Q2 2024 Distribution Solutions Group Inc Earnings Call

Yeah.

[music].

Operator: If anyone should require operator assistance during the conference, sir, you may begin.

Speaker Change: Good morning, everyone and welcome to the distribution solutions groups second quarter 2024 earnings call. Joining me on today's call are Dst's, Chairman and Chief Executive Officer, Bryan King and Executive Vice President and Chief Financial Officer, Ron Knudsen, Inc.

Speaker Change: In conjunction with today's call. We have provided financial results slide deck that is posted on the company's IR website at Investor Dot distribution solutions group Dot com.

Please note that statements on this call and in today's 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 comp.

Steven Hooser: Please note the statements on this call and in today's 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 and on the company's website. Thanks, Steven, and good morning, everyone. Thank you for joining us this morning, and on a busy earnings day for many of you, we will try and move through our prepared comments expeditiously.

Steven Hooser: Although DSG's second quarter sales, excluding acquired revenue, declined on the basis of marketplace sluggishness, growing by almost 4% compared to this year's first quarter, each of our verticals made solid progress in the quarter on important strategic initiatives, while driving margins and even more impactful longer term compounding for shareholders. Commitment to Expanding Our Customer Value Proposition and Service While Refining Our Approach to Our Profitability and Returns on Invested Capital Discipline on the revenues and capital assigned to each business vertical. Our leadership team is committed to making DSG the highest possible long-term compounder for our valued shareholder partners.

As like renewables, we will discuss this more in a few moments.

Our consolidated EBITDA margins enjoyed a sequential improvement from the eight 7% from the first quarter to a double digit EBITDA margin of 10, 3% in the second quarter.

All three of our verticals experienced sequential EBITDA margin improvement from the first to the second quarter.

Speaker Change: We enjoyed good visibility in our initiatives to reformulate dsg's cost structure and drive structural margins and returns on invested capital higher.

Speaker Change: Process improvement and structural optimization initiatives for each business unit are well underway, our teams disciplined prioritization and execution of internal profitability enhancement initiatives reflects a coordinated commitment to get to expense optimization levels that will continue to unlock additional profitability and <unk>.

Steven Hooser: We understand the importance of not only focusing on financial growth but also on building a strategically positioned company. While we are fully committed to this mission, I eagerly await, like all of us involved, colleagues, customers, and shareholders alike, for a more constructive macroeconomic backdrop to be enjoyed. Switching gears and moving to slide 5, the team and I are very excited to share details on our announcement to acquire Source Atlantic, which we expect to close in a few weeks and which we have committed to use this call to broadly introduce the opportunity. As many may already know, Source Atlantic has long been a leading industrial distributor providing value-added products and specialty services in the Canadian market. Sourced Atlantic was not for sale.

Speaker Change: This call to broadly introduce the opportunity as many may already know source Atlantic has long been a leading industrial distributor providing value added products and specialty services in the Canadian market.

Speaker Change: Last year their annual sales totaled approximately $250 million in Canadian dollars and their revenue has continued to grow as they continue to execute successfully on their marketplace strategies.

Speaker Change: Source Atlantic was not for sale when we contacted owners and we know how rare it is to get the opportunity to purchase a company directly from the owners with such a long rich history that has not been traded in the marketplace. This business began in the 18 sixties and has been under the Irving families thoughtful stewardship for the past 80 years.

Steven Hooser: When we contacted the owners, we knew how rare it is to get the opportunity to purchase a company directly from the owners with such a long, rich history that has not been traded in the market and has been under the Irving family's thoughtful stewardship for the past 80 years, nurtured around a tremendous culture the Irving family has fostered and developed over decades. As a reminder, today our Bolt Supply House operates from Western Canada and is uniquely complementary to Source Atlantic's largely Eastern Canadian business.

Speaker Change: Through our M&A diligence, we discovered this to be an exceptionally clean business with excellent customer and supplier relationships nurtured around a tremendous culture. The Irving family has fostered and developed over decades.

Steven Hooser: DSG's acquisition of Source Atlantic creates significant scale and geographic expansion potential by executing a strategy to grow our footprint, value-added services, and incremental product offerings across Canada, allowing us to enjoy line-of-sight toward a leadership offering for our colleagues and customers in Canada. Our bulk customers are concentrated in Western Canada and primarily span British Columbia, Alberta, Saskatchewan, and Western Manitoba. Although these provinces in Western Canada cover a large geographic footprint, they only represent about 28% of the current Canadian MRO market.

Speaker Change: <unk>, Canada are important to our decision to pursue this acquisition as well as our strategic and revenue growth lands across D. S. G three verticals.

Speaker Change: Our bulk customers are concentrated in western Canada, and primarily spanned British Columbia, Alberta, Saskatchewan and Western Manitoba.

Speaker Change: Although these provinces in Western Canada cover a large geographic footprint. They only represent about 28% of the current Canadian MRO market.

