Q2 2022 Distribution Solutions Group Inc Earnings Call

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Good morning ladies and gentlemen and thank you for your patience. Your conference will begin shortly. Once again, thank you for your patience. The conference will begin shortly.

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Good morning, everyone, and welcome to the Distribution Solutions Group's second quarter 2022 earnings call.

As a reminder, this conference call is being recorded.

Now, I'd like to turn the call over to Sandy Martin, three-part advisor, to provide instructions to read the Safe Harbor Statement. Please go ahead.

Good morning, ladies and gentlemen, and welcome to the Distribution Solutions Group second quarter 2022 earnings call. In conjunction with today's call, we have provided a Q2 earnings presentation that has been posted on the company's IR website at investor.distributionsolutionsgroup.com. Joining me on the prepared remarks for today's call will be Brian King, DST's chief executive officer and chairman, and Ron Knudson, DSG's executive executive officer.

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 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.

Please consider the information presented in that light. The company may at some point elect to update the forward-looking statements made today, but disclaims any obligation to do so. Management will also refer to non-GAAP measures, including adjusted EBITDA, adjusted operating income, and adjusted diluted EPS. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release.

The earnings press release issued earlier today is posted on the investor relations section of our website. A copy of the release has also been included in the current report on Form 8K filed with the SEC. This call is being audio webcast on the internet via the Distribution Solutions Group investor relations page on the company's website. A replay of this teleconference will be available through August 23, 2022. the hashtagraf- excuse me the hashtagishi.com

I will now turn the call over to Brian King. Brian ? Thank you, Sandy, and good morning, everyone. I'm excited to share with you our results of the Combined Distribution Solutions Group organization. Our survey did not see it yet, but it is box1000.

As Sandy mentioned, please refer to the slide deck that we have provided on our website to follow along with our commentary today. As you'll recall, we completed the merger effective April 1, 2022 by strategically bringing together three high-touch value-added specialty distribution companies.

First, I'd like to quickly summarize each of the operating companies under distribution solutions group for any of our new listeners.

Lawson Products is a leader in the MRO distribution of Class C parts, offering vendor-managed inventory services through its over 1,000 sales reps.

GEXPRO Services is a provider of supply chain solutions of largely C-parts, specializing in developing and implementing VMI and KITTING programs to high specification manufacturing customers.

TestEquity is a leading distributor of specialized test and measurement equipment and solutions, electronic production supplies, and customized toolkits from leading manufacturing partners.

In a moment, Ron will cover the financial details for the quarter, but let me start by pointing out a few of the highlights from the second quarter and also comment on some operational initiatives within each of the companies.

For the combined companies, sales grew 34% to 321 million from both acquisitions and organic growth.

Organic sales grew nearly 12% versus a year ago quarter. On an apples to apples basis.

This organic growth demonstrates the strength of the core businesses before taking into consideration our acquisition revenues.

We reported solid organic growth across all three of the operating companies.

or segments.

We generated almost 32 million of adjusted EBITDA for the quarter, which translates to 9.9% of sales. We are encouraged by these results as all three operating companies are performing at or above their expectations.

While DSG does not provide formal guidance, we expect 2022 adjusted EBITDA margins to exit the year above 10% as previously communicated. All three operating companies are experiencing an improvement in both adjusted EBITDA dollars and margins, which we remain strategically focused on. Each of the operating companies made significant progress that give us further confidence in our overall strategy and teams leading those businesses. They continue to pay expenses for children under race, disability and income when they

The company's acquisition strategy continues to be a large part of our growth initiatives.

During 2022, JEXPRO services closed on the Resilux and Frontier acquisitions, and test equity closed on the T-Equipment and National Test Equipment acquisitions.

In aggregate, these four acquisitions create annual revenues estimated over $180 million, an annual adjusted EBITDA of nearly $20 million.

All of these acquisitions are creative and fit nicely into the strategic direction of the operating companies.

They also provide important complementary elements to adding incremental customer and supplier relationships.

Looking at our pipeline, we are evaluating acquisition opportunities continuously for each of the businesses, and the funnel remains full.

We've structured the M&A team to support each of the operating businesses to identify, diligence, and close transactions that meet our criteria.

As I mentioned, acquisitions are a significant part of our ongoing strategy.

Additionally, the leaders at our three operating companies are collaborating to expand relationships with existing customers and they are working together and with our teams and theirs to identify cost energies where it makes sense.

