Q2 2023 Distribution Solutions Group Inc Earnings Call
Greetings and welcome to the distribution solutions group second quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to your host Mr. Steven Hooser, you may begin.
Good morning, ladies and gentlemen, and welcome to the distribution solutions group second quarter 2023 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 got distribution solutions group Dot com.
Please note that statements made 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 and we may elect to update the forward looking statements made today, but disclaim any obligation to do so.
Management will also refer to non-GAAP measures and reconciliation to the nearest GAAP measures can be found at the end of the earnings release. The earnings press release issued earlier today was also posted on the Investor Relations section of the website a copy of the release has also been included in the current report on form 8-K filed with the SEC.
This call is also being webcast on the Internet via the distribution solutions group Investor Relations page on the Companys web site.
A replay of the teleconference will be available through August 17th 2023, I will now turn the call over.
To Bryan's DSG is chairman and Chief Executive Officer, Brian .
Distribution solutions group delivered strong 2023 first half results anchored by our industry leadership positions, our broad portfolio of products value added services and mission critical solutions and the benefits we are starting to unlock with our significantly improved scale coupled with.
Our talented teams relentless focus on execution.
Starting on slide four of the second quarter earnings presentation, We again delivered strong quarterly sales up almost 18% in the second quarter, which included organic growth of 5%.
Second quarter adjusted earnings per share were was 52.
And up over 40% from the comparable prior year earnings per share.
We also generated adjusted EBITDA in excess of $40 million or a margin of 10, 6% in the quarter. This quarter represents the fifth consecutive year over year quarterly EBITDA margin expansion.
We are extremely pleased with how the teams have executed, especially in a dynamic operating environment with a lot of initiatives that are requiring investment of internal and external resources in the first half of 2023 to accelerate unlocking future value to the shareholders.
Later, we will provide more commentary on important sales and cost initiatives. We are currently working on along with our discussion of the operating unit performance for the second quarter.
We are excited that DSG is successfully established establish itself as a leader in the end markets we serve.
We are positioned well to leverage our high touch service delivery model and deepen customer relationships with our increasing breadth of value added products and services.
We are thrilled to have closed on the <unk> acquisition on June eight and are successfully integrating processes and Nick and the team to create a unified and streamlined single platform with test equity.
We fully expect to realize expanded sales productivity and meaningful cost synergies.
We continue to grow significant wallet share across ESG and are identifying key cross selling opportunities with solid contract wins through our growing business pipeline and <unk> only expands these growth engagements.
I applaud the strong collegiality and respectfulness across the collective expertise in DSG of our leadership teams, we have assembled and how they have prioritized and aligned their common goals across how our verticals can best leverage the total spend and capabilities the DSG to successfully improve.
<unk> and expand our products and services within our intimate customer engagement model, allowing me to see quite discretely, how it will continue to translate into an acceleration in building shareholder value for all of us.
In conjunction with these efforts and is a reality following many of our investments I also expect shareholders to benefit in coming quarters and for years to come from the investments being made and process improvements underway that will accelerate free cash flow and specifically for free cash flow conversion in the back half of 2023.
In 2024% to significantly improve.
While we remain guarded about our current rate environment and how it could weigh on our customers' business activity remained solid through July very consistent with our first half of the year.
Our sales organizations continue to engage the marketplace using customer Senate centric experiences that deliver quality products and smart efficient solutions that reinforce our value proposition to our important end markets. We are actively monitoring the demand environment.
And marketplace forces at each of our channels, we're leveraging DSG strong customer relationships and focus on a customized customer experience to expand our engagements, especially getting traction with large strategic accounts were.
We are confident this is strengthening the company's organic growth trajectory and reducing resistance to our cross selling efforts as we reinforce our customer centric priority.
And offer more value added capabilities in each of our verticals.
Moving to slide five let me briefly provide business updates on initiatives for each of our verticals.
First Lawson products as a leader in the MRO distribution of sea parts offering vendor managed inventory services. During the second quarter of 2023 loss and continued to make significant operational and financial progress I am pleased with how well the team managed pricing freight recoveries.
Growth within its customer base.
Also during the second quarter, the loss and team successfully aligned the sales organization to better serve our customers with key strategic field and inside sales personnel shifts.
