Q3 2023 Distribution Solutions Group Inc Earnings Call
Greetings and welcome to the distribution solutions group third quarter 2023.
Earnings Conference call.
At this time, all participants are on a listen only mode.
A question and answer session will follow the formal presentation.
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I will now turn the conference over to your host Sandy Martin at three part advisors.
You may begin.
Good morning, everyone and welcome to the distribution solutions group third quarter 2023 earnings call. Joining me on today's call are DSG is chairman and Chief Executive Officer, Bryan King and Executive Vice President and Chief Financial Officer, Ron can chime.
In conjunction with today's call. We have provided a Q3 earnings presentation that has been posted on the company's IR website at Investor got distribution solutions group Dot com.
Please note that statements on this call and in the press release contain forward looking statements concerning goals beliefs expectations strategies plans future operating results and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those 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 the non-GAAP measures and reconciliations to the nearest GAAP measures can be found at the end of our earnings release. The earnings press release issued earlier today was posted on the Investor Relations section of our website a copy of the release has also been included and I currently.
Port on form 8-K filed with the SEC Lastly, this call is being webcast on the Internet via the distribution solutions group Investor Relations page on the company's website.
Replay of this teleconference will be available through November 16, 2023, I will now turn the call over to Bryan King Brian.
Thanks, Andy and thank you all for joining us to review our third quarter results in September we hosted our first ever DSG Investor day, which allowed our team to demonstrate the companys strong market positions in key vertical channels that offer broad and differentiated specialty distribution solutions.
We also introduced our deep leadership bench and explored how customers rely on us to provide high touch value added distribution solutions for their MRO, OEM and industrial technology needs in our large addressable market of over $60 billion.
It was constructive and valuable to meet and take questions from new and existing investors and sell side analysts.
We appreciate many of you joining us in Fort worth and those that joined virtually.
We encourage you to review the Investor day deck on the Investor Relations section of our website, where we shared our strategic plans for further topline growth margin expansion and free cash flow generation as well as walking through our capital allocation priorities and plans to create long term shareholder value.
Yes.
Beginning on slide four we reported total third quarter sales of $439 million up over 26% from the prior year and excluding the impact of his scope, we increased EBITDA margin 70 basis points.
As we discussed last quarter and highlighted during Investor day, we generated strong double digit organic sales results in last year's third quarter, creating difficult comparisons for the 2023 third quarter total organic growth declined by 4%. This pressure was isolated to softness in technology.
<unk> markets, including semiconductor manufacturing renewables and test and measurement capital equipment sales.
These markets have strong secular tailwind and we purposely added differentiated capabilities to serve these important end markets.
Softness in these important end markets was partially offset by organic growth within this within the loss in vertical.
The capital equipment softness further highlights the importance of adding his scale as part of the industrial technology platform moving forward given the more recurring nature of that business we.
We will provide updates on the integration milestones and progress later.
DSG delivered strong quarterly growth in profitability, despite pockets of choppy demand.
Our teams continued to focus on what we can control within the businesses as we March operating margins towards our long term goals outlined during investor day.
We worked hard this quarter to execute strategic operational initiatives that improve sales productivity and grow market share in each of our three verticals for the third quarter, we reported adjusted EBITDA of $44 million or 10% of sales and adjusted earnings per share of <unk> 17 per share as we sit.
Gold last quarter and at the time of the acquisition <unk> results will initially pressure our EBITDA margins. Excluding his scale. Our adjusted EBITDA margin would have been 10, 7% for the third quarter up from 10% in the prior year's quarter.
We generated significant cash from operations of $74 million year to date, which speaks to the power of our model and the discipline of our working capital management.
Our teams continue to perform well and our sales transformation efforts resulted in further field rep productivity improvements. Additionally, we continue to invest in technology and remain resilient and flexible in operating the business.
Moving to slide five let me briefly provide business updates and important sales and cost initiatives for our MRO OEM and industrial technologies focused verticals.
Lawson products continues to be a leader in the MRO distribution of sea parts offering vendor managed inventory services.
During the third quarter Lawson grew organic sales by six 3% on a same day basis, and we also realized strong double digit EBITDA margin, which increased significantly over the prior year quarter and expanded sequentially over the second quarter.
This was achieved while concurrently accelerating loss in sales transformation initiative, which we elaborated on during Investor day.
We continue to identify a wallet share expansion opportunities with current customers as well as the strong market share expansion opportunities with new customers or lift in sales is largely been seen by lift in engagement with large strategic accounts as well as growth in select business verticals, we are enjoying a robust and <unk>.
Growing strategic accounts pipeline and an accelerating sales cycles significantly enhanced through the collaborative cross selling efforts focused on strongly embedded customer relationships of jacks Pro services and importantly, now his scope.
We continue to see mild customer level activity softness consistent with the third quarter and our core Street business. It Lawson, it's not unusual for lawson's customer order frequency to be unpredictable during the holidays.
I'm pleased.
With the Lawson team drove nice organic growth through market and wallet share expansion.
Also we are confident that our sales transformation initiatives will better position Lawson to boost growth and customer engagement over the long term, we're finalizing our mobile enabled CRM tool that Lawson, which will be fully rolled out here in the first quarter of 2024.
During the third quarter, our sales rep productivity increased by 18%, which represent success building on success this year.
Over the last two years, we have set up a more disciplined operating structure to invest in additional growth resources to constantly evaluate how to better serve our customers to enhance our customer experience, while becoming more differentiated and our solutions for them.
In reflecting on each of our divisions and our shared but often competing objectives of driving high quality revenue growth, while also committing across DSG greater discipline and operating efficiency to unlock structurally higher EBITDA and margins, we pour over the initiatives balancing the tensions and tie.
<unk> around investing in additional growth resources and customer experience enhancements, while also optimizing our spend to unlock accelerating current profitability.
