Distribution Solutions Group Inc. Q1 2023 Earnings Call
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[noise] I would turn the conference over to your host Steven Hooser Investor Relations you may begin.
Yeah.
Good morning, and welcome to the distribution installations of your first quarter of 2023 earnings call in conjunction with today's call. We are providing in Q1 race presentation.
And on the companies I, our website and industrial distribution solutions group Dotcom.
The statements made on the call and in the press release.
Forward looking statements concerning goals beliefs expectations strategies plan future operating adults 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 use 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 this claim no obligation to do so.
That will also refer to non-GAAP measures and reconciliation to the nearest GAAP measures can be found at the end of the earnings release.
Brings press release issued earlier today was posted on the Investor Relations section of our website a copy of the police.
Has also been included in the current report on form 8-K filed with the F. C C.
This call is being audio webcast on the Internet via the distribution solutions group Investor Relations page.
A <unk> a replay of the teleconference will be available.
<unk> 2023.
I will now turn the call over to Brian King D. S E as chairman and Executive Officer, Brian .
Thanks, Stephen and thank you all for joining to review our first quarter results. Joining me for today's call Us <unk> D. S. G as 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 Steve.
Steven mentioned, a slide deck that we're using in conjunction with our prepared remarks, starting on slide four we delivered strong sales of 28% on a comparable basis, which included almost 14% of organic growth and.
In addition, we generated first quarter adjusted EBITDA of 39 million, representing our four consecutive quarter of expanded EBITDA margins into the double digits. We.
We believe that our scale and breath of products and services continue to provide competitive advantages and especially industrial distribution industry.
R. D. S. G operational teams are working well together and we were saying good evidence of wallet share growth volume increases and encouraging invalidating cross selling words as well as continued at <unk> and and initiatives 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 and improve 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.
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 and our first fiscal period of this new year and culminated a strong first full year four seasons, so to speak working increasingly well together.
We are actively engaging customers with the goal of providing a simple and efficient and even more value added customize 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 are expanding value added customer centric capabilities and each of our channels.
This business most closely alines with tests equity, 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 his go to join our vision of building out a scaled.
Next we're projecting with the addition of his goes leadership Mark market knowledge footprint in close collaborative customer relationships are 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 platforms. The.
And re mixing test equities 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 offering us more embedded value added engagements to daily reinforce our total value to the.
While we are enthusiastic about what the future will look like the closing is still subject to certain regulatory approvals, although we're progressing as planned toward closing in the second half of this quarter.
With our high touch customers that create greater long term value.
Secondly, Jack's borough services Louie is a leader in the supply chain solutions have largely see part specializing in BMI programs for high spec OEM customers.
We continue to capture cost synergies and production efficiencies by moving our products and a distribution centers that are closer to our customers, resulting in what will be improved delivery times and lower shipping costs.
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.
Average daily sales or ADN screw 19, 4% organically over the first quarter of 2022 on and adjusted basis and 80 S 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% in 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 Grove during the quarter was achieved through an increased share of wallet with the existing customers and new customer relationships in particular within strategic or large accounts and our Kent automotive businesses and both of those pieces of our business we ship to approximately nine.
10% more unique locations this quarter than a year ago.
Lawson continues to realise steady improvement and it's 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 in leveraging our costs over a higher sales base.
Lawson to 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 adjusted EBITDA as a percent of sales was 14.7% in the quarter versus 7.7% a year ago quarter.
Turning to Jack's borough services and slide Ted.
Total sales projects Pro 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 in $15.3 million from organic growth.
In 2022 Jacks Pro services acquired Reza locks 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.
<unk> 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, alternative test equity on slide 11.
Sales for the quarter grew 35 million or over 48% to $107.4 million, primarily driven by recent acquisitions.
During 2022 test equity closed on three acquisitions T equipment, and National test equipment, and Q2 and instruments 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, where lumpy throughout 2022 and as expected slowed in the first quarter of 2023 is customers have delayed expansion projects and we continue to face supply chain challenges.
On an adjusted basis EBITDA basis, the first quarter ended at 7.1% of sales or seven $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 and access to capital we have approximately $31.1 billion 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. According in feature.