During our recent operating company leadership summit in Chicago, we identified specific work streams with near-term timelines for each of the three companies.

The teams left those meetings with specific action items and accountability, meaning that specific leaders or owners are responsible for both delivering sales, synergies, and cost takeout opportunities.

We are seeing near-term evidence of success, and I am confident that these teams will create significant and meaningful results to further drive DSG sales and earnings growth, accelerating value creation and sustainability of earnings growth for all shareholders.

Before I turn it over to Rod, let me comment on a few operations.

margins, and we are diligently reviewing the best way to deliver high-touch service to our customers the way they want it while driving operating leverage across our resources.

Additionally, Lawson continues to expand its distribution capabilities with upgrading its conveyor systems at the Suwannee, Georgia, DC location, doubling the size of its Calgary, DC earlier this year, and changing processes within their network to better fulfill customer demand and drive efficiency.

Cesar is an inspiring leader and he's putting in place a strong accountability and customer-centric sales culture with aggressive strategic growth initiatives and improved profitability objectives.

Second, JEXPRO Services.

JAX Pro Services is continuing to drive significant services segment growth with the acquisitions of Frontier, Resilux and SIS.

The renewables and technology verticals are well positioned for growth, especially with this inflation reduction act.

ChexPro services completed price increases based on current supply markets impacted by increases in raw materials, labor, and freight indexes and inflation. And the teams have been able to maintain gross margin percentage throughout a tough inflationary environment.

Finally, the JetPro services team continues to improve supplier rebates and extend payment terms via acquisition synergies.

And finally, test equity.

The process of integrating the T-Equipment acquisition into the business is going well.

We're seeing sales of combined product offerings gaining traction in the T-Equipment business.

Supply chain challenges are still affecting sales and delivery of the test and measurement product lines.

The chip shortage has caused lumpy delivery from our suppliers and continued swelling of our backlog. Projections are that lumpiness in our inventory flowing from key manufacturers will continue into 2023.

Inflation has had a positive effect on sales numbers as price increases from suppliers are passed on to customers in a timely manner.

Customers are tending to push purchases ahead of price increases, which has helped us develop an increase in our customer backlog of orders.

The outsourcing of the test chambers project is hitting its stride and we are now starting to reduce our backlog while focusing on delivering products timely to our customers.

A secondary production facility is brought online in July and will be shifting product in August .

Soon, we also hope to start proactively growing demand versus just reacting to a replenishing backlog from organic demand.

Electronic production supply of the business has shown continued growth in the third month in a row. We're seeing consistent demand growth in key areas on that side of the business.

Our operating company leaders are keenly focused on improving their operations. We're excited to continue to share these activities with investors and also share our long-term strategic vision and plans as we work diligently to create long-term shareholder return.

Now, I'd like to turn the call over to Ron to dive into the financials. Ron? Ron, are you there?

Thank you Brian and good morning everyone.

We're excited this morning to share with you the second quarter results of Distribution Solutions Group. While this represents our second quarter results, it is our initial quarter of presenting consolidated financial results of the three operating companies, Lawson Products, JEXPRO Services, and Test Equity. and our financial initiatives want to thank you for your Legislature'? Lets do this again.

Given that this is the initial reporting quarter of the combined company, let me comment on the required GAAP accounting presentation before we discuss our results.

Please turn to page three of the second quarter 2022 financial results presentation that we posted on our IR website of DSG.

As you may recall, and that was disclosed in the proxy filed earlier this year, the combination of the three operating companies is required to be treated under GAAP as a reverse merger. For more information on GAAP, visit www.gaap.com

Given the common ownership control of JEXPRO services and test equity by LKCM on a combined basis, they were deemed to be the accounting acquirer of Lawson products.

A few items to keep in mind as we review the second quarter results.

The second quarter 2022 results include all three companies for the full quarter.

The comparative gap information for 2021 only include Ajaxpro Services and TestEquity as the predecessor company of the accounting acquirer.

The year-to-date gap information for 2022 includes JEXPRO services and test equity for the first six months, and given the merger date of April 1st, only includes loss in products from April 1st through June 30th.

For ease of comparing the results, the slides that we will be utilizing for the conversation this morning are adjusted for the pre-merger activity of Lawson products.

Now turning to slide five, let me summarize the second quarter results.

On a combined basis, we reported strong top line and bottom line results across the three principal operating companies.

As Brian mentioned, we reported combined organic sales growth of nearly 12%.