We believe critical initiatives like positioning or our field sales team to become more productive with our high touch high demand customers generates greater customer lifetime value.
We are confident that this more balanced approach will drive sustained long term growth and engagement with customers.
<unk> leadership, we took the first steps this quarter.
We also continue to make strategic investments by enhancing our supply chain technology to support our customers and progressing on our digital roadmap.
We are working diligently on the CRM go live with enhanced mobile capabilities that loss in.
The company's investment in lead generation capabilities and CRM tools is expected to roll out in a few months.
Our goal is to better enable our sales reps across all sales channels to be more productive serve customers more efficiently be better equipped for cross sell opportunities and ultimately drive higher compensation for our high performing growing sales force.
Specializing in VOI programs for high spec OEM customers Jacks Pro services delivered strong quarter results, both sequentially and versus the prior year quarter.
Customers continue to be interested in our renewables value proposition that combines expanded electrical mechanical and hardware product offerings with kitting supply chain services, we've accelerated our leadership position as a value added channel partner for major Oems, helping them with solutions not only.
On the OEM side, but across the growing demand around the retrofits and upgrades upgrade cycle for the installed base.
We've seen a recovery in the aerospace and defense vertical and industrial power demand remains very solid.
Importantly, <unk> pro services value creation initiatives. This year include getting additional synergies out of our acquisitions expanded kitting and project services and successfully launching our e-commerce platform with a focus initially on tech and aerospace and defense customers.
We are also working through an expanded pipeline of opportunities, where our customers are engaging us as partners to offer solutions around additional product and service capabilities.
Our goal is to continue to win OEM programs, we are where we are intensely embedded with our customer as the provider of choice.
Our collaborative approach and the benefits seen through strategic combinations and bolt on acquisitions significantly increases our resources footprint and collective expertise and offerings.
Thirdly, moving to test equity.
Vendor managed inventory solutions continued to show sustained strong double digit strength in the second quarter.
We've seen pressure in the technology and R&D sectors, which we believe are impacted by higher cost of capital and capital expenditure delays.
Our team our teams are learning that projects are not being canceled however, they are being pushed out for several months.
As we mentioned last quarter, we continue to see increases in rental bookings and refurbishments as market dynamics change.
We will begin shipping many models just in time from current stock in early 2024, which should drive expanded margins.
Digital sales were up 8% in the second quarter with growth primarily from the new test equity and tea equipment E Commerce sites.
We are in the process of optimizing people processes and technologies as we integrate <unk> with test equity. So in addition to acquisition related costs. We also recorded about $2 million of restructuring expenses that Ron will cover more in a few moments.
We will continue to capture cost synergies and production efficiencies, resulting in improved delivery.
Delivery times and lower shipping costs regarding.
Regarding hesco.
The <unk> team.
Quickly embraced and are successfully engaging and established ESG cross selling efforts.
We expect this to have a meaningful impact on the overall profitability and cash flow generation for DSG beginning this year.
With that I would like to turn the call over to Ron to walk through the financials Ron.
Thank you, Brian and good morning, everyone turning to slide seven were excited this morning to share with you our strong second quarter results of distribution solutions group.
As Brian mentioned, we reported total sales growth of 17, 6% with organic sales growing four 8% through both price and volume expansion the.
Second quarter results reflect continued growth in margin dollars GAAP reported income improved threefold with Q2, adjusted EBITDA exceeding $40 million.
<unk> since bringing DSG together over a year ago.
Our positive momentum and movement in cash flows generated from operations continued with our focus on working capital improvements.
I'll now walk through some of the specific numbers on a combined basis of which most of this is on page seven of our presentation.
Consolidated revenue for the second quarter was $378 million revenue increased 17, 6% or $56 $7 million over the second quarter of 2022, driven by organic growth plus approximately $43 4 million coming from acquisitions.
Of which 28 million was from his skull.
Second reported GAAP operating income was $13 8 million compared to $4 1 million a year ago quarter.
On an adjusted basis, excluding merger related costs acquisition costs.
Stock based compensation severance and other nonrecurring items adjusted EBITDA improved by nearly 27% or $8 5 million to $40 1 million or 10, 6% of revenues.
