Q2 2025 Distribution Solutions Group Inc Earnings Call
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A question and answer session will follow the formal presentation.
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Please note this conference is being recorded.
I will now turn the conference over to your host Mr. Steven Hooser, Sir the floor is yours.
Good morning, and welcome to the distribution solutions group second quarter 2025 earnings call. Joining me on the call today are Dst's, Chairman and Chief Executive Officer, Bryan King and Executive Vice President and Chief Financial Officer, Ron can you.
In conjunction with today's call. We have provided a 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.
Subject to risks and uncertainties that could cause actual results to differ materially from those described.
In addition statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those used to change and we may elect to update the forward looking statements made today, but we disclaim any obligation to do so.
Management will also refer to certain 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 a.
A copy of the release has also been included in a current report on form 8-K filed with the SEC.
Lastly, this call is being webcast live on <unk> Investor Relations website, and a replay will be available through August 12.
I will now turn the call over to Brian <unk>, Brian.
Thanks, Stephen Good morning, we appreciate you all joining dsg's call today.
We're pleased to deliver solid operational results with strong top and bottom lines, along with robust cash flows from operations for the second quarter. Our results reflect the dedication and resilience of our team and the quality of the leading <unk> and value added services capabilities assembled in DSG that propel it forward.
Many of our end markets have exciting tailwind and we continue to focus on what we control in a few pockets of any unevenness.
Internally, we set higher more challenging budgets in the street expects and we hold each other accountable for meeting or exceeding these objectives on a monthly and quarterly basis for the second quarter, we reported strong sales and realized substantial forward progress, including sequential margin improvements in each of our verticals.
There were many important milestones and achievements accomplished in the second quarter as part of our commitment to transform DSG and its business units into a much more profitable and resilient platform for growth.
Any of these accomplishments are not yet reflected in the strong earnings progression today.
The efforts and successes are the reflection of a dedicated passion across our teams for our work to build a much larger and sustainable engine to compound shareholder value further expanding over time Dsg's culture built around a clear vision of collaboration accountability and alignment committed to delivering value embraced by the customer.
<unk> suppliers and employees and exceptional value creation for the shareholders as a company. Our vision is to deliver world class global supply chain capabilities and services with a differentiated value proposition to our over 200000 customers across a diverse set of end markets each day.
Before we discuss our second quarter results I'd like to share some background on our newest operating CEO hired to transform the test equity group Barry Litwin.
He has over 30 years of experience in transformational leadership and highly relevant industry. Having previously served as the CEO of global industrial our team has collaborated with an invested behind Berry on various projects before his recent DSG appointment and we have witnessed his ability to unlock value and drive execution in multiple <unk>.
<unk> he is a proven strategic and operational leader, who excels at transforming complex businesses recruiting talent and driving operational excellence. In addition, very has extensive experience in expanding companies through innovative multichannel go to market strategies and many of the end markets that very worked with in prior role.
<unk> overlap with test equities current customers Barry did a deep dive on test equity for the board from a consultative perspective and came away confirming his confidence that test equity was well positioned and presented a unique opportunity for him to rapidly unlock and accelerate significant value creation, while transforming its uniquely positioned.
Abilities and scale into the clear leader in its marketplaces for our next phase of growth at test equity group. The board DSG in LTC headwater leadership teams and I. All believe that Barry is the ideal person to lead. This vertical I also want to recognize Russ Fraser for his dedication and commitment over the past seven years, which positioned test equity.
And bind with Hesco to build and leverage the infrastructure and take test equity. The next level. We asked Ross who is a gifted with a strong operational skill set to step into the CEO role during a challenging moment as we were presented with the prospect of pulling together several key businesses that today represent the test equity group, which has over three.
Times larger than when he started with his tireless effort and talents Ross played a key role in integrating the acquisitions some of which were tuck ins, but <unk> was as large as the base of business as it was blending into working with his team Ross was able to rationalize and capture synergy cost savings and create a cohesive business platform.
That is well positioned for berries complementary talents to leverage for enhanced organic and inorganic growth profitability and long term position in the marketplace. We are very appreciative of how this has all transpired.
Now moving to slides four and five we will start with a discussion of our key takeaways from the second quarter, and then walk through the strategic initiatives for each of our operating businesses on a consolidated basis, we achieved second quarter sales of $502 million, representing a 14, 3% increase in sales compared to the same quarter last year.
Total sales expansion was based on a combination of inorganic revenue and a three 3% growth in our organic daily sales for the quarter. Although some seasonality is inherent in this number we were pleased to see sequential daily sales growth of two 4% over the first quarter, our consolidated adjusted EBITDA margin increased to nine seven.
<unk> percent in the second quarter, which compares favorably to the 9% margin in the first quarter. We are pleased to report that all of our businesses verticals achieved sequential quarterly improvements in their respective EBITDA margins I will discuss this by business vertical in a moment, but despite the uncertainty in choppy global macroeconomic backdrop.
This year, we continued to drive momentum and significant end markets, including aerospace and defense technology and renewables with growing demand in the pipeline for industrial power production supplies and test and measurement continue to be soft as does the industrial demand in the Canadian market in the quarter and tariff disruptions continue to create noise and has.