To date, in 2022, we have closed on four acquisitions for a total of $180 million of acquired annual revenues.

Broadly, the product demand remains strong, an increase in customer backlog within test equity that will help in the future.

We have also made good progress on realizing cost savings and cross-selling among the three operating companies with early wins on new customer business.

And finally, our performance in all three operating companies was at or above expected levels.

Turning to slide six, let me first discuss DSG on a combined basis.

Consolidated sales were $321 million.

Although not necessarily meaningful, this represents an increase of 139% on a gap basis driven by the inclusion of Lawson products commencing in the second quarter of 2022.

organic growth of the business, and acquisitions made by JEXPRO Services and TestEquity in both 2021 and 2022.

On a like-for-like basis with the inclusion of Lawson from a comparative basis, sales increased nearly 34% or 80.6 million over the second quarter of 2021 with 52.3 million coming from acquisitions and organic growth of nearly 12%.

Second, reported GAAP operating income was $4.1 million compared to $5.5 million a year ago quarter.

The second quarter 2022 results were negatively impacted by the one-time merger related costs, higher stock-based compensation, and higher intangible amortization expense related to the fair value opening balance sheet of Lawson Products.

On an adjusted basis, taking into account these items, adjusted EBITDA improved by 11.7 million to 31.7 million or 9.9 percent of sales.

Operating income of approximately $5.7 million from acquisitions made in 2021 and 2022 drove about one half of that increase.

Now, moving on to slide seven. From a balance sheet perspective, we ended the quarter with $17.9 million of cash on hand and available liquidity of $85.9 million under our existing credit facility.

We also reported approximately $406 million of outstanding debt, primarily as a result of consolidating the existing debt at the time of the merger, as well as acquisitions made by JEXPRO Services and TestEquity during the first half of 2022.

We ended the quarter with net debt leverage ratio of 3.6 times in line with our expectations given the acquisitions made during the quarter.

As previously communicated, we intend to manage our net debt to trailing 12 months adjusted EBITDA leverage in the 3 to 4 times range.

Let me now comment on each of the three individual operating companies.

Within the 10Q, we have broken down our segment reporting based upon the three operating companies.

Let me first start with Lawson Products on slide 9.

Please remember that since Lawson is the accounting acquiree, it is not in the GAAP reported numbers for the first quarter of 2022 or for the comparative GAAP numbers in 2021.

Loss in product sales were $107.3 million for the second quarter.

Please note that this excludes bolt supply as they are now included in the all other reporting segment.

However, as a side note, Bolt Supply had a great quarter. Sales were up nearly 40% and adjusted EBITDA was 13.6% of sales.

The loss in segment sales grew 13.1% in organic sales over the second quarter of 2021 on an adjusted basis and 2.3% increased sequentially over the first quarter of 2022.

The increase over a year ago was driven by strong performance within the strategic business, saw 23%,

Kent Automotive up 30%, and the core business up 11%, partially offset by government being down 8%.

Of the 13% increase versus a year ago quarter, approximately 10 percentage points were driven by price.

All of Lawson's growth during the quarter was organic growth through increased share of wallet with existing customers and new customer relationships in particular within strategic or large accounts.

Lawson realized an expansion of gross margins to 58.6 percent in the quarter before the reclassification of certain selling expenses into margin.

Excluding the fair value step up for the opening balance sheet amortization, adjusted gross margin was 60.1%, up from 58.2% a year ago quarter, and also up versus 58.2% realized in the first quarter of 2022.

The improvement in gross margin is primarily being driven by price adjustments put in place in late 2021 and in the first half of 2022, as well as lower inventory reserves in the second quarter of 2022.

Lawson's gap reported operating loss was $2.6 million for the second quarter, net of the non-recurring items previously mentioned.

Excluding these items as well as for the previous quarters, Lawson's adjusted EBITDA improved to $9.4 million compared to adjusted EBITDA of $7.8 million a year ago quarter and $8 million in the first quarter of 2022 primarily driven by the sales and gross margin improvements.

Turning to JEXPRO services on slide 10.

Total sales were $99.8 million for the second quarter of 2022.

Of that increase, approximately $29.5 million was driven by acquisitions in 2021 and 2022.

In 2021, JEXPRO services closed on the OMNI, NEF, and SIS transactions.

And so far in 2022, JEXPRO services closed on the Resilux transaction earlier in the year and on Frontier on March 31st.