We ended the quarter at a net debt leverage ratio of 2.7 times, primarily on increased earnings.
Our deleveraging that started in 2022 continued into the first quarter of 2023 for.
For reference at the time of the April 1st 2022 merger of the three businesses.
Our that our net debt leverage was three six times.
This progress is consistent with our intention to prudently manage our debt levels and our leverage in the three to four times range.
Ned capital expenditures inclusive of rental equipment was 5.1 million for the quarter.
Before I turn the call back to Brian 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 Brian mentioned, we continue to be pleased with our long term outlook. However, we are up against tougher sales cops going into the second half of 2023.
All of the businesses continue to execute on their planned initiatives for 2023, which will make a 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, <unk> services and test equity for their commitment and drive to deliver these great results in the first quarter.
I will now turn the call back over to Brian .
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 in working capital investments are not unique.
Our underlying philosophy is anchored in a disciplined to allocate capital of the highest return projects while building the best position longterm 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 like business or organic growth primarily comes in the form of investment and trade working capital and great people as well as inorganic investments through M&A.
We've invested significantly in all three over the last year.
The returns on our incremental investments and working capital may disappoint organic growth or without a doubt the highest returns on a pretax basis. They often approximate 80% to 100% are significantly higher consistent with what we've observed over a long cycle have been and continue to be the returns of our peers.
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.
These acquisitions should enhance our ability to organically grow at a faster more profitable right and turn sustaining and driving higher returns on working capital all of which will significantly cheapened back the purchase price. We certainly believe that his go 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're not in any hurry to buy something that is only accretive.
Along those lines are that leverage is an important focus, especially given the rising rate environment and currently our leverage remains below three times ahead of the closing of the his co acquisition, which we expect to take us to somewhere between three and three to five times. After the close we will have approximately 450 million.
Net working capital pro forma alongside are accelerating 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 of 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 longterm 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.
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 and are working capital with another $100 million or so coming with his scale or.
Our investment in working capital over the last year reflected our expectation around many ways to continue to drive organic growth and how that drives accelerating profitability for our shareholders. We invested more aggressively last year, especially with the business combination and with the 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 dramatically.
More than dramatically increase it.
Are operating team understands my intense belief that prudently managing working capital is one of the best ways to drive meaningful return on invested capital and should be.
And should the economic headwinds get testy. 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 and calmer environment.
As I mentioned in the last quarter are operating teams have a heavy focus on managing or working capital intensity for 2023 I.
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 principal goal of 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 are are cycled our merger transaction completed in April 2022, and are seeing the benefit of our working capital investments are acquisitions and our collaboration across the three business units.
We're finding more ways to leverage spend in a drive cross selling through our embedded alignment with many of our closest customers.
His skill will significantly enhance both primary objectives.
Aside from our work on Hesco, 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 for sequential quarters of sales growth in margin improvements and although we are excited too.
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 returned 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, Maine 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 four quarters.
We all can appreciate what some of the leadership teams are now facing with having delivered exceptionally the last few quarters and me trying to move the goalposts board on them at a faster clip.
We will get to the next margin milestone threshold soon but I want a temper all our expectations mine included.
That it will likely will not be as linear as steep as we just enjoyed and we will be copping tougher quarters later this year.
DSG as a specialty distributions 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, an industrial technology needs with a combined addressable market a $57 billion our verdict.
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 outsource expertise labor specialty capabilities and supplies with secure.
Supply chain management.
It is daily reaffirmed that are unique competitive advantages are compelling to customers and are important to manufacturers Oems and businesses that use specialized products and their industrial and commercial industries.
And expanding our distinct products and solutions makes this hesco acquisition of compelling investment for us.
Thank you for your time today and now we would like to open up the line for Investor questions Operator.
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First question today is coming from Kevin's Sankey from Passion research, Kevin Your line of Slash.
Thanks.
Thanks, and good morning to you as well.
Good morning run I appreciate.
Your comments there about.
About.
The fact that.
Maybe the margin improvement won't be as whenever you're.
Going forward as it has been.
But you know obviously you you've.
Hit that in now exceeded that.
Near term 10% goal.