<unk> and decision, making with customers, which al will discuss more in a moment.
In addition to our margin expansion. This quarter. We also realized a notable improvement in our cash flow from operations of $33 million, allowing us to continue repurchasing shares and effort to commenced in the first quarter through strong cash management. We ended the quarter with no outstanding borrowings under our revolving credit facility that Ron will cover in more detail.
Turning to our strategic initiatives.
Our salesforce transformation at Los <unk> continues with work on talent acquisition and territory planning, which is still in flight.
We knew that taking on a transformation of this magnitude for its 70 plus year old organization would be a multi year process as it involves a full system upgrade and reset specifically rewiring, the tools and productivity opportunity and accountability of a thousand person sales organization from the ground up requires time and resolved a.
Distant and purposeful and strategy and a clear message internally and externally as part of effective change management, what management committed to with the employee shareholders and board takes time and requires patients from all over the past 18 months since the launch our deep dive into the quickly evolving data continues to offer key learnings that have.
Been instructing us on how to adjust our efforts around processes priorities and people and we are iterating and re prioritizing as necessary, although revenue growth and sales rep productivity or some of the best indicators of early success. We also know that driving adoption at a level where results are consistent through the use of new sales proceed.
<unk> tools and technology takes time and early wins, where consistency is shaping up include the following one implementing a complete CRM with adoption rates now exceeding 70% recall that the CRM system did not exist a year ago, and we are continuing to customize the user experience.
<unk> to drive better productivity gains.
<unk> driving additional accountability with better data and more manageable dashboards at the sales leadership level with daily and weekly <unk> objectives.
Third rebuilding our rep count, adding approximately 90 in the last 12 months in stronger markets, while seeing a decrease in the turnover of seasoned reps fourth implementing a data based approach on the skill set of successful sales reps pre hiring attributes fit.
Fifth first steps and wins on improving the number of reps, placing daily orders and six launching a completely refurbished web platform now realizing over 10000 customer visits daily to support a more flexible and expanded go to market strategy to supplement our leading BMI offering to meet certain BMI customers, where they were.
To engage us I want to highlight a few of these wins all of which have real deliverable opportunity still in front of them against continuing execution on kpis as it's easy to forget how much progress is being made along the way as we all acknowledge this is a long journey to accomplish this transformation, we know that is sustainable.
Transformations magnitude is a multiyear strategic initiative, requiring us to scope. It on the front end is having real dramatic opportunity for positive impacts on organic growth and scaling opportunities profitability and margin expectations and acceleration around returns on invested capital.
While we always want to see faster results. We are confident the team is making solid progress and we have insights into how we expect continued improved results across the kpis.
While we are pleased with the progression. We're also refining processes, where we've seen less early progress in the data then we hope to see for example, new Rep productivity in the first 12 months remains flatter than we expected compared to previous years and it's prompted us to re prioritize numerous actions to drive more productivity gain on this kpis.
Easter while we recognize there is a lot of noise in this objective at this early juncture, where it doesn't yet reflect the seasoning of many of our initiatives, we're not waiting to see but instead have initiated approaches to refine processes, we're improving the hiring process criteria for the first time in many years, providing better warm leads upon hiring a rapid to in open territory.
Implementing mentoring programs and enhancing training among other initiatives and still to come our initiatives focused on on route optimization to create better density within a territory as well as additional service reps to supplement the workload of field sales reps. This places existing field sales representatives and a much better position to.
<unk> their business and earn more commissions.
We purposely invested in our sales team going into this transformation process today, our average rep compensation is 25% higher than it was just a couple of years ago, even with the new hires bringing our average rep tenure down almost 25% we have a plan for the total compensation to reps to continue to climb as they embrace the tools and processes provide.
It will also restoring better operating leverage and profitability to the company. After two years of investment in the sales team and tools have deliberately contracted EBITDA and margins a bit although Ron will cover this in detail I would like to note that even with the investment taking place from dollars and distraction of this project.
<unk> average daily sales increased by two 6% accompanied by a sequential expansion in their EBITDA margins, which rose to 12, 6% in the second quarter, while compressed by recent investments, it's still trough to at a level not contemplated prior to the DSG merger.
We are pleased with this average daily sales and earnings margin progression.
Particularly given all the changes and investments implemented and the sales organization over the past year. However to accomplish what we know is possible. We fully realize there is still a lot of work to be done under <unk> leadership, we are enthusiastic Louisiana stickley committed to it and what it will do for the long term value of loss and in DSG.
Moving to the Canadian Division.
We can describe our performance in Canada as if it is a tale of two candidates bolt supply located in the western side of Canada as a legacy MRO business that demonstrated its typical seasonal sales lift in local currency during the second quarter and achieved strong double digit EBITDA margins nearly 16% on a standalone basis source.
Atlantic, which we acquired in 2024 is a significantly different business in terms of footprint and offerings, our new executive leadership team recruited to supplement the capable leadership at source Atlantic and bolt supply to constructively pull all team members together and lead a pan Canadian lens is working timely and constructively through our underwriting objective.
