Good morning, ladies and gentlemen and welcome to the Distribution Solutions Group Third Quarter 2022 Earnings Conference Call. At this time all participants have been placed on a listen-only mode. And the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host Steven Hooser. Sir the floor is yours.

Good morning, ladies and gentlemen, and welcome to the Distribution Solutions Group third quarter 2022 earnings call. In conjunction with today's call, we have provided a Q3 earnings presentation that has been posted on the company's IR website at investor.distributionsolutionsgroup.com. Joining me for today's call is Bryan King, DSG's Chief Executive Officer and Chairman; and Ron Knutson, DSG's Executive Vice President and Chief Financial Officer. During the call, they will be providing an update on the business from an operational and financial perspective. Additionally, Brad Wallace, LKCM-Headwater Partner and DSG Advisor as well as operating company CEOs, Cesar Lanuza, Russ Frazee, and Bob Connors will be joining for the Q&A session. Please note that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those described. In addition, statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change. And we may elect to update the forward-looking statements made today, but disclaims 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 press release issued earlier today is posted on the Investor Relations section of our website. A copy of the release has also been included in a current report on Form 8-K filed with the SEC. This call is being audio webcast on the Internet via a Distribution Solutions Group Investor Relations page on the company's website. A replay of this teleconference will be available through November 17, 2022. Now with that, I'd like to turn the call over to Bryan King. Bryan?