Speaker Change: By contrast sourced Atlantic geographic concentration has a rich history, principally focused on excellent coverage of all of eastern Canada for market perspective, Ontario, and Quebec represent 67% of the MRO with strong industrial activity, just north of our Great Lakes U S presence given the.

Speaker Change: The opportunity to offer expanded support two industries and end markets in that region, the opportunity to engage with expanded scale across Ontario, and Quebec will allow us to together grow faster with our combined MRO solutions and specialty services, which we prioritize is an exciting strategic opportunity for our shareholders colleagues and customers.

Steven Hooser: In addition to expanding customer presence in Canada and getting more utilization out of our combined capabilities and footprint, Total Addressable Market Expansion and ability to drive real value creation for our shareholders make this an extremely compelling business to add that fits nicely into exactly what we are trying to accomplish with our M&A playbook. Just like we were excited to have landed S&S Automotive only a couple of months ago.

Steven Hooser: Our acquisition of Source Atlantic expands DSG's Canadian MRO addressable market to approximately $41 billion. Like we did with Bolt after we acquired it, we expect to drive both Source Atlantic and our total Canadian opportunity to higher structural margins via scale and synergies across our platform in Canada. Ron, will you walk through our detailed second quarter results and funding sources for Service Atlantic?

Ronald Knutson: Turning to slide six, I'll summarize reported results for the quarter and then I'll break out each of the reporting segments. I'll expand further on this at the segment level here in a minute. We reported gap-diluted income per share of $0.04 for the quarter, inclusive of higher depreciation and amortization and a valuation allowance on certain deferred tax assets compared to earnings per share of $0.07 in the year-ago quarter.

Speaker Change: In the first quarter and eight 4% in Q4.

Speaker Change: I'll expand further on this at the segment level here in a minute.

Speaker Change: We reported operating income of $14 2 million for the quarter inclusive of $12 2 million of acquisition related intangible amortization expense and $12 5 million of aggregate costs from stock based compensation acquisition severance and retention related expenses.

Speaker Change: Is merger and acquisition costs and other nonrecurring items adjusted operating income was $38 9 million as compared to $34 9 million a year ago quarter, and $29 8 million in the first quarter.

Speaker Change: We reported GAAP diluted income per share of four cents for the quarter inclusive of higher depreciation and amortization and evaluation allowance on certain deferred tax assets.

Speaker Change: Paired to earnings per share of seven cents in the year ago quarter.

Speaker Change: Adjusted EPS was <unk> 40 cents for the quarter up from 25 cents in the first quarter compared to 42 cents a year ago on 3.6 million more shares outstanding.

Ronald Knutson: Turning to slide 7, let me now comment briefly on each of the operating segments. Starting with Lawson, sales were 121.1 million, up 1.7% on comparable days from a year ago, primarily due to very strong comps a year ago quarter of nearly 11% and the S&S automotive acquisition that closed earlier this quarter. Excluding this acquisition, organic sales were down 4.2% from the first quarter, given some of the softness in various end markets and on a lower field rep count.

Ronald Knutson: We continue to see a strong pipeline of new strategic customer agreements, but these have a longer implementation cycle, so the associated revenues are not yet being realized. In the aggregate, we're generating more sales dollars on a per rep basis. For the quarter, Lawson realized adjusted EBITDA of 16.5 million, or 13.6% of sales, up 220 basis points over the first quarter.

Speaker Change: This helps us sales reps have a larger book of business and earn more commission dollars.

Speaker Change: For the quarter loss and realized it realized adjusted EBITDA of $16 5 million or 13, 6% of sales up 220 basis points over the first quarter.

Speaker Change: Of the margin growth of $3 1 million approximately 1.1 million came from our acquisition this quarter.

Ronald Knutson: The acquisition helped raise Lawson's margin by approximately 11 VIPs for the quarter. The remaining margin expansion came almost equally from both organic gross margin improvements and related cost control. We feel good going into future quarters that these end markets will continue to expand, allowing us to further leverage our operating expenses. As expected, we saw in Q1 and again in Q2 some recovery in sales along with a focus on gross margin improvements and cost control, so that of the 90 basis point improvement from Q1, approximately 120 basis points. Second quarter sales grew 45.1% to $197.5 million, an increase of $61.4 million driven by the 2023 acquisition of Hisco.

Speaker Change: The acquisition helped raise lawson's margin by approximately 11 bps for the quarter. The remaining margin expansion came from almost came equally almost from both organic gross margin improvements and related cost controls.

Speaker Change: Turning to Jack's Pro services on slide eight total sales for the quarter increased eight 6% to 107.1 million over Q1.

Speaker Change: As indicated in our previous calls we were seeing some end market recovery starting late in 2023 into the first quarter, which continued through the second quarter in particular within technology and renewables, while aerospace and defense remains strong.

Speaker Change: We feel good going into future quarters that these end markets will continue to expand allowing us to further leverage our operating expenses.