While the timing of income statement investments is not always perfect and linear the discipline and commitment from our management team to the shareholders is.
Across our leadership team, we are perfectly aligned with our shareholders and I am convinced we are doing great work and I. Thank our teams for us regularly.
At the end of our remarks, I'll talk about our capital allocation framework for reinvesting our collective cash flow and balance sheet, but the more nuanced and often less talked about framework, but equally as critical as how we are investing more on the income statement and initiatives across the S. G to drive growth while also balancing those <unk>.
<unk> with initiatives to unlock more near term earnings and cash flow.
The sales productivity lift it Lawson is in what we consider the early innings of a broader commitment to our sales force to help them grow their revenue engagements with resources in which we have been investing and to drive their compensation.
As I reflect on a series of decisions over the last two years of coming together and the benefits of being a part of one larger DSG company Lawson's MRO business has grown as third quarter revenue over third quarter 2021 prior to the merger by 22% and its EBITDA by <unk>.
112% taking.
Taking EBITDA margins from eight 4% to 14, 5% in less than two years.
This is based on a collection of partially executed initiatives structured around being a part of the larger DSG family and we are just now beginning to see the capability and cross selling benefits accrue to Lawson and other businesses.
Turning to <unk> Pro services, which continues to be a leader in the supply chain solutions have largely see parts specializing in vendor managed inventory programs for high spec OEM customers.
For the quarter, our sales were essentially flat over the prior year's quarter.
Our largest end market remains renewables, which combines electrical mechanical and hardware product offerings with with kitting supply chain services and domestic manufacturing of which government funded programs support many we're seeing green shoots in the renewables markets given the rapidly changing geopolitical environment, we anticipate.
<unk> momentum to continue in aerospace and defense with secular tailwind for some time, we also see strength in the industrial power markets this quarter and this year.
All of our programs are still intact and being renewed we have seen the largest softness this year and our highest margin business, which addresses the technology and market.
As activity and pulling our product through our customer facilities is down 45% this year versus last year, creating a $6 1 million dollar EBITDA headwind, we largely made up elsewhere that.
That said our pipeline across our verticals for new programs with our suite of capabilities is excellent and although we have working quotes timelines have slowed likely due to the higher cost of capital environment.
We continue to see growth in the retrofit and upgrade cycle for the installed base like in renewables.
<unk> services is creating value from synergistic acquisitions, expanding kitting and project services. The successful launch of our E. Commerce platform this year and continuing to refine how we offer our expanded core products and vendor managed inventory capabilities with the addition of Lawson's MRO and now <unk> product.
Leadership in key categories, we continue to emphasize embedding our products and services in a new OEM programs and becoming more sticky as the provider of choice.
Our customer centric approach combined with the breadth and scale of our strategic acquisitions has materially expanded our resources products footprint and collective expertise across the platform.
Using the same two year lens as I did with Lawson, we track the success, we've enjoyed both growing and transforming the profitability of our acquisitions as they are folded into their vertical and more broadly our DSG network.
We've committed to our investors that we are not buying EBITDA unless it supports our broader strategic objectives and are reviewing the five acquisitions, we've added to the <unk> Pro services vertical over the last two years. They have an average increase in their organic revenue of 49% and together have more than doubled their EBITDA.
<unk> is there a value added capabilities are leveraged more broadly across our network, allowing our offerings to our collective customers to be more uniquely differentiated.
During this same period, our core Jacks Pro services organic revenue has grown 10% and our EBITDA has been largely flat challenges I referenced by a significant mix shift away from our most profitable and we believe sexually attractive technology end market, which is currently in a tough part of their IND.
History cycle, and where we have visibility that our offerings will continue to secure us more programs and market share.
Lastly, moving to industrial technologies to discuss test equity along with our initiatives to integrate <unk>.
With each day, we are even more confident with our decision that <unk> is key to our broader DSG strategy and our focus on rebel balancing test equities consumable supplies versus capital mix to support the full electronics cycle.
Our major work streams associated with integrating <unk> into test equity continue to progress on schedule. We are pleased to report the test equities inventory is now available for sale on the his go E Commerce Web site, which is a win for us and for our customers.
During the third quarter test equity was under pressure from a sales standpoint with comparable sales down in the mid teens range largely from pressure within test and measurement and some of the capital assets that complement and environment supporting test and measurement equipment like in a laboratory.
We saw downward pressure on outlays in the technology and R&D sectors due to capital spending deferrals and we've seen some excess products try to get pulled through the channel, especially in the second half of 2023, a year ago. It was a product supply issue and now that has flipped to excess market supply on lower industry demand.
Our customers are telling us that higher capital costs continue to drive capital expenditure delays and our vendors continue to reiterate our market leading distribution position within these categories in conjunction with our work streams to integrate his go and rebalancing the collective cost structure, we identified in recent.
We commenced action on over $10 million of annual run rate cost savings that will improve the overall margin profile going forward and the industrial technologies vertical.
The earn out period has passed and we are implementing these initiatives along with the sales teams collaboration and other mission critical activities.
Our vendor managed inventory or BMI solutions continue to show sustained growth and are on track to show their highest profitability today.
Our chambers business continues to perform well and we anticipate accelerating product line growth as well as gross margin expansion in this business.
We have re baseline operating expense spend across the industrial technology vertical to better position us heading into 2024 as we focus on driving profitability of this vertical to our stated goal of exiting 2024 at a 10% or higher EBITDA margin, we continue to capture cost synergies and production.
Efficiencies, resulting in improved delivery times and lower shipping costs as we discussed at Investor Day, we're accelerating work streams to build a higher structural margin business that benefits from expanded engagement around cross selling through our other verticals and businesses.