Thank you, Steven. And good morning, everyone. We appreciate your interest in Distribution Solutions Group and we are excited to share the results for our fiscal third quarter. Please refer to our supplemental Q3 earnings presentation that is provided on our website to follow along with our prepared remarks. DSG represents a best-in-class Specialty Distribution Solutions Company operating in three separately managed high touch value added marketplaces. We offer customers both replenishable industrial parts and products as well as specialized products. We also provide outsourced solutions for companies to help solve their labor shortages and supply chain management challenges. We have a unique offering of products, services, and solutions. Our competitive advantages are compelling to customers, and are important to manufacturers, OEMs, and businesses that need specialized products and solutions in their industrial and commercial industries. We're very proud of our leadership teams and their DSG colleagues as they work collaboratively and executed this third quarter, their second quarter together consistent with our underwriting objectives in pulling these businesses together. For our combined companies on a comparable basis, sales grew 46% to $347 million consisting of organic growth of 15% and acquired revenue of 31%. We generated nearly $35 million of adjusted EBITDA for the quarter and achieved our target of 10% of sales for adjusted EBITDA margin. We are encouraged by these results as all three operating companies are performing at or above our expectations. While DSG does not currently provide formal guidance, we are not currently seeing softness in our businesses and the demand environment remains strong as we enter November. We want to remind investors Q4 seasonality lower and we have four less operating days this year. That said all three operating companies reported strong Q3 results with meaningful progress on cross-selling and early wins on new customer business. We've identified hundreds of leads for cross-selling, expanding relationships, and wallet share with many of our largest customers. Leveraging these strong customer relationships sets us up for significant organic growth in each of our three businesses. Each of our operating companies are making significant operational progress that gives us further confidence in our overall strategy and our teams. We've also announced today an expansion of our share repurchase plan. It was originally authorized under Lawson Products, and has now been expanded to DSG's share repurchase program. We will speak to this more when we discuss our capital allocation strategy in a few moments. We are cautious in our outlook for 2023 and our ability to manage this business for value creation across the cycle. Although we are not currently seeing a slowdown, we do understand how to manage through changes in demand environments, especially for working capital intensive businesses. Our team has successfully operated distribution businesses through down cycles in '01, '08, and '09 and 2020. Also, I have experience with distribution companies as a Director that goes back 30 years, where we had underwritten to the benefits of owning distribution businesses during inflationary cycles, one where we leaned on learnings in the late 70s and early 80s, where we never experienced the inflation that we are facing currently. More broadly, our leadership bench has over 200 years of specialty distribution expertise between the combined LKCM headwater and DSG CEOs. And in today's environment, we understand that macro-economic headwinds and recession fears are changing how companies think about 2023. DSG's working capital intensity has grown this year, and at the end of the third quarter, our trade working capital is $337 million. I'm constructive on the level of working capital investment we've seen in our business. In my opinion, sound, incremental working capital investments to grow revenues of distribution companies are one of the best ways to drive cash flow return on invested capital, and to internally compound the value of our business. Over the last nine months investment in working capital has been driven by tuck-in acquisitions in pushing towards SKU congruence, inflationary pressures of replenishing sold inventory, and the growing top-line revenue. We strongly believe disciplined investing in working capital provides the highest incremental return on invested capital. We can walk through the math on this, but I've enjoyed ranges of 40% to 140% cash flow return on invested capital for our other distribution businesses supported by strong working capital investment. Returns can often exceed a well-priced acquisition opportunity. We will continue to manage our accounts receivable tightly and monitor inventory investments especially as we navigate 2023. We expect the 2022 investment we've made in working capital will support growth from these revenue levels. And there also should be some efficiency gains in working capital intensity over the coming year. I also want to spend a few minutes today discussing our capital allocation strategy. On Slide 5, we've laid out our view of the world related to prudent capital deployment. The entire DSG management team operates under this capital allocation framework. And we continuously rank and recalibrate investment decisions to seek the highest returns. In a way projects compete for capital when we consider core growth versus M&A. Hurdle rates are always changing to reflect the economic changes that affect risks and valuations. As of the end of the third quarter, our net debt leverage was 3.4x. We expect to enjoy significant free cash flow after the recent investment in working capital for growth and SKU alignment over the coming 12 months. We also understand how much free cash flow we will generate out of working capital should we see softer economic environments in our combined end markets. We can take cash out of working capital to accelerate deleveraging further. As we have consistently experienced in distribution businesses in previous soft economic cycles. We will continue to operate in a disciplined and prudent manner as we decide on the highest ROIC capital deployment opportunities. Today, we reported that in Q3, we were in the market buying back shares. And we also announced that the board has expanded our share repurchase program. Since DSG is already over 65% owned by LKCM headwater, we appreciate that our float can be a concern. However, we want to have a share repurchase in our capital allocation framework, so that we can return capital to shareholders when appropriate. With regard to how we think about our capital allocation, our internal hurdle rates in IRR criteria teamed with our focus on long-term strategic value enhancement. Our lens has evolved today, much like the macro environment, and our platforms are continuing to evolve. We want to maintain flexibility and plan to remain resilient as this economy evolves for our business and for our customers. Our goal at DSG is to continue to build and scale our specialty distribution network to drive significant free cash flow with an enhanced return profile. Remember that since we merged these companies earlier this year, we have not had the benefit of a full cycle or year of working capital flowing through the P&L to capture and measure annual returns on invested capital, which we see as currently understated relative to where we will see them in arrears a year from now. We appreciate we are still in the early days at DSG and are putting solid objectives which are embraced by our leadership team members, and all are eager to show significant progress. With our capital allocation framework is the foundation, we have a robust acquisition pipeline for each of the businesses and our corporate development team is busy evaluating timing, valuations, and fit for tuck-in acquisitions. Over the past three months alone, we've reviewed numerous new opportunities. Multiples appear to be in flux currently, in some cases softening and in other cases, trophy assets are being discussed for the first time in decades, as operators are enjoying robust demand and improved profitability, but recognize inflation and interest rates are creating a moving target on daily confidence levels for some owners and shareholders. The current environment should make transactions more compelling for us as we move forward. Before Ron covers the consolidated and operating company financial results, please turn to Slide 6 and I will comment on a few areas of focus within each of our three companies. Lawson Products, a leader in the MRO distribution of C-parts, offering vendor managed inventory services has realized significant growth in our largest strategic accounts, and the Kent Automotive division. In this challenging labor and market, Lawson has successfully brought customers incremental support through outsourcing services using their intensive vendor managed inventory solutions on Class C products. Cesar and the team at Lawson are also carefully evaluating new channels to market for Premier level services, depending on the specific needs of the customer. We've seen not only strong growth helped by pricing, but also a nice return to core growth from SKU and customer level activity, as well as new customers embracing Lawson's solutions. Gexpro Services is a leader in the supply chain solutions of largely C-parts specializing in developing and implementing VMI and kitting programs to high specification OEM customers. In a challenging inflationary market, customers continue to turn to Gexpro Services to help improve their total cost of ownership through VMI, complex kitting programs and aftermarket services. Bob and the team are having success by vertically integrating manufacturing and light assembly solutions for their customers via their acquisition partners, Frontier Technologies, Resolux, State Industrial Solutions, and Omni Fasteners. Gexpro Services has successfully passed on material and freight pricing and continues to focus on supplier and commodity rationalization as well as synergies on acquisitions. Gexpro Services has been a strong leader in driving the culture of cross-selling the benefits and products from each of the three legs of DSG with established customers, as well as prospective key target accounts. TestEquity is a leading industrial technologies distributor of specialized test and measurement equipment and solutions, electronic production supplies and customized toolkits from leading manufacturing partners, pass-through pricing continues to work to our advantage as customers are accelerating orders to capture near-term pricing versus risking further price escalations in 2023. Our leadership team at TestEquity is accelerating their digital migration and an estimated 40% is now transacted online since the acquisition of TEquipment. This percentage continues to accelerate with the release of our first e-commerce platform in Europe this quarter. We are realizing synergies between TEquipment and TestEquity in the product and digital sales categories and believe this will deliver further margin enhancements in operating leverage and continues to show a strong acceleration in driving ROIC metrics to best-in-class levels for peer industrial distributors. Now I would like to turn the call over to Ron to walk through the financials, Ron?