Is that all embraced to set it up to be a structurally different earnings engine partnered with bolt supply in DSG than it was as a standalone business. However, sourcing Atlantic has been heavily impacted by declines within many of its top customers as MRO and service spending has contracted at the same time as projects have rolled.
Off.
And have not been replaced with new ones, primarily due to cautious business behavior due to regional economic anxiety surrounding uncertain tariffs our results with our customers are consistent with those of other businesses in the region, especially in the eastern Canadian provinces. This year stepping.
Stepping back and comparing candidates 2025 manufacturing sector versus the U S manufacturing PMI. This year. The U S index reports of more stable overall operating environment on the other hand, the U S contrast, with candidates manufacturing sector, which has shown a steep decline in the first half of 2025 notwithstanding these differences.
<unk> acquired revenues, our Canadian divisions revenues increased 2% on a constant currency basis, and EBITDA margins expanded by 130 basis points sequentially from the first quarter to six 5% in the second quarter, which has been supported by the early innings of our integration work as well as helped by the energy and effective leadership brought by the source.
Atlantic and bolt supply teams and the key executives added to bring the companies together as a best in class Canadian specialty distributor, we have confidence in our team and all our planning and I expect that this business will generate substantial shareholder value over time, we know we acquired a great business with source Atlantic at a very fair value for our.
<unk> that we embraced knowing it would require significant effort for management to unlock all the value that comes with what we still very much like about their attractive market presence strong customer relationships and unique strategic fit with our existing bolt supply in Los and Canadian businesses.
Our Canadian Division team is meeting objectives in terms of planned synergies of facility consolidations and gross margin expansion, which includes approximately 290 basis points improvement with source Atlantic since we've acquired it many of these profitability enhancements are not yet flowing through the P&L. There is still much of our underwriting objectives to unlock earnings and compound.
Value yet to be done still we are pleased with the progress and energetic resolve of the teen despite the challenging macroeconomic pressures they face in certain Canadian regions almost immediately after our purchase of the business.
At <unk> services.
We continue to drive momentum in large end markets that include aerospace and defense renewables in technology. We're also seeing the backlog fill up for industrial power, which is encouraging is that was an area of softness that we highlighted last quarter and is a key historic end market of leadership for <unk> services based on our acquisition in Southeast Asia, and a number of key hires in.
Facility investments, we are working on a large and growing pipeline of new customer development activities, some of which are already committed to us.
Also there is a growing book of cross selling business development as we collaborate on these with losses, we've mapped a successful playbook to win wallet share in new mandates by including new products and services and are seeing some leverage securing more of our DSG chemical and MRO capabilities enhanced by strong revenue recruitment performance in the first half of the year.
Our outlook anticipates sales comps in the second half of 2025 will become more challenging as we cycle through strong strong sales that began mid year last year, but we remain enthusiastic about the very real momentum Jets Pro services is gaining in the marketplace. We're pleased to report an EBITDA margin expansion for <unk> services in the second quarter to 13.
4%, representing an 80 basis point increase from the first quarter and twice what we enjoyed when we started our transformation of the business. When we acquired it in 2020 expanded value added capabilities brought to the vertical through strategically identified and pursued acquisitions starting in 2022 are helping drive <unk>.
Services EBITDA margin margins higher than they would've been structurally considered attainable with the capability set in 2020 and are helping bring enhanced credibility with existing and prospective customers around expanding how they think about our value add for them.
Our leading to wallet share gains and acceleration in new business opportunities.
Our deliberate investment in talent largely focused on expanding the dialogues around our enhanced capabilities to solve customer challenges should continue to drive our growth objectives, primarily by focusing on our growing commercial sales pipeline as discussed last quarter.
We are also monitoring potential headwinds in the domestic renewable sector, even as our international pipeline is expanding jets Pro services continues to expand its presence as a global supply chain leader at the request of its current customers incredible best in class perspective ones and we have every reason to expect it will continue to grow and scale it services and <unk>.
Parts offering as a <unk> provider of choice to the most discerning Oems and we will continue at DSG to look for ways to invest in supporting their growth momentum.
Lastly, moving to test equity group as I mentioned at the beginning of my remarks, we recently announced the leadership change I believe Berry is well suited to take us to the next level of growth in this business as expected we saw softer electronic production supply sales and lower test and measurement revenues, resulting in average daily sales down one 2% for the quarter.
Seasonality typically creates tailwind with active summer projects, which pushed our sequential daily sales lift to one 7% in the quarter, but some of the lack of consistent revenue uptick in the quarter that wed expected to see we and others in the marketplace are now believing was impacted by some customer behavior that could be tied to timing.
<unk> is around better clarity on the tariff impact to their businesses and to the cost and availability of products from several of our leading vendors.
Of note <unk> performance did improve this quarter as evidenced by positive sales growth in the second quarter compared to the same period last year sales are also up sequentially from the first quarter <unk>, which is supported by non tariff product offerings in a broad range of source selections.
S equity continues to be better and better position with more product offerings with more structural earnings opportunities tied to them and with more market share gains in their channels reflected to us by our largest vendors.