While the percentage is down slightly from Q1, approximately 40 bps of the decline was related to including the initial three weeks of <unk>, which we did anticipate.
And third we reported GAAP diluted earnings per share of <unk> 14 for the quarter compared to a loss of 23 a year ago.
On an adjusted basis diluted EPS was <unk> 52 for the quarter versus 36.
For a year ago quarter.
Turning to slide eight let me now comment briefly on each of the businesses starting with Lawson sales were $119 1 million for the quarter.
Please note that this does not include bolt supply as they are included in the all other reporting segment.
The Lawson segment average daily sales of our <unk> grew 11% organically over the second quarter of 2022.
During the quarter unit volume increased approximately two 5% versus a year ago.
License growth during the quarter was achieved through increased share of wallet with existing customers and new customer relationships in particular within strategic or large accounts and our Kent automotive business during.
During the quarter loss and continue to build out its infrastructure to help our field sales reps become more productive.
Excited about these overdue investments to help the long term growth of our field sales representatives as they expand their book of business.
Watson continues to realize steady improvements in its gross margin percentage, while were up against some mixed shift headwinds as our largest customers have been growing faster and we continue to see expansion given price realization lower net freight cost and leveraging our cost.
Or a higher sales base.
<unk> adjusted EBITDA improved to $16 1 million compared to adjusted EBITDA of $9 4 million a year ago quarter, primarily driven by the sales and gross margin improvements, partially offset by increased compensation on higher sales.
<unk> adjusted EBITDA as a percent of sales was 13, 5% in the quarter versus eight 8% a year ago quarter, you may recall that loss and get out of the gate with an extremely strong start in Q1 with its strongest quarter that we've seen.
During the second quarter, we launched our initiatives to better service our customers depending upon their needs in size through additional channel offerings, which should improve the effectiveness and long term efficiency of our sales force.
That combined with some of the infrastructure investments that I previously mentioned.
Right down the percentage sequentially slightly however, we are well positioned to grow the company and the long term margin profile.
In the first half of the year loss of nearly doubled its adjusted EBITDA going from $17 4 million to $34 6 million and is well positioned with these investments to grow the company on an accelerated basis.
Turning to <unk> services on slide nine total sales were $108 3 million for the second quarter of 2023, an increase of $8 5 million over the second quarter of 2022, all from organic growth approximately four 4% came from volume with the rest.
On price.
The increase in aggregate sales was primarily driven by new customers and the expansion of existing customer relationships.
<unk> ability improved although mix shift was a headwind and softer sales to the semiconductor end market were more than offset with nice growth in aerospace and defense and industrial power markets.
Five of the six verticals delivered year over year sales growth.
And the ability to deliver world class support to the OEM production cycle.
<unk> services works extremely close with its customer base to ensure they have the necessary products and services and to simplify the supply chain and improved total cost of ownership for their customers.
<unk> services, adjusted EBITDA expanded to $13 1 million or 12, 1% of sales as compared to $11 9 million or 11, 9% for the year ago quarter and 11, 6% in the first quarter of 2023.
<unk> services continues to make incremental improvements in their margin profile and managing through varying and market cycles.
<unk> equity closed on three acquisitions key equipment and national test equipment in the second quarter and instruments in Q4 and in the second quarter of 2023, we closed on <unk>.
Organic sales were down 7% versus a year ago with a decrease in test and measurement sales and.
$9 5 million, representing an increase of 900000 over a year ago quarter.
With the softening of <unk> sales and with the benefit of thinking how his goes resources will begin to be leverage as folded in through the integration plans. Later this year indexed the legacy test equity business had more flexibility to remove nearly $4 million of annual cost out of the company.
Which commenced in June .
Moving on to slide 11 during the quarter, we expanded our committed credit facility from $500 million to $805 million.
We were able to accomplish this in a very difficult bank market, which validates the support of our strategy from our existing Bank group plus four additional banks that joined our credit facility.
Additionally, we also issued $100 million of additional stock to existing shareholders through a common stock rights offering. These two actions allowed us to close on the <unk> transaction pay down our revolver manage all our overall financial leverage within the guided range and increase our capacity for future acquisitions.