Discussed and.
When you get disco layered and you're expected to accelerate improvement.
Improvement near structural margin profile could be given any.
Thought about.
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.
To particular number.
Yeah. So Kevin this is rod I'll I'll I'll take that and and then may be Brian make a couple of comments as well. So we've we've not publicly put out any specific percentages.
But it is.
As we indicated in bold Brian's prepared remarks, as well as mind, we we did exceed our plan that we had initially set up for for the first quarter.
Seeing a nice improvement.
300 bps over Q1, a year ago, and also 100 bps over over Q4. We ended Q4 at 10, three and we got to be 11 three.
What I would say is that I mean, there were really no I would say kind of one time items. They gave us a big benefit in that in the first quarter. So.
To Brian Cohen structurally.
I think all all three of the of the businesses are are getting the benefit of a lot of the actions that we took in 2022, so again, probably probably premature to to commit to a percentage.
But.
We're seeing that spillover effect of those actions that we made in 22 into 23.
I did my prepared remarks, I did indicate that we're up against some tougher calms as we as we enter into the latter half of the year.
And I think to Brian point <unk>.
Certainly.
It won't be as linear and we're making investments within all three of the companies as well so, but we feel really really good about about the first quarter and and not only the net margin expansion, but also the gross margin expansion as well, so I'll I'll pause there and.
Maybe it probably wants to add comments as well.
I think you said, it well raw and what what I would add to it is just.
What Kevin's question about.
Are alluding the structural margin.
We demonstrated to ourselves and I think the marketplace hopefully that that the businesses.
I'm 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 gonna be elements of.
Of.
When we pulled T test test.
Tess equity in Petsko together.
Set in our comments that.
Together, it accelerates getting both of them up to some our margins to what the total company that this year.
But coming from a from a lower level and then Lawson.
Has you know we've been talking for years about the contribution margin that Lawson enjoys when revenue is growing.
Pulling the businesses together is unlocking and opportunities.
Four law center to access.
Some new customers and to enjoy some growth that we had struggled with and there are some really exciting initiatives. It stays artist team had been working on to.
To continue that growth.
And to really free up.
More.
Opportunities for our salespeople to to go Hunt.
New customers ordered superstar the customers to set got where they're continuing to grow wallet share. So that we would expect that as that is that those efforts.
Pulling out more this year and we've been working on it the first part of this year or.
Getting traction that Lawson structural margin, which was 14.7%.
This quarter.
Significantly higher than than what we had been saying the last few years, but part of a real strategy here that we had pulling DSC together are going to continue to March forward. So we think the whole is gonna get pulled up I don't think it's going to be linear slope was dramatic obviously between last quarter and this over one.
Basis points in a quarter.
And that's what I was trying to make sure that we we measure having a more measured perspective specialty distributors that are out there that are public we've gone back and studied them through their continue on for the last 30 years and.
To get.
To line up where we would like to like to and where we want to be.
Several hundred more basis points is our objective, but it's gonna take us.
357 years to get to where we.
We think that we can get this this business so.
Hopefully that's helpful.
Yes, absolutely very helpful commentary.
So where are we.
Terms of the you know the journey with with pricing <unk> did you mentioned the.
Overall contribution.
To your 13.7 per cent organic growth from price.
And if not what was that and then.
I guess that would kind of plan to the tougher tops, perhaps perhaps as we move forward. This year in terms of starting to lift some of those price increases.
Yeah, Kevin, Yes, I did I did not.
Indicate the consolidated number but it out of the $13 seven about 10 about 10 points of that was price related and and the other call. It for three and a half to four was volume on a consolidated basis and and all all three of the of the.
Of the businesses.
We're taking.
Taking continuing to take us pricing actions and again kind of spillover effect from.
From the actions taken in <unk> I'm, sorry in 2022 into 2023, so yeah, you're right. It does it does play a bit into the to.
The tougher times later in the year.
Would say that we.
We're still continuing to see some vendor cost increases come through although they've moderated a bid from where we were in 2022, but all three of the businesses are are keenly.
Managing and and and expanding their gross margin percentage.
Not only from from necessary pricing actions, but other initiatives around freight.