Looking back across the last two years of acquisition performance in our industrial technology vertical four of the five are structurally more profitable with higher earnings.
Although three of them had been challenged at some level of revenue softness from the current capital spending pressure test equity has also faced our enthusiasm continues to build as we continue uncovering all the capabilities and levers and how his scho will significantly transform this vertical and the broader revenue and profitability op.
<unk> across the DSG platform <unk>.
Bringing leadership and expertise in key product categories embedded strategic customer relationships expanded industry engagement value added services and a prominent presence in Latin America for the other verticals to draft.
With that I would like to turn the call over to Ron to walk through the financials Ron.
Turning to slide seven let me summarize Q3 results.
Consolidated revenue for Q3 was $438 9 million up $91 8 million or 26, 4%.
Although acquisition revenue in 2022, and 2023 resulted in incremental sales of $106 3 million organic sales declined by four 2%.
If we look at this from a cumulative two year basis organic sales were up approximately 11% versus 2021 through a combination of strategic price and volume expansion.
Third quarter results reflect strong growth in margin dollars.
We reported a $9 million improvement in adjusted EBITDA growing to $43 7 million or 10% of sales and an increase of 25, 9% versus last year's adjusted EBITDA of $34 seven.
As Brian mentioned, excluding <unk>, our adjusted EBITDA would have been 10, 7% for the quarter.
<unk> operating income was $12 8 million compared to $22 million a year ago quarter.
Excluding nonrecurring merger related costs acquisition costs stock based compensation severance and other nonrecurring items operating income would have been $26 7 million up from $25 7 million in the year ago quarter.
We reported a GAAP diluted loss per share of <unk> <unk> for the third quarter compared to earnings per share of 42 cents a year ago.
On an adjusted basis adjusted diluted EPS was <unk> 17 for the quarter versus 32 cents for a year ago quarter.
This reflects the impact of acquisition related DNA expenses, and higher share count compared to the prior year period.
We continued to show strong cash flow generation from operations and good working capital management with $47 million of the $74 million of cash generated from operations that Brian mentioned being realized in the third quarter.
We ended the quarter with unrestricted and restricted cash of over $100 million.
Turning to slide eight let me now comment briefly on each of the businesses.
Starting with Lawson sales were $114 5 million up four 6% for the quarter and representing a six 3% increase on a same day basis.
The increase over a year ago was driven by strong performance within the strategic business Kent automotive in government military.
As Brian mentioned, the core Street business was somewhat softer which continues into the fourth quarter.
Similar to the second quarter Lawson's growth in Q3 was achieved through increased wallet share with existing customers and new customers in both our strategic accounts and our Kent automotive businesses.
As we discussed at our Investor Day Lawson.
<unk> initiatives to transform the sales team were executed this past summer, which resulted in an 18% lift in sales rep productivity this quarter.
Los <unk> adjusted EBITDA improved to $16 7 million compared to adjusted EBITDA of $9 7 million a year ago quarter.
This increase was primarily driven by the sales increase and gross margin improvements, partially offset by increased compensation on higher sales levels and channel investments to better position Lawson on a longer term basis.
<unk> adjusted EBITDA as a percentage of sales was 14, 6% in the quarter versus eight 8% a year ago quarter.
And improved sequentially from 13, 5% in the second quarter of 2023.
Turning to Jack's pro services on slide nine.
Total sales were $103 2 million for the third quarter, essentially flat versus $103 7 million.
In a year ago period.
Like last quarter <unk> saw a decline in sales in their highest margin.
Technology and market.
Offset by growth in aerospace and defense and industrial power markets.
The leadership team is reallocating resources to better align with demand to maintain profitability and margin goals set for the business for this year.
<unk> services largest vertical is renewables.
Which are expected to have secular strength over the next several quarters and years.
We are reinvesting in growing the business and being cautious about weaker markets or ones are more sensitive to current macroeconomic issues at.
<unk> services, we are focused on existing relationships and market share gains from new customers through our value creation offerings, including Kitting project services and the ability to deliver world class support to the OEM production cycle.
Jack's Pro services adjusted EBITDA was $11 6 million or 11, 2% of sales versus $12 5 million or 12% of sales for the year ago quarter with much of the decrease being a shift driven by sales mix.
Realigning our costs to align with our sales in improving gross margins will benefit us yet this year and beyond.
Lastly, I will turn to test equity, including his go on slide 10.
Q3 sales grew to $207 7 million, primarily due to $106 $3 million of acquired revenue offset by a decrease of 13, 2% inorganic sales.
Given the strong third quarter organic growth from last year on a cumulative two year basis.
Test equity is still up approximately three 7% compared to 2021 sales levels.
As Brian mentioned test and measurement sales were soft and our Q3 key supplier shipments through the entire channel were down even more dramatically than the test equity results might suggest.
In other words test equity performed well in Q3, especially given the market dynamics in this space.
While we continue to see Choppiness in capital spending the bright spots in the quarter, where the continued growth in the chambers business enhancements within our BMI offering and progress within digital into our own brand offering.
Although not a big part of the business, we do value our owned brands.
As a way of improving the mix of higher margin business over time.
Test equities adjusted EBITDA for the third quarter was $14 3 million or six 9% of sales and EBITDA dollars. This was an increase of $4 2 million or 42% over the same period, a year ago of which approximately eight <unk>.
$3 million was generated from the acquired businesses.
Although we are actively making progress to optimize the expense structure through the test equity and his go integration.
We are working on operating expense rebase lining to align sales volume to align with sales volumes for test equity.
Moving on to Slide 11, we ended the quarter with $279 million of liquidity, including $85 million of unrestricted cash and cash equivalents and $198 3 million under our existing credit facility.
Our amended credit facility was expanded earlier this year from 500 million to $805 million.