<unk>.
As part of that facility. We also have an additional $200 million accordion feature.
We ended the quarter at a net debt leverage ratio of three one times, primarily on increased earnings and taking on debt for the <unk> acquisition.
So even with multiple acquisitions over the past 15 months, we've been able to deleverage the company and improve our scale and offering to accelerate further deleveraging and support additional inorganic growth.
For reference at the time of the April one 2022 merger date, 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.
Our positive movement in cash flows generated from operations continued during the quarter with our focus on working capital improvements.
Net capital expenditures inclusive of rental equipment was $5 7 million for the quarter.
We expect full year capex to be in the range of 16 to 22 million.
Most of which is a discretionary investment to grow rental assets, which also supports used equipment sales.
All of the businesses continue to execute on their planned initiatives for 2023, we.
We will continue to prudently manage our balance sheet and financial position as we monitor current market trends.
Thank you to the operating teams and Lawson products <unk> services and test equity for their continued focus and commitment to deliver these great results and welcome to the entire <unk> team ill now turn the call back over to Brian .
Thank you Ron let's turn to slide 12, we believe it is important, especially as U S and global markets evolve and change quickly to discuss with investors on our approach to capital deployment.
Dsg's allocation of capital is focused on a disciplined balance between investing in growth both in our core businesses as well as in strategic acquisitions that fit our model with a prudent approach to working capital intensity leverage and occasionally through opportunistic share buybacks.
Our goal is to continue to scale the DSV platform into an even more enduring well positioned specialty distributor with key differentiators that uniquely benefit from utilizing our high touch value added distribution solutions services and customer.
<unk> capabilities that customers clearly recognize and celebrate.
Since we have built this business as an asset light structure, we have planned for organic and inorganic growth through deliberate.
Working capital investments as well as strategic acquisitions that are aligned with our commitment to accelerating shareholder value.
Our targeted.
Our investment in working capital over the last year <unk>.
<unk> facilitated our focus to drive organic growth that drives accelerating profitability.
For our shareholders.
Finally, we continue to seek the highest return on invested capital opportunities with an obsessive commitment to build incremental shareholder value for the benefit of all of us.
We understand and appreciate why there continues to be interest in DST from investors. It is easy to see the long term compounding effects of owning.
A leading specialty.
Distribution company with the scale and breadth of our products and solutions.
Turning to slide 13, our principal goal at DSG remains focused on improving our overall return profile by building and maintaining profitable scale is especially distribution business second quarter results accomplished our profitability objectives, while balancing significant investments in the business.
We know that adding hesco will accelerate advancing many of our current initiatives and longer term goals.
We continue to be selective with our robust acquisition pipeline as we carefully analyze opportunities that fit our focused value accelerating criteria.
I'd like to thank all our DSD associates, who are working to optimize and streamline operations better serve our customers and position the company to maximize its full potential.
We believe the decisions and actions today from our teams generates accelerated shareholder value.
Before I open it up for questions I would like to let you know that we are hosting an investor day on September 28 in Fort worth.
We plan to share key operational initiatives.
And we'll include a showcase our show until featuring Watson products Jeff's Pro services and test equity so that investors can better understand each of the unique products and solutions. We will audio webcast elements at Investor Day, I believe you may get the most benefit by attending the event live and <unk>.
If you have not registered yet please reach out to our IR team for more details.
Thank you for your time today and now operator, we would like to take questions from analysts and investors.
Thank you very much at this time, we are opening the floor for questions. If you would like to ask a question. Please press star one on your telephone keypad.
Information time will indicate that Youre line is and the key you May press star two if you would like to remove your question from Nicky to any participants using speaker equipment. It may be necessary to pick up your handset before pressing the stocky. Please pose amendment, whilst we poll for questions.
Thank you. Your first question is coming from Kevin Steinke of Barrington Research Kevin Your line is live.
Good morning.
The organic growth.
The breakdown of price versus volume is kind of roughly half.
Price and half volume the way to think about that.
5% organic growth in the.
Second quarter.
Thank you.
Give me the breakdown there.
Yes, Kevin This is Ron I can I can jump in on that one so it varied a little bit by by each of the three individual companies. If you look at Los <unk> organic growth of 11%.