Rebates.
We put a portion of our costs up into up any gross profit as well so we're getting some basis points list.
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, but about about 10.
Short answer is about about 10 of the 13 seven was price related for the quarter.
Got it no that's great that's helpful.
Just wanted to touch to Lawson.
It seems like some <unk>.
Really strong momentum there.
And you mentioned the nine per cent growth and shipped to locations.
Any more.
Commentary on what what's contributing to that.
<unk>.
Your expansion to new sales channels, and what have you and just just trying to get a sense of the momentum that's building there.
Perhaps could continue to build.
As you start to roll off some of the CRM tools and filled out those sales channels.
Sure. So I can I can start and and then maybe have Brian jumping as well so.
Yes, very very pleased on the Lawson results for the quarter, the $14 seven that Brian <unk>.
Quoted really nice improvement and I would say that that.
Is primarily coming from sales growth as well as gross margin expansion and and up and really leveraging our our cost structure that we knew we could get you know we've talked publicly about getting 30% to 40% flow.
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 to the 9% increase in unique shipped to locations. That's a metric did that we're measuring.
Cross the entire business on all of the segments and.
It is.
As I think about this for the investments that we've made in 2022 and that really just 2022, but even going back previous to that.
Lawson has made some pretty significant investments in the strategic account area, where we developed.
Longterm relationships with large customers servicing many many of their locations you know with the with the pricing strategy in a rebate strategy. So we have we have specifically invested in strategic account managers and.
Customer support individuals to support that piece of the business as well as the Ken automotive business.
As we look at the the trajectory of those two pieces of our business over the last five years.
Really been the strong, yes, and I think it's bad not only developing those core relationships with the larger customers that are that are very sticky.
Slightly less gross margins. So we're up against that from a from a headwind perspective, but we're still seeing gross margin expansion out of consolidated basis. So.
Yeah.
We're driving our business really from both existing customers as well as new customers and certainly those unique shipped to locations as a big piece of the overall growth for us.
Okay great.
Just wanted to ask lastly here about.
What what you've seen in April in terms of.
Sales growth trends and.
You mentioned some moderation.
Few markets.
Perhaps related to the economy, but.
Doesn't sound like that's a meaningful headwind at this point I guess so.
Thoughts on April and the trend in.
The economy.
While on that either one of us once you get around and I'll fall, but you sure okay, great yeah. So so.
<unk> I would say.
For April .
We've continued to see pretty positive results.
I would say you know we've seen a little bit of moderation in some of the end markets.
We both both Brian and I commented on the on the test and measurement side within the test equity business.
And.
What 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 the first quarter on a consolidated basis.
With.
Couple of markets being.
A couple of our vertical as being Lawson being up you know.
Versus where we where we exited the first quarter.
Keen on being down a little bit and and I would say within within <unk> services.
A little bit of a mixed there, but we are seeing some growth now on 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.
Don't see any don't see any major red flags that sit out there here for the month.
Kevin I just would add that.
<unk>.
We spend a lotta time looking at all of our collective in markets that were serving and trying to understand how to continue to add balance to them. So that we you know between MRO and OEM, which Cisco does some very deliberate thanks for us.
And.
So we are incur.
Encouraged.
As we kind of look at at what we're trying to build longer term in terms of kind of some of the.
The.
I'm about to fall into my CFA taught the correlation coefficients of the different industries and.
And different economic at <unk>.
Backdrops and so.
Right now, we're saying things like renewables were a year ago.
The one acquisition that we had made at Jack's borough services that was.
That was actually when we reported last quarter.
<unk> exceptionally well, we brought down EBITDA multiples on acquisitions that we've made.
Over the course of 12 months.
The one that was outlier to the negative even though they are average was was very good was that the fact that renewables had given us some challenges and we knew that that <unk>.
Tough backdrop, there and that backdrop is starting to really open up and the strategy that 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.
That market.
To <unk> to firm up our leadership with that markets.
Is taking hold and so while we aren't yet getting the benefit of of that market being back at peak levels. The the acceleration. There is is copping against much easier comps a year ago.
Enjoying Eric.