Over the last 18 months, we've reduced our net debt leverage from three six times at the close of the merger on April one 2022 down to two nine times, all while acquiring for businesses.
We continue to focus on deleveraging the balance sheet through operating and working capital improvements.
With our target leverage ratio remaining in the three to four times range.
Net capital expenditures, including rental equipment.
$14 7 million for the first nine months of this fiscal year.
And we expect full year capex to be in the range of $16 million to $20 million or approximately 1% of revenue.
With that I would now like to turn it back over to Brian.
Thank you Ron.
Let's turn to slide 12 to recap our capital allocation framework.
<unk> is focused on a prudent balance of organic and acquisitive growth, where we use a disciplined approach to track working capital intensity leverage and periodic discussions and decisions to invest in our own stock.
Our goals at DSG are to scale, our business, even further while improving the return profile of our specialty distribution platform.
Benefit from our fortified competitive mote, and our verticals with unique and well positioned products and solutions.
Serve our customers with high touch value added specialty products services and solutions.
Maintain our asset light capital structure with planned growth through sustainable working capital investments as well as highly strategic acquisitions that expand our offerings and improve our unique and highly differentiated value proposition for our customers.
Finally.
All creating long term shareholder value by elevating our earnings structure and generating significant cash flow per share.
Turn to slide 13.
Third quarter results demonstrated our ability to benefit from our diverse end markets to achieve a 10% EBITDA margin or 10, 7%, excluding our recent <unk> acquisition.
As your partners and as the leaders of the business. We are excited shareholders as we see significant levers some of which are outlined on slide 13 available to us to unlock significantly higher earnings over the coming years, regardless of how the current economic cycle unfolds. We are committed to work hard on the elements of the business that.
We control like the current focus on improving the sales force productivity.
Sharing best practices, and reducing cost across DSG, where scale and we're pulling together businesses with redundant capabilities is allowing us to continue to incur uncover spending we can eliminate which continues to be an everyday opportunity where the management teams are collaborating and finding new opportunities.
Additionally, constructive collaboration is a key part of our cross selling initiatives, which are a priority and are both growing and paying off and we are finding better and different ways to increase sales through long standing relationships with our best customers.
Enhancing our offering and value to our customers is adding to our management team's enthusiasm as they see an expanded opportunity complementing the DST platform. We are building with the his scho acquisition and the role it plays in accelerating differentiated revenue growth initiatives.
We also identified more cost reduction benefits and margin improvement opportunities as <unk> becomes more integrated with test equity and our industrial technologies vertical we are committed to driving our elevated margin objectives in that business in that vertical over the next several quarters similar to what we've done in the other verticals.
We continue to engage in numerous discussions around strategic assets to buy and we've accelerated interest from businesses that see the value in and want to be a part of the differentiated specialty distribution business. We are building with ESG.
Several of them, we would like very much to add to our business and we expect we will get the opportunity to.
But we have a high bar and a disciplined framework and commercial logic that must exist for us to add businesses to our fold and then expect a lot of profitability growth as we optimize them for the benefit of each of our verticals consistent with the financial success on our last 10 acquisitions like we've outlined today.
All of our management teams have to be supportive and committed that an acquisition is key to their success and own that accountability for us to bring an acquisition on board and for it to enjoy similar success to what we've enjoyed.
With that operator, we would like to take questions from analysts and investors.
Thank you at this time, we will be conducting our question and answer session.
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One moment, please while we poll for questions.
Thank you our.
Our first question is coming from Kevin Spanky with Barrington Research Your line is life.
Hey, good morning.
Kevin Good morning, Kevin.
Hey, I wanted to start off just by asking about.
You mentioned some of the pockets of choppy demand or demand softness related to the technology.
Vertical you know renewables.
And measurement equipment.
What do you think thats.
And environment that.
It's something that persists.
As long as the cost of capital is higher.
Any any insight from your customers.
When maybe some of those are areas start to kind of turnaround or pick up again just.
I know you're bullish on those areas over the longer term, but just kind of wondering what your thoughts are.
Next couple of quarters.
Kevin.
Yes, it's a really fair question and.
I was actually asked that yesterday in a different context.
We thought that the renewables in market would start accelerating after the inflation reduction act or the production tax credit was renewed.
There were a lot of projects in the queue that we were.
Aware of.
Our market share there is very high so we were gonna get to enjoy those as interest rates rose and cost of capital went up it thought some of the economic benefits of production tax credit.
Because those projects are largely project financed.
So there's been certainly some delays associated with those projects, but there's a lot of pressure to get them.
To get them started.
And so we're kind of in a holding pattern there where we've seen a lot more interest and we expect to see an acceleration in demand on the renewable side has been on the retrofit, which some of our tuck in acquisitions that we did on <unk>, where really does allow us to have some additional capability.
As to address electrical mechanical and kidding, so that we can be.
A key supplier to the long term cycle of retrofitting all of the existing installed base, which is more of a maintenance side of.
<unk>.
Multi year cycle of maintaining.
Renewable infrastructure that's already in place.
And those projects, we expect we will get released.
But it's really on the early cycle of <unk>.
<unk> of <unk>.
Saying those projects take off on the on the test and measurement side us.
Well, then on the semiconductor and the technology side.
We've seen kind of a.
A real challenging backdrop, particularly project for services, there as I alluded to it in the call.
That was our most profitable it has been historically.
<unk>.
While secondarily, we think that the.
That space in North America is.
<unk> got a benefit with the.
With the chips Act.
There's definitely been a slowness in the pull through from our customers of our products.
Those cycles on the semiconductor side, we've all most of us who've invested in.
Semiconductor stocks over the years I have watched the ryzen fall there.
Had one particular customer that.
Has given us.
Just had more challenges and their pull through with us, which probably negatively impacted that revenue.