By offering used equipment and rental options and calibration activities at test equity or expanding our chambers availability that are made in the U S are expanding our sales efforts around our attractive printing and conversion businesses acquired with <unk> or our test equity groups specialty products via my offerings collectively we enjoy a wide range of Cigna.
<unk> higher margin opportunities to grow profitability, our <unk> acquisition late last year gave management, which has been busy with integration efforts across the us equity group a renewed focus on that business and the services service elements around it yielding strong profitability growth and improvement in fleet utilization year to date.
Reviewing the host of offerings with Barry emphasized that test equity group has a collection of key high value added business capabilities that enjoy current EBITDA contribution margins in the 20 to 40 plus percent level that need to be more emphasize as part of the allocation of resources and the go to market strategy, where resources and focus could better.
Optimize total group profitability.
Rental and used test and measurement equipment enjoyed the most recent shot in the arm of attention with immediate success of acquiring conrad's into our fleet, adding customers equipment geography, and key personnel that more than complemented our larger test equity offering as we've reflected test equities customer value proposition, which is appreciated by those close.
Two it needs a better ability to communicate it has evolved commercial message post integration as it is rooted in differentiated products and services for the combined offerings acquired via test equity <unk> equipment, and <unk> along with the key tuck in acquisitions have strengthened the opportunity for customer intimacy through a host of value.
Added service offerings, not too dissimilar from what we've done at <unk> Pro services, but in the test equity case third party engagements offered that we needed a much more evolved commercial effort and go to market strategy to tie together, the very logically enhanced and complimentary offering to the customers, while the revenue and EBITDA.
In this vertical has been short of our expectations. Thus far this synergy cost savings and platform are ready for a leader like Barry to drive our refined go to market strategy and deliberateness around how to emphasize the levers for enhanced profitability.
We are encouraged by various early assessments around the very real opportunities to drive a cohesive and aligned strategy in the organization and simplify complexity. He believes that after spending time assessing his team and the resources. He is adding to them that he has the tools offering and people to be successful with tremendous focus and <unk>.
Energy and a proven ability to successfully execute with similar products and end markets earlier in his career improved even by the broader DSG support his quickly and confidently constructing the strategies and game plan around shorter term and longer term opportunities test equity group enjoys to accelerate value creation and earnings.
Although he continues to learn and evaluate the business various already accelerated communications and set up meetings each week that a well defined purpose and objectives to encourage sales products and supply chain teams on levers to pull.
He's brought a fresh perspective, and we are encouraged by his commercial inside of energy as he quickly build ownership alignment and accountability.
With that I'll turn it over to Ron for details on our second quarter financials.
Thank you, Brian and good morning, everyone turning to slide six <unk> consolidated revenue for the second quarter was 502 million. This represents a 14, 3% increase with the $63 million increase being driven by the five acquisitions closed in 2024 and <unk>.
Organic growth.
<unk> organic average daily sales were up three 3% versus a year ago and up two 4% sequentially over the first quarter.
For the quarter, we generated adjusted EBITDA of $48 6 million or nine 7% of sales.
As expected sources land and compressed our second quarter margins by approximately 60 bps. Excluding this acquisition net margins would have been 10, 2%.
The nine 7% compares favorably by 70 bps to the first quarter and adjusted for source Atlantic is essentially flat with a year ago period.
As Brian mentioned, all verticals realized sequential margin improvement over the first quarter.
We reported operating income of $26 8 million for the quarter, which included $11 7 million intangible amortization from acquisitions and another $1 4 million of severance and other noncash charges.
Adjusted operating income improved to $39 9 million versus $38 9 million, a year ago and $34 4 million in Q1.
GAAP net income per diluted share was <unk> 11 for the quarter versus <unk> <unk> a year ago adjusted.
Adjusted EPS was <unk> 35 for the quarter compared to 40 in the year ago quarter on fewer shares offset by higher interest and depreciation expense.
And lastly, we generated over $33 million of cash flow from operations for the quarter compared to approximately $21 million a year ago quarter as we accelerated our focus on working capital improvements.
Now moving to slide seven.
Starting with losses.
Q2 sales totaled $124 3 million, representing a two 6% increase in average daily sales, which includes acquired revenue.
Organic eds was down 1% entirely driven by lower military sales volume.
Sequentially compared to the first quarter organic eds was up one 6% due to broad based growth across most end markets.
For the quarter loss in reported adjusted EBITDA of $15 7 million or 12, 6% of sales up 70 bps from Q1 on a sequential basis.
The net margin contraction from the prior year was primarily due to continued investments in sales transformation compared to the same period last year.
We continue to manage margins around the tariff impacts and do not anticipate a negative effect on lawson's margins this year.
Turning to slide eight second quarter sales for the Canadian segment in U S dollars were $55 9 million.
The business benefits from typical seasonality, which is somewhat offset by noise around the tariffs.
Excluding revenues acquired from sources Atlantic organic sales increased <unk>, 7%.
We're up 2% on a constant currency basis.
Q2 revenues increased sequentially by 10, 5% from Q1 or 6% on a constant currency basis, primarily due to seasonality.
The second quarter adjusted EBITDA for the Canadian segment was $3 6 million or six 5% of sales expanding 130 bps over Q1.
