And so it has been margin-enhancing at both the gross margin level and the EBITDA margin level..

And Ron, just to clarify one point that you made there.

You mentioned before that the vendor cost increases, those are starting to moderate, correct?.

Yes..

Another question here. So you talked about easing lead times in some of the individual businesses. I was wondering if that's impacting inventory decisions at all.

And if you think that could lead to faster backlog monetization at the customer level?.

So we definitely have seen our supply chains get easier or easing. And we did take actions a year ago and even before to make sure that we had product on hand for our customers and that did increase our working capital investment and our inventory position.

This year, we think that we're going to see some real tightening up on our working capital investment. That's one of the things that we went into the year as a focus point. And we're -- the different verticals are working on that.

The incremental returns have been really good just because we've had the updraft of EBITDA to go along with the increase in working capital investment. But we think they can go even better.

And -- but there's the anxiety, I think, on our part of making sure that we had product on hand for customers and maybe buying more aggressively or leaning into inflationary pressures from our vendors by stocking deeper is some of that abating. And so that allows us to operate with more confidence with a leaner inventory position.

Ron, I don't know whether or not we're seeing -- I think part of your question maybe, Katie, are our customers changing their purchasing behavior because they are also not as anxious.

And to the extent that they were -- they're buying from us, and we're stocking more around -- and this is -- Ron, you can correct me on this, but the way that we think about it and talk about it as a team is that our customers are giving us forecast around what their needs are going to be.

And we're really holding that inventory oftentimes until we're loading it into their bends, putting it on their site or managing it at the production line as it would be for Gexpro solutions.

And so that has influenced or informed us more about what we need to have on our balance sheet and less about what we might have -- might be placing at their production facilities. So the -- it is allowing us to -- we certainly, I think, have reflected on the fact that our customers have padded those numbers some for us.

So their production -- their end market production on their schedules may over the last 12 months have looked different than what they asked us to hold in inventory. And so that was partially driven by their anxiety making sure that we had key products on hand.

So as they needed it based on whatever their production output was going to be that we were not -- they were not caught short or we were not caught short being able to support them.

So -- but I don't think that that necessarily created pull-through where they were stocking inventory or they were safety stocking up much greater amounts of inventory on hand. The only place where we really had longer lead times were on Test and Measurement Equipment. And that was -- that's a place where we've already talked about.

There's been some customer behavior changes there over the last 4 or 5 months. But we don't think that that hasn't necessarily -- sometimes you end up with a little bit. That's one area where we have a backlog. A lot of our other places, we don't -- we aren't sitting on backlogs.

We're sitting on kind of visibility around what we're going to be pushing through, but we wouldn't say that there's a backlog where they're waiting on inventory.

The chambers business is a place where we've had a backlog where we've not been able to manufacture at the pace that our customers were asking for chambers and that's where we did get caught with some margin compression over the last several quarters because we had quoted in price product a year ago and then we had inflation on our cost -- I mean, on our component prices, so our cost of goods sold went up on us, but our top line stayed the same.

And we're working through that overhang and ought to get margin lift in that area as well as an acceleration actually in revenue as we get further into this year.

Ron, what else?.

Bryan, I think well said. I think we're seeing certainly some easing taking place on some of the -- on getting product. What we don't believe we've seen is that the pull-through from our customers is decreasing because they were -- they had inventory stocked up at an excessive level.

So we still saw in the EPS business at Test and certainly with injection services and Lawson, we saw nice volume increases as well, not just price. So we're not seeing significant pullback from our customers as they try and normalize their inventory levels.

And to Bryan's point, I mean, Gexpro is so well -- Gexpro Services is so well connected into the production process with the customers that they've got a great read on what the future need is for their customers and they're able to go out and source that product on a timely basis to help their overall production cycle.

So -- and within the Lawson business, there's certain items that are on back order with our customers. We track that. It's pretty isolated in terms of specific SKUs. But for the most part, we've seen a decrease in back orders as well, which is an indicator that the supply chain is easy for us to be able to get that product..

Okay. That's helpful. And then just one last question for me. So I wanted to clarify on the margin cadence commentary from earlier.

Should we expect an outsized move to margin sequentially versus normal seasonality? Is that what you're trying to get at?.

Yes. Let me make sure I understand your definition of an outside movement beyond seasonality..

Yes. I guess just in terms of the sequential moves versus the normal seasonality, you're saying it's going to be less linear than it was in the past.

In terms of sequentially, is that you're expecting an outsized difference versus prior years?.