Excluding the impact of these acquisitions on the second quarter, organic sales grew by 6%.

All of the end markets that JEXPRO services operates in are expanding with the exception of some headwinds in renewables.

The increase in aggregate sales was primarily driven by new customers, the expansion of existing customer relationships and price.

Reported gross margin for the quarter was 29.2%, unchanged from a year ago quarter.

Gross margins continue to be managed by the JEXPER services team through strategic sourcing improvements. PVE!'

new supplier development, and the movement toward longer-term supplier agreements.

These efforts have been partially offset by slighter, lower gross margins of the recently acquired businesses.

JEXPRO Services adjusted EBITDA expanded to 11.9 million or 11.9% of sales as compared to 7.5 million or 11.3% for the year-ago quarter.

Acquisitions drove approximately $3.7 million of the earnings increase.

And lastly, I'll turn to test equity on slide 11, which also had a strong quarter.

Sales for the quarter grew 30 million or over 44%.

During the second quarter, test equity closed on two acquisitions, tea equipment and national test equipment.

Combined 2021 and 2022 acquisitions added $22.8 million of sales growth to the second quarter with organic sales increasing 10.6 percent both in their test and measurement business as well as the electronic production supplies business.

We anticipate that sales in the test and measurement business will be lumpy for the remainder of 2022 given some of the Chamber supply chain challenges.

Backlog has increased 2x from where we ended 2021.

Thus, we have the customer orders and are able to ship product quickly upon the receipt of the product.

However, vendor delivery has been inconsistent due to ongoing supply chain issues.

Having this level of backorders will result in positive momentum as we move into the second half of 2022 and into 2023.

On an adjusted EBITDA basis, the second quarter ended at 8.8% of sales or 8.6 million, representing an increase of nearly 5 million over a year ago quarter.

Of that $5 million increase, approximately $2 million of earnings was driven from 2021 and 2022 acquisitions that I previously mentioned.

Before I turn the call back to Brian for some closing remarks, let me just emphasize the strength of the second quarter.

With this being our initial quarter of reporting our combined results, we are very pleased with our progress and believe that we are on a strong path as exhibited by our sales growth and our adjusted EBITDA of 31.7 million for the quarter or 9.9% of sales.

DSG relies solid double-digit organic growth across the platform complemented by the strategic acquisitions. But we think we canalege toGaming for that without wiping offbs and

I'll now turn the call back over to Brian .

Thank you, Ron.

I'll direct you to page 12.

This page really speaks for itself and I would echo Ron's comments that we have gotten off to a great start in our initial quarter of our combined companies.

Second quarter results demonstrated our ability to report strong growth.

both by acquisition and organically, and to drive substantial adjusted EBITDA.

We remain confident about the opportunities to scale the business and believe that while supply chain stabilize, customers are going to continue to look for ways to streamline their businesses and leverage their operating results.

Our businesses, through Lawson Products, Jexpro Services, and TestEquity, are well positioned to partner with those customers to accomplish their goals.

We're expanding WalletShare and partnering with our customers to support them with comprehensive supply chain solutions.

With that, I would like to open up the line for questions. Operator.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality.

Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions.

Your first question is coming from Kevin Steinke from Barrington Reef Search. Your line is live.

Good morning.

I wanted to ask about, you mentioned progress on cross-selling among the operating companies.

When we think about cross-selling and you have conversations with your customers about baby bringing...

services of one of the operating companies and to them that they hadn't been using before. Are you, is that something typically they haven't been outsourcing before when you're able to cross sell or are you displacing a competitor? I'm just wondering how that dynamic typically works or if it's just kind of, you know, all different situations I assume maybe depending on the customer. Kind of persists it doesn't last long it lasts a very short time. So you're going to do great things along side you think. You're going to lookthere you're going to follow it. Really? I mean I'm curious what is that market? So when you say once in a company that for example you have an May Day trial in 2020

Yeah, this is a great one to let Bob tee up on, as he and Cesar have been working closely on those two businesses collaborating on some customers. So Bob, why don't you hit it? Maybe I'll finish with Ellen maybe then Mike.

Thank you, Brian . It's actually a great question.

And I can tell you, for Jexper Services, we're there at the blue-chip OEMs every day, managing their production line, bringing our value-added services, VMI, supermarkets.

Kanban systems. And, you know, I've been doing this over 30 years, and customers continue to come to myself and Ray Herzog, who's our chief commercial officer, asking us to expand the service capabilities and include MRO. For us to do that independently, it would be significant investment, not just in terms of trade work and capital brick and mortar and subject matter expertise.