About two five points of that was.
Volume and the rest being price.
Jack's pro services of the eight five organic growth.
Kind of split 50, 50, a little bit north of 4% on price and at the same on volume and then on the test equity side organic we mentioned that they were down about 7%.
About 2% of that was price and down.
The offset to that was was lower volume. So all in if you can kind of take the weighted average between the three operating companies.
<unk>.
Kind of flattish maybe up just slightly in volume.
And then with price being the remainder of that.
So hopefully that breakdown by company is more specific than maybe what you asked but hopefully that answers your question.
Well that's great.
That's perfect.
Such on that.
Some of the segment discussion as well but.
Okay, great. So.
Thank you mentioned in your prepared comments that.
Business activity remains solid.
Uh huh.
And in July .
We think about similar type.
Volume trends on the organic side continue into July .
We'll have we largely lapped the benefit of the price increases.
You've been implementing.
Yes.
Jumping on that one as well so.
I would say to that.
We'll start lapping some of the some of the increases that we put in place.
More so in the second half of the year in particular on the on the loss in business.
I would say we're in the early stages of starting to lap some of those.
And.
And as we think about.
Just overall, what we've seen so far here in the month of July .
<unk>.
Flattish to.
Kind of where we were in the second quarter flattish to down just a little bit we continue to see.
Little bit of softening yet within some of the end markets.
Got.
Again, it kind of varies a little bit by by operating company as did as to where we're seeing that in there is you end up with some kind of some strange dynamics based upon how the how the calendars fall so that that impacts our average daily sales, especially.
Gestural services, which has.
Basically.
Five week July typically we see a little bit of compression in the average daily sales numbers. So.
But kind of flattish as I as I think about where we are.
Where we're at today versus.
The reported numbers in Q2 on a consolidated basis.
Ron I just.
Let me give you a little more detail on so the lapping.
Where we did.
On the loss and we had specific spots where we did.
Take pricing.
Actions last year.
And they were in July of last year. So it was later in the year.
So to specifically answer your question July did have both as it related to loss that had both the benefit of some volumes and had some benefit of pricing.
We're going to say I think it was September .
Was was it late August or September that we had a specific price action.
Initiative and Lawson.
So just ever.
So that way you've got specifically.
Some support from us in terms of.
Of actually.
We had a lot less ability last year to on the longer cycle pieces of Jack's Pro services.
To be able to take price action on those contracts until later.
To kind of give context around <unk>.
Jack Pro services, we were.
It was hoping it was later in the course of the year and in some cases it was really rolling through those contracts.
As they reset through the inflationary pressures that we had last year and we started to get the benefit of some pricing actions there.
Came a little bit more dynamic on price actions. So it was less of.
On a single day, a point of price action taken.
It started to kind of become more.
Dynamically blended into what we were saying in those particular skus on the sourcing side.
And so.
It becomes less clean if you will.
To be able to kind of point to specific points in time as.
As we move back into 2023.
And so I'm hopeful that that gives you some context.
On the.
The sales side, the softening that we saw on <unk>.
Test equity.
I think that the context, there that I would offer is first of all we're really glad that we've bought hesco because hesco offers what longer term, we want out of that business unit, which is to have a lot more.
Mauro and OEM.
Repeat activities as opposed to cash equity itself. The legacy business that we've enjoyed for the last number of years did have.
Two thirds of its revenue of the legacy business was tied towards.
Test and measurement equipment or bench sales and really.
What I would characterize it as more of a capital spend.
From the customers on that piece of it we've got active dialogues going with the customers and there is there is.
We've seen some sliding in their interest to kind of either replace or expand there.
Their equipment needs.
But and we think that we're going to say.
<unk>.
Renewed level of order flow there, but that's that's an area that we've had the most.
Softness across all of our ESG platform, which is in those that kind of two thirds of the historic test equity piece that was tied to more capital spend.
And we know there were some patients are that that's been interesting that had been more favorable too.
Or kind of I guess equally one has been kind of press.
Pressure on gross margins other it's been to the benefit of.
We have seen a shift as people have deferred or delayed purchases on equipment. They have asked for more rental.
<unk> access.