Ronald Knutson: As indicated previously, we have a roadmap developed to build the combined test equity and HSCO business back to double-digit margins, and we took a nice step in that direction this quarter. As we think about the remainder of 2024 for test equity, we will continue to focus on the integration of HSCO and test equity. We remain committed to sequentially improving our margin profile as 2024 develops through higher sales, synergies to be realized in the combined company, and proactively rebalancing our cost structure.

Ronald Knutson: Between the merger savings and other cost normalization, we're focused on delivering approximately $15 million of cost savings in 2024, which are starting to be realized. As we make traction on many of our initiatives in 2024, and as comps against the prior year soften, we would expect organic sales growth to be flat to slightly positive in the second half. Our DSG model works well because we are committed to a disciplined and competitive approach to capital allocation and holding ourselves and our colleagues accountable to build a business that will survive. Cash flow per share is an important driver of our model as we focus on the compounding effect of cash flow reinvestment.

Speaker Change: <unk> rental equipment were $4 million for the second quarter and $6 9 million on a year to date basis.

Speaker Change: We expect full year capex be in the range of $15 million to $20 million or approximately 1% of our revenues.

Speaker Change: Before I turn the call back over to Brian I'd like to make some comments on how we see the remainder of 2020 for developing.

Speaker Change: As we discussed over the past two quarters, we were up against tough organic comps, while these comps do become easier in the second half we do see some softness in our shorter cycle MRO business offset by continued recovery of various end markets within our OEM and industrial.

Brian: G verticals.

Brian: As we make traction on many of our initiatives in 'twenty 'twenty four is comps against the prior year soften we would expect organic sales growth to be flat to slightly positive in the second half.

Brian: However, we remain cautious given the current macro economic environment.

Brian: To achieve our internal sales plans, we will need some normalization of various end markets and some recovery of cost of customer capital related project spending.

Brian: We also expect while not linear with improvements that we realize sequentially over the first quarter than all three verticals will expand their margin profiles in the second half of 'twenty 'twenty four over our most recent Q2 run rates I'll now turn the call back over to Brian.

Brian: Thank you Ron turning to our capital allocation framework on slide 11.

Brian: Our DSG model works well, because we are committed to a disciplined and competitive approach to capital allocation and holding ourselves and our colleagues to be accountable to build a business that will sustain driver.

Brian: Driving our long term compounding effect for exceptional shareholder returns as part of that framework. Our leadership team is focused on efficiently and continually managing working capital, which result in discipline around stronger cash flows, allowing for more deliberate reinvestment our trailing 12 months of cash from operations was 100.

Ronald Knutson: Over the last decade, from where we are today, we have enjoyed a 14% IRR on our loss in investment, and I am confident we will do better over the next decade with the expanded discipline and opportunities presented by DSG. And we are excited that we can see how we have made significant progress toward. We also want to emphasize that as part of our commitment to a disciplined capital allocation framework to drive shareholder value over the long term, share repurchases will continue to be a part of our capital strategy, as we believe we have a great line of sight on how our intrinsic value creation journey is dynamically progressing.

Brian: Cycles should come more from organic and in organic sources and that we can fade. Our DSD returns on invested capital structurally higher from the approximately 12% level, where we are starting.

Brian: Our five year goals that we set out during our Investor day last year include revenue of over $3 $3 billion, and an expert and an EBITDA of over $450 million with 13% to 14% margins.

Brian: And we are excited that we can see how we have made significant progress towards those goals over the last year.

Speaker Change: As Ron covered we will continue to judiciously focus on managing our leverage and debt service. We also want to underscore that as part of our commitment to a disciplined capital allocation framework to drive shareholder value long term share repurchases will continue to be a part of our capital strategy as we believe.

Speaker Change: We've we have great line of sight on how our area our intrinsic value creation journey as dynamically progressing so it makes sense that we also use some of our capital opportunistically to engage an accretive moments where the share price may reflect an attractive enough discount to what we see is our intrinsic value.

Ronald Knutson: So it makes sense that we also use some of our capital opportunistically to engage in accretive moments where the share price may reflect an attractive enough discount to what we see as our intrinsic value in the nearer term. We will continue managing our business and cash with tight discipline and focus.

Speaker Change: In the near term, we will continue managing our business and cash with tight discipline and focus.

Brian: Let's turn to slide 12 I.

Speaker Change: I wanted to discuss our three business verticals and provide some outlook commentary we had been signaling that our 'twenty 'twenty four first half comps would be under pressure with easier comps in the second half.

Brian: At this point that is still our informed lens, but we are continuing to see choppiness with certain customers and in certain end markets as the macroeconomic loons has not offered more broadly our customers are clear and confident path to economic expansion.

Ronald Knutson: All that said, we are also pleased to see progress in certain key markets that appear to have returned to growth and other pockets where we see green shoots. As we've discussed, Our overall backlog, bid-to-quote, and book-to-bill measures continue to be constructive, and we enjoy a quarterly ramp-up in this business. Our outlook is to continue to invest in growth segments like aerospace and defense, industrial power, and automotive, and we fully expect an acceleration of the top line in 2024 and beyond.

Brian: All that said we are also pleased to see progress in certain key markets that appear to have returned to growth and other pockets, where we see green shoots.

Brian: Most of our marketplaces broadly feel reluctant to lean into purchases and stocking skus for growth, although there are choppy, but improving sales trends in a number of our end markets and industries.

Speaker Change: At test equity group, we enjoyed double digit sequential improvements in sales volume for the test and measurement division due in major part to return of the tech and automotive sectors.

Speaker Change: Cars, driving repeatable business and consumables segments, and optimizing digital selling capabilities.

Speaker Change: We are excited about the road ahead for the test equity group and the continued progression, we expect out of margins and returns on invested capital.

Speaker Change: At Jets Pro services, we have sequentially improved sales and EBITDA margins quarter over quarter since the 2023 fourth quarter fueled by strong double digit growth and important end markets Aerospace and defense and technology continue to be a bright spot with year over year growth as well as sequential increases through the <unk>.

Speaker Change: First half of 2024. In addition, the renewables end markets were strong with double digit growth this quarter and double digit growth in the second quarter versus the first quarter of 'twenty 'twenty, four and <unk> and they show the promise we expected for the back half of the year.

Speaker Change: The frontier and <unk> acquisitions continue to present expanded opportunities as we evolve them into successfully collaborating versus competing with these great businesses that we acquired.

Speaker Change: Our overall backlog bid to quote and book to Bill measures continue to be constructive and we enjoy a quarterly ramp up in this business based on last year's second half slowdown, we expect easier comparisons and favorable trends in 2024 for the second half Jack projects Pro services. Our outlook is to continue to invest in <unk>.

Speaker Change: Gross segments like aerospace and defense industrial power and automotive and fully expect an acceleration of top line in 2024 and beyond.

Speaker Change: For Lawson, we continue to invest in areas that will increase sales in the short medium and long term as Ron mentioned, we implemented the next phase of our sales force transformation and went live with our CRM tool during the second quarter.

Speaker Change: This tool allows us.

Speaker Change: A more data driven approach to the sales organization and we have identified 70, new sales reps for the targeted territories in our CRM.

Ronald Knutson: After getting through many of our initiatives to invest in tools and opportunities for our sales force to become more effective and earn more, it is now time to fill back in all those open and optimized territories with a recruitment lens that we expect will yield better opportunities for candidates than years earlier experiences around recruiting outside sellers did. We also know that training new and existing reps on a refined engagement process will produce a more consistent and even order flow for our customers and our sellers.

Speaker Change: After getting through many of our initiatives to invest in tools and opportunities for our sales force to become more effective and earn more it is now time to fill back in all those open and optimized territories with a recruitment lens that we expect will yield better opportunities for candidates than in years earlier experiences around recruitment of <unk>.

Speaker Change: Outside sellers did.

Speaker Change: We also know that training, new and existing reps on a refined engagement process will produce a more consistent and even order flow for our customers and our sellers. We are implementing initiatives to work with district sales managers by encouraging more sales calls and efficient time management is a critical part of this transformation to drive more.

Ronald Knutson: We are implementing initiatives to work with district sales managers by encouraging more sales calls and efficient time management as a critical part of this transformation to drive more revenue and productivity through our sellers and the opportunity to share more of that with them. For the second quarter, net rep counts were up, and attrition was down due to better productivity, but we still need to hire at least another 70 reps. As a reminder, ESS drives product brand extension for Lawson in the safety category, while ESS expands the Kent Automotive Division's presence in the auto collision repair market, concentrating more on dealerships.

Speaker Change: For revenue and productivity through our sellers and the opportunity to share more of that with them for the second quarter net rep counts were up in attrition was down on better productivity, but we still need to hire at least another 70 reps.

Speaker Change: We also realize that these new routes need a few quarters to ramp up which is us remind ourselves without any crystal ball are informed inside that lawson's performance may not be linear from quarter to quarter.

Speaker Change: Earlier this year loss in acquired emergent safety supply or ESF and S. N S automotive.

Speaker Change: As a reminder, E. S. S drives brought up product brand extension for Lawson in the safety category, while E. S. S expands the Kent automotive divisions presence in the auto collision repair market concentrating more on dealerships.

Ronald Knutson: Brand and line extensions will allow this business to grow, improve margins, and scale into new geographies and categories that reduce business risk. Turning to slide 13, as we move into the second half of 2024, we are confident and enthusiastic about our prospects to grow and create shareholder value. DSG serves large, highly fragmented marketplace needs with specialty offerings and value-added capabilities across diverse end markets.

Brandon: Brandon and.

Speaker Change: And line extensions will allow this business to grow improve margins and scale into new geographies and categories that reduce business risk.

Speaker Change: As we discussed at the beginning of the call. We are very excited about loss in Canada and bolt.

Speaker Change: And will they will be well positioned to provide customers in eastern Canada.

Speaker Change: With value added MRO services and access to other specialty products through our acquisition of source Atlantic and that our total Canadian opportunity will be greatly enhanced by pulling these businesses together under dsg's broader specialty capabilities.

Brian: Turning to slide 13, as we move into the second half of 'twenty 'twenty four we are confident and enthusiastic about our prospects to grow and create shareholder value.

Speaker Change: ESG serves large highly fragmented marketplace needs with specialty offerings and value added capabilities across diverse end markets.

Speaker Change: We offer unique total customer value proposition with high touch service models distinct capabilities and product assortments across our platform leveraging the power of three D. S cheese collaborative business verticals offer highly embedded value added services and it is not surprising that we have well over 90% customer retention.

Ronald Knutson: Since we merged these companies just over two years ago, we have discovered new and expanded ways to cross-sell, in-source products and production, and further leverage our scale to unlock value. We were ambitious with our objectives for DSG and for each of the three verticals individually as well, coming into the creation of the platform, but our expectations have only increased as we have collectively gained an even more informed lens around the opportunity in front of each vertical inside of DSG, as well as for DSG, and how they add to our DSG objective to drive total long-term compounding in the platform.

Speaker Change: We merged these companies just over two years ago, we have discovered new and expanded ways to cross sell in source products in production and further leverage our scale to unlock value we were ambitious with our objectives for DSG and for each of the three verticals individually as well coming into the creation of a platform, but our expectations have only.

Speaker Change: The increase as we have collectively gained an even more informed lens around the opportunity in front of each vertical inside of D. S G as well as for DSG.

Speaker Change: Overall, our process improvement and optimization initiatives much evolved and expanded from where we started are well underway and we are in the early innings of our programs to deliver higher structural margins at each of the verticals our product development plans and expanded in sourcing and value added service programs are continuing to come into <unk>.

Speaker Change: Greater focus built around not only a strategic lens, but also financial compounding lens as well like we outlined previously for Lawson, where he put in an initial concentration on greatly improving our safety and power hand tools categories, which drives total productivity of the sales force organic revenue growth and returns on our.

Speaker Change: Invested capital, we're driving our returns on invested capital framework down through our individual business verticals to each of their follow on acquisitions. So there is clear accountability and a highly informed set of objectives and what we acquire and how we drive performance out of those investments and how they add to our DSG objective.

Speaker Change: To drive total long term compounding and the platform. We have an active M&A pipeline and are highly strategic playbook to facilitate the integration and understand what improvements and all the initial metrics must look like for business unit to effectuate the capital allocation to make an acquisition and how that must also draw.

Ronald Knutson: We have an active M&A pipeline and a highly strategic playbook to facilitate the integration and understand what improvements in all the initial metrics must look like for a business unit to effectuate the capital allocation to make an acquisition and how that must also drive more total value for all of DSG. Today, more than before we created DSG, our verticals continue to expand their capabilities to better serve their existing customers as well as prospective customers through the entire life cycle of all of DSG's customers within our various end markets, leveraging and actively expanding and improving the world-class global supply chain platform we are building at DSG.

Ray: Ray more total value for all of DSG today more than before we created DSG, our verticals continue to expand their capabilities to better serve their existing customers as well as prospective customers through the entire lifecycle of all of Dst's customers within our various end markets leveraging and actively.

Speaker Change: Spanning an improving the world class global supply chain platform. We are building at DSG and we're just getting started.

Ronald Knutson: And we're just getting started. Finally, we will continue to work on DSG's targeted investor outreach. In August, we plan to attend the Midwest Ideas Conference in Chicago. This fall, we will participate in the Jeffries, Baird, and Stevens Conferences, plus a non-deal roadshow in the Mid-Atlantic.

Speaker Change: Finally, we will continue to work on DSG is targeted investor outreach in August we plan to attend the Midwest ideas conference in Chicago. This fall, we will participate in the Jefferies Baird and Stephens conferences, plus a non deal roadshow in the mid Atlantic with that operator, we'd like to open the call for questions. Thank you.

Operator: With that, Operator, we would like to open the call for questions. Thank you. Thank you. The floor is now open for questions. If you wish to join the queue to ask a question at this time, please press star one on your telephone keypad. And our first question this morning is from Kevin Steinke from Barrington, R.C. What?

Speaker Change: Thank you. The floor is now opened for questions. If you wish to join the queue to ask a question at this time.

Speaker Change: Please press star one on your telephone keypad.

Speaker Change: We do ask that listing on speaker phone. This morning that you can pick up your handset all asking your question provide optimal sound quality. Once again, if you wish to join the queue to ask a question at this time Please press star.

Speaker Change: One on your telephone keypad, please hold a moment, while we poll for questions.

Speaker Change: Yeah.

Speaker Change: And our first question. This morning is coming from Kevin Spanky from Barrington Research Kevin. Your line is live. Please go ahead.

Kevin Spanky: Thanks, and good morning.

Kevin Spanky: Good morning, Kevin wanted to alright, Kevin good morning.

Unknown Executive: Why does this start out... Kevin, just to add to that, we texted, I think, at the end of the fourth quarter and again at the end of the first. Yeah, so, Kevin, as we look at our, you know, kind of end segments that we manage the loss of business within, you know, within our strategic customers and, and military, our core street business and, and, and Kent Automotive, we have seen, you know, some softening across, across most of those segments.

Kevin Spanky: One wanted to start out.

Kevin Spanky: By asking about the testing.

Speaker Change: Test and measurement.

Speaker Change: Business within test equity it sounds like some recovery going on there.

Speaker Change: Last quarter I got the impression that maybe that.

Speaker Change: Market was a little recovering a little more slowly than you had anticipated and you had been talking about excess inventory in the market. So.

Speaker Change: Just maybe talk about the pace of the recovery there.

Speaker Change: What you expect for the second half and just overall the state of inventory in the market.

Kevin Spanky: Yeah.

Speaker Change: Customers plans for capital spending in that area et cetera.

Kevin Spanky: Ron why don't you start there.

Kevin Spanky: Yes.

Ron: Yeah I'll jump in.

Kevin Spanky: Thanks for the question Kevin So we we mentioned this a little bit on the.

Ron: On the first quarter call as well that we were starting to see some sequential improvement in in the test and measurement business really as each month's surpassed in the first quarter. We continued to see that trend here in the second quarter is.

Kevin Spanky: Well and even though we feel like there is there are some market.

Kevin Spanky: Recovery, there certainly interest rates really haven't haven't moved since the end of the first quarter and I would and I would really probably describe it more of that.

Speaker Change: We're taking share candidly.

Speaker Change: You know I think youre well aware that that's a that's a that's a very.

Speaker Change: <unk> relationship type of business on the test and measurement side and we've continued to work really really hard with our top suppliers.

Kevin Spanky: In order to gain more of their business.

Kevin Spanky: We've had a couple of customers there.

Kevin Spanky: We've regained that.

Kevin Spanky: Really kind of faded off honest in 2023, so that's helped helped build it as well.

Kevin Spanky: Do we think about it think about the rest of the year.

Kevin Spanky: Certainly the.

Kevin Spanky: The overall interest rate.

Kevin Spanky: Environment, I think we will probably still put some pressure on that overall end market.

Kevin Spanky: But we have we've got great initiatives going on internally within the test equity grew.

Kevin Spanky: In order to expand those supplier relationships and to go back and get some of these customers that have faded a little bit out of us in 2023. So.

Kevin Spanky: As I mentioned that first I mean, if I look at the first six months of the year for this year.

Kevin Spanky: It's a nice sequential movement in the right direction. So so we feel we feel good about that.

Kevin Spanky: That piece of our business continuing to Q2 lift us for the rest of 'twenty four.

Kevin Spanky: Kevin just to add to that.

Kevin Spanky: We messaged I think.

Kevin Spanky: Through the end of the fourth quarter.

Kevin Spanky: Again at the end of the first that there were some.

Speaker Change: Lack of there was some purging of inventory that was taking place by some people who had entered.

Speaker Change: That marketplace.

Speaker Change: With an inventory position that they had historically.

Speaker Change: Then as big of a participant.

Speaker Change: Selling those vendors products and so there were some undisciplined in my opinion, Mark markdowns by some folks that we might submitted RFP.

Speaker Change: Somebody may have come to us for technical support major customer somebody who we've worked with and consistently worked with for years. We did we would spec out of purchase and then somebody would come in underneath it and dumped some inventory.

Speaker Change: And that was created some additional choppiness.

Speaker Change: Over the first.

Speaker Change: Last year in the first quarter of this year.

Speaker Change: A lot of that US seems appears to have abated itself.

Speaker Change: So that's we're picking back up the same customers that or those orders were out there.

Speaker Change: We were actually doing the staff work on them and then we just lost a bit to go line by not breaking discipline on pricing.

Speaker Change: In some cases, we probably look back in the fourth quarter and wonder whether or not we should have taken those orders, but we wouldn't have cleaned the market with that kind of excess inventory there within the channel for some of the smaller competitors that don't have as much market share selling those.

Speaker Change: Major manufactures products in North America.

Speaker Change: So that's part of it we do think that there is some green shoots we are seeing some end market customers that are.

Speaker Change: Returning we highlighted a couple of them.

Speaker Change: On the call but.

Speaker Change: To the test and measurement area.

Speaker Change: But we're still.

Speaker Change: Being cautious in terms of capital spending just given until we see interest rates in the marketplace.

Speaker Change: Appearing to have more confidence that we're backing economic expansion, but there is just some cyclic purchases that were seeing it come back in and that we're getting more of our share than we were in at the end of the fourth quarter.

Speaker Change: Okay. That's all very helpful commentary I appreciate it.

Speaker Change: And.

Ron: Ron you mentioned.

Ron: When talking about <unk>.

Ron: I can have that youre seeing some.

Ron: Softness in short cycle MRO.

Ron: You saw some organic revenue saw softness in loss and in the second quarter.

Speaker Change: Can you maybe expand on that a little bit more is that.

Speaker Change: Is that market softened up.

Speaker Change: Little bit more than you might have expected.