Thank you, Bryan, and good morning everyone. Turning to Slide 7, we're excited this morning to share with you the third quarter results of Distribution Solutions Group. Briefly let me comment on the required GAAP accounting presentation before we discuss our results. Also, as Bryan mentioned, we posted our Q3 2022 financial results presentation on the IR website for DSG. As a quick reminder, the combination of the three operating companies is required to be treated under GAAP as a reverse merger. From an accounting perspective, Gexpro Services and TestEquity acquired the stock of Lawson Products as of the April 1, 2022 merger day. A few items to keep in mind as we review the Q3 results. The third quarter 2022 results include all three operating companies for the full quarter. The year-to-date GAAP information for 2022 includes Gexpro Services and TestEquity for the first six months and given the merger date of April 1, only includes Lawson Products from April 1 to September 30. The comparative GAAP information for 2021 only includes Gexpro Services and TestEquity as the predecessor company for the accounting statements. For ease of comparing these results, the slides that we are using for the conversation this morning are adjusted for the pre-merger activity of Lawson Products. We also heard from many shareholders on the lack of visibility of prior quarters. So we're now presenting trailing five quarters of adjusted sales and adjusted EBITDA on a combined basis. Let me summarize the third quarter results. On a combined basis, we reported strong top line and bottom line results across the three principal operating companies. As Bryan mentioned, we reported total sales growth of 46% with organic sales growing 15.4% through both price and volume. Today in 2022, we have closed on four acquisitions, for a total of over $180 million of acquired annual revenues. Broadly, product demand remains strong. However, we are cautious going into 2023 given some of the macroeconomic indicators. We've also made good progress on realizing cross-selling opportunities among the three operating companies with early wins on new customer business and cost synergies. And finally, our performance in all three operating companies was in line or above expected levels. Now let's walk through some of the numbers on a combined basis. First consolidated sales were $347.2 million. Although not necessarily meaningful, this represents an increase of 163% on a GAAP basis, driven by the inclusion of Lawson Products commencing on April 1. Organic growth of business and acquisitions made by Gexpro Services and TestEquity in both 2021 and 2022. With the inclusion of Lawson from a comparative basis, sales increased 46% or $109.5 million over the third quarter of 2021 with $68 million coming from acquisitions and organic growth of slightly over 15%. Second reported GAAP operating income was $22 million compared to $5.5 million a year ago quarter. On an adjusted basis, taking into account merger-related costs, stock-based compensation, severance, and other non-recurring items, adjusted EBITDA improved by $13.5 million to $34.7 million or 10% of sales. This also represents a sequential improvement of $3 million of adjusted EBITDA over the second quarter. And third, diluted earnings per share was $0.84 for the third quarter. On an adjusted basis, adjusted diluted EPS was $0.64 for the third quarter of 2022 versus $0.25 for a year-ago quarter. Now moving on to Slide 8, while Slide 7 included Lawson for pre-merger activity and other acquisitions since the date of acquisition, Slide 8 includes the full run rate of all completed acquisitions as of September 30, as if they were owned for each quarter presented. As you can see from this page, our full run rate inclusive of acquisitions has seen nice quarter-to-quarter growth reflecting the strong performance of each of the three operating companies. As Bryan mentioned, Q4 is typically our slowest quarter given fewer selling days and lower seasonal customer activity. Turning to slide 9, let me now comment briefly on each of the three individual operating companies within the 10-Q that we have filed we have broken down our segment reporting based on the three operating companies with a focus on how they go to their end markets. Starting with Lawson, recall that Lawson is the accounting acquirer and is not in the GAAP reported numbers for Q1 2022 or for the comparative GAAP numbers in 2021. However, for purposes of these slides, we've included the pre-April 1st results. Sales were $109.4 million for the third quarter of 2022. Please note that this does not include both supply as they are now included in the all other reporting segment. However, both supply had another great quarter with sales increasing 45% with adjusted EBITDA in excess of 14% of sales. The Lawson segments sales grew 16.8% organically over the third quarter 2021 on an adjusted basis at 1.9% sequentially over the second quarter of 2022. The increase over a year ago was driven by strong performance within the strategic business, up 16%. Our Kent Automotive business being up 25%, the core