Excluding sources Atlantic second quarter adjusted EBITDA for this segment would have been 15, 9%, which represent bolt supply on a standalone basis.
As we've discussed in the first quarter softer sales and source of Atlanta, primarily within their larger accounts has put downward pressure on net margins for the Canadian branch.
However, we are making good progress on planned synergies around gross margins and branch consolidations.
Turning to <unk> services on slide nine.
Second quarter revenue was strong at $127 8 million up 18, 2% from the year ago quarter organic.
Organic average daily sales were up two 4% sequentially from Q1.
<unk> Services' adjusted EBITDA was $17 1 million or 13, 4% of sales up from 11, 9% a year ago and compared to 12, 6% in the first quarter.
Operating leverage remains strong injects pro services continues to capitalize on the acquisition in southeast Asia through wallet expansion and cross selling.
Momentum in most end markets is strengthening <unk> services is up against tougher comps headed into the second half of 2025.
Lastly, alternative equity group on slide 10.
Second quarter sales were 195 million with average daily sales down one 2% versus a year ago, However, up sequentially by one 7% over Q1.
We continue to experienced flattish electronic production supply in test measurement business.
The revenue acquired from Congress for the period was approximately $1 9 million.
Test equities adjusted EBITDA for the quarter was $13 5 million or six 9% of sales up sequentially by 10 bps from Q1.
Net margins were down from seven 8% in the prior year quarter, primarily from deleveraging on a lower sales base.
Moving to slide 11, and starting at the bottom of this slide.
We ended the quarter with total liquidity of $314 million, which is our foundation for executing a disciplined capital allocation strategy.
Starting from the left we invested in organic growth, which generated positive organic sales through a combination of market share expansion internal initiatives in wallet share expansion with existing customers.
We have driven scale added product.
Jason sees and footprint through our five acquisitions completed in 2024.
We continue to closely manage working capital within each of our verticals at.
At the end of June cash and cash equivalents, including restricted cash totaled 62 million.
And net working capital was approximately $491 million.
Net leverage at the end of the quarter was three five times and through tight cash management, we had no outstanding borrowings under our revolving credit agreement at the end of Q2, representing a net paydown of $28 million from the end of the first quarter.
And as Brian mentioned, we generated $33 million of cash flow from operations for the quarter.
As a reminder, we have also invested approximately $450 million in cash and nine acquired businesses since our merger transaction in April of 2022.
All while maintaining our leverage in the mid threes.
During this first six months of the year, we also returned $20 million to our shareholders through our share repurchase program.
And we currently have.
Approximately 6 million still available under our previous board authorized program.
Additionally, we are still tracking at approximately 90% free cash flow conversion over the trailing 12 months.
And have a TTM return on invested capital of approximately 11%.
And finally, our first half.
Net capital expenditures, including rental equipment were $10 6 million.
We expect our full year 2025, net capex to be in the range of $20 million to $25 million or approximately 1% of our revenues.
I will now turn the call back over to Brian.
Thank you Ron our overarching mission at DSG is to invest in exceptional businesses and talented individuals and utilized and leveraged technology to gather and analyze data improve productivity and expand the breadth of our products and services, resulting in compounding returns and driving significant cash flow.
We also believe that a well executed customer intimacy strategy combined with a team built to drive operational improvements and efficiencies will enhance our value proposition for customers and drive profitability.
Often financial resort results are not linear however, we dedicated an extra ordinary level of strategic work and data analysis to our initiatives driving accountability across the operating companies and their leadership teams that share a passion for achieving targeted results. The teams are aligned through incentive structures that support value creation in DSV.
<unk> management team also actively collaborate with LK team headwater operations team to drive the business towards an inflection point focusing on short and long term targets related to profitability cash flow and returns on invested capital, we know that productive work streams and the disciplined execution of our strategic initiatives over time will achieve.
<unk> and compounding results. This is our proven approach to maximizing long term value for all stakeholders and we continue to have strong line of sight on how our initiatives are driving intrinsic value as they unlock and increase in future run rate earnings part of the reason we are confidently use some of our free cash flow this year to buy back shares as we digest.
Some of the operational initiatives around our recent acquisitions and deliberately worked through securing our next strategic acquisition opportunity I want to thank our dedicated team for their tireless efforts and unwavering commitment to serving our customers and advancing our long term strategy ultimately contributing to our success, especially in an uncertain macro environment.
I would also like to thank our supportive board and all of our shareholder partners for trusting me and the entire DSG and <unk> headwater team with this critical investment, we're focused energized enthusiastic and increasingly well resource with talent and all exceptionally well aligned. Thank you. We continue to work diligently on our Investor Relations efforts.
With an active IR calendar that includes investor conferences, and non deal Roadshows throughout North America, we will be in Chicago in August for the ideas Conference in New York City in early September for the Jefferies Conference with plans for a non deal roadshow in the Baltimore Philly area in the fall as well and with that operator will you. Please open the line for questions.
Thanks Keith.
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One moment, please while we pull for questions.
Thank you.
Our first question is coming from Tommy Moll with Stephens. Your line is live.