More than I would think about just the baseline on selling the semiconductor activity domestically or North America.
When I think about the <unk>.
Test and measurement side.
There's been a lot of deferral of purchasing we made some decisions.
Over the last year, there that had to do with pricing discipline.
Which candidly as end market soften.
Probably impacted us more than we would've expected.
There was a customer that we had that was a reseller of venues.
A customer that we had supported over the last several years.
As a veteran.
It's just a kind of a reseller in the channel.
The price and the margins there just weren't as attractive relative to the amount of capital we were tying up and so we walk to that customer during this year and that had an additional impact to our topline.
In the.
When when matched with a tougher industry backdrop.
Aerospace and defense, which has been a real strength for <unk> services, while the MRO side has been a real soft areas for test equity.
We know that our customers there are healthy we know that they've got capital spending needs that they are deferring on test and measurement equipment.
But you know given.
Their businesses.
Obviously, the macro environment is globally is causing their businesses to be.
Strong.
Quick deferred some some purchasing on the capital side and so I don't know how.
It's hard to predict where those end markets are going to pick back up.
But we are.
We certainly feel like that our market share position is strong and.
And there is.
I don't know that I would anticipate that they're going to pick back up here in this fourth quarter.
I think that what we've seen so far this fourth quarter has been pretty consistent with.
What we felt during the third quarter, although sales on test and measurement is turn so we bottomed there and in.
In the first.
<unk>.
The fourth quarter has been better than the trough in the third.
Certainly.
And so we would expect that some of the.
Purchasing is picking back up.
And that we thought was being deferred and we think that some of the inventory that was in the system that people were kind of you know.
Being more aggressive on pricing, while we were not willing to.
Participate in some of our customers, where we were quoting and doing the engineering work and stocking things out and then somebody else would come in and low vol ups.
On a on a customer that we have a long standing relationship with somebody who has caught with some inventory wanted to get out.
And.
And we were trying to maintain a lot of.
The discipline that we've tried to put in place to drive margins.
Impact is a little bit more on volume.
Test and measurement side this quarter this past quarter.
Yeah, Kevin This is Greg Kevin. This is yes, Kevin This is Ron just one maybe one one additional comment on top of Brian's comments.
As we look at the.
The next couple of quarters, just keep in mind that we are up against some pretty tough comps.
Enter into Q4 and into the first quarter of 2020 through 24 versus <unk> 23, as well so.
All three of the of the businesses had.
Nice organic growth in Q4 versus.
Q4 of <unk>.
Okay.
<unk> 22 versus 21.
So just keep that in mind that we are up against some pretty tough comps as we enter into the fourth and first quarter of next year.
Kevin.
That's good point.
Ron.
Kind of along those lines.
Two other things that I didn't touch on Cisco when we bought <unk>. There were there were a couple of programs in there that.
We knew like.
They had a great they have a great relationship with Abbott and they had a program that was a.
Covid testing kits, which we know COVID-19 testing kits have kind of decelerated a lot. We expected a couple of these programs that when we bought the business we forecasted that there would be some softness there. So hits goes businesses is performing how we expected it would so were real.
Pleased with with Canada, Hesco side on the topline.
Yeah, there was some construction.
Programs, there and then there were a couple of these.
Pharmaceutical programs.
We're effectively sunsetting.
Based on the construction staff was was end market related.
Avid or some of the pharmaceutical programs, where more COVID-19 related.
We've got some new programs there that we have visibility to.
That.
Are you now have not yet hit the P&L, but.
And that we expected.
Some of it a little bit the choppiness there on the top line that doesn't that doesn't bother us at all and then the other thing that I.
Mentioned is that part of the attention that we've had we're trying to drive EBITDA.
Margin and EBITDA profitability, and then just even like Salesforce productivity with Lawson has been trying to make sure that that we're focused on profitable good revenue growth as opposed to so we've had to be disciplined about either.
Work at some customers as I alluded to earlier.
And being disciplined around pricing.
Debt.
The more robust economic backdrop would be kind of blended are buried.
But in an environment, where you've got some choppiness that is coming through a different end markets.
It's.
Probably.
Just a little bit more than half to explain when we walk away from a customer to take a little bit more.
Of our test and measurement decrease in topline.
But with the objective of having more discipline around margins and pricing and ultimately our EBITDA objectives that we've put out there.
So.
Oh, great. Okay. That's all.
Really good color and then so I appreciate that.
You know.
The.
Performance.
The loss in business was.
Impressive impressive as you noted with the 18% increase in sales were up.
Productivity.
So.
As I look back about 18 months ago. It looks like the sales force head count is down a bit but.
As you noted productivity up significantly so maybe you can just refresh us or walk us through the steps that you've taken too.
Oh really.
Drive productivity in there.
You know how.
How that's been playing out for you.
I'd love to answer that question, because I get excited about it but Ron loves it everyday.
Ben you know at tested lost in all over all these years, so Ron why don't you.
Ill.
Jump in on it first and then I'll follow up even though.
Not sure enjoy yeah.
For sure so yes, Kevin.
You've track for for quite a few years, what we've been.
Doing on the on the sales side and the field sales reps in terms of productivity and to your point I mean, we're we're really pleased with.
The progress that we've been able to achieve that loss in going from kind of high single digit EBITDA to now.
Pretty steady, 13% to 14% range, but.
As we think about.
The field.
<unk> for us.
Clearly, making investments into those into those team members and they are they are a critical critical piece of our overall success and banging. It out every single day in terms of visiting our customers.
And so when we.
What we've really tried to do is to.
Really supplement and provide them. Some additional resources for example, we're investing in a much more sophisticated.
RM tool that will be rolled out here in the first quarter.
We have.
Built up.
Some support roles.
Anywhere from service reps too.
To inside sales reps as well in order to be able to expand our channel.