business up 14% and government up 22%. During the quarter unit volume increased approximately 5% with the remainder being driven by price and mix. Lawson's growth during the quarter was achieved through increased share of wallet with existing customers in new customer relationships, in particular within strategic or large accounts. Lawson continues to realize improvement in its gross margin percentage excluding non-recurring items. While customer mix is putting pressure on the overall gross margin percentage, the business continues to focus on gross margin expansion opportunities, which we envision will continue into 2023. Lawson's reported operating income was $5.4 million for the third quarter inclusive of the non-recurring items previously mentioned. Excluding these items as well as previous quarters Lawson's adjusted EBITDA improved to $9.7 million compared to adjusted EBITDA of $7.6 million a year ago, primarily driven by the sales and gross margin improvements, partially offset by increased compensation and healthcare costs. Turning to Gexpro Services on Slide 10. Total sales were $103.7 million for the third quarter of 2022, an increase of $39.5 million over Q3 2021, of which $30.8 million was driven by acquisitions and $8.7 million from organic growth. In 2021, Gexpro Services closed on the Omni, NEF, and SIS transactions. In 2022 Gexpro Services has closed on Resolux earlier in the year and Frontier on March 31. Excluding the impact of these acquisitions on the third quarter organic sales grew by nearly 14%, of which approximately 7% came from price. The end markets Gexpro Services operates in are expanding with the exception of headwinds in renewables. The increase in aggregate sales was primarily driven by new customers in the expansion of existing customer relationships. Reported gross margin was down slightly from a year ago on lower margin profiles of the acquired businesses. Gross margins continue to be managed by the Gexpro Services team through strategic sourcing improvements. New supplier development and the movement towards longer-term supplier agreements. Gexpro Services adjusted EBITDA expanded to $12.5 million, or 12% of sales as compared to $6.3 million or 9.8% for the year-ago quarter. Acquisitions drove approximately $5.1 million of the earnings increase. And lastly, I'll turn to TestEquity on Slide 11. Sales for the quarter grew by $48.9 million for over 72%. During the second quarter of 2022, TestEquity closed on two acquisitions, TEquipment and National Test Equipment. Of the $48.9 million sales increase for the quarter, approximately $37.6 million was generated from the 2021 and '22 acquisitions, while organic sales increased 16.9% with approximately 8% coming from price. We anticipate that sales in the Test & Measurement business will continue to be lumpy for the remainder of 2022 and into the first half of 2023 given some of the continuing chamber supply chain challenges. Customer orders remain strong and we're able to ship quickly upon the receipt of product. However, delivery has been sporadic due to ongoing supply chain issues. Having a higher level of customer back orders creates positive momentum as we move into 2023. On an adjusted EBITDA basis, the third quarter ended at 8.7% of sales or $10.1 million, representing an increase of $4.6 million over a year-ago quarter of which approximately $2.5 million came from the 2021 and 2022 acquisitions previously mentioned. Moving on to Slide 12. Bryan previously commented on our approach to capital allocation so I won't repeat his comments. However, from an access to capital perspective, we have approximately $25.2 million of cash and $75.1 million available under our existing credit facility. As part of our credit facility, we also have an additional $200 million accordion feature. We ended the quarter with a net debt leverage ratio of 3.4x on increased earnings. During the quarter, we continued to invest in the business to support the 15% organic sales growth, while at the same time had approximately $11 million of non-recurring cash items that impacted our cash flow during the quarter. Net capital expenditures for the quarter were $3.2 million and $6.6 million on a year-to-date basis. Before I turn the call to Brian for some closing remarks, let me just reemphasize the continued strength that we realized in the third quarter on top of our previously reported strong initial second quarter. We are very pleased with the progress on both the financial results, as well as the underlying operations of the three operating companies. We firmly believe that we are on a strong path is exhibited by our adjusted EBITDA of $34.7 million for the quarter, or 15.4%, organic sales growth and the incremental benefit of our acquisitions. We hit our 10% margin target for the quarter and continue to be excited about our future on a combined basis. While the third quarter was strong, we're also paying close attention to the macroeconomic trends in the marketplace. We will prudently manage our financial position, including our financial leverage as 2023 develops. I'll now turn the call back to Bryan.