Good morning, and thank you for taking my questions. Good morning Tommy.
Thanks Tommy.
To start just a quick one on anything you can do to frame third quarter expectations for us Ron maybe you could give us the July pacing or any insight you have in the quarter to date for for daily sales and then margin was any reason for a meaningful difference on a consolidated basis.
For the EBITDA margin up or down versus the second quarter performance. Thank you.
Sure sure Jami, So let me let me let me start just.
A couple of general comments relative to July where we've seen a trend out and when we look at it.
I would say it's relatively consistent.
Where we were in the in the second quarter.
If you look at it on an average daily basis.
We do it does get compressed a little bit just because of.
In fact gestural services is 24 selling days in we typically do you have more selling days it kind of naturally just kind of compressed as the etfs are a little bit on us.
But generally speaking we've not seen I would really say any major movement from the trends that we saw in the second quarter I think those trends.
Has continued here in July.
And I know Brian through his prepared remarks in some of my remarks, as well talked a lot about.
Some of the end market strengthening and I would say that those who.
You've continued kind of on that on that same pace as well.
<unk>.
Relative to.
Brian made his comments.
As you look at the individual verticals gestural service is certainly up against tougher comps moving into the second half of the year.
Lawson products is actually up against easier comps as we move into the second half of the year. So we will probably see a little bit of kind of netting effect there as we move throughout the rest of the year.
But based upon our sales here in the in the second quarter, even comparing that against Q3 and Q4 a year ago.
We should be able to see.
Some nice nice increase.
On a year over year basis, moving into the into the second half of the year.
Relative to margins.
We certainly don't provide any any formal guidance.
But.
And certainly I would say there was.
Really not anything highly unusual in the second quarter.
Ed.
Would impact us either way as we move throughout throughout the rest of the year.
Certainly we have internal targets and forecasts.
<unk> forecast that that Brian referenced as well.
That we certainly are holding ourselves accountable to continue margin expansion.
<unk> develops but theres nothing that we see in the <unk>.
In the near term or at least over the next six months that our census would swing that one way or another keep in mind Q4 does have 61 selling days.
Just came off the second quarter was 64 selling days. So we do normally see a little bit of margin compression in the fourth quarter, just given the number of selling days Q3 has 64 selling days as well so hopefully hopefully that helps a little bit.
Thank you Ron as a follow up I wanted to ask on the Canada branch consolidation for any kind of an operational update you can give us there. Thank you.
Yes.
Yes, I can I can speak to that as well so we are.
Early in the process we.
And we've committed to consolidating four locations here in 2025.
Two of those locations.
Been through the process here and the other two will be completed by the end of the year.
There is an additional two that we're looking at when we initially made the acquisition we had two.
Luminary Identive preliminarily identified six locations that we thought had.
Some pretty significant overlaps so certainly on target there.
<unk> to seeing some of those savings those consolidations have gone <unk> gone I would say extremely well at this point there are no major disruptions.
And then the other piece just wanted to touch on.
Think about the Canadian branch.
The margin expansion that we've been in a gross margin expansion that we underwrote the business too we were able to realize that as well and then lastly can't help but to call out bolt supply really strong quarter, nearly 16% EBITDA margins.
Great leverage here in the quarter.
On.
On solid sales and good execution at the branch level. So just wanted to.
Place point.
Point of emphasis on really strong performance on bolt on a standalone basis here in the quarter.
Thank you Ron I'll turn it back.
Sure.
Thank you. Our next question is coming from Kevin Spanky with Barrington Research. Your line is live.
Thank you and good morning.
Good morning, Kevin Good morning, Kevin.
I wanted to just ask about.
Longer term margin goals specifically with.
Lawson and also test equity in light of obviously the.
<unk> got some investment going on in loss and with the sales force transformation and now.
New leadership at test equity.
Have you given a little bit more thought again too.
You think those margins.
With just the adjusted EBITDA basis for those segments.
Achieve or trend over the long term.
Yes.
Kevin I'll start with <unk>.
First equity.
And I would say that.
As over the last <unk>.
Six months in particular as we've.
It really started with the <unk> acquisition.
Of.
We've been so focused on getting through integration and cost savings and integrating our sales force across the operational platforms that we've acquired.
I think that some of the optimization of profitability outside of the rationalization. If you will of some of the of the cost to.
To pull together.
Cost structure into one platform.
Had left us not drilling down into the <unk>.
Driving our optimizing some of the profitability by the specialty offerings that we have that make up a big part of the total revenue at test equity group.
So I'd say that the <unk>.
<unk> acquisition gave us an opportunity to really do a lot more.
Line by line analysis of profitability.
Profitability by our specialty across our specialty offerings and and brought attention to kind of the levers to pull to unlock more value out of it just on the contract side are rental.
Used in refer and calibration efforts.
So we did unlock some profitability there, but what is highlighted was how many business lines. We have that have structurally very different contribution margins and really by division have operating margins that are.
Pre corporate are operating.
And over 40%.
So we feel confident in what we've said all along which is that there is a line of sight for what we're trying to accomplish with the tax equity group to get to the double digit EBITDA margins are so if you we had one noisy ness in the quarter on our EBITDA margins on test equity group.