So it's just natural for us to tap Lawson, who has best in class VMI capabilities, to supplement our service offering. And what's surprising to us is we did expect the customers to be well received in terms of seeing the total platform. But what shocked us is how many quick conversions we got right off the bat. And now we're literally going through the top 100 accounts.

and looking at the opportunities with loss and injects for services as well as test equity to pull the full complete platform together. Customers, mostly what they're looking for, it's not just supplier rationalization, but they're looking for total cost of ownership improvement. So when you can bring packages together of production line services and MRO as well as test and equipment, which their strength is on.

test in R&D, you basically put together a package service offering of products and services that can really enhance the value proposition not just of the business but the TCO to the customer.

All right, great. That's a lot of helpful color.

You know, I guess I didn't get on immediately at the beginning of the call, but I don't know.

It doesn't seem like it, but have you seen anything?

indicating that economic uncertainty or economic slowdown is.

impacting

any of your businesses at this point?

Yeah, good morning, Kevin. It's Ron Knudsen. So I'll comment on this and then certainly the other three CEOs can jump in as well. And I would say really across the businesses, we've really not seen a slowdown in terms of unit volume being shipped out of the service centers and the distribution centers. So...

It's interesting, as we look at our internal metrics, we're not seeing really much indication of a slowdown currently. In fact, even the increase in the customer backlog that we referenced on the prepared remarks for test equity is an indicator that there's still strong customer demand that is out there. So, we're seeing a lot of growth. We're seeing a lot of growth.

You know, when we think about...

Inflation, and you talked about this with regard to loss in products, your price.

increases are being realized there to offset inflation. Where do you stand, I guess, not only within Lawson, but across all of your operating segments in terms of...

your ability to keep pace with inflation or

you know, your view that it might be necessary to implement more price increases going forward.

Yeah, Kevin, this is Ron again. Really, all three companies have been able to pass along price increases really to offset some of the supplier cost increases as well as the freight and the labor piece of it. On an organic basis, we grew nearly 12% on a combined basis for all three companies combined. You're looking at the you're you're looking at the future.

And if we look at that on a combined basis as well across all three companies, about 7% of that 12 is price related. So we have been able to pass the price increases along and generally I would say that they're being accepted by the customers. It's not always an easy task to get the customer to...

When we think about margin expansion...

Can you just talk a little bit more about the factors that

You know drill margin expansion adjusted even down margin expansion year over year you know, I guess on in terms of the adjusted results including loss and last year and

Just, you know, your.

or what gives you confidence that you're gonna exit the year at that 10% plus margin.

I'll take that one, Kevin. As both Brian and I mentioned in our prepared remarks, we ended the quarter at 9.9 percent. If you look at where we were a year ago, really nice expansion, as well as the first quarter expansion as well.

I would say there's a few items that are driving that confidence. One kind of goes back to your earlier question around some of the sales opportunities across all three organizations working together. That gives us a lot of confidence that the teams are working really well together to identify those opportunities. As Bob mentioned, we've got the top 100 sales opportunities in the world.

accounts already identified in terms of trying to expand those relationships. That certainly is a piece of it. The fact that we're seeing strong demand just from a unit perspective gives us some additional confidence as well. And then we are looking at, and we didn't bring the three companies together from a

from a cost perspective, that wasn't the strategy. However, there certainly are costs that we can take out across the platform on a combined basis that we're focusing in on as well. So I would say those couple of areas being the revenue synergies and the costs, you know, from a combined basis. And then as Brian commented on, a lot of it is going on within the three individual operating companies.

And we're seeing that margin expansion take place on an individual company basis as well, and then factoring in the additional sales and cost opportunities is really, in my mind, it's building our confidence as we move throughout the rest of 2022 and into 2023.

I would also add that we're still.

in the early stages of integrating the acquisitions that the...

TestEquity and Jexpro have folded into their business units.

And there's, you know, while we didn't make, we didn't bring the three companies together to try and leverage too much of the cost in any way that would disrupt the relationship with the customers. We have just come out of a summit in Chicago where all the, you know, significant amount of the leadership teams and functional team leaders of each of the three companies were together with our operations team that works just with our portfolio company.

and then our investment team. And they came out of that with a lot of very specific objectives.

that they are going to focus on trying to work through a lot of energy, a lot of enthusiasm, but also a lot of opportunities for efficiency gains, as well as cross-selling opportunities going back to your earlier question.

And then when you drill down into the acquisitions that we've made inside of GEXPRO and TestAquity recently, there's opportunities that we're still working through to capture synergy there.

All right, great. Lastly, I just want to ask about the acquisition pipeline. You mentioned it remains strong. Can you just give us any more flavor on the types of opportunities you're seeing in terms of size across all three of your operating companies and what valuations look like right now?

This is a great opportunity. We have a great team, Kevin, and we were able to bring back Matt Boyce, who helped us significantly on industrial distribution group, if you remember that one, when we bought it back in 2008, and more than quintuple the EBITDA there. Matt had been over at Carlyle, the public company, leading acquisitions. He worked there before we recruited him for IDG and then went back there.

with Bob and has been leading the efforts there. And then we brought in Matt to kind of lead the whole effort.

And then he brought in a colleague. And so Brad, if you've got any color there, why don't you...

Why don't you fill in detail for Kevin? Yeah, Kevin, I would say that it's pretty spread out. I would say it's a robust pipeline now. We've got activity going on across all three of the platforms.

And I'd say valuations are pretty much in line with where we've been seeing them. You know, we're targeting, you know, seven, you know, potentially up to eight times on the acquisition multiples. And we've historically cheapened those back a couple of multiple turns after, you know, realizing some of the cost savings that Brian alluded to earlier. And so, you know, market conditions now are obviously a little bit different than they were six months ago.

We're happy with the acquisitions that we have done. Bob and Cesar and Russ are, you know, they're all working on, you know, both combining, integrating the businesses that they've acquired as well as working diligently on, you know, continuing to fill that pipeline. So I would say it is a robust pipeline now that we're excited about.

Super excited about having really a dedicated team out focused on M&A.

Brad, you know, just to add to that, Kevin.

The way that we kind of think about EBITDA multiple historically for the size of acquisitions that we're focused on is a six to eight range with a seven being the mode. But

And I, you know, we.

We think that there may be opportunities to see that environment, in the current environment, to see opportunities that may be towards the lower end of that range versus the higher end. But the better quality businesses or the ones that are more strategically appropriate for what we're trying to accomplish with the platform, you know, may require us to cheapen them back, meaning it kind of, if they cost us eight times.

we would expect to bring them down as Brad said. I'm not convinced yet that.

that there isn't the

the firepower that a number of the large private equity firms have out there and the distribution platforms that they've built, while each of these acquisitions we're working on are largely directly sourced.

I'm not sure that the sellers are ready to take a lower multiple.

And the end market, however, that a number of the large private equity firms have out there and the distribution platforms that they've built, while each of these acquisitions we're working on are largely directly sourced.

I'm not sure that the sellers are ready to take a lower multiple.

And the end market, on the industrial side, at least what we're saying, the end markets that we're playing in, other than renewables, which we're about to get a shot in the arm on in government, which we think is also...

going to improve power that a number of the large private equity firms have out there and the distribution platforms that they've, that we're looking at is largely consistent with pre-COVID years.

Okay, that's really helpful power that a number of the large private equity firms have out there and the distribution platforms that they've built while each of these acquisitions we're working on are large.

A spending package working its way through Congress, that could be a shot in the arm. Is that the way you're thinking about it?

Bob can't wait to talk about a number of the large private equity firms out there and the distribution platforms that they've built while each of these acquisitions we're working on are large.

for wind, solar, as well as electric vehicle. So for us, we saw the Senate vote. That's positive. It's going through the House. How are the number of the large private equity firms have out there and the distribution platforms that they've built, you know, while each of these acquisitions we're working on are large?

taking the questions. Appreciate it.

Thanks, Kevin....power that a number of the large private equity firms have out there in the distribution platforms that they've...over countlessango Da tease listening about

Thank you. Your next question is coming from Ben Newman from KeyBank Capital. Your line is live.

More power that a number of the large private equity firms have out there and the distribution platforms that they've built, while each of these acquisitions we're working on are large.

of selling days. When we look at the calendar here for 2022, we have 64 selling days in the second quarter, 63, I'm sorry, 64 in Q3, and 60 days in Q4. So we'll naturally see a little bit of a slow down as we enter into the fourth quarter just based upon the selling days. But I think that the second quarter,

results that we posted is a really good indication of how strong the quarter was. When we look at how the third quarter has started, and we don't provide formal guidance as you're aware, but I would say that what we've seen so far, the first, call it, five weeks into the quarter, is that really a consistent...

mode in terms of what we saw in the second quarter as well. So, you know, nice increases over a year ago and I would say really in the same call, kind of in the same range, maybe even a little bit greater than what we saw here in the second quarter from what we posted. So, you know, the trends that we saw have continued so far here early in the quarter.