Thank you, Ron. Turning now to Slide 13. We accomplished what we set out to accomplish since merging the businesses in April. The teams are working well together. And I would say that we have achieved more than we expected by September 30 with much more expected in front of us. Let me highlight a few of these areas as an acknowledgement of the strong successful effort in shared accountability by our colleagues throughout DSG. We've enhanced our go-to-market strategy for the three businesses and importantly, expanded our channels to market. As I mentioned briefly, we've rolled out an incentive program for our sales team to support ambitious cross-selling goals for our largest strategic accounts for DSG. And we have pipeline leads and wins to support our growth initiatives. Also, maybe quite differently than you typically hear on earnings calls like this. We've operationalized LKCM headwater and our operating partner team mostly retired C-suite distribution executives at each of our operating companies. There is not a management fee for this work, as is typically done by other groups and consultants. As this support team, in collaboration with the management teams, are fully in line with investors and shareholders to improve financial and operational performance. Generate cash flow and build long-term enterprise value through stock price appreciation. Turning to Slide 14. Third quarter results demonstrated our ability to report strong growth organically and by acquisition and to drive substantially adjusted EBITDA with a 10% margin. We believe that DSG has the best operating leaders in the industry, and they are working hard to grow sales, improve margins, and generate cash flow. We remain confident about the opportunities to further scale the business and drive margins structurally higher, leverage the working capital investment and generate accelerating level of free cash flow off of each dollar of revenue and generate cash. We believe our MRO OEM and Test Equipment products, services and solutions provide customers with a comprehensive set of industrial, distribution and supply chain support that are increasingly being reaffirmed by our customers and vendors daily in the marketplace. Thank you for your time today. And now we would like to open up the line for investor questions. Operator?