And that obviously has historically come with a higher gross margin associated with it. It does influence how we have to think about investing dollars into our rental fleet.
And then one of the things that I spoke too specifically on test and measurement thats been a real drag for a while.
Test equity side on the capital spend side, that's been a drag to us, but yes. It has actually had a little bit more support in the topline it's been a drag to margins and revenue over the last several years has been our chamber side and we will lap some orders that we got over a year ago, where we were in a different.
Cost of goods sold environment that we had locked in the pricing and we finally get out from that burden here in the fourth quarter, having worked through the backlog we have.
It expanded our contract manufacturing capabilities, but for those that support us on our on the.
Chamber side and.
And it allows us to start accelerating the revenue.
Out of our chambers again, because we had a large backlog there and it allows us to get back to a much healthier margin.
Okay great.
I was just wondering how we should think about.
Adjusted EBITDA margins.
As we look to the second half and beyond.
I think you mentioned, Ron that 40 basis points sequentially.
Of the.
Versus the first quarter.
40 basis point headwind just from inclusion of pisco.
And you also talked about plans to improve <unk> margins I mean.
We start to run into some tougher comps I guess in the second half here year over year.
Should we think about this.
Layering in his skull being largely offset by organic margin expansion or.
How quickly can you start to improve the his skull margins just any color on.
Margin direction.
It would be helpful.
Yes.
I can start yeah sure, Brian , Yes, I'll start with that so yes, yes sure.
Kevin Youre spot on.
Sure.
On the <unk> impact on the on the sequential margins from Q Q1 to Q2, and we did anticipate that when we.
When we announced the <unk> transaction, we knew that it would.
It will bring down the overall margin on the shorter term basis.
But clearly.
Our expectation is that.
When we worked through the integration process, which we are well underway as we as we even as we sit today that those margins will.
Really come up to the margin profile, though of overall DSG show.
In Q3 and Q4 so.
Whether or not it's going to be entirely offset by by margin expansion from the other from the other entities.
Yes.
As a bit of a tough question to answer without giving specific guidance here over the last.
Six months of the year.
What I would say is that we have very specific <unk>.
Objectives around.
And action items around the integration of <unk>.
We did comment on some of the cost actions that test equity has already taken around that to help that that'll that'll help right away here starting in the third quarter.
And.
And <unk> Pro services, just continues to deliver when we start thinking about even their end markets cycling a bit.
They have a great ability to be able to focus on those end markets, where they can pick up growth and we saw and we continue to see incremental margin expansion there on the organic basis.
As well as on the loss side.
<unk>.
Yeah.
<unk>.
So hopefully that helps without giving you without giving you a specific percentage that we're going after here in Q3, and Q4, but that might give you a little bit of context, just in terms of some of the actions were taken.
Ron Let me.
Dovetail onto that and just kind of as it relates to <unk>.
There.
One thing I want to flag is that.
Is that we've got an earn out element to the <unk> transaction at the end of this quarter.
I say this October I guess, Ron is that right, yes. So October October .
October so.
There are elements to making sure that they are able to have clean numbers.
For that opportunity, which.
It really was set around some real growth and.
Profitability as well as.
Their targets right now.
We would expect it.
That'll be a tough reach for them to hit but.
And we've got a great relationship with that management team. So we want to make sure that we give them every opportunity to kind of get through October .
With their stewardship of kind of.
The margin profile there so it's easier for us to take those actions that we took.
Month of June looking forward to how the businesses are getting integrated.
The test equity side itself and so thats why when we call out the $4 million of actions that we took on the test equity side and.
And we didn't call out actions that we've played.
The management team of <unk> is out as.
Is looked at as the two businesses come together.
We wanted to make sure that we want we wanted.
Then at every opportunity and we would love for them to hit their earn out.
There are gross margin initiatives that are across that total vertical now.
Well, we will see during the third and fourth quarter. Some as it relates to the test equity side and more opportunity going forward as it relates to the <unk> side.
There are.
When we think about longer term structural margin opportunities for the whole business.
When we speak about how hesco allows the whole business to have a structurally higher margin. There's two real levers. There. One is the fact that hesco with test equity allows test equity and his go together to get to a higher structural margin than where test equity would have been by itself and it gets there faster.