Understood. And then just on price, it sounds like 10% price in loss in product seems like a really good solid improvement. And then just on price, it sounds like a really good solid improvement.

Understood. And then, just on price, it sounds like a 10% price in loss in product seems like a really good solid improvement. 7% consolidated.

When I think about that in the context of the order that you're taking.

Do you think price contributions here have likely peaked in the second quarter or?

that ramps further in coming quarters.

Yeah, it's, you know, what we've seen is that the cost increases from many of our suppliers have not slowed down dramatically from what we saw in the second quarter. So you know, we're continuing, all three companies are monitoring margins very closely and in monitoring those increases from our supplier base.

So, you know, it's a little tough to forecast this out, but, you know, we're not seeing any great slowdown, I would say, and we'll stay on top of it from an individual company perspective. So I suspect that we'll continue to see price actions as we move throughout the rest of 2022. Thank you for having me here.

Right. In terms of the test equity backlog, I understand the supply chain remains pretty challenging here, but.

Just any sense or color if there was some delivery slippage that impacted revenues in that segment this quarter? And then if so, maybe give us a little bit more color, how much of the backlog increases of push out versus order growth?

Run?

Russ? Yeah, I'd like to talk about that.

Yes, thanks. I can take that one. We've seen a continuous slippage in the orders coming from our suppliers over the past couple of years since COVID started with the chip shortage. We haven't seen it increase. It's been maintained about the same. We get won't be deliveries from our suppliers and we can turn that very quickly when we get it back in. I don't see that changing much over the next 12 months.

but I don't see it increasing. Our suppliers are working toward allocating their chips in the proper way to help fill the backlog. Our backlog's at its peak right now that it's ever been, but we're comfortable that we'll be working through that over the next 12 to 24 months.

When I think about the shift

shortages within that segment, I mean, maybe.

How should I think about the types of chips that are going into some of the less than equipped products? Is it more of the trailing edge chips, the older chips versus some of the new leading edge chips that are being built for the newer processes?

You know, it's a mix.

There's a lot of the older chips that are still there's quite a backlog for the newer chips They're not going into production as quickly as they normally would so it's a combination of both

Okay. Just one more for me.

I didn't hear a mention of cash flow or cash generation in the quarter. Maybe you could just help us understand where that ended and how do we think about or if there's been a change to the outlook for cash generation and working capital building to the back end.

of cash flow or cash generation in the quarter, maybe you could just help us where that ended and how do we think about or if there's been a change to the outlook for cash generation and working capital building to the back end.

Yeah, I can jump in on that. For the first quarter, I say for the first quarter, for our initial quarter, on a combined basis our cash flow, or I would say even our debt level was pretty well flat with where we opened the transaction as of April 1st. However, keep in mind that this initial quarter had quite a few what I would call one-off items in terms of...

will be back to the normalized levels. But this first quarter was, I would say, really impacted by some of these one-off items and letting the trade payables clear through. So again, we manage working capital very tightly within all the individual operating companies. We have a comprehensive process we go through around managing CapEx as well.

So, you know, we're comfortable that, you know, we'll be back to our normalized levels here in the latter half of the year.

Can you just remind me what is – I mean how would you define normalized cash flow generation for the consolidated businesses? Is it – Yes, you're right.

I mean, is it fair to think that free cash could be

100% of net income or in excess of that in the out year if things start to normalize here from a supply chain perspective.

Yeah, would I, yeah, let me let me answer that.

A couple of data points. From a CapEx perspective, we would anticipate on an annual basis that we'll be in the $15 to $20 million range on CapEx this year. Then the other piece that I'll comment on is really just the working capital needs in terms of the expansion of the business in terms of organic sales. Historically, if you look back, and there's certainly some...

And then we have the funding or the service of ADAPT as well in terms of interest in the principal payments.

Understood. Good color. Thanks. Thank you.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star, then one on your phone at this time. Your next question is coming from Brad Hathaway from Far View. Your line is live.

Hi everyone. Hi Brad.