Ladies and gentlemen, the floor is now open for questions. Thank you. Our first question is coming from Ken Newman with KeyBanc Capital Markets. Please go ahead.

Hey, good morning guys.

Good morning, Ken.

Good morning, Ken.

So I guess we'll start on the demand side here. Obviously, you're seeing that you're not seeing any evidence of customers delaying projects or pushing orders out? I'm not, I know you're not ready to guide to 2023 or you're not, you're not guiding at all. But I'm curious if you have any color on just how much of your current backlog provides visibility into the following year at this point?

Well, on the MRO side, it's more demand driven. And we don't usually keep a backlog but we are seeing consistent activity levels with what we've seen throughout this year. On Gexpro, we're more tightly aligned with the OEMs. And Bob might have more perspective on exactly what he's seeing. But across most of all of our verticals, with the exception of renewables, demand has stayed consistent and elevated. Renewables has been impacted throughout the year. And we've been waiting for the inflation tax or the inflation congressional, whatever they're calling it the country inflation, but the production tax credit extension, that should reaccelerate that one vertical from the depressed levels that we've experienced this whole year. In markets, Bob on your end-markets, would you want to comment on it?

And the best way to look at it is five of the six vertical markets are up double-digits going into Q3. So we're seeing nice tailwind in aerospace and defense and consumer industrial. A nice lift in transportation. Technology, where we are seeing headwinds is sustained headwinds is renewables. And we anticipated that, as Bryan said, the Inflation Reduction Act has been extended. So we know that the wind and renewables market over the next 10 years is going to be well positioned for growth. So to Bryan's point, we're well versed in operating and tailwind and headwind environments. And if you know, going forward into '23, we see some cautionary headwinds. We'll adjust accordingly.

Okay. And then obviously, organic growth…

It may be helpful just because this is so on everybody's mind. To probably let Cesar speak about Lawson, in the end market demand that he's seeing. I mean, we're seeing an acceleration in SKU activity. And we've had actually good solid demand increase at Lawson. But I think that there's no topic that's on any of our minds more than what end markets are doing right now in demand. So why don't we let Cesar and Russ each answer your question as well. So they can speak about their end markets so that we can get that out there for everybody to understand what we're seeing. Cesar, wanted to say something about Lawson's end-markets as well.

Thanks, Bryan. Like you've heard from Bryan earlier, our MRO market, we continue to see the demand flowing through our different end markets that we serve, which is very diverse industries. We're serving a lot of industrial waste management companies, utilities, fleet, automotive, you name it. So we continue to be very sticky with our customers and play a significant role when it comes to labor shortages. And as we've been growing our business, the piece that we continue to feel strong about is our approach for new customer acquisition and increasing the share of wallet, across the board. But when it comes to seeing any type of softness across the different end markets, we're not seeing any significant or major signal right now. But as you heard from everybody, we're very cautiously coming into 2023.

I think that your end markets are all performing. But we're all kind of everybody is looking at the end markets and kind of wondering what we might see. But we aren't saying it, Russ, you've got the business with the strongest backlog. Indications, why don't you speak about your end markets?

Our end markets have remained steady throughout the years steady to growing. We've seen a little softness in the beginning of the year in aerospace and defense. But that seems to have stabilized a bit. Technology can be lumpy. And we're seeing that as it's going forward. And that's mainly due to supply chain. But we're not seeing any indications from our customer base right now on anything significant softening in the market, we continue to build a significant backlog due to the lumpiness in the technology sector as well.

That's all really great color and appreciate all that. My follow up here is really on the price side, obviously, organic growth was strong across all three segments. I'm curious if you just kind of help us understand how much price was taken in the quarter, any color on what price cost was across the three segments? And then maybe also, how much do you expect from a carryover benefit from pricing actions that you've taken so far this year into 2023?

I will turn it to you, Ron but I just would say that one of the things that we've really prided ourselves now for really 30 years in distribution investing is staying really nimble on pricing, particularly when you get an opportunity to raise prices due to inflationary pressures. And we had spent a lot of time studying in the 70s and 80s, which I alluded to earlier, how inflation can be, can work to the advantage of cash flow on a normalized working capital cycle for distributors. And that led us in our desire to compound money and distribution businesses that kind of led us to distribution over our longstanding investments in banks and in financial institutions, just had a higher return on invested capital profile, especially on incremental dollars in particularly in inflationary cycles. When normalized for the increase in working capital that you have to step into, as you're replacing inventory with higher dollar cost inventory. And receivables that are growing, because your top-line is growing. But all that being said, I think that Ron and his team were set up well for it as were each of our companies going into it. We talked about whether or not we were going to roll into an inflationary cycle. And so we started taking some price actions pretty early, and we've continued to take them. We've had to work where we have contract pricing to make sure that we're getting, you know that we're working collaboratively with our customers that are longer-standing, larger customers where we have some contracting elements with them. That's more probably over Gexpro with Bob's business than it is in others. But even there, we've been able to be very constructive in being able to list our pricing consistent with on a percentage basis with our cost of goods sold. We're getting more flow through where we expect to continue to get more flow through on that. And we've got some more pricing actions that we've got prospectively in front of us. And we've taken a little bit this year or this quarter. Ron, why don't you speak to that where specifically you've taken it? Are you seeing the other verticals take it?