Yes. So let me try and address that from a seasonality perspective. I would say, generally speaking, Q2 and Q3 across the platform are the strongest quarters. We did see, again, we saw the nice lift here in the first quarter.

And -- but generally speaking, we would see Q3 and Q4 -- sorry, Q2 and Q3 being the strongest, probably Q4 being the weakest just because of fewer selling days and then Q1 fallen after Q2 and Q3.

So I think our commentary around the linear piece of that really gets to the 300 bps improvement that we saw over a year ago quarter in that when you think about the second quarter of 2022 versus where we end up here in Q2 2023, it may not be that linear.

As we think about where we exited the first quarter, certainly, we believe that we can still create margin expansion and operating leverage on the top line sales growth.

So Again, I think what we're saying is don't expect a 300 bps improvement every single quarter as we move throughout 2023, but exceeding 11% sets a really nice baseline to start sequential growth on as we develop the rest of 2023..

So Katie, I kind of hit on that at the end of my prepared remarks. And I just wanted to make sure that we knew when we pull these businesses together and we know from where we are today, what our longer-term objectives are.

But -- and we've had conversations that we aren't going to try and give like near-term milestone guidance on where EBITDA margin should be. But what we did say a year ago was that we expected at this time of a year ago, we made the strong comment that we were -- and at that time, we were at 8.3% EBITDA margins or 8.6% EBITDA margins.

And we said we -- pulling the businesses together, we expected to be -- to end the year at over 10% on a run rate basis. And we actually ended the year at slightly above that. I think it was 10.4%, something like that. And now we've moved up to where we're operating -- where we had a strong quarter at 11.3%.

And we know we've got a long march to a much different structural EBITDA margin objective for this specialty distributor. But we don't expect that we're going to be picking up a couple of 100 basis points a year or over a 12-month period again. It could happen.

But really, what we think is going to happen is that we're going to be continuing to have significant milestone objectives at each of the verticals.

And as those verticals move up from where they have historically operated, it's going to create a blended margin of -- for the DSG kind of from a specialty distributor perspective, that's going to move DSG up more consistent with what I would expect we should have out of this type of a scaled-up specialty distributor.

And -- but it's just not going to be linear. And it's not going to be linear. We're rolling in Hisco. We've got some opportunities there to significantly leverage the TestEquity Hisco vertical and there's going to be good movement there forward over the next 12 months on their EBITDA margin. And then that's going to contribute to the new blended rate.

And then you've got Lawson is going to continue to have the benefit of, we think, cost leveraging across the platform as well as margin opportunity at the contribution margin level. And so it should operate better.

And Gexpro Services has done a great job of their relationships and their -- with their OEMs are tight and it's not always easy to just raise prices the way we can on kind of transactional MRO activities like you can at Lawson or like you could on the MRO side of Hisco or could going forward on that on the Hisco side.

On the OEM side, it's more sticky. And so they've done a great job of passing through and having constructive conversations because they are such partners with their OEM customers that's been very collaborative.

But -- and that should continue to work in our margin favor on Gexpro Services as well just because we're getting more scale there and we're able to have some of that pricing action continue to kind of flow through versus having it flow through more specifically on a date like it does on Lawson..

Katie, just I just wanted to point you to on Slide 8 of the deck. We reflect what the margins are inclusive of all the acquisitions. In Q2, I think this gets to our points, Q2, inclusive of all the acquisitions that we made for the -- even the pre-acquisition period, our adjusted EBITDA percentage was 9.6%.

The GAAP reported numbers was 8.3% Q2 a year ago, but inclusive of all the acquisitions that have been made, which certainly will be there in Q2 of '23 as well. If you were to look at that from a year ago, it's the 9.6%. So I think that's exactly to our point, is that kind of don't expect a 300 bps movement in over a year ago.

So that margin percentage was not inclusive of the acquisitions, 9.6% in Q2, 9.9% in Q3, 10.3% in Q4. So it kind of comes back to the commentary around a lot of the actions that we took in 2022 helped drive the performance later in the year and accordingly, some tougher comps here in the second half of the year..

I would now like to turn the call back to Bryan King for closing remarks..

Thank you, operator, and thank you for those that joined us today for the call. And absolutely, thank you to all those folks that work for DSG for allowing us to have a great quarter and continuing to operate so well together as we look prospectively at what we're building. So thank you for your interest in DSG.

We're excited about being your partner and we are optimistic about the business that we will continue to be together with you on. Thank you..

We look forward to talking to you next quarter. Have a great day..

This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation..