Q3 2024 Distribution Solutions Group Inc Earnings Call
Disappoints are on a listen only mode and a question and answer session will follow the formal presentation.
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Speaker Change: I'll now turn the conference over to your host Mr. Steven Hooser with Investor Relations, Sir the floor is yours.
Good morning, everyone and welcome to the distribution solutions group third quarter 2024 earnings call.
Steven Hooser: 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 can you tuned in.
Okay.
Okay.
In conjunction with today's call. We have provided our financial results slide deck 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 are subject to risks and uncertainties that could cause actual results to differ materially from those described in addition statements.
During.
Steven Hooser: This call are based on the company's views as of today the company anticipates that future developments may cause those views to change and we may elect to update the forward looking statements made today, but disclaim any obligation to do so.
Management will also refer to non-GAAP measures and reconciliations to the nearest GAAP measures can be found at the end of the earnings release.
The earnings release issued earlier today was posted on the Investor Relations section of our website.
Copy of the release is also included in our current report on form 8-K filed with the SEC.
Lastly, this call is being webcast and on the Internet via the distribution solutions group Investor page on the company's website. A replay of this teleconference will be available through November 14th 2024 now.
Speaker Change: Now I'd like to turn the call over to Bryan Bryan.
Bryan: Thanks, Steven and good morning, everyone. Thank you all for joining US today, we plan to share a brief overview of the quarter's results with an update on our initiatives before opening the line for questions.
Starting on slide four we again reported record quarterly sales up six 6% compared to last year's third quarter, Although organic sales were down two 1%. This quarter what stood out this quarter was excellent traction we are seeing at Jack's pro services that includes new customer wins and the sequential for.
<unk> and that continued in certain end markets, including renewables technology in aerospace and defense.
More broadly we saw continued lackluster industrial backdrop, however, our commitment to our shareholders is to focus on what is in our control and in that regard we are making solid progress.
At Los and after a year of adding sales tools re imagining our sales territories and processes and implementing focus insights for customer engagement as we dig into our transactional data we're excited to be in a position to begin adding to our sales rep count following a period of critical investments new processes and reconfiguration.
Our sales strategies that we believe will continue to allow our reps to operate at a higher level of productivity and importantly allow us to recruit and retain new reps in the significantly more productive territories and provide them with better tools for success. We also confirm as part of this process and additional 130 <unk>.
New sales territories.
We've made good progress on integrations across ESG, most notably on test equity Heska, where we've captured more cost savings than we underwrote and are seeing the cross selling wins, we had anticipated with <unk> OEM offering getting pulled into test equity and <unk> Pro services legacy customers.
<unk>.
This industrial technologies focused vertical has made tremendous strides integrating all its acquisitions and while it has faced a tough marketplace backdrop between excess test and measurement of inventory in the channel and weak electronics manufacturing the channel concerns have largely been cleaned up and the vertical is enjoying <unk>.
Speaker Change: Stable activity, even while broader industrial activity remains weak with a growing book to bill.
Speaker Change: We need to see the key end markets that have been soft like electronics manufacturing does pull back up to be able to demonstrate the earnings leverage that we've built into this vertical.
Finally, the quarter highlights include announcing three acquisitions that went through a rigorous capital allocation process, where each offer a unique value proposition to customers and the DSV platform and reflect a disciplined but programmatic and active capital acquisition strategy that is hitting stride, while accomplishing defined.
<unk> at attractive valuations.
Despite an active hurricane season, Dsg's consolidated organic sales improved slightly up 2% in the third quarter compared to the second quarter and closer to 1%. If you weigh in the ADF for the three verticals. We also have begun to lap easier sales comps from a year ago, which should be a positive.
Speaker Change: As we end the year and begin 2025, despite seasonally slower months ahead, we generated third quarter consolidated adjusted EBITDA of $49 1 million or 10, 5%, which is an improvement over last year's third quarter, a 10% and sequentially over the second quarter of 10, 3% of sales.
We are committed to carefully manage our cost to create better operating leverage we're taking a disciplined approach, but it is a journey, where we do not control the end markets to optimize <unk> cost structure and sales processes with a line of sight around driving structurally higher margins and returns on invested capital as I've said before we are committed.
Building, a better and more valuable business for all our partners and appreciate that the progression will not be linear and the challenging market backdrop in the last year and longer and test and measurement equipment.
Speaker Change: That said, we are a committed and aligned team with a mandate to scour for levers to unlock incremental profitability and operational efficiencies, while thoughtfully challenging each other around what is the best way to serve customers going forward.
Our internal mandate is to unlock incremental profitability and operational efficiencies. This disciplined unlocking cash flows and identify areas to reinvest those cash flows into higher return organic and inorganic opportunities that the collective shareholder focused team embraces with an emphasis on monitoring leverage.
Strengthening our balance sheet as we continue to add key capabilities and services to our platform with a commitment to make DSG is structurally better partner long term for our customers and customer facing colleagues as well as a better long term compound or for our shareholders.
We've underscored the shareholders the ongoing comprehensive deep dive by our DSG management teams with strong support from the <unk> headwater team and external and external resources, where we're looking to improve our long term customer intimacy proposition and measure key profitability and return metrics and levers to drive them.
Speaker Change: Sustainably higher overtime within each of our verticals.
Our processes to rigorously evaluate opportunities for investment and then prioritize capital allocation to the best and highest returns on initiatives and acquisitions that drive accomplishing our long term goals.
Speaker Change: We maintain a healthy and active pipeline of acquisitions through the first nine months of 2024 with strategic acquisition opportunities being executed for each vertical I'll now walk through the strategic rationale for the three most recent acquisitions and then cover other initiatives within each of the verticals afterwards.
Speaker Change: That said, we are a committed and aligned team with a mandate to scour for levers to unlock incremental profitability and operational efficiencies, while thoughtfully challenging each other around what is the best way to serve customers going forward.
In August we closed on our source Atlantic acquisition, which generate significant scale and geographic expansion in Canada to improve our strategic North American footprint as we discussed last quarter source Atlantic takes our Canadian business from a regional MRO player to a national MRO player in the country.
Speaker Change: Our internal mandate is to unlock incremental profitability and operational efficiencies. This disciplined unlocks cash flows and identify areas to reinvest those cash flows into high return organic and inorganic opportunities that the collective shareholder focused team embraces with an emphasis on monitoring leverage.
The combined platform will have a breath of leading positions in fasteners safety supplies and other specialty services and offering that each business alone locked our team has spent more time with a broader set of the source Atlantic employees, which has increased our excitement about the talent capabilities growth culture and operational disk.
Speaker Change: And strengthening our balance sheet as we continue to add key capabilities and services to our platform with a commitment to make DSG is structurally better partner long term for our customers and customer facing colleagues as well as a better long term compound or for our shareholders.
Upon the source Atlantic team is bringing to DSG not every acquisition can bring the rich heritage and thoughtful stewardship of the business light source Atlantic does where it has roots in eastern Canada that go back to $18 67, as Ron will explain further in a moment the Canadian branch Division is a new reportable segment that I felt like allow.
Speaker Change: We've underscored the shareholders the ongoing comprehensive deep dive by our DSG management teams with strong support from the LK seem headwater team and external and external resources, where we're looking to improve our long term customer intimacy proposition and measure key profitability and return metrics and levers to drive them.
With better visibility to our shareholders, then having an integrated into our Lawson MRO platform, allowing us all to track and follow the growth of this Canadian business source Atlantic brings $250 million Canadian or approximately $180 million of annual revenue 600 colleagues and thousands of new.
Speaker Change: <unk> higher over time within each of our verticals.
Speaker Change: Our process is to rigorously evaluate opportunities for investment and then prioritize capital allocation to the best and highest returns on initiatives and acquisitions that drive accomplishing our long term goals.
<unk> DSG enhancing our opportunity to serve our existing MRO customers and employees under bolt supply and loss in Canada were important underwriting elements and our decision to pursue this acquisition as well as how to improve our strategic and revenue growth wins in Canada across Dsg's three verticals.
Speaker Change: Our goal is to leverage the combined source Atlantic bolt enhanced position in the Canadian market to improve growth in what we broadly see is a ripe and growing Canadian marketplace for our collective DSG offerings.
Next we recently announced our acquisition of Connor is test equipment, a carve out from Continental resources incorporated Congress scored very high as an accretive use of capital across our priorities. Our analysis of test equities value added capabilities in its test and measurement lines of business brought to light significant.
Opportunities to prioritize areas that bring more customer intimacy and value added support to our customers with improvement desired in several key geographic geographies, most notably the northeast. The addition of a northeast calibration laboratory in Congress as employees offer DSG added sales and support in <unk>.
Key growth markets in the northeast, where many of our global customers have a presence.
Speaker Change: We believe that an accretive acquisition of <unk> allows us to accelerate historical asset utilization rates, resulting in an appreciable improvement opportunity on our returns on invested capital for our specialty lines of business like rental used in calibration.
Speaker Change: We also believe in the direction, adding conrad's takes our test and measurement line of business and engaging a more holistic long term lens to support our customers customer facing associates and key vendors Conrad's reflects a transaction similar to terms and how we would assign value to purchasing a large fleet.
Speaker Change: I've used test and measurement equipment to place an inventory of what we believe is a point in time, where the current market environment to grow our rental and used fleet is depressed. This allows for real upside as we did not have to ascribe value.
To the calibration lab, which was critical to our underwriting decision as it adds a third DSG lab in a key geography to an asset base and strategy, where we are focused on unlocking additional value through more value added services.
Speaker Change: We believe shareholders will benefit or will enjoy the benefits of immediately folding in cash flows and expanding engagement through established relationships with excellent customers.
Speaker Change: We already serve many of Congress top tier national customers in other parts of the country. This tuck in acquisition brings on day, one about $12 million in annual revenues that we should be able to immediately enhance while executing towards improved asset utilization driving our returns and margins higher.
Speaker Change: We also recently announced our tech component resources or TCR acquisition, although smaller than the other two businesses discussed today. This one is highly strategic to our <unk> services business as it provides an important beachhead operation and what is being called the global semiconductor supply chain hub in southeast Asia.
As a distributor of fastener fasteners mechanical components and other industrial products, serving key existing OEM customers of <unk> services and now TCR with its headquarters in Singapore, and our second location in Malaysia. This business provides us with an expanded geographic footprint and an ability.
To pull through our best in class offering around products and service capabilities to best serve the expansion efforts of existing global customers. This gives our customers better access to <unk> services, which is a trusted partner for OEM classy parts and a growing critical marketplace expanding dsg's market potential.
Speaker Change: With a with a critical geographic footprint for products and service offerings. In these regions of the world extends opportunities in key end markets, including technology semiconductor industrial and manufacturing, we know that <unk> services is well positioned to expand tcr's products and service capabilities for our broader and more diverse.
<unk> selection of offerings, creating a superior customer value proposition.
Speaker Change: This small acquisition also fits well into our long term customer strategy, while enhancing our key profitability and return metric objectives projects Pro services and we believe was an excellent allocation of a modest amount of capital for what it is accomplishing for existing customers and the value it will unlock.
Let's turn to slide five and I'll provide updates on initiatives under our three business platforms and discuss our outlook in a few moments.
Speaker Change: Lawson.
Speaker Change: Lawson MRO focused vertical now includes the Canadian operating unit that we expanded significantly with source Atlantic that we mentioned earlier under <unk> leadership, we will manage and report the bolt source Atlantic financial results separately from Lawson's business. We believe this provides important visibility for management as well as for investors to track and monitor.
Our Canadian MRO growth strategy and it is consistent with how we as your partners will manage and measure its accomplishments. Our MRO focused vertical now represents 38% of Dsg's consolidated revenues on a trailing 12 month basis, which includes all of lawson's accomplished acquisitions to date.
On the organic side, we continue to invest in our sales force transformation with the goal of 900 sales reps by year end and a line of sight around a thousand routes midway through next year. We also have identified through our sales territory realignment and a rollout of new technology enhanced sales tools and data insights 134, new sales territories.
That we did not previously have identified our team's efforts have validated that new Greenfield territories are about twice what they had been scoped at in previous periods, our rep count increased by 22.
Third quarter, while still early our territory re mapping of reps through Lawson's, New CRM is making excellent progress. We also understand that adding new reps requires an investment as they ramp up even when offered a highly targeted book of business our commitment to our sales force is genuine and we as we are loading them with tools.
Speaker Change: Support resources and actively Incentivising production and monitoring progress we want the sales force to be motivated to earn more than Lawson outside sellers earned in the past we needed these tools and measures to be in place to demonstrate to our sellers and those we are actively recruiting that we are in different and a different chapter of this business.
Speaker Change: Our modern and grow chapter we continue to train all reps in the development and engagement process with the goal of more consistent and even order flows for our customers getting the right people and technology synchronized on top of our territory optimization strategy is an investment that we understood. When we started it with the recruitment of <unk>.
And no one is more impatient about more and more committed to this initiative and made it takes time and disciplined execution to result produced the results we desire for Lawson I believe wholeheartedly in it for a decade is the most important initiative for the shareholders sellers and customers of Lawson.
We continue to invest in our sales force transformation with a goal of 900 sales reps by year end and a line of sight around a thousand Ralph's midway through next year. We also have identified through our sales territory realignment and a rollout of new technology enhanced sales tools and data insights 134, new sales territories that we did not pre.
Some of the technology tools and insights have taken longer to rollout than we want it and we have been slower to start back billing in growing our sales force than we should have been but we have made tremendous strides with great insights ever improving accountability, and our Bakken and investment growth mode around feed on the street, which we know in a vms centric business.
Speaker Change: Obviously have identified our team's efforts have validated that new Greenfield territories are about twice what they had been scoped at in previous periods, our rep count increased by 22.
Is paramount to growing customer engagement and revenues. We also added the three key acquisitions that address areas of opportunity to drive improve margins and returns across our MLR MRO offering. This year, we already discussed source Atlantic and we continue to tackle operation and operational and selling initiatives on emergent safety.
Speaker Change: In the third quarter, while still early our territory re mapping of reps through Lawson's New CRM is making excellent progress. We also understand that adding new reps requires an investment as they ramp up even when offered a highly targeted book of business our commitment to our sales force is genuine and we as we are loading them with tools.
Speaker Change: <unk> with product brand extension strategies for Lawson in the safety category.
Speaker Change: And support resources and actively Incentivising production and monitoring progress we want the sales force to be motivated to earn more than Lawson outside sellers earned in the past we needed these tools and measures to be in place to demonstrate to our sellers and those we are actively recruiting that we are in different in a different chapter of this business.
We are extremely encouraged with how our SNS automotive acquisition is already expanding our Kent automotive division product offering and presence both in the auto collision repair market and now opening more opportunities with auto dealerships. These category and brand expansion initiatives delivered growth better margins and an ability to scale into new markets and customers SNS.
As a modern and grow chapter we continue to train all reps in the development and engagement process with the goal of more consistent and even order flows for our customers getting the right people and technology synchronized on top of our territory optimization strategy is an investment that we understood. When we started it with the recruitment of saves.
Speaker Change: As an extremely profitable operating model and is it is helping our inform our Kent automotive division, which has enjoyed significant organic growth momentum on how to drive profitability to levels not previously contemplated.
<unk> services, we continue to see a resurgence of business in four key verticals technology renewables transportation and aerospace and defense. These end markets are now demonstrating year over year and strong sequential growth, which is encouraging. It is still early days, but project business also appears to be coming back and we are staying diligent.
Speaker Change: With tightly managing cost on a growing sales base, we are aligning resources to stay ahead of business acceleration in certain verticals, especially technology.
<unk> services, we are expanding our leadership team to drive the commercial efforts to expand and deepen our customer relationships, while attracting new business the growth in sales and managing our costs has resulted in strong net margin expansion in 2024, or 2021, and 2022 acquisitions, which collectively had great 2022.
<unk> are now more integrated and present, a stronger <unk> services total value added proposition to customers as a whole they had a tough profitability year in 'twenty three as we invested in them and some of their key market softened.
As many of their end markets are firming back up those acquisitions are starting to demonstrate their renewed earnings benefit for the <unk> services vertical we continue to be very pleased with our frontier and <unk> acquisitions as they present expanded opportunities and we are very excited about the upside potential for TCR that we just discussed earlier.
Speaker Change: Test equity group, we continue to see an uptick in our test and measurement sales as compared to late 2023 in early 2020 for a positive sign of growing demand and market activity in.
Speaker Change: In market strength is demonstrated through improving metrics in aerospace and defense technology, and R&D, which we believe aligns with new fiscal year budgets, our commitment to our key vendors and customers. During the last 18 months of Choppiness has resulted in gaining market share in key areas and unlocked some key growth opportunities as we remain.
Committed to capitalizing on our improved value proposition and set of capabilities for our channel partners created by pulling together test equity to equip and Hesco, most notably in this vertical and how they are able to better engage with a broader DSG capabilities on the capital equipment side of this vertical we are seeing rep.
<unk> bookings for two months now, which we believe foretells a commitment by our customers to invest back in their business, even as we continue to face softness in our OEM order volume per invoice across certain manufacturing and markets in the U S and Mexico, especially with our electronic manufacturing customers.
Related to Hesco, our integration actions are mostly completed our cost takeout largely realized and growth initiatives are well underway at test equity or strategic focus continues to be on expanding wallet share with customers driving repeatable business on the consumable side and optimizing digital selling capabilities.
We believe that supply chains are normalized for our key vendors, we've grown our market share with them through persistent commitment.
Our approach and platform is allowing us to expand our vendor relationships, although business remains choppy in some areas. We are seeing the benefit of our disciplined approach and improved platform across a number of our strategic imperatives. This year and are optimistic that we will see sales and margins build quickly as our end markets return.
With that I'll turn it over to Ron and then come back to add some closing comments.
Ron: Thank you, Brian and good morning, everyone as with Brian and I will keep my comments brief but will highlight a few key takeaways within each of the verticals for the quarter.
Turning to slide six.
Ron: <unk> consolidated revenue for the quarter was $468 million.
This represents an increase of $29 1 million or six 6% driven by $38 1 million coming from our 2024 acquisitions.
Ron: Organic sales declined by two 1% versus a year ago, and we will provide average daily sales by operating segments in a few moments.
Ron: From the second to the third quarter total sales sequentially grew by six 5% again fueled by our acquisitions, while organic sales were up 2%.
Ron: For the quarter, we generated adjusted EBITDA of $49 1 million up 12, 4% over the prior year and up eight 7% versus the second quarter.
Our adjusted EBITDA margin improved to 10, 5%.
50 bps compared to last year's quarter, and up 20 bps sequentially.
Ron: As expected the acquisition of source Atlantic in the quarter depressed our net margins by approximately 20 bps.
We reported operating income of $18 9 million for the quarter inclusive of $12 million of acquisition related intangible amortization expense and $11 5 million, primarily due to noncash stock based compensation and nonrecurring charges, such as retention and <unk>.
Position related costs and other onetime items.
Ron: Adjusted operating income improved to $42 5 million or nine 1% of sales compared to 38 million or eight 7% of sales compared to the year ago quarter, and a sequential improvement from eight 8% of sales compared to Q2.
We reported GAAP diluted income per share of <unk> 46 for the quarter inclusive of a 40 <unk> tax benefit as required under GAAP based on the anticipated effective tax rate for the full year.
Ron: This compares to a loss per share of <unk> in the year ago quarter.
Adjusted EPS was <unk> 37 for the quarter compared to 40 cents in Q2, and 35 cents a year ago quarter.
Speaker Change: Turning to slide seven let me now comment briefly on each of the operating segments.
Starting with Lawson sales were 118 billion and average daily sales was one more selling day versus a year ago were up one 4% on acquired revenue this year.
Organic average daily sales were down 10% due to a lower sales rep counts in certain end market and customer headwinds.
In particular federal government contributed to approximately 50% of this decline is the ordering processes are being revamped at the federal level.
Net rep counts increase between Q2, and Q3 and we ended the quarter with approximately 860 field sales reps compared to 835 at the end of Q2 and approximately 900 in the year ago quarter.
And other one time items.
Adjusted operating income improved to $42 5 million or nine 1% of sales compared to 38 million or eight 7% of sales compared to the year ago quarter, and a sequential improvement from eight 8% of sales compared to Q2.
While we continue to build a stronger loss and by investing in our sales support team we have not yet seen the benefit of these investments rolled through our financial results.
These efforts take time as we are making numerous changes that will benefit our sales reps and our company on a longer term basis.
Speaker Change: Yes.
We reported GAAP diluted income per share of <unk> 46 for the quarter inclusive of a 40 <unk> tax benefit as required under GAAP based on the anticipated effective tax rate for the full year.
Los <unk> reported adjusted EBITDA of $15 5 million or 13, 1% of sales down 50 bps from Q2.
This compares to a loss per share of <unk> <unk> in the year ago quarter.
We anticipated more uncertainty and choppiness in results for loss and based on a ramp of sales reps and uncertainty around end markets and larger customer activity.
Adjusted EPS was <unk> 37 for the quarter compared to <unk> 40 in Q2, and 35 a year ago quarter.
Turning to slide eight as Brian previewed, we added a new reporting segment that combines both supply house previously included in our other segment with source Atlantic to report separately on our Canadian branch business.
Speaker Change: Turning to slide seven let me now comment briefly on each of the operating segments Star.
Starting with Lawson sales were $118 million in average daily sales was one more selling day versus a year ago were up one 4% on acquired revenue this year.
Supporting the MRO market, we call this new reportable segment, the Canada Branch Division.
Organic average daily sales were down 10% due to a lower sales rep counts in certain end market and customer headwinds.
Which we believe adds good visibility and accountability to this somewhat different leg under our Lawson products MRO focused business unit.
Speaker Change: In particular federal government contributed to approximately 50% of this decline is the ordering processes are being revamped at the federal level.
Speaker Change: Sales for this new Canada segment were 39, 1 million, including $24 7 million from the source Atlantic acquisition mid quarter.
Net rep counts increase between Q2, and Q3 and we ended the quarter with approximately 860 field sales reps compared to 835 at the end of Q2 and approximately 900 in the year ago quarter.
Excluding the acquired revenue sales increased six 2% from the year ago quarter.
Speaker Change: Key operational initiatives are focused on the integration of bold in stores, including optimizing the sales force cost management and integrating product availability.
While we continue to build a stronger loss and by investing in our sales support team we have not yet seen the benefit of these investments rolled through our financial results.
Speaker Change: Q3, adjusted EBITDA for the for the Canada Branch segment was $4 million or 10, 3% of sales consisting of 14, 8% from bolt and seven 6% from source Atlanta.
Speaker Change: Turning to <unk> services on slide nine.
Total average daily organic sales for the quarter were up $12 9 million or 12, 5% from the year ago quarter and up 10, 1% sequentially.
Speaker Change: As Brian mentioned, the combination of many <unk> services end markets recovering along with new customer wins are driving the sales growth.
<unk> services adjusted EBITDA expanded by $4 8 million to $16 4 million or 14, 1% of sales up from 11, 2% of sales a year ago.
And 11, 9% of sales in the second quarter.
Speaker Change: Sequentially adjusted EBITDA growth and margin expansion was due primarily to operating leverage from the sales increase on relatively flat operating costs.
Speaker Change: Operating leverage is benefiting us inject from services is capitalizing on cross sell acquisition synergies.
Hitting offerings and digital revenue.
With a growing book to bill compared to the year ago period.
Lastly, I will turn to test equity group on slide 10.
Speaker Change: Third quarter sales were $195 2 million with daily sales declining by seven 4% due to headwinds in the electronics assembly market or our consumables, causing softness and the electronic production supply and market.
We are seeing good traction in our test and measurement and Chambers business is 2024 is playing out but overall softness in the electronic production continues.
Speaker Change: Test equities adjusted EBITDA for the quarter was $14 4 million or seven 4% of sales up from six 9% as a percent of sales in the prior year quarter.
Sequentially net margin compression is primarily the result of sales mix shifts due to lower consumable sales this quarter as opex remained flat as a percent of sales.
Speaker Change: Finally on slide 11, our balance sheet is strong we ended the quarter with approximately 498 million of net working capital and $328 million of liquidity, which includes $76 million of cash and cash equivalents and approximately $252 million under our existing.
Speaker Change: <unk> credit facility.
During the quarter, we expanded our credit facility by $255 million with $200 million of that being a term loan and the remaining $55 million, increasing our revolver from 200 million to $255 million.
We closed on the source Atlantic transaction in Q3, which added to our leverage profile. However, the credit facility expansion added significant flexibility and availability to support our growth initiatives.
Speaker Change: Leverage at the end of Q3 was three seven times, which remains inside of our goal of three to four times.
Speaker Change: Net capital expenditures, including rental equipment were $4 1 million for the third quarter and $11 million year to date.
We expect full year capex to be in the range of $15 million to $18 million or approximately 1% of our revenues.
Speaker Change: We also realized trailing 12 months free cash flow conversion of approximately 90%.
Speaker Change: Resulting in ROIC.
Speaker Change: Inclusive of all of our acquisitions of approximately 10%.
We fully understand the more mature distribution assets can generate an ROIC north of 20%.
I'll now turn the call back over to Brian.
Thank you Ron with regard to the recent hurricanes, our employees and families impacted by the storms are safe and there were no material disruptions are significant financial impacts cut.
Customers in the affected areas were down between 2% and six days, mainly to power outages, which I'm certain presented a challenge for many of our DSG families as well and.
In fact, too often we get in get wrapped up in strategy and financial metrics as we focus on driving the outcomes, we expect and missed the humanity of a business like DSG ours is a company, whose successes and operational improvements like many in this last quarter are really a reflection of a lot of dedicated good people putting <unk>.
Speaker Change: <unk> effort forth in the face of lots of marketplace uncertainty as their leadership like me continue to think through ways to evolve and improve this commercial platform to be the best it can be with many of those new initiatives and timely accountability expectations, requiring even more work from them in the next period.
Speaker Change: All of our success has happened because of all of the committed colleagues across <unk> business units and I want to thank them from all of US who represent the shareholders are.
Our businesses have lapped 2023 softness and we'll compare against somewhat easier sales comparisons over the next several quarters.
But I'm more focused on demonstrating to my fellow shareholders about all the progress made by our employees across countless initiatives and a more benign marketplace.
Marketplace backdrop by getting back to our 2022 growth trajectory.
We're not letting off the gas as we tackle more growth plans and initiatives, making strategic investments and controlling all controllable as best we can.
Speaker Change: We are carefully controlling all cash outlays expenses and working capital management.
Speaker Change: The U S manufacturing purchasing managers' index or PMI numbers. This fall continue to track around 47.
PMI Dominion as many of you know below 50 may signal more contraction than expansion in the intermediate term, which we don't like but it is the environment, we are managing with that but like all shareholders and our management team I can't wait to see this business when PMI is back in an expansionary mode.
Speaker Change: While we continue to prepare for Choppiness in the demand environment for certain end markets. We are also starting to enjoy a resurgence in some of our key OEM end markets as well as improving demand and orders in test and measurement and our chambers product categories, which we believe are all early indications of recovery for some broader key areas of our <unk>.
Leadership like me continue to think through ways to evolve and improve this commercial platform to be the best it can be with many of those new initiatives and timely accountability expectations, requiring even more work from them in the next period all of our success has happened because of all of the committed colleagues across D. S.
Speaker Change: Business we.
We also are eager for the election to be behind us soon eliminating one more overhang to customer behavior. As we are also encouraged that the feds very recent monetary policy shift towards starting to loosen with rate cuts should also restore confidence and more reticent customers and some encouragement towards growth and sluggish in markets.
<unk> business units and I want to thank them from all of us who represent the shareholders.
Our businesses have lapped 2023 softness and we'll compare against somewhat easier sales comparisons over the next several quarters, but.
For the many markets that are already experiencing in market recovery. We are encouraged and expect that others will return as uncertainty and macroeconomic pressures ease or.
But I'm more focused on demonstrating to my fellow shareholders about all the progress made by our employees across countless initiatives and a more benign marketplace.
Our DSG model is built on a competitive approach to capital allocation and at the core are fortified competitive mode as repeatedly being demonstrated and being affirmed in the marketplace, a clear differentiated value proposition for our customers by delivering deep technical knowledge extensive surface capabilities and rely.
Our market place backdrop by getting back to our 2022 growth trajectory.
We're not letting off the gas as we tackle more growth plans and initiatives, making strategic investments and controlling all controllable as best we can we.
Abel sourcing of products, while also sorting sourcing complex and scarce products. We believe that DSG is presented with a large marketplace opportunity to continue consolidating some key capabilities, reducing complexity for our customers and improving our sales force's ability to communicate our unique value.
We are carefully controlling all cash outlays expenses and working capital management.
The U S manufacturing purchasing managers' index or PMI numbers. This fall continue to track around 47.
PMI diminish as many of you know below 50 may signal more contraction than expansion in the intermediate term, which we don't like but it is the environment. We are managing within that like all shareholders and our management team I can't wait to see this business when PMI is back in an expansionary mode.
Speaker Change: It is driven by the high level of fragmentation of niche product and service offerings that complement our expand our competitive position in the market, while beneficially enhancing our diversification strategy across customers suppliers and markets and geographies, we see a substantial addressable market across a diverse set of <unk>.
Speaker Change: While we continue to prepare for Choppiness in the demand environment for certain end markets. We are also starting to enjoy a resurgence in some of our key OEM end markets as well as improving demand and orders in test and measurement and our chambers product categories, which we believe are all early indications of recovery for some broader key areas of our.
Markets in the MRO, OEM and industrial technologies focus, especially distribution categories that include products and services, where we have intimate experience and relationships across ESG and <unk> headwaters resources our.
Speaker Change: Business.
Our verticals and increasingly DST is a company enjoy a trusted proven track record of resiliency through business cycles that benefit from our asset light model and tight working capital management.
Speaker Change: We also are eager for the election to be behind us soon eliminating one more overhang to customer behavior. As we are also encouraged that the feds very recent monetary policy shift towards starting to loosen with rate cuts should also restore confidence and more reticent customers and some encouragement towards growth and sluggish in markets.
Speaker Change: Distribution solutions group is built to generate significant free cash flow that offers us as align stewards the flexibility to reinvest in key areas to improve our business and its return profile or to return capital to shareholders. We are consumed across our team and all the resources, we can wrangle with a focus.
Speaker Change: <unk>.
Speaker Change: For the many markets that are already experiencing in market recovery. We are encouraged and expect that others will return as uncertainty and macroeconomic pressures ease.
Speaker Change: Our DSG model is built on a competitive approach to capital allocation and at the core are fortified competitive mode as repeatedly being demonstrated and being affirmed in the marketplace, a clear differentiated value proposition for our customers by delivering deep technical knowledge extensive surface capabilities and rely.
Speaker Change: On creating an exceptional platform for vendors customers and employees alike with a paramount commitment towards a disciplined prescriptive approach to unlocking significant shareholder value that collectively sets up DSG to compound returns at an elevated level for many years to come we remain as excited and confident about our strategy.
<unk> sourcing of products, while also sorting sourcing complex and scarce products. We believe that DSG is presented with a large marketplace opportunity to continue consolidating some key capabilities, reducing complexity for our customers and improving our sales force's ability to communicate our unique value.
<unk> and DSG dsg's future prospects.
Lastly from a capital allocation perspective, we will continue to run an active but highly focused strategic M&A playbook, which continues to enjoy a robust pipeline of active opportunities. While we continue to lean into facilitating an efficient and disciplined integration process to hold all accountable to capture the full opportunity.
It is driven by the high level of fragmentation of niche product and service offerings that complement our expand our competitive position in the market, while beneficially enhancing our diversification strategy across customers suppliers in markets and geographies, we see a substantial addressable market across a diverse set of <unk>.
Set around these investments we are making with shareholder capital we will do this while making sure that all of our leaders appreciate the metrics, we expect to effectuate encouraging them to prioritize and unlock higher return projects as timely as possible as we all appreciate how unlocking those those sustain our primary.
End markets in the MRO, OEM and industrial technologies focus, especially distribution categories that include products and services, where we have intimate experience and relationships across ESG in L. K C M headwaters resources our.
Objective, which is to drive elevated value creation in the near and long term at DSG.
With that operator, let's open the line for questions.
Our verticals and increasingly DST is a company enjoy a trusted proven track record of resiliency through business cycles that benefit from our asset light model and tight working capital management distribution.
Speaker Change: Thank you.
Time will be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
<unk> solutions group is built to generate significant free cash flow that offers us as align stewards the flexibility to reinvest in key areas to improve our business and its return profile or to return capital to shareholders. We are consumed across our team and all the resources, we can wrangle with a focus on creating.
If you wish to remove your question you May press Star two.
Speaker Change: Compared to <unk> using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Exceptional platform for vendors customers and employees alike, with a paramount commitment towards a disciplined prescriptive approach to unlocking significant shareholder value that collectively sets up DSG to compound returns at an elevated level for many years to come we remain as excited and confident about our strategy.
Speaker Change: Thank you.
Speaker Change: First question is coming from Tommy Moll.
Steven Your line is life.
Good morning, and thank you for taking my question.
Good morning, Tommy.
Brian I wanted to start on <unk> pro.
Speaker Change: Now three quarters in a row, where there has been a sequential step up in revenue there, although the rate of the increase.
In DSG dsg's future prospects.
Lastly from a capital allocation perspective, we will continue to run an active but highly focused strategic M&A playbook, which continues to enjoy a robust pipeline of active opportunities. While we continue to lean into facilitating an efficient and disciplined integration process to hold all accountable to capture the full opportunity set.
Improved I think you were up double digits third quarter versus second quarter. So what can you do to unpack the shape of that recovery for us.
Speaker Change: What if any visibility do you have going forward there. Thank you.
Speaker Change: Yes.
Ron you May want to help me on this but Tommy.
Speaker Change: Around these investments we are making with shareholder capital we will do this while making sure that all of our leaders appreciate the metrics, we expect to effectuate encouraging them to prioritize and unlock higher return projects as timely as possible as we all appreciate how unlocking those those sustain our primary.
The end markets that we've highlighted the renewables.
Semiconductor markets that had been real laggards last year.
We're an important part of we indicated that we thought we would see improvement.
Speaker Change: Improvement in those end markets as we got in the back half of the year and we have been saying that it's not yet to the level that we.
Active which is to drive elevated value creation in the near and long term at DSG.
Speaker Change: We've enjoyed in the past, but it is significantly better than it was.
With that operator, let's open the line for questions.
As we were exiting last year.
Banking at this time, we will be conducting a question and answer session.
Last year was a particularly tough year for renewables as well as semiconductor. So we've talked about those consistently in our quarter calls last year.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
Speaker Change: And that impacted.
Some of those end markets that were soft last year really did impact as we were investing in some of the <unk>.
If you wish to remove your question you May press Star two.
Speaker Change: The acquisitions that we bought to fold into <unk> pro and we we're really leaning into investments in those acquisitions versus leaning them out.
Speaker Change: Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please while we poll for questions.
Last year.
A lot of times when you buy things you try and pick up synergies in our case the synergies that we saw were on the top line and really we're not in the cost structure of those companies like frontier and <unk> that we've that I alluded to on the call and so we've leaned into the costs.
Speaker Change: Thank you.
First question is coming from Tommy Moll with Stephens Your line is life.
Good morning, and thank you for taking my question.
Good morning, Tommy.
Tommy: Brian I wanted to start on <unk> pro.
Investments in those businesses took the cost structure up at the same time as the end market softened. So that had a kind of a double whammy last year on profitability and now those end markets are starting to spool back up and we're getting more performance out of those acquisitions.
Now three quarters in a row, where there's been a sequential step up in revenue there, although the rate of the increase.
Improved I think you were up double digits third quarter versus second quarter. So what can you do to unpack the shape of that recovery for us.
Speaker Change: And we're getting the earnings leverage coming back our favor. So I don't know if thats helpful.
What if any visibility do you have going forward there. Thank you.
Last year, Jack Pro services core carried the profitability and made up for some deterioration in acquisitions profitability, where we've made.
Speaker Change: Yes.
Ron you May want to help me on this but Tommy.
And markets that we've highlighted the renewables in the semiconductor markets that had been real laggards last year.
Investments in their operating expenses and your markets soften and this year, we're getting some benefit on both sides. Both the jets Pro services core.
Speaker Change: We're an important part of it.
Speaker Change: We indicated that we thought we would see.
Speaker Change: And then also the benefit to cross sell our to expand our engagements with some of the customers in the market places that are recovering.
Improvement in those end markets as we got in the back half of the year and we have been saying that it's not yet to the level that we.
From from the help of those acquisitions.
We've enjoyed in the past, but it is significantly better than it was.
Speaker Change: Rob anything you can help me on there.
You hit it Brian I mean, as we look at aerospace and defense has been has been strong over over.
As we were exiting last year.
Last year was a particularly tough year for renewables as well as semiconductors that we talked about those consistently in our quarter calls last year.
Rob: Quite a few of the past quarters.
Rob: The technology side, which for Q3.
Our low point, there was really Q3, a year ago and that technology end market for us.
Speaker Change: And that impacted.
Speaker Change: Some of those end markets that were soft last year really did impact as we were investing in some of the acquisitions that we bought to fold ended to Jack's pro.
Not quite doubled sales from where we were a year ago quarter, but pretty close.
And we we're really leaning into investments in those acquisitions versus laying them out.
That is a really nice recovery for us and then certainly on the renewable side primarily wind.
Last year.
A lot of times when you buy things you try and pick up synergies in our case the synergies that we saw were on the top line and really we're not in the cost structure of those companies like frontier and <unk> that I alluded to on the call and so we've leaned into the costs.
Rob: That segment that that end market continues.
Speaker Change: To March up sequentially.
Speaker Change: For the first three quarters of this year as well so.
Yes, I think I think those are really the I would say the three main end markets that are driving the majority of that growth.
Investments in those businesses took the cost structure up at the same time as the end market softened to that had a kind of a double whammy last year on profitability and now those end markets are starting to spool back up and we're getting more performance out of those acquisitions.
And as a follow up I wanted to ask this one may go to Ron just on the fourth quarter or the pacing in October run.
<unk> been active on the M&A front and so I just wanted to get any kind of insight you can share on organic.
And we're getting the earnings leverage coming back our favor. So I don't know if thats helpful.
Trends versus whatever acquired revenue you would expect to book in the fourth quarter and then similar question just on the margin side. Ron you were in the double digit range from a consolidated EBITDA margin standpoint for the second consecutive quarter.
Last year <unk> Pro services core carried the profitability and made up for some deterioration in acquisitions profitability, where we've made.
Speaker Change: Investments in their operating expenses and your markets soften and this year, we're getting some benefit on both sides both that Jesper services core.
Any reason that that should not again be the case as you go into Q4. Thank you.
Speaker Change: And then also the benefit to cross sell our to expand our engagements with some of the customers in the marketplaces that are recovering.
Speaker Change: Yes, Tommy so just relative to sitting here one month into the fourth quarter.
From from the help of those acquisitions.
I would say that our our sales levels are.
Ron anything you can help me on there.
<unk> ESG. This is this in the aggregate.
You hit it Brian I mean, as we look at aerospace and defense has been has been strong over over.
Speaker Change: Relatively consistent.
In terms of what we saw in the third quarter. So I would say no no major movements.
Quite a few of the past quarters.
Speaker Change: On the technology side, which you know for Q3.
From where we where we left off at the end of Q3 to where we are today.
Our low point there was was really Q3, a year ago and that technology end market for us.
Relative to Q4 from a margin perspective.
Not quite double sales from where we were a year ago quarter, but pretty close.
Speaker Change: Yes.
Speaker Change: Fewer selling days, but we would expect that we'd still be able to perform.
Speaker Change: That is a really nice recovery for us and then certainly on the renewable side primarily wind.
At a double digit margin range even with.
A couple a couple of less selling days than in.
Speaker Change: That segment that that end market continues.
In the quarter and that's that's significant for us.
Speaker Change: To March up sequentially.
For the first three quarters of this year as well so.
Speaker Change: Every day for US is even on the organic side is about six five or $7 million in sales. So.
Speaker Change: Yes, I think I think those are really the I would say the three main end markets that are driving the majority of that growth.
Two days takes 14 million or actually I think it's three days I think it's <unk>.
And as a follow up I wanted to ask this.
61 days versus 64 so.
Speaker Change: But we still feel like we're going to be able to get ourselves in the double digit EBITDA range.
This one may go to Ron just on the fourth quarter or the pacing in October run.
You've been active on the M&A front and so I just wanted to get any kind of insight you can share on organic.
Thank you both I'll turn it back thanks.
Speaker Change: Thanks Tommy.
Thank you.
Trends versus whatever acquired revenue you you would expect to book in the fourth quarter and then similar question just on the margin side. Ron you were in the double digit range from a consolidated EBITDA margin standpoint for the second consecutive quarter any reason that that should not again be the case as you go into Q4.
Speaker Change: Our next question.
It is coming from Kevin Steinke with Barrington Research Your line is life.
Thanks, Good morning, good morning.
Speaker Change: Hey, Kevin good morning.
Good morning wanted to just start out by asking about.
Sure. Thank you.
Loss and then you talked about.
Yes, Tommy so just relative to sitting here one month into the fourth quarter.
Roughly 130, new sales territories, there I believe.
I would say that our our sales levels are across the ESG. This is this in the aggregate.
Speaker Change: I think you mentioned Greenfield are those all greenfield or there was some kind of dividing up all of the territories to make them.
Speaker Change: Relatively consistent.
Speaker Change: In terms of what we saw in the third quarter. So I would say no no major movements.
More efficient from just a routing perspective, just trying to get a sense as to how.
From where we where we left off at the end of Q3 to where we are today.
Speaker Change: Much more kind of revenue opportunity you are treating with <unk> scores new sales territories.
Relative to Q4 from a margin perspective.
Speaker Change: Rob.
Speaker Change: Yes.
Let your satellite even though enthusiastic voice here.
You are selling days, but we would expect that we'd still be able to perform.
Rob: Yeah no problem. So we've been working on this for 10 or 20 years, but now yes.
Speaker Change: In a double digit margin.
Rob: Yes.
So on this one for a decade.
Speaker Change: Our range even with.
A couple a couple of less selling days than in the.
Kevin I would really the majority of those are new territories that we feel as though we can we can put.
In the quarter and that's that's significant for US you know every every day for US is even on the organic side is about six five or $7 million in sales. So two days takes 14 million or actually I think it's three days I think it's.
Sales reps in and be more successful than in the past as Youre aware.
Rob: We have and we continue to work on optimizing our current.
61 days versus 64 so.
Rob: Sales territories.
Rob: Within our existing sales reps and.
But we still feel like we're going to be able to get ourselves in the double digit EBITDA range.
Rob: As Brian mentioned and I mentioned as well.
We're down from a rep count perspective versus where we were a year ago up sequentially here in the third quarter, but.
Thank you both I will turn it back.
Speaker Change: Thanks, Thanks, Kevin.
Speaker Change: Thank you.
We are also identifying and.
Our next question.
Rob: Are much more data driven today than where we were historically around where we feel that there is opportunities that we can put a sales rep into and be.
Speaker Change: It is coming from Kevin Steinke key with Barrington Research Your line is life.
Rob: Much more successful right out of the gate, so even though we continue to kind of refine the territories that we have today.
Rob: These are what I would really classify as more kind of new markets, where we feel like we can put a wrap it in.
Rob: And get them successful right out of the gate.
Speaker Change: And so Brian and Brian had this in his prepared remarks.
Rob: We are we're targeting 900 reps by the end of this year. So that's still a net increase of 40 versus where we ended the quarter and then we will have a.
Rob: Pretty heavy push on this for the first half of next year as well with.
With our goal being 1000.
Rob: And I would.
Speaker Change: The only thing I'd add to that.
Part of the scoping. These are the way they've been characterized to me is that they are net new.
Rob: From where we were.
Rob: More towards our peak of reps there has been some reorganizing and some kind of trying to make the routes in their territories more efficient as.
As well as trying to make sure that the territories that we have.
Available to new hires are significantly larger in terms of scope revenue.
Rob: Then what.
Rob: We might've been hiring somebody into in years past, so it's important to us to see that.
I had mentioned as well.
We're down from a rep count perspective versus where we were a year ago up sequentially here in the third quarter, but.
That we're hiring are more productive out of the gate with the tools that we've offered them with the scoping of larger.
Rob: Available revenue that is there for new reps.
We are also identifying and are much more data driven today than where we were historically around where we feel that there is opportunities that we can put a sales rep into and be.
Rob: And.
Rob: <unk> bin.
Rob: We've got a.
And inside our kind of our internal team that we developed it worked well for us.
Much more successful right out of the gate.
Rob: On the.
Rob: Strategic account side, it's worked well for us on the military side, although military.
So even though we continue to kind of refine the territories that we have today.
Rob: Challenge right now with the with the order entry shift or the.
These are what I would really classify as more of a kind of new markets, where we feel like we can put a rapid and.
The government is going through its impacted I think a lot of distributors and really it's causing a massive at the military bases, where they're not able to get the kits and the <unk>.
And get them successful right out of the gate.
And so Brian and Brian had this in his prepared remarks.
<unk> timely, but that aside we got a sourcing of.
Speaker Change: We are we're targeting 900 reps by the end of this year. So that's still a net increase of 40 versus where we ended the quarter and then we will have a.
And Ah.
Our new business development team.
That will help those reps grow their street business.
And so there is a lot of initiatives that we put in place to try and be much more successful with our growth plans going forward with our sellers. We rode the brake too long in my opinion about hiring reps and back filling.
Speaker Change: Pretty heavy push on this for the first half of next year as well with.
With our goal being 1000.
Speaker Change: And I would.
Speaker Change: The only thing I'd add to that.
Is that part of the scoping. These are the way they've been characterized to me is that they are net new.
Rob: We were trying to get our technology and our tools in place. So that we could have the right offering when we recruited but.
Speaker Change: From where we were.
Speaker Change: More towards our peak of reps there has been some reorganizing and some kind of trying to make their routes in their territories more efficient as.
Rob: That caused our J curve of our sales rep count to drop further than it should have.
Rob: <unk>.
Rob: We're all cognizant of that and if we were going to look back over the last year and a half in and look at all of the progress we've made on the sales front and.
As well as trying to make sure that the.
Speaker Change: Territories that we have.
Available to new hires are significantly larger in terms of scope revenue.
And what we think we're going to be able to do restoring.
<unk> much more effective and efficient opportunity for sellers and growing revenues going forward on loss and that.
Then what we might've been hiring somebody into in years past, so it's important to us to see that.
Rob: That would be our.
The reps that we're hiring are more productive out of the gate with the tools that we've offered them with the scoping of larger.
Rob: Kind of are.
Rob: <unk>.
Rob: Monday morning quarter backing of what we wish we had done differently, which was in the face of kind of slowness out of our tech team and getting data and tools in place and reorganizing territories, all of which take a lot of time I think we should have been hiring more aggressively even before we had.
Speaker Change: Available revenue that is there for new reps.
Speaker Change: <unk>.
And then we've got a.
All of the tools that we now have in place.
Speaker Change: Okay Fair enough that's helpful commentary there but.
You mentioned there.
One of the higher more aggressively obviously, just what does the pipeline look there in terms of your ability to find reps and.
Speaker Change: I know, it's very early days, but any initial indication.
Rob: <unk>.
Bill we're on but we're Onboarding, we then historically, yes, yes.
Rob: Yes.
I think that we've got more tools to offer we've got larger initial territories and we're recruiting.
Rob: More.
Rob: More deliberately and the type of reps that we're recruiting we've got a lot of years of knowledge and about.
Trying to grow rep, count and watching it be very challenging in terms of attrition and so one of the concerns was not having the tools in place not having the data in place not having.
Rob: Re scope.
The open territories or the new territories that are greenfields.
To be out recruiting until we had the ability to recruit the very best candidates we could.
Rob: But we have a robust effort going right now and we're confident that we will be able to add.
Rob: You get to a 1000 rep count number sometime midyear next year so.
That's our objective and that's what we'll be pushing to do so the 100.
35, net new reps between now and middle of next year.
And Kevin just and just to maybe put emphasis on Brian's point, if we if we look back historically, we would we would be hiring anywhere from kind of the high teens, maybe 20 sales reps in a month and if you look at the average bump the hires.
That's helpful commentary, there, but I.
Speaker Change: You mentioned there.
During the third quarter, it's closer to 30 on a monthly basis. So we so we are we're up effectively 50% versus what historically we've hired at.
One of the higher more aggressively obviously, just what does the pipeline look there in terms of your ability to find reps and.
Speaker Change: I know, it's very early days, but any initial indication of <unk>.
So we have the ability I certainly.
As always.
Rob: It's always a little challenging to find.
They are bill we're on but we're.
Speaker Change: On boarding three than historically, yeah yeah.
Really good talent and we're we continue to push on that but.
Speaker Change: Yes.
Speaker Change: I think that we've got more tools to offer we've got larger initial territories and we're recruiting.
Rob: But we've seen a nice upward tick here in the third quarter in terms of hiring rates.
Speaker Change: More.
More deliberately and the type of reps that we're recruiting we've got a lot of years of knowledge and in about.
Speaker Change: Okay that sounds good.
I appreciate all the comments as usual got a jump to another call here, but thank you guys I'll turn it back over.
Speaker Change: Trying to grow rep, count and watching it be very challenging in terms of attrition and so one of the concerns was not having the tools in place not having the data in place not having.
Speaker Change: Thanks, Kevin.
Thanks, Kevin.
Thank you once again, ladies and gentlemen, if you have any questions or comments. Please press star one on your telephone keypad at this time.
Speaker Change: Re scoped it.
The open territories or the new territories that we are greenfields.
Our next question is coming from Brad Hathaway with Fairview Youre line is life.
To be out recruiting until we had the ability to recruit the very best candidates we could.
Rob: Sure.
Hi, guys how are we doing.
Speaker Change: But we have a robust effort going right now and we're confident that we will be able to add.
Speaker Change: Good morning, Eric.
Rob: Well.
Thanks, a lot I appreciate the commentary.
Speaker Change: You know to get to 1000 Rep count number sometime midyear next year so.
What return on invested capital looks like for a mature distribution business. I was just wondering if kind of qualitatively you could talk a little bit about I guess kind of a path from where return on invested capital is today to guide to that 20% level and how you got to think about bringing the SCR in that direction.
That's our objective and that's what we'll be pushing to do so the 100 <unk>.
35, net new reps between now and middle of next year.
Speaker Change: And Kevin just and just to maybe put emphasis on Brian's point, if we if we look back historically, we would we would be hiring anywhere from kind of the high teens, maybe 20 sales reps in a month and if you look at the average monthly hires.
Yeah Brad.
Rob: The biggest challenge of AWN.
Returns on invested capital obviously youre initially when you make an acquisition.
Rob: Out capital and here you haven't yet folded in the earnings of the earnings accretion.
Speaker Change: During the third quarter, it's closer to 30 on a monthly basis. So we so we are we're up effectively 50% versus what historically we've hired at.
Rob: Accretion.
Rob: The synergies that you expect to get out of taken out costs or are driving.
Rob: Accelerated topline growth as you're folding it in and so there is no doubt that our M&A activity has been.
Speaker Change: So we have the ability I certainly.
Rob: Absolutely weighing on our returns on invested capital the way that.
If we look at it.
Going to come down some as you're building your base out.
And then as you build your base out you should start seeing it improve when you look at.
This is an example, the acquisitions that we've closed this year through the Conrad's closed yesterday, we've spent about it we paid about eight times EBITDA for those acquisitions collectively.
Rob: Like.
We would estimate that integrated over the next year or so that we will own them at six times.
Rob: So that and that's kind of the first leg of trying to drive here.
For that class at 2024 class a acquisitions driving your ROIC see back up after absorbing the capital outlay and not having the benefits of the earnings where you want them debate that last year, we had.
Acquisitions that we've made in 2022 and 'twenty, one that had chat more challenging or headwinds in their end markets as we were.
Sending out some of our kind of integrating shared cost that are duplicative costs on his go with test equity now we've got those costs out and as we look to the earnings leverage that we built into the model, we will get a lot of of of updraft.
Rob: The ROIC fee there.
We've done a good job managing working capital we've had it's been a little bit tougher in the last three months.
Rob: <unk>.
Rob: As we've seen a little bit of Choppiness.
<unk> said some of our end markets.
Rob: Don't have your inventories reset and you haven't gotten your.
Payables or I'm, sorry, your receivables are pulled back down so we expect that.
Rob: Last year, we ran at over 100% conversion.
Rob: We're at 90%.
Rob: Over the trailing 12 right now we should get some benefit back into that because we've been running at about 80% the last two quarters.
Rob: So that's another way that you can get a little bit of it and then the number one thing that you get when you start getting the top line.
And when we look at the.
Rob: The cross selling we look at the revenue synergies and bringing some of these capabilities into our call.
We expect that.
We're going to get improved profitability per dollar of revenue as well as.
We would estimate that integrated over the next year or so that we will own them at six times.
Kind of as we saw demand and we also.
And so that Internet, that's kind of the first leg of trying to drive here.
Rob: That should get.
Rob: More benefit of being able to do a better job across our customer base.
For that class at 2024 class a acquisitions driving your ROIC see back up after absorbing the capital outlay and not having the benefits of the earnings where you want them to be the last year, we had.
Grow organically, so we wouldn't be making acquisitions. If we didn't think that they were going to drive organic revenue growth and a better value proposition for the customer and Thats. What you really have to have to get to that for us to get over the 20% threshold.
Acquisitions that we made in 2022 and 'twenty, one that had chat more challenging or headwinds in their end markets as we were.
We expect we will get to as we are.
Rob: Our pacing of acquisitions.
Sending out some of are kind of integrating shared costs that are duplicative costs on his go with test equity now we've got those costs out and as we look to the earnings leverage that we built into the model, we will get a lot of of of up draft or the ROIC see there.
Relative to the size of our core base.
Rob: Is not as significant as it has been the last couple of years.
Rob: I don't know if that got it.
Rob: You can see.
Rob: Is that helpful.
Speaker Change: Okay that is helpful. So I mean, I guess it sounds like.
Duration of the acquisitions, you've made can you lay out the capital at a time and then the earnings if not improve it.
We've done a good job managing working capital we've had it's been a little bit tougher in the last three months five months.
Is there also an opportunity on the working capital side as well to kind of increase the efficiency of the balance sheet.
As we've seen a little bit of Choppiness in some of our end markets. You don't have your inventories reset and you haven't gotten your.
So Brad.
Brad: We've worked hard on that efficiency, we've brought in external resources and we have made quite a bit of progress. We've got some progress left in front of us.
Payables or im sorry, your receivables are pulled back down so we expect that.
Last year, we ran at over 100% conversion.
We're at 90% year over the trailing 12 right now we should get some benefits back into that because we've been running at about 80% the last two quarters.
Rob: That on the margin.
Rob: Tens of millions of dollars on your invested capital base, it's not hundreds of millions of dollars and when youre laying out 240 or $260 million of acquisitions in a year.
And so that's another way that you can get a little bit of it and then the number one thing that you get is when you start getting the top line and when we look at the.
When you are.
Your your biggest driver is going to be trying to double the EBITDA on those acquisitions and that's where that's what we're focused on is taken.
Speaker Change: The cross selling we look at the revenue synergies and bringing some of these capabilities into our whole.
Rob: <unk>.
We expect that.
Go into buying $30 million EBITDA turn it in at <unk> 60, and.
We're going to get improved profitability per dollar of revenue as well as <unk>.
Rob: And Thats, where.
That's what we've got to do some of that comes from integration.
Rob: Most of it.
Some of that comes from purchasing better.
Rob: The longer tail and benefit of driving ROI I mean, if we go back in time and then the nineties.
I was covering this sector back then.
Fats and oils and our grinders were more more acquisitive relative to the size of their base and then once you got to a spot where you're base was pretty well that and you're offering was pretty well set than you started getting a long tail benefit of assembling all the right capabilities and.
Rob: And getting.
Organic growth out of them and you've got started walking your way away from the original purchase price.
We've seen that model worked well for us over the last two decades as we've bought distributors and we would expect that that is exactly where we said with DSG as we look towards the tail of opportunity.
Continuing to compound.
The earnings stream out of the acquisitions that we're making and we compound it and we grow those earnings streams.
Incremental returns on invested capital are very very high on the <unk>.
These accretive acquisitions that we're making the initial capital outlay is a burden, but as long as theyre strategic and as long as they fit into the model right. Then it drives incremental returns on invested capital across the whole platform as well as the maturing and high returns on invested capital that Youll get out of the acquisition itself.
Rob: That should all day.
Long term.
Very much structurally higher returns on invested capital.
Speaker Change: Got it that makes sense. So just mathematically obviously the denominator changed much because you lay out the capital upfront.
Current EBITDA is well below what you believe.
Fully synergize fully operational future EBITDA will be so the numerator increased a lot with the dominator awesome that's correct.
If you have color on that Brad I took a reset the ties and just looked at 2020 twos revenue levels and tried to take a more.
Speaker Change: Stable revenue environment for all of US and took that 2022 model and ran it back through our new cost structure and kind of our new incremental margins and where we are in and that in and of itself has a really big lift in ROIC.
Speaker Change: Assuming we arent, making the next wave of acquisitions, which we will be but that's the that's the sort of.
You've got started walking your way away from the original purchase price and we've seen that model worked well for us over the last two decades as we've bought distributors and we would expect that that is exactly where we said with DSG as we look towards the tail of opportunity of continuing.
Rob: Then from there.
Rob: In 2022, we expected.
Rob: The acquisitions, we were making were going to take the slope of organic revenue growth up we've been in a more choppy and set of end markets. We've been doing some tuning that's been disruptive like on the loss of Salesforce, but it's critical for unlocking a lot of growth in the future and so as we're doing all of that tuning theres challenges and disruptions to it but if you.
Continuing to compound.
Speaker Change: The earning stream out of the acquisitions that we're making and we compound it and we grow those earnings streams.
Rob: That 22 static revenue base to build off of the earnings leverage and how that then drives the ROIC.
Speaker Change: Incremental returns on invested capital are very very high on the these accretive acquisitions that we're making the initial capital outlay is a burden, but as long as theyre strategic and as long as they fit into the model right. Then it drives incremental returns on invested capital across the whole platform as well as the maturing and high returns on invested.
Rob: Is.
Rob: Is very impactful.
Speaker Change: Got it that's very helpful.
Rob: Thank you for the explanation I appreciate it. Thanks I appreciate it Brad I always like the questions.
Thank you.
Capital that Youll get out of the acquisition itself.
We have no further questions in queue at this time I would like to hand back to Mr. King for any closing remarks.
Speaker Change: So that should give us long term.
Very much structurally higher returns on invested capital.
Mr. King: Thank you operator.
I appreciate everybody's interest in DSG.
Got it that makes sense. So just mathematically obviously the denominator changed much because you lay out the capital upfront and then you know.
Rob:
We'll continue to have a lot of confidence in what we're building here for the long term as well as in the intermediate and short.
Speaker Change: Current EBITDA is well below which you believe.
Fully synergize fully operational future EBITDA will be so the numerator increased a lot with the dominator awesome. Thanks, so much.
We're excited about the team we've got the assets that we've assembled the colleagues that we have working with us and we appreciate your interest.
Speaker Change: If you have color on that Brad I took a re sensitize and just looked at 2020 twos revenue levels.
On Halloween day to day, everyone stay safe and enjoy family time, if you can get it.
Rob: And we look forward to visiting with you in follow up conversations for the next quarter. Thank you all so much for your time.
And tried to take a more stable revenue environment for all of US and took that 2022 model and ran it back through our new cost structure and kind of our new incremental margins and where we are in and that in and of itself has a really big lift in ROIC.
Thank you ladies and gentlemen. This concludes today's conference and you may disconnect. Your lines at this time and we thank you for your participation.
Assuming we arent, making the next wave of acquisitions, which we will be but that's the that's the sort of.
And then from there when we in 2022, we expected to.