Aerospace and defense is a strong space for <unk> services right now and so.
So they have some verticals that are that are that are stronger. We went end of the year anxious about their semiconductor and market and it's softer than it was a year ago.
And that impacted.
Their first quarter, even their first quarters, great but.
But it weight on it a little bit and and yet it's harmed up a little bit.
From where we started the year and where we ended last year. So.
So there's even as we look at the time of the cloudiness. That's out there are in markets seem to be performing well the the one area that that we've we've.
Tried to really.
Emphasize on this call is that <unk>.
Capital spending is where we're all of us across all of our portfolio companies not just DSG and I'll all of our investments and public companies.
Capital spending is.
People are are cautious about it and so tested measurement equipment to the extent that.
Somebody can delay, making a capital decision.
We're saying in southern textile 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 our challenging part of our business.
And it has been so far this year. Some of that is late was late times and challenges with.
Getting product to from our vendors to our customers and.
And what I did emphasizing the call is that we <unk>, we are saying at some.
Level of those customers, who are well capitalised large.
Customers are.
Are 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 in Cisco doesn't have that.
So we think about disco and how it lines up with what we're doing here.
It doesn't have that tested measurement equipment.
Exposure and their revenue.
But they do have.
Some programs that we had identified that we're rolling off.
So when we get to talking about it next quarter.
They picked up some new mandates and and so we're not saying real weaknesses and their end markets, so, but just like with any other Oems.
Relationships like we would have <unk> services.
You can have into life programs like a COVID-19 <unk>.
Testing kit.
For instance.
So.
But you're picking up new programs, along the way as well, but more than more than backfill that revenue.
Alright, great well, thanks for all the the.
Site, and and commentary I'll turn it over.
Thank you Kevin we appreciate your interest.
Thank you once again, ladies and gentlemen, please press star one <unk>.
Questions and the next question is coming from.
From far for Ya.
Of your line of sight.
On and Brad.
Martin.
Thanks, Thanks for incredible job in the quarter really impressed with both the organic growth that'd be incremental margins on <unk>, we'd be 11 prescribed as quickly so well done on that 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 you mentioned a little bit within vertical is like when you mentioned the jets prosection something about with it and I just want to understand kind of.
Maybe a little more detail and some of the opportunities you see they're both you know from between <unk> Lawson, but also within Jack's borough within tax equity themself.
Yeah, So I'm gonna run a late on this and then I want you to help me get.
Get some tightness on what I'm, saying.
Brad <unk>.
Example, I used on renewables is probably one of the best examples that we've got to show how.
How <unk> pulling some of these acquisitions together inside of a vertical.
Has accelerated opportunity, but then in addition to that it's pulling.
The <unk> you know Bob coins early on the power three which is the way that he's been really <unk>.
Firing his salesforce epic <unk> services to go out and.
And engage with their embedded relationships.
Relations.
Sorry.
And so there is.
The renewables peace, we needed to land.
The some of the.
I've been here in a little bit of feedback, but uhm.
We were we needed a lan some of those major Oems and there are no more 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.
Instead of solutions that if we could get tightly.
Tightly coupled with them that we could broaden out our engagement with and so on.
On the renewable side, there was one of the major Oems and that when space that we did not have.
As much of an engagement with her relationship with and one of the acquisitions brought that relationship but didn't several of our acquisitions that we made on <unk> solutions or deliberately mapped out to significantly expand our solution Ah built our ability to provide solutions for not only.
Oh, William that we were working with but the OEM that we landed through an acquisition and that has given Bob and his team and ability to take a much more robust set of offerings.
To them Uhm, we've led with being able to help solve for all of the guts inside of the.
The towers connecting the base to the to the.
To the turban and.
And on their retrofits in their overalls and.
And that we we would not have had all those elements.
Yep brought together had we not pull those acquisition together. So that's one way to think about it but what that also does is it we're putting MRO elements are we're putting pieces of what Lawson does into that dialogue and so there's an engagement there.
<unk> <unk> some of the.
The products of test equity on the electronic production supply side and the MRO.
<unk> excuse that that Lawson had and then to the extent that we are working inside of a facility.