Congrats on an incredible quarter. I mean, both the growth and the profitability was really great. Most of it was discussed. Thanks, Brad.

I guess I was positive to hear the commentary on kind of the confidence on the EBITDA for this year. I guess I'm curious, based on kind of what you're seeing from the summit and all the kind of discussion among the teams, I mean, how do you feel about the EBITDA progression as we look into the midterm and kind of that path towards the team that you talked about previously? I mean, how has your confidence changed on that?

I was positive to hear the commentary on kind of the confidence on the EBITDA for this year. I guess I'm curious, based on kind of what you're seeing from the summit and all the kind of discussion among the teams, I mean, how do you feel about the EBITDA progression as we look into the midterm and kind of that path towards the team that you talked about previously? How has your confidence changed on that?

Well, first of all, it was nice just to get through the first one, right? I mean, it's been over a year of really 15, 16 months of...

since we made the proposal in May or wrote a letter in May of 2021.

And so to get one under the belt, to get out of the gate, you know, more than straight, and to feel really good about how everyone's working together and the opportunities that we're continuing to uncover, which are larger than the opportunities that we underwrote to when we first thought about bringing the businesses together, both in terms of how they could...

work collaboratively on cross-selling, some of the abilities to leverage the platform to be more efficient, and then obviously how we are thinking about using the pre-cash flow and the scale benefits to continue to add acquisition revenue and thoughtfully the right strategic acquisitions kind of bringing our netuart Carder Discourses, the Roldau Project's coordination with short term treasury and other export partners that En Answer are HAUC from broadcast and g and the inflation

together a better business, not just to grow EBITDA.

So I think as we're looking at it, you know, that this is, the progression is going to be up and to the right in terms of operating margins, EBITDA margins over the next several years.

I think we're feeling.

The other thing that's nice, Brad, is that each of the three teams have done a great job managing the inflationary pressures on inventory or purchasing and passing that through to kind of in order to sustain their margins and actually improve their visibility on margins for their price action.

And so I think that that's helpful in an inflationary environment. The last thing you want to do is lose ground on that.

It's hard to recapture if you don't get after it on day one.

We're still seeing some of that flow through the model, some of the price actions that we've taken.

And so I think our confidence is...

And a big part of that comes from the three CEOs and Ron who are on the phone and how well they and their teams are culturally working well together.

we see a lot of progress in front of us.

Excellent, that's great, that's really helpful. And I guess just, I mean, yeah, it seems like all three teams are operating great, so thank you all for all that effort. And I guess just one other small question on the M&A pipeline. If memory serves, there was a GEX Pro deal that was kind of, you know, somewhat in the proxy, something that was kind of at least in process. Is there any update you can provide on that one?

Brad, do you or Bob want to talk about where we are on that company? Yeah, so Brad Wallace speaking here. I would say it is still in process. I think that M&A, certain transactions take a life of their own and this would qualify as that. We are in the later innings than we were before, but we're not yet to the ninth inning.

So it is still on the hook and still in process. Got it. And has test equity completed all the transactions from the proxy? The ones that they've got, are those all done? Yes, they have.

Got it, okay. So it's just this one GEXPRO one for the proxy that's not in there yet. Referencing back to the proxy, that is correct. But as I mentioned earlier, there's others that we are working that are in the pipeline that were not included in the proxy as they weren't as far along as those that were in the proxy. No, 100%, I understand the pipeline is very different. I was just curious about the ones specifically noted in that. Great, well I would say that not only have you come out straight, but I think you guys have come out with a really great person.

along this journey and we welcome those that are new to our business. And we're really proud of the management teams of these three business units and how they've continued to work together and collaborate and a lot of work that Ron and his team has done in order to work through the challenges of effectively a double reverse merger and one of the more complicated accounting...

GAAP accounting exercises that we've been involved in.

Lots of hard effort, hard work over the last six months, nine months to get to where we are today. We're enthusiastic about what we're seeing in the marketplace right now in the last couple months for the businesses and the way that the teams are working together to be able to unlock more value for the shareholders. The business is gonna present at Midwest Ideas Conference in Chicago, which is held on August 24th and 25th.

We welcome anyone that is going to be there to meet with us in person. And then obviously, if anyone has any questions, as follow-ups or would like to have a call with us, please reach out to...

to three parts advisor or to Ron, and let's get on the calendar and have a conversation. Thank you for your interest, and have a great rest of the summer, and hope to see you soon. Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.