Selling channels and for US it's all about.
Really trying to be able to help them become more productive and provide them.
A more defined territory and.
Dan.
More repeatable type of type of revenue so.
Youre right head count field head count.
<unk> is down versus where we were a year ago.
And it's.
It's not so much.
Head count number for us that's important it's really more about.
Finding those territories that are that are really really can be really really successful and providing our sales reps.
Customers in the leads that allow them.
To be successful and ultimately make more commission dollars as well so.
So I would say that 18% growth is a combination of all of them.
A lot of effort over the last 18 months two to.
To help redefine some of the territories provide some new revenue avenues.
Strategic accounts, we've talked about that.
A little bit in the past continue to have really strong growth in that piece of our business.
Very sticky customers and really bring to the sales rep kind of a sweet spot in terms of the size of a location that they can service.
And day out and and service them very well so.
So anyway, so I'll pause there, but yes, we're really excited about the productivity side and certainly expanding our channel reach out to our customers as well.
Right now I just.
It's our favorite topic for us to really dig into.
Kevin.
Yeah.
Okay.
Ron's comments.
There was a decision this year to make a significant investment in additional resources to support.
The outside sales force.
If we go back and you just kind of hit the lens of history.
Many of US were conditions over the last eight or so years 10 years that I've been involved in loss in that.
That we really needed to grow our our outside kind.
Street Sellers, our street sales force to try and grow revenue to try and get leverage through.
Through their efforts at the street level, which really requires more feet on the street to get the EBITDA margins to start moving our direction.
And lifting and I think that the.
Our lenses evolved and what.
What we've learned is that one we think that there's a lot of efficiency gains that we can help our sales force well by giving them more tools and more support resources back in the home office.
And even in some cases more support resources at the customer location so be it.
Support technician, that's there to help them refill the bands to.
Goes by so that the sales person can be looking for ways to grow revenue or to call on more customers.
And they're really serve the customer better where theres, a where we've identified that there's a growth opportunity with the customer.
First is the amount of time that maybe our salesforce is spending.
With some of the customers that were harder to grow.
Or resetting the bans.
And organizing the parts on sites that support on the technical side I mean, we've added technical expert experts back and we're going to add some more back at the home office, so that theres more technical expertise that the field sales force and lean on.
And there is.
Ultimately an objective to significantly slow down what the historic turnover had been with the loss in field sales force and so.
Productivity is a result of having.
Our sellers have more time to look for revenue growth opportunities are over the last year our strategic.
<unk> revenue growth is up over 20% year over year earnings, 23% right Rod and so.
That part of our business, obviously is has been where our funnel or pipeline.
It's been helped some by being part of DSG and that's very focused approach to trying to sell to those some of those larger accounts.
Where we can grow with them has been a priority.
<unk> business is the smaller accounts, which had been largely flattish.
Slightly.
Slightly down and down 1% or thereabouts.
He has been an area, where we've tried to drive efficiency or drive sensitivity out of our salespeople in terms of how they're how much time, they're spending at a site.
And.
And making sure that they are hunting to try and grow their revenue because we want them to make more money, we think that their compensation or the opportunity that they've got to drive their compensation higher through but being more efficient in growing their productivity and us helping them on that and then looking at ways to make.
Sure the date.
Can be rewarded more.
By their productivity growth.
<unk> is going to slow down that turnover.
And that turnover is something that we've said publicly before.
Historically for the last five years or so.
On our side, we've done a lot of work around the cost of the turnover and we think it's still 20 plus million dollars a year, that's a real cost to the business.
Of of having excess of turnover on the sales force.
And so these are all parts of a very deliberate plan it has.
<unk> shifted our focus probably.
Our investment more than you know how to support that.
The team that we've got versus trying to figure out how to grow the team constantly.
So theres been a little bit of compression in the number of steel the reps that we've got but theres not been any compression in terms of the of the total spend when you I mean, maybe a little bit but when you look at.
The inside sales Rep support that we've tried to offer to the outside sales reps and then the insight technical support and then the service tax all of which are counted in that outside sales force number that we're looking at.
The total head count is down nearly as much as is that that the leading number on the outside sales force would indicate.
Okay, great. Thanks for all the insight I have to jump to another call here, but again, thanks for all the commentary.
I'll turn it over.
Thanks, Kevin Thanks.
Thanks, Kevin.
Thank you. Our next question is coming from Tommy Moll with Stephens, Inc. Your line is live.
Good morning, and thank you for taking my questions.
Hey, Tom Good morning, Tommy.
I wanted to continue on the Lawson theme, Brian you mentioned a couple of times.
Some of the pressures or uncertainty among.
Or within the core Street business, what's the state of the Union there on leading edge demand across your customer base.
Yes Tommy.
It's hard for me to unpack.
There is.
Customers are so.
There are so many customers in that street business right and so when you look at it it's it's tens of thousands of customers and.
It's been hard for us or it's hard for me over the years, we're going to get a lot better data out of our CRM. They are more advanced CRM tool that were.
That we're working with right now I mean, we've got it.
Out in the field of data beta worked on for about a quarter of our sales force is using it this quarter and then it goes to all the sales force.
At the beginning of the first quarter will get a lot better information.
At least for me from a data perspective, but.
That's where I'm most sensitive about whether or not there is you know what the recessionary pressures are.
We're feeling in the economy.
And there you know the welding shop there.
The small Manny.
Manufacturer, it's somebody who's <unk>.
Only buying a 1000, a couple thousand dollars a year from us.
In some cases, even less.
And that business across it looks like it's.
Soft.
Yes, we had a we had a one 4% decline in that in that small customer Street Street business as opposed to the strategic or the cat, where we had much bigger gains.
Over quarter over quarter.
And and Thats, where our across our portfolio of businesses, we see kind of the pressures across the economy.