This action that allowed us to take on the test equity side.
We had targeted to get test equity.
To double digit EBITDA margin at the end of the year or before the end of the year and.
And that's without <unk>.
As part of it.
That's been operating objective that that team has been moving towards.
For the last 18 months.
We continue to feel confident that they are marching that direction. There's also the.
The stabilization if you will.
And the kind of the repeat volumes that you get out of OEM and MRO MRO.
Our now two thirds plus of the revenue, especially with revenue being softer in test and measurement and the kind of benches in some of the capital spend on the cash equity side, that's really where we've seen just like we called out the 8% growth in the digital side of test equity during the last quarter. So that part has been growing the consumables.
Been growing.
But the softness has been on the capital spending side.
Now that whole division is much more levered to that and that ought to allow us to.
<unk> optimize both.
Both the cost structure and the way that we approached margin.
Pull that up.
The value added capabilities that <unk> has.
<unk>, allowing some opportunities to look back at <unk> Pro services and at loss and where we have lost it has got the highest structural margin profile because of the contribution margin that enjoys.
But there is there is opportunities that we are saying.
On pulling some of the capabilities of Heska back across the <unk> services and the tests that are the orphan side and then there are some capabilities that textbook services has on the value added side that are allowing us to look across the test equity Hesco platform.
And those are on the margin side and additionally.
We have seen very good traction with.
With the Heska team out of the gate they've been great team came players and they have seen.
Assigned will opportunity to being able to cross sell some of it specifically the capabilities.
That just <unk>.
Services.
<unk>.
The loss in half and to their customers on the web.
Are there more deeply about it and also the geographic expansion that we've been able to.
Yeah.
South of the border.
Alright, thanks for all the.
I appreciate it I'll turn it over thanks.
Thank you very much.
Hi, good morning, guys.
Good morning, Ken.
Hey, Ken.
Good morning.
So Brian you gave some pretty good answers.
Very.
Very.
For a lot of my questions have been asked so maybe I'll just ask one here.
Its 30 year, it's 30 years of Dan asking the questions that you're asking.
Yeah.
Given that I've been on the other side of these calls for so many years.
It's hard for me to resist not trying to.
Offer.
Some color that I'll, probably get in trouble west with my team afterwards.
Well for my question.
We are hearing more of this earning season about customers revising orders as lead times are improving especially in some of these electrical components that maybe you guys touch a bit with tax equity and Jack Sparrow curious if youre seeing that today.
How do you view that impacting demand at all in the coming quarters.
Ron.
There's two ways to answer that question. One is specifically talk about how lead times have influenced our own purchases and then also some of the actions that we took a year ago.
18 months ago or I guess.
15 months ago, when we were concerned about lead times and so over the last two years, we've certainly increased the working capital intensity in our businesses.
They are across the business across our verticals and we've got the benefit today being able to take up more.
Sure.
Bob.
Take a posture on our working capital investment that is.
Should allow us specifically.
And the opportunities that we've identified to lean up our working capital investment over the next three to six months.
Nine months to kind of get through it or so so that's where I called out free cash flow.
Good free cash flow conversion in this last quarter I think that we'll have better at some point in time over the next six to nine months, we've got initiatives to really.
Go back and look at where we took some actions on inventory.
Stocking levels.
We were worried about strong inflationary pressure as well as lead times and freight costs.
A lot of money that we've tied up in working capital that we think we might.
Be able to release over the next six to nine months. So that's one part of it that also as it related to Jacks Pro services specifically.
Had a had an impact.
It's kind of the old game of telephone or that kind of where one person tells you and historic kind of gets amplified and it gets to the next person or maybe it's.
Kind of fishing stories, if you will but.
The challenge has been that our customers have relayed with a lot of anxiety production levels that said got narrated back to and through purchasing and now that there is less of a concern from there and we're getting to the heart of exactly what their production levels are and it's allowing us.
Exacting in our.
Because theres less anxiety are there and that we're going to not have adequate inventory to support their OEM.
Specifically the risk associated with a bunch of our customers of us being out of it for us.
Out of.
Sky out of stock on a small piece good that would slow down our major manufacturing line.