Speaker Change: Entering in as you enter 2024.

Speaker Change: Yes so.

Speaker Change: Kevin.

Speaker Change: As we as we look at R. R.

Speaker Change: Kind of end segments that we manage the loss in <unk>.

Speaker Change: Business within within our within our strategic customers in military our core Street business in Kent automotive.

Speaker Change: We have seen.

Speaker Change: Some softening across.

Speaker Change: Across most of those segments.

Unknown Executive: As I, you know, as we look at the second quarter and even a little, little bit in the first quarter, ISM is still running well below 50. We've seen probably a bigger impact on the military.

Speaker Change: As we look at the.

Speaker Change: The second quarter, and even a little a little bit in the first quarter.

Speaker Change: <unk> is still running well below 50.

Speaker Change: We've seen probably a bigger impact on the military I know we talked about this on our first quarter call. Just in terms of the ordering process that volume is not.

Speaker Change: It is not yet fully come back to us.

Speaker Change: So we're we're a little cautious on the short cycle piece of Av.

Unknown Executive: I know we talked about this on our first quarter call, just in terms of the ordering process, you know, that volume is is not yet fully coming back to us. You know, so we're, you know, we're a little cautious on the short cycle piece of this business, you know, within Lawson. And, you know, in the other piece, I would say, and Brian commented on this in his prepared remarks, you know, we are actively recruiting and hiring new sales members, new, you know, expanding our sales team. You know, certainly we took that down as we were, you know, refining some of the process.

Speaker Change: This business within Lawson and.

Speaker Change: And the other piece I would say Brian.

Speaker Change: Brian commented on this in his prepared remarks, we are actively.

Brian: Recruiting and hiring new sales members.

Brian: Expanding our sales team.

Brian: Certainly we.

Brian: We.

Speaker Change: Took that down as we were refining some of the process and now we're in a position where we feel like we're in a really good position to build that back up.

Unknown Executive: And now we're in a position where we feel like we're in a really good position to build that back up. And we're, you know, targeting to hire nearly 70 individuals between now and the end of the year. And, and so that'll, you know, give us a little bit of a lift here in 2024. But, but in reality, you know, those hires will benefit 25 and 26, you know, certainly more than in 2024.

Brian: And.

Brian: And we're targeting to hire.

Brian: Nearly 70 individuals between now and the end of the year and so that will give us a little bit of a lift here in 2024, but but in reality those hires will benefit 25, and 26 certainly more than more than 2024. So so we're a little we're a little cautious on the loss side right now I mean, you saw you saw.

Unknown Executive: So, we're a little cautious on the Lawson side right now. I mean, you saw really nice net margin expansion. And I think, you know, going, you know, call it from the mid-11s to the mid-13s, you know, kind of back to where we were on a full run rate basis in 2023. So we're managing the business, you know, daily from a cost perspective and from a gross margin perspective.

Brian: Really nice net margin expansion and I think going.

Brian: Call. It from the mid elevens to the mid <unk> kind of back to where we were on a full run rate basis in 2023.

Brian: So we're we're managing the business daily from a cost perspective and from a gross margin perspective.

Brian: Yeah, Kevin I think your intuition is right there what's been surprising I think.

Brian:

Brian: A little bit to all of us is that the longer cycle. The OEM visibility is appears to be getting worse staying firm are getting better.

Brian: Especially across some of our markets like renewables and technology in aerospace defense on the pro services side and I think even.

Brian: That's firming some on the on the test equity group side.

Brian: Obviously, you're going to lap some easier comps there as well.

Brian: But our.

Brian: Operating with less salespeople than we did a year ago or two years ago.

Brian: We knew was going to weigh some on our ability to drive organic growth and often but it was critical to our strategy to.

Brian: Driving returns on invested capital and EBITDA margins higher and ultimately cash dollars higher.

Brian: And so now we're layering back in that growth plan on filling an optimized sales territories.

Brian: And with optimized tools.

Brian: We thought it was premature to do that until we got some of those pieces.

Brian: Better lined out for new hires and could bring them in.

Brian: With a clear expectation and a clear opportunity that was maybe different than some of the.

Brian: The way that we on boarded salespeople several years ago.

Brian: And I think they have an opportunity to earn a lot more in the quality.

Brian: <unk> experienced that they will have what we think it will be.

Brian: Allow for us to hire.

Brian: Even better.

Brian: Consistency.

Brian: On new hires there so there is.

Brian: That's a big part of it.

Brian: But there's no doubt when we look at the short cycle side of the business and we're going through each customer that is a repeat customer and there the size of their orders.

Brian: Theres been a lot more noise than it over the last several months.

Speaker Change: And there was.

Brian: Last half of last year.

Brian: Yes.

Brian: Kevin I wouldn't put it just one additional data point out there for you so.

Brian: And it really I think it follows onto Bryan's comments I mean, we are I mean, we're we're a more profitable organization within loss and given a lot of these changes operating now in the mid <unk>.