In the U S with interest rates higher.
And some slowing in business activity, we're not seeing it with the big strategic customers.
Now we're seeing it in certain industries.
But the bigger accounts seem to be.
Business activity levels that are have been more again industry agnostic here it looks more healthy.
In the current economic backdrop.
I do think that there is.
Tommy work with the program that we put in place with our sales force and we're trying to drive them being sensitive about how they are investing their time and wanting to make sure that we're encouraging them to be.
A more productive and to try and drive their compensation up.
Theirs.
There's probably some concern in my mind that that debt.
The smallest customers.
May not be seeing there their cell salesperson as often as they used to we knew we were losing as much as.
We did an activity based exercise on this probably four years ago or five years ago.
<unk> had water I've got into the data a lawson and tried to really look at.
It's fully burdening, our small smallest end of our customer base and we were losing money on that on that 10% of the revenue that was on the smallest customers. We were on a fully burdened basis, we were losing like maybe $20 million a year or more.
We were losing as much money as it was total revenue.
And so I think it was 5% of the revenue of the business that were losing $20 million and so we knew that we needed to figure out a way to help the salespeople turn those relationships into more profitable relationships and we didn't want to abandon those customers at all so we were trying to we've worked hard at trying to come up with a solution that helps our sales.
Fourth continue to serve them.
But serve them in a way that's not.
Loading their bandwidth at a level, where they can't continue to grow their books of business.
And and make sure that we're not over serving over serving those customers the way that we historically had been.
So theyre. Thank you Brian didn't denigrate, there could I guess, what I'm trying to tie me there could be some denigration on that small street business that that is not just economic.
Could be yes.
Catching them quite as frequently.
Thank you.
Zooming up to the consolidated company level.
You've.
You've outlined some of the cross currents in terms of the demand environment I just wondered if you could give us a reasonable expectation for fourth quarter.
If we just compare to the third.
Third quarter results, you did 439 million of revenue, 10% EBITDA margin do you have a sense of whether those those two points are flat up down quarter over quarter. If you roll it all together thank you.
Yes sure.
Tommy This is Rob so a couple of things.
<unk>.
Keep in mind relative to Q4 so.
We do have 61 selling days in the fourth quarter versus.
Versus 64.
63 in this quarter.
In Q3, so that clearly will have an impact and even.
Think everybody realizes that 61 may not really be a fully equivalent of 61. So.
As we think about.
And Brian Brian commented on this as we sit here through through the first month of the quarter.
We are seeing kind of a similar mid single digit.
Total sales declined putting putting his store side since they were not in the prior year numbers.
And so I.
I think.
We think about that for Q4.
I'm not I'm not sure that we're going to see.
A fast turnaround here certainly in November and December.
Wouldn't surprise me that the trend that we saw in October really kind of continue for the remainder of Q4.
Adjusted for an avs basis.
In terms of the overall.
Adjusted EBITDA percentage.
We historically, we do see a little bit of compression there versus.
63, or 64 day quarters, just given our fixed versus variable operating cost structure. So we see a little bit of compression there typically in the fourth quarter nothing.
Nothing dramatic but.
But I think if you look back we do see a little bit there. So we're we're anticipating.
Current revenue trends that we will probably see less.
A similar.
Little bit of compression in the in the fourth quarter versus what we saw in Q3.
Thank you both I appreciate the insight and I'll turn it back.
Thanks, Kevin.
Once again, ladies and gentlemen, if you have any questions. Please press star one at this time.
Our next question is coming from Brad Hathaway with far fewer your line is live.
Hi, guys.
One question for you it seems like the bulk of the weakness is still in the test and measurement equipment.
And in.
In the 10-Q I think you mentioned that you saw.
You are optimistic about a recovery in the first half of 2024 and that segment I'm curious what gives you that optimism and how do you have visibility into that.
Great question.
[laughter].
Yeah.
I think theres two things there.
There's three things one is at this point we've seen.
You know a turn.
A slight turn but it's definitely a turn from the trough in July.
Starting to see.
Our test and measurement activity levels coming back up it is still down but.
Certainly.
<unk> got visibility around.
Order interest.
And starting to see better performance there than when it where it was at its trough and then we're also.
We have been.
Some of the revenue that we decided not to do or to take.
Based on what we felt like some.
Less rational.
Destocking that was going on with.
Maybe some of the players in the market.
We've got a dominant position there we've got the largest inventory position.
We.
It has been for our key vendors.
Biggest part of their north American sales through distribution.
And we.
Didn't want to be a price disrupters.
But when you try and hold that discipline you see if you end up losing some revenue that you would consider normally go into you Bob.
By being more disciplined around price discounting it used to be that there was more firm.
Discounting.
Boundaries that were enforced by the vendors they've got there became some sloppiness on that over the last.
Quarter or so as I think some distributors, we're trying to move some inventory.
And we feel like that that's behind US at this point and so that's another reason why.
We think we have more optimism there and then lastly, there is.
We're going to.
Ah clips.
A relationship that we made a strategic decision.
At the coming off of 2022.
And feeling really good about the progress we've made at test equity, but being very disciplined around our focus on wanting to drive more margin discipline, ultimately EBITDA margin as well.
We're not.
Not willing to continue to sell into the channel.
Two a reseller that we said at a really low margin for us, but it was real volume and.
And that volume became a bigger headwind when you when you match it the volume that we walked away from it became a bigger headwind when you match that up with a weaker backdrop.
And the industry.
So.
That was kind of.
Probably amplified.
The the the.
The negative revenue out of test and measurement.
Year over year.
In the quarter.
The good amplified.
Okay. So it's kind of cycling some things that are internal but you kind of already in control of as opposed to making kind of a macro prognostication on one PNM will recover.
Oh, you know.