Theres, just not that level of flexibility on our side. So we understand why they popped.
Some of their forecasting to us.
Hey, Brian I guess clarify my question here.
I'm more concerned about your of the demand that youre seeing.
Our customers pulling back on orders because it used to take.
Call. It three months four products widget acts and now it dates back to normal three weeks. So they don't have to order out as far.
Are you seeing that in a proper business perspective, that's been.
Something that we've talked about over the last six months and I think I, even alluded to it on the last call with whether or not we were going to see some destocking at our customer level.
Would have some influence on our own.
<unk>.
Levels that we were saying and I think that some of Thats going is absolutely taking place.
<unk>.
If it was happening we were saying it happened in the last quarter.
Because we're not saying right now an acceleration in it but it.
I think it's certainly I've said it to some of the investors.
But I think I've said it in the lab.
Our last quarter's earnings call.
<unk> been calling out for three to six months for our team to be anticipating that we were going to see some destocking at the customer level because they're concerned about.
Lead times and availability.
So peak a year ago that they stocked deeper themselves and so we're staying on the public side, we're seeing some of our customers look like Theyre working inventory level stay on on working capital and we think some of that's been playing out as kind of a.
A bit of a.
Kind of a bit of a <unk>.
Dampener on our own performance over the last three months or maybe even longer.
But we aren't seeing a steepening of that yet this.
This quarter.
We didn't see any more of that happening we don't think during the month of July .
That's helpful anymore.
More than what we saw in the second quarter.
But yes, we have had a lot of internal conversations about how much of that was taking place.
So I think that's fair.
We're on that you may have some more specific areas, where we're staying at or where we might have seen it yes. The only the only piece I would add to that Brian is on the on the loss side, Ken We're we're a short cycle.
Business so.
So it's a little difficult for our customers to buildup. They really don't have to have a buildup of stock.
And so we.
I mean, we turn quickly with our with our customers so probably less impacted that on the loss side of the business.
Generally for checks pro services long term agreements that we have.
Customers on the Jets for services side.
I agree with Brian There is certainly.
Any.
Further pullback than probably what we just see as part of the normal process in general services is so well connected to the production cycle.
That we probably saw a little bit of a bump probably last year, but again, it's not it's not it's not huge movement I would call it dramatically impacting our results from quarter to quarter.
Yes, Ron.
I would even just kind of thinking about what I've said and reflecting on it.
And hearing you say sometime so helpful. Jack So services as Scott those long term contracts and we are required to hold that inventory. So if anything that inventory has been on our balance sheet and now whats happening is because they are pulling it as they need it and so they are carrying any real buffer on there and we're carrying that buffer.
We're on our end and Thats, where I am talking about us being able to work our own.
Inventory levels.
Down that we've been carrying for our customers as their anxiousness as kind of buffered a little bit so that should actually translate back into cash for us.
On test equity Theres, some shelf life elements, there and on some of their some of the products that they order from us and so.
We have not seen it specifically in our conversations on test equity.
<unk> be something that we've been concerned about.
Continue to be concerned about it it's a question I'm asking.
Consistently but the answer I've gotten back on the test side has been that we are have not been saying that so those are those two and then the short cycle side of of.
Lawson I think Ron answered.
<unk>.
Very well so.
Wouldn't offer any more color there.
Perfect. Thanks for the color.
Thank you for the question.
Okay, you appear to have no further questions in the queue.
Back over to Brian for any closing remarks.
Thank you I appreciate it operator.
We appreciate everybody participating today.
Your support on what we're doing with tests.
Across ESG.
The businesses are coming together very nicely as we alluded to earlier.
It is important to <unk>.
Process, we've got a lot of moving parts, we made some decisions that we wanted to invest in the business.
We called out some of those investments during the second quarter and we're very pleased with how those are impacting where we think we're headed with the business from a structural margin and from a.
Long term value for shareholders going forward, we look forward to talking a lot more detail.
And.
Having a more of a forum discussion.
At the end of September on our Investor day, and we would encourage any investors or any analysts that are interested in <unk>.
Fort worth and participate with us in.
And that day.
Thank you very much and we appreciate your time.
Good balance this summer.
Thank you everybody. This does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.
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