We're trying to pull some of that Lawson capability at work getting good traction with some really key.
Mmm.
To where.
Where we had Jeff.
<unk> services.
Specifically, you had very deep relationships and we're we're <unk> basically able to <unk> and unseat.
On those MRO and BMI pieces.
Folks that were were there before and I think it's really how collaborative and you know the relationships already were.
And then being able to you know take that collaboration lands and I think about it on a micro level.
The <unk>.
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.
You know, while we're working in our back office in our warehouse to try and improve automation, we're not taking a lot of that.
Automation lands to the experience of some of these customers and that's been that's been successful.
So.
And we think it will continue to be skeptical, we're just scratching the surface on some of the cross selling candidly works. The dialogues are expansive the wins are more narrow, but the windsor still material to the to.
Financial performance is just the final is is a lot larger.
Yeah.
<unk> 40000, more customers that were picking up with this account.
Yeah.
<unk>, Yeah, I would I would add branches.
There is there is an excess of 300 active leads I think we talked about this on the on the queue for a call where we are we are incentivising. Our sales teams across all all of the companies to bring these leads that Brian referenced into into the other organizations.
So we are we are actively working in excess of 300 300 leads and you know have seen realized sales.
Oh.
Multi million.
<unk> into already coming through now some of that you know what happened in 2022, but you know I would say in China and.
Steeper scale as we enter into 2023, so I mean, it's not a it's not an eight figure number yet from a sales perspective, but it's but it's a few million dollars that we've been able to to realize on top line growth.
Awesome. Thank you guys. So much for the color and thank you for the incredible performance look forward to see how this could you develop thanks a lot. Thank you Brad thanks bread.
Thank you and the next question is coming from Katie pressure from Keybank capital K to your line of slash.
Hi, good morning, Sir Ken today.
Yeah.
Wanted to follow up on your pricing around the pricing question from earlier can you clarify if price costs was positive margin and what's the expectation for the rest of the year.
So.
Yeah, <unk>, yeah, so the you're referencing back to the 10% pricing that that I commented on.
Yes.
Yeah. So.
Show.
We've we've seen more of that I would say here in the in the first quarter. Given that then we are laughing some of the 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 of our combined increase on Ah.
On a quarterly basis for every quarter on a go forward basis, I'd say as we.
We think about timing in terms of some of those actions. We <unk>. We did in 2022. They were probably later in the year versus versus even even in queue too. So.
We're probably up against.
Less headwinds from a pricing standpoint here in the second quarter, but but probably more more so in the in the in the latter half of the year. So.
I don't know if that answered your question or not I mean, we're not we're 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 as we're we're still as I mentioned earlier street seeing some vendor increased cost increases coming through and so we're certainly not not sitting on those and absorbing those internally. We we are passing continue to pass those those that affect along so.
And generally speaking the.
Customers had been.
Understanding and and willing to to take those increases certainly in 2022.
And and so far here in 2023, certainly some conversations with some customers about tightening up a bit on that but but generally speaking I would say that that the customers are supportive in an understanding those actions.
Okay.
I'm Gonna just touch <unk> on that.
I mean, your your question I think was pretty straightforward and that.
<unk>.
Our our price actions more than eclipsing the inflationary pressures that were feeling from our cost of goods sold our vendors and the and the short answer is absolutely and then the longer answer is theirs. So yes, we are more than <unk>.
Been able to capture margin and we're continuing to.
The difference between especially distribution and and broadline distributors or commodity distributors is that an 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.
But with the other capabilities and the people that are supporting it.
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 of the actual product that we're selling through it.
So it has been margin enhancing at both the gross margin level and EBITDA margin level.
Okay. Okay, great that's helpful and Ron just to clarify one point that you made.
Sir you mentioned before that does vendor cost increases those are starting to moderate correct.
Yes.
Okay Alright.
Mm [noise]. Okay. Another question here at <unk>, you talked about easing lead times and 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 that our supply chain get easier.
Are 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.
And that did increase are working capital investment in our inventory position.
This year, we think that we're gonna see some real tightening up on our working capital investment. That's one of the things that we went in to the year is it is a focal focus point and were the different verticals are working on that the incremental returns had been really good just because we've had the updraft of EBITDA to go along with the you know the the <unk>.