We have the.
The tariffs.
In disruption this year, it's been hard on some of our channel partners and we had a.
Our bad debt allowance that we reserved for.
For a customer that took EBITDA margins down 80 bps in.
And the test equity group.
Just because it was the minority channel partner for.
A government contractor that we have to sell through.
Unfortunately their business has been.
Significantly impacted in the way that they run their business.
By the.
Their cash flow available to support paying their obligations.
We would say that kind of we see a nice progression there we see the levers to pull and we've got.
A really nice portfolio of much higher earning opportunities on loss and we didn't tackle the loss in salesforce transformation without having a very.
Specific objective to get the structural.
So get to profitability of loss to where we could scale it into the levels that we haven't yet seen an EBITDA margin, but we knew that to get there we're going to have to make a significant investment in the sales capabilities of our tools.
We needed to invest in our sales force.
Both the tools that we offer as well as the way that we.
Compensate them and we needed to ultimately recruit.
Sure.
We're adding salespeople recruit more deliberately sort of talent that we want to add too.
New hires and so all of that is kind of in flight process.
We are seeing a lot of good kind.
Kind of granular.
<unk>.
Our results, it's not yet flowing through the P&L because of the investment that we've done there and we still don't have a lot of the.
The effort that.
A lot of the results have not yet been reflecting the effort and the deliberateness that we've put into it.
All of that should drive structural EBITDA margins up into the mid to high teens at loss and over time I continue to believe that that business should be a 20 plus percent EBITDA margin.
Offering.
And there's nothing that I am saying that would indicate that that's not what we should be shooting for.
Okay, great. Thank you.
Okay.
At this time.
I don't want any factors in.
And their model for this year and next year, but.
Have a good line of sight on how to get there.
No absolutely understood.
Yes. It also just following up on Boston.
Any update on the military market or does that still continue to be relatively murky.
How does the business for <unk>.
Form.
Organically, excluding the headwind from military.
Yes.
Yeah, Kevin I'll take that one so.
As you know we've been talking about military over the past several quarters.
We did see.
A little bit of movement upward here in the second quarter.
As we.
So we had some orders ultimately get released in fact.
If we.
Knowing that it was.
Drag versus.
A year ago, though.
You made a comment in our prepared remarks.
Loss and organically it was down about 1% versus a year ago. If you exclude the military effect out of that for the quarter.
We were up about a half of 1% so it did.
It did have an impact on it on a quarterly basis versus a year ago.
And so we're seeing some.
Some.
Lights of encouragement there is maybe the best way to phrase. It again, we saw a tick up in Etfs on the military business in India.
In the month of June.
It's a sporadic business those two right. So it can it can kind of come and go from month to month.
I would say that.
That slight tick up we saw in June we haven't seen in July.
So it's but.
But at the same time, we're starting to kind of lap some of those compressed numbers from from a year ago as well so it's effectively kind of already in our run rate.
Certainly we have not taken the eye off the ball there we continue to work with the procurement individuals' at all the basis.
Our sense is is that we're not certainly losing market share in fact, when I look at it by customer and by locations.
We are still actively selling into the locations that we sold into a year ago.
Just a very very compressed level so.
I think part of the good news there is that we've not seen any of the any of the individual locations stock purchasing from us.
And Ron I would I would also I think add callout, which I think is important and it's.
It's part of the affirmation that we're getting on the efforts that our team has.
Ben.
Trying to drive through the Salesforce transformation, but our street business our base business.
It's finally started growing.
So we've enjoyed now many years of strategic accounts growth at Watson.
And we've watched our business shift towards strategic accounts from street business or base business. If you will.
<unk>.
And so we talk a lot about the military we talked a lot about the strategics, but for the last.
Better part of a decade, we've watched our.
Base business kind of be neglected and we've had a slow bleed out of it over the years as our sales forces.
Both compressed but also before that paid their attention more towards the strategic accounts that we were delivering them and we've started to see with the salesforce transformation.
First signs of our base business growing and so we had positive.
Core business growth.
Over the course of the last number of months.
<unk> for the quarter.
So first Ron Yes, yes, that's a great call out yes.
That could really important data point that we didn't have in our prepared remarks, but it is something that we're watching very closely.
We've.
We will continue to emphasize with our sales force.
Okay, that's good to hear.
I appreciate it.
The comments and I will turn it back over.
Thanks, Kevin.
Thank you Kevin.
As a reminder, ladies and gentlemen, if you have any questions or comments. Please press star one on your telephone keypad.
Our next question is coming from Ken Newman with Keybanc capital markets. Your line is life.
Good morning, guys. This is ethan on for Jon.
Good morning, good morning.
Yes, My first question I kind of want to ask.
If there is any pricing contribution on tariffs for this quarter and whether price cost was neutral or positive for you guys. And then any color you guys can provide on price cost for the third quarter or into the second half.
Yes.
So I'll take that.
Initially here so from an overall tariff perspective.
We.
And we've communicated this over the last couple of quarters, just given the multiple different changes that are happening.
Through the process.
Generally speaking, we're not expecting any compression from a margin perspective, when we look across the board.