Brian: Versus the high single digits going back a couple of years ago, and even so even though we saw some some sales pressures.

Brian: Into the second quarter.

Brian: If you look at loss and the net margin dollars realized is up almost $9 million going from Q1 into Q2 now call. It about $1 million million. One of that was the acquisition that we made kind of mid 20 mid <unk> in the second quarter, but but structurally we're a we're a more profitable business.

Brian: And to Brian's point, we're now.

Brian: We're in a much better position to go out and.

Brian: Put.

Speaker Change: Core trash on.

Brian: Filling in some of these open territories given given some of the structural changes we've made over the last.

Speaker Change: Year to 18 months.

Unknown Executive: Okay, thanks. That's very helpful. And lastly, I wanted to ask about Source Atlantic. Congratulations on that agreement. Looks like it'll be a really nice deal for you. We think about layering that into our model in the future when that deal closes. Can you, Yeah, I can. So maybe I can give you a couple of points of reference without giving specific numbers. So, you know, Brian, you'd mentioned that, really, you know, getting, you know, that piece of the business to a run rate, double digit EBITDA margins, you know, exiting 2025.

Speaker Change: Okay. Thanks, that's helpful and lastly.

Speaker Change: I wanted to ask about source Atlantic.

Speaker Change: Congratulations on that agreement looks like it'll be a.

Speaker Change: Really nice deal for you.

Speaker Change: You did mentioned.

Speaker Change: It hasnt closed yet but.

Speaker Change: It's a bit.

Speaker Change: Lower margin.

Speaker Change: Consolidated DSG right now, but do you have plans to improve that over time.

Speaker Change: Again.

Speaker Change: We think about layering that into our model in the future when that deal closes can you.

Speaker Change: Talk to her.

Speaker Change: How much of an impact that could potentially have on your <unk>.

Speaker Change: <unk> margin I know, it's not a overly large acquisition, but Ron I don't know if you could touch on that at all.

Ron: Yes, I can.

Speaker Change: So and.

Ron: And maybe I can give you a couple of points of reference to wood.

Speaker Change: Without giving specific numbers so.

Speaker Change: Brian Brian you had mentioned that.

Speaker Change: Really.

Speaker Change: Getting that.

Speaker Change: The piece of the business to a run rate double digit EBITDA margins exiting 2025.

Unknown Executive: And, you know, we did mention the 250 million Canadian dollars, and maybe the best way to frame it up is, when we purchased Bolt Supply, we were in the call it mid to high single digits, and I would say, and we've now, you know, pushed that business up into the, you know, 13 to 14% range from an EBITDA perspective. Probably you'll see a bigger impact as 2025 develops, going kind of from that mid to high single digits into double digit territory by the time we get out of 2025.

Speaker Change: And we did mention the $250 million Canadian dollars.

Speaker Change: Maybe the best way to do that.

Speaker Change: To frame it up as well.

Speaker Change: We purchased bolt supply we were in <unk>.

Speaker Change: Call it mid to high single digit.

Speaker Change: I would say.

Speaker Change: And we've now pushed that business up into the 13% to 14% range from an EBITDA perspective.

Speaker Change: I would put.

Speaker Change: Sources, Atlanta kind of in that same initial.

Speaker Change: Kind of out of the gate in terms of when we when we bring bring them in here later this year, so again not a.

Speaker Change: Huge impact to two.

Speaker Change: 2024.

Speaker Change: Given our overall.

Speaker Change: Eight in sales.

Speaker Change: $180 million in EBITDA, but.

Speaker Change: Probably you'll see a bigger impact as 2025 develops going kind of from that mid to high single digits into into double digit territory by the time, we get out of 2025.

Operator: Okay, thanks. I appreciate the commentary. I'll turn it back over to you. Thank you. And as a reminder, if you wish to join the queue to ask a question at this time, please press star one on your keypad. Once again, that'll be star one. If you wish to join the queue to ask a question, please hold a moment while we poll for questions. And there are no further questions in queue at this time. I would now like to turn the floor back to Bryan King for closing remarks.

Speaker Change: Okay. Thanks, I appreciate the commentary I'll turn it back over.

Speaker Change: Great. Thanks, Kevin Thank you Kevin.

Speaker Change: Thank you and as a reminder, if you wish to join the queue to ask a question at this time. Please press star one on your keypad.

Speaker Change: Once again that'll be star one if you wish to join the queue to ask a question. Please hold a moment, while we re poll for questions.

Speaker Change: Yeah.

Speaker Change: And there are no further questions in queue at this time I would now like to turn the floor back to Brian King for closing remarks.

Brian King: Okay. Thank you operator, thank you everyone for helping us are joining us today I know that.

Speaker Change: We've got a lot of other distributors that.

Speaker Change: In the nine o'clock call for many of you. So thank you so much for joining US we look forward to talking to you at the next.

Speaker Change: For the next quarter's earnings and have a great balance of the summer.

Speaker Change: Thank you this does conclude today.

Speaker Change: This conference call.

Speaker Change: Disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Speaker Change: Okay.