<unk> in working capital investment, but we think they can go even be even better.
And.
There's.
The the anxiety I think on our part of making sure that we had products on hand for customers.
And maybe buying more aggressively or leaning into inflationary pressures from our vendors livestock and 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 saying I think part of your question, maybe Katie our 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 were stocking more around and this is Ron you can correct me on this but the the way that we think about it and talk about it as a team is that our customers are giving us forecasts around what their needs are gonna be and we're really holding that inventory oftentimes until we're loading it into their beds.
Putting it on their site or managing at at the production line as.
Yes, it would be for <unk> pro solutions and so.
That has influence or informed us more about what we need to have.
On our balance sheet and less about what we might have.
<unk> might be placing at their at their production.
<unk>.
So you know it is allowing us to.
Certainly I think has reflected on the fact that our customers have padded those numbers. Some force of their production Act there and market production.
On there and I'll <unk>.
Schedules may over the last 12 months have looked different than what they asked us to hold an inventory and so.
<unk> that was partially driven by their anxiety and making sure that we had key products.
On hand.
So as I needed it based on whatever their production.
Output, what's 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 credit pull through where they were stocking inventory or they were they were safety stocking up much greater amounts of inventory on hand.
The only place where we really had longer late 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.
They're over the last four or five months.
But we don't think that.
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 other places we don't and we aren't sitting on backlogs were sitting on cotton kind of visibility around but we're gonna be pushing through.
But we wouldn't say that there's a backlog where they're waiting on inventory. The chamber's business is a place where we've had a backlog where we.
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 are quoted in in price product a year ago.
And then we had inflation on our costs are made on our component prices.
<unk> cost of goods sold went up on us, but our top line stayed the same and we are working through that overhang and oughta get margin lift in that area as well as an acceleration actually in in revenue.
We get further into this year.
Ron what else I've got.
Yeah, I would yeah, I would I would probably I think well set I think we're seeing you know certainly some some easing taking place on on on some of it and get on getting product what would what what we don't believe we've seen is that the upholstery from our customers is is decreasing.
Because they were they had inventory stocked up at an excessive level. So we still Shaw.
And the EPS business.
Cast and certainly with the injection of services and and Lawson, we saw nice volume vol.
Volume increases as well not just price so we're.
We're not we're not seeing.
Significant pullback from our customers.
They try and normalise their inventory levels, so into into Brian's point, I mean, <unk> pro is so well <unk> services a show well connected into the end of the production process with the customers that they've got a great read on on what the what the future need is for for their customers and they are able to go out and <unk>.
Step product on a on a timely basis to help their overall production cycle. So.
And within the Lawson business you know there's.
Certain items that are that are on back order with our customers. We track that is pretty isolated in terms of specific skews, but for the most part we seen a decrease in backwards as well, which is an indicator that the supply chain is is easy for us to be able to get that product.
Okay. Thanks, that's helpful. And then just one last question for me. So I wanted to clarify on the margin cadence commentary from earlier shall.
Can we expect an outsize moved in margin sequentially first as a normal seasonality is that what you're trying to get at.
Yeah, Let me, let me make sure I understand your your definition of an outside movement beyond seasonality.
[laughter] yeah.
Yeah, I guess it just in terms of the the sequential news first as in normal seasonality.
Saying, it's it's gonna be less linear than it was in the past.
Yeah, Yeah. So in terms of sequentially is that you're expecting an outside it's different person prior.
Prior years, yeah. So yeah. So <unk>. So let me, let me try and address that from a seasonality perspective, I would say generally speaking.
Q2, and Q3 across the platform are are the strongest quarters. We did see again, we saw the nice lived here in the in the first quarter.
And but generally generally speaking we would see Q3 and Q4, sorry, Q Q2, and Q3 being the strongest probably Q for being being the weakest.
Because of fewer selling days and then Q1 <unk>.
Fallen after Q2 and Q3 so.
I think our commentary around the linear piece of that really gets too.
The 300, <unk> 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 it may not be that linear you know as we as we think about.