Core verticals, including the Canadian business.
We've been able to manage our way through that on some of the tariff pieces already.
We have.
The ability to work really close with our customers not only from a pricing perspective, but also from a sourcing perspective.
If you look at some of some of Dsg's really strong capabilities across all the verticals. It's on the procurement side and so we've been able to we proactively reach out to our customers when we see their purchasing from certain products that are coming within certain.
Coming from certain countries that the tariffs may be going up and help them manage their way through that process. So.
We're not seeing.
Any net net effect.
From a from a margin perspective.
Certainly were.
We have.
Model that keeps getting updated almost on a weekly basis as changes are being made.
It gives us pretty good insight into.
Where were some of the exposure may sit in the specific customers, we need to work with and and the specific countries of origin as well so.
Hopefully that answers your question without.
Getting into too much detail.
You look at probably the largest.
So I think we've made this comment on the last call as well.
About call it 6% of our of our product purchases are coming from China.
So it's not a it's not a huge piece.
Certainly thats, where I think some of the tariff.
It seems like Thats, where were seeing probably the biggest swings in terms of exposure and it's a relatively small piece of our of our product acquisition.
Got it that's helpful.
And then for my follow up I know you guys touched on Expo earlier, but what are you guys with expectations kind of ramping in the back half I know the comps get harder but kind.
Kind of like a 20% incremental EBIT margin kind of still the right way to think about things.
Yes, I would.
So I would.
I'm not sure.
Try and quantify the overall EBITDA EBITDA margins.
When we.
We saw a nice we saw a nice flow through here in the quarter.
Getting to call. It 13 513, 4%.
Again, even though they're up against stronger comps in the second half of the year.
You many of their end markets are on an upward trend we feel we've got some good good visibility into into backlogs.
And our expectation is that.
Piece of our business will continue to be really strong in the second half of the year.
And I think Brian had mentioned.
One end market in particular, where it was a little soft, but even that that market has started to turn positive on us. So.
So we feel good about.
Where that business is at today.
<unk>.
We.
Again, it gets impacted a little bit based on number of number of selling days in the quarter and so forth but.
We feel good about the progression of that business.
And more specifically just kind of the upward trend of the majority of the end markets that they operate in so Bob and team have done a phenomenal job around.
Wallet share expansion within existing customers, winning new business.
It.
It's performing really really well.
I'd just call out.
We've made just like with the Salesforce transformation initiative at Washington.
We have made out made and will continue to be making significant investments in.
<unk> services.
That are flowing through the P&L, so we compressed margins at Los <unk>.
Leaning into the sales force if you look at the last two years.
And those investments to take took EBITDA margins down before now they are starting to climb back up.
Pro services has had the benefit continues to have the benefit of really good momentum on the topline.
Which has allowed us to kind of not still have.
EBITDA margin progression, while at the same time as we're really leaning in to some investments.
Particularly on the commercial capabilities.
Sales leadership.
A number of selling.
Exactly kind of senior selling professionals as well as adding a lot of square footage around like our Asian effort.
So even though we've quadrupled the amount of capacity that we can support.
If the little CSR acquisition that we did in Asia.
Asia last year.
Not realized any incremental lift on EBITDA there.
Because we've been leaning so hard into it.
On investing and Thats built a very large revenue.
Kind of funnel of.
Future revenue for <unk> services. So there's there's kind of attention on timing around how EBITDA is going to continue to progress and also the core offering of jacks pro services outside of the specialty elements that we've added to it which are performing very well right now.
On those acquisitions, we did in 2022, who are really most all if not all of which are EBITDA margin accretive to the structural margin that jet pro services would normally enjoy which I didn't kind of said before when we bought <unk>. It was six 5% EBITDA margin business.
And that was in 2020, and we've unlocked a lot of structural margin.
<unk> doubled that EBITDA margin.
At the at the core level.
And it was the incremental acquisition the strategic.
Inorganic efforts that we did the blended that margin up to the 13 six or so that we enjoyed this quarter.
And.
So depending on where we're getting the revenue growth is going to dictate how that flows through the EBITDA margin line and also depending on how the pacing of investing in the business is going to create some noise in the contribution margin that you might see but the contribution margin that you alluded to a 20% has been what we've kind of <unk>.
Joyce.
Even with a lot of the investments we've been doing.
But that has some to do with the mix shift to where the revenue is coming from.
So we do feel a lot of momentum in the business there.
So.
Got it. Thank you guys are open to that.
Thank you ladies and gentlemen. This concludes today's question and answer session. So I would like to hand, it back over to Mr. King for any closing remarks.
Well, we appreciate everybody's time today, we know it's a busy day for earnings and we appreciate the time that everyone offers us we continue to be very optimistic about what were bill.
Building at DSG and the progress that we've made since we brought the business together three years ago.
Thats more than twice the business that it was.
And we continue to believe that it'll be twice the business. It is today hopefully three years from now so with that ill.
Look forward to taking calls from people or seeing you all on the road.
Thank you for your time.
Have a good summer.
Thank you ladies and gentlemen, this does conclude today's call you may disconnect. Your lines at this time and we thank you for your participation.