<unk>.
Yes.
It's probably a combination of both but yes. It's definitely there are some things that were internal.
That we were cycling, but then there's also.
There's.
We think that there's customers that have just.
Been slow to release dollars.
And to try and replace or upgrade their test and measurement equipment that are ultimately.
In our Q that that need to replace it or.
Add to it but it's.
I don't think we're making a call on the economy as.
As much as we are making a call on our customer are accused.
And in the conversations there.
And how we see this.
The.
The longer cycle demand for more sector really for the.
From our customers of equipment.
But there's got it yes, it would be ideal.
I'd be concerned about trying to make a call on it.
But.
Less concerned.
We're making the call versus the fact that we think that we've got better visibility right now than we did.
60 days ago.
Understood, Okay, great and.
Okay.
You also reiterated on this call and staying with cash cost of equity that you expect to exit 2004, I believe at 10% EBITDA margins and that's obviously a long way from where we are today seven ish.
I guess, how much of that is part of this demand recovery or demand recovery, but part of this kind of recovery you see in the business and a 224 versus Cisco integration. I mean is there way to kind of break out how you see that significant improvement.
Yeah.
Very fair question.
So the the cost side opportunity that we've alluded to is.
Is actions that are.
They have taken place or is it.
Or in process right now.
<unk> is over 100 basis points.
So it's a 100 to 150 100.
150 basis points that have already had actions taken that haven't flowed through.
More opportunity to to try and optimize that.
The total industrial technologies vertical.
That we still are working cohort.
Kind of collaboratively across the hits go test equity.
Ben businesses to kind of.
Unlock but it's been identified hadn't been actions.
So I would.
And then there is gross margin actions that are.
Under way and then there is some gross margin dynamics that we saw like I just alluded to on test and measurement.
We think that we're gonna be sunsetting.
We're getting.
Getting the benefit out, but there's there's gross margin actions across the industrial technologies vertical.
The auto linked to it so those two pieces, we think are largely controllable.
I would now.
I would posit that that's two thirds or more.
Of.
Of what we think we need to be able to pull.
That business to our objectives, there's probably less than a third that would be demand normalization.
Not demand growth, but.
I was trying I was actually messing with this math yesterday and I don't think it's.
I think it's hard to get there without without having its hard to get to over 10% without having some.
Constructive perspective by the end of next year the demand is not.
Continuing to be as soft as it was this last quarter.
Market.
Disciplined marketplace.
Yes.
But if there is.
Disciplined marketplaces is cleaned up.
And we're participating in more of the demand that's in the marketplace or if we're seeing any demand recovery then that should be.
With the other two levers.
Yeah.
More than what we need to get there.
Okay.
Got it thanks, and maybe just finally on the congrats on getting the <unk>.
Leverage down below 3% I mean six months after his good that is.
Pretty impressive.
And it sounded like you were.
Optimistic, but remain but retaining a kind of a high bar for future M&A.
Is that kind of a fair assessment.
Well, we're optimistic we will start with that.
We've got a really robust pipeline of projects that were.
Of.
Uh huh.
The diligence are locked down.
I'm trying to get them get them right.
And the disciplined framework is one that we've just want to make sure we're reiterating because theirs.
Not an urgency on our part to spend liquidity.
Yes, it's absolutely fits.
Sure.
Commercial objectives as well as our financial objectives for the business.
But there are things that we are actively working on and there are all different sizes.
At this point got it.
No.
But.
Brad just to just maybe to add a comment on top of Brian's node.
Our balance sheet, we currently sit with over over $100 million of total cash in and certainly the third quarter from a cash generation for US was a really strong quarter, we we created $47 million of cash flow from operating activities.
All in that $74 million on a year to date basis I know that was in some of our prepared remarks.
It's really helps get that leverage down to down to the 2.9, even though we have we have a limitation on how much cash we can offset in our in our bank defined.
EBITDA leverage so.
Just didn't one.
To to get away from the call without reiterating our cash position and I think it ties directly into your question around around acquisitions, and having as we sit today $280 million owed.
Availability through our revolver plus the cash position and that we do have an additional $200 million accordion feature through our credit facility as well. So we feel like from a liquidity standpoint, we're positioned really well to to.
Take advantage of those opportunities as they come up.
Fantastic well hopefully you can find another <unk> out there.
Yes.
Excellent well. Thank you all very much we've got we've got ideas on that.
Okay.
There's been a lot of interest in.
I've mentioned it in the prepared remarks, but theres been a lot of interest that's been inbound which has been quite interesting.
About wanting to.
<unk> be a part of what we're building.
And.
There's some some businesses that are out there and there's some assets that are out there that that really do fit very well with what we're trying to accomplish in would be.
Real jewels to add to our.
Business and would be very good.
Financially and commercially.
Valuable to accelerating as being able to get to some of our objectives long term. So we'll see where that we can land the plane.
Otherwise, we've got some just infill ban around the basis.
In light of our Rangers win last night.
Objectives that we think we can that we can where we can score some runs on acquisitions that really do fit commercially and are taking on a very big bites.
Yeah.
Yeah, no good alright.
All right excellent well, thanks, again, and obviously, we look forward to develop yet reported chetan.
Thanks, Greg.
Thank you.
We have reached the end of our question and answer session. So I will now hand, the call back over to Mr. Kim for his closing remarks.
Thank you Ali.
Look forward to speaking with everyone again, when we report our fourth quarter results in early 2024.
Additionally, we will be presenting at the upcoming Baird conference in Chicago on November seven and at the Stephens Conference in Nashville on November 15th we hope to see you all there and so there please come up and say well I don't have a great day and go Rangers. Thank you.
Thank you ladies and gentlemen, this does conclude today's conference and you may disconnect. Your lines at this time and we thank you for your participation.
Right.