Where we exited the first quarter shortly.
Certainly we believe that we can still create margin expansion and operating leverage on on the top line sales growth show.
Again, I I think 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% set a really nice baseline to to start sequential growth on you know as we developed the rest of 2023.
Yeah, So Katie.
I've kind of hit on that at the end of the my prepared remarks and you.
I I just wanted to make sure that.
We knew when we pulled these businesses together and we know from where we are today what are longer term objectives are but and we've had conversations that we are gonna try and can give.
You know like near term milestone guidance on where EBITDA margin should be but.
What we did say a year ago, what we expected at this time of year ago. We made the strong comment that we were <unk>.
And at that time, we were at 8.3 per cent EBITDA margins are 8.6 per cent EBITDA margins and we said we pulling the businesses together, we expect it to.
To be to end the year at over 10% on a run rate basis, and we actually.
End of the year it slightly.
Above that I think it was.
10.4, something like that and and and now we 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 special.
Especially distributor.
But we don't expect that we're gonna be picking up a couple of hundred basis points, a year or a R 12 month period again.
It could happen, but really what we think is going to happen is that we're gonna be continuing to have <unk>.
Significant <unk>, a milestone objectives that each of the vertical.
And as those verticals move up from where they have historically operated.
It's gonna create a blended margin.
For the <unk>.
Kind of from especially distributor perspective, that's gonna move DSC up more consistent with what I would expect we would we should have added this type of a of a of a scaled up especially distributor and.
But it's just not gonna.
Being linear and it's not going to be linear we're rolling in his scho, how we've got some some opportunities there to significantly leverage the tests equity Hesco uhm vertical and.
And there's gonna be good movement there forward over the next 12 months on on their EBITDA margin.
And then that's going to contribute to the the new blended right and then you've got Lawson is going to continue to have the benefit of we think you know cost leveraging across the platform as well as his margin opportunity at the at the contribution margin level.
And so it it should operate better than Jeff Pro services has done a great job of it.
Their their relationships and their and their with their Oems are tight and it's not always easy to just <unk>.
Raise prices the way we can on.
You know kind of transactional.
<unk> activities like you can't it at.
At Lawson or like you could on the the MRO side of pisco or could going forward on that on the <unk> on the OEM side, it's more sticky and so they've done a great job of a passing through and having constructive conversations because they are such partners with their <unk>.
Oh am customers.
That's been very collaborative.
And that that should continue to work in our March in favor on checkbook services as well just cause we're getting more scale, there and and we're able to to have some of that pricing action.
Continue to kind of flows through versus having it flow through more.
Specifically on a day like it does on Lawson.
Katie just I just wanted to point you to on slide eight of the of the deck.
There we reflect what the margins are inclusive of all the acquisitions in queue too I think just getting into our points Q.
Q too inclusive of all the acquisitions that were made for the even the Preacquisition period are adjusted EBITDA percentage was 9.6%. The gap reported numbers was eight three Q2, a year ago, but inclusive of of all the acquisitions had been made which certainly will be there in Q2 23.
As well if you were to look at that from a year ago. It's benign, 6%, so I think that that that.
The.
I think that's exactly to our point is is that you know kind of don't expect a 300 <unk>.
Movement in over a year ago, so bad that margin percentage, which ninth inclusive of the acquisitions, 96th and Q2 nine nine in Q3 10, three in queue for so kind of comes back to the commentary around.
Lot of the actions that we that we took in in 2022 helped drive the performance later in the year.
And accordingly, some tougher comps here in the second half of the year.
Yep.
Okay, Great that was very helpful. That's it for today. Thanks. Thanks.
Thanksgiving.
Thank you if there were no other questions in queue. At this time I would I would like to turn to call back to a Bryan King for closing remarks.
Thank you operator, and thank you for those that uhm joined us today for the call.
And absolutely. Thank you to all those folks that work for D. S C for allowing us to have a great quarter and continuing to operate so well together.
As we look prospectively at at what we're building. So thank you for your interest in DSC. 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.
Well look forward to talking to your next quarter.
Have a great day.
Today's conference.
Can I get your lines at this time and have a wonderful day. Thank you for your participation.