Certainly. In terms of the price increases for each of the businesses, we outlined the organic sales in the presentation. All three companies implemented price increases and reaped benefits during the quarter. Gexpro Services experienced a 14% increase in organic sales, with approximately 7% attributed to price. TestEquity's organic sales rose by 17%, with around 8% from price increases. On the Lawson side, organic sales were up 17%, driven by about 5% in volume, resulting in approximately 12% from price and mix. Regarding the Lawson business, we have been catching up throughout 2022 compared to 2021, which explains a larger share of price-related increases compared to the other three companies. All three organizations are facing cost increases from our suppliers, although the Lawson business showed some moderation in costs in October, which may be a positive indicator for the future. Currently, all three companies are managing to stay ahead of vendor cost increases, as reflected in the margin percentages. Some of the cost increases will carry over into 2023. We expect that any pricing actions taken this year will have a full-year impact next year. Despite a slight easing in vendor cost increases in October, we anticipate they will continue into 2023.

Got it. And then just one more here. I mean can you just talk a little bit about how you think about the M&A strategy. Obviously, correct me if I'm wrong, but it sounds like Bryan, that you're cognizant of the macro uncertainty, we've seen you going to shift some capital back towards share repurchases, and then back towards internal growth initiatives. But you also talked pretty positively about the pipeline being full. Just to clarify, I mean, with interest rates rising, and just with the leverage profile that where it is today. Should we assume that it's not the top priority for capital deployment in the near-term? Or is that an unfair statement?

I want to clarify that while I don't think your statement is unfair, I also don't want to set expectations too high regarding aggressive acquisitions that could jeopardize our long-term business vision. Our aim is to create value as partners with our public shareholders. We currently have several appealing tuck-in acquisitions in the works that we believe will enhance revenue for our core business. Our goal is not to engage in acquisitions purely for financial engineering. I have always been cautious about the idea of roll-ups. If we cannot identify a clear reason for an acquisition that enhances the financial and long-term sustainability of our core operations, then we shouldn't invest capital. As I mentioned in my prepared remarks, the returns on invested capital and working capital in distribution businesses are significant, allowing us to grow our business attractively through internal initiatives or working capital investment. We have numerous opportunities available to us now, but there are specific factors we believe will strengthen what we have and accelerate organic revenue growth. Sometimes this involves acquiring key customers, particularly in situations where sales cycles are lengthy. For example, in Gexpro Services, we face long lead times. Acquiring customers that require deeper engagement or possess more SKU expertise than we do can be beneficial. If we are directed by key vendors to enter new geographies, such as Europe with TestEquity, we may consider small acquisitions that are financially beneficial but also enhance our position as a partner for those vendors and our existing North American customers who are requesting expansion into other areas. While our primary focus remains on North America, we are being asked to explore small acquisitions elsewhere for good reasons. We are in discussions with owners of certain high-value assets that could greatly transform our platform. As we look to integrate TestEquity's engineering and production supply capabilities with Gexpro Services and Lawson OEMs, we see opportunities that align with our vision of creating a more cohesive solution. These conversations have been ongoing for several years, and we are uncertain about when opportunities may materialize. It’s important to note that in this current environment, our goal is not to increase leverage; we aim to build a robust long-term business. Although we do not want to dismiss the possibility of engaging in M&A, any actions taken will be measured and thoughtful, contingent on gaining insight into our end markets, and our confidence in generating significant cash flow next year, which we are optimistic about. This year, we've invested heavily in working capital to integrate our businesses, and our analysis suggests we can achieve considerable top-line growth without needing to invest further in working capital. However, ongoing inflation and the need to replace inventory at increased prices may pressure our inventory investment. If we continue to see growth in receivables alongside our revenue growth, it indicates that we should also consider increasing our expenditure compared to the past.

Helpful color. Thanks.

Thank you. Our next question is coming from Kevin Steinke with Barrington Research. Please go ahead.

Good morning, Kevin.

Good morning. In the prepared comments you mentioned Lawson Products exploring some new channels to market. I don't know if you could expand on that at all.

Cesar, you're probably best to tackle this.

Thanks, Bryan. Hi, Kevin.

Good morning.

Elaborating a little bit more on Bryan's note. When you think about it, we got a 90,000 active customer base and we go-to-market one single channel right now with our field rep, are there every day for our customers. But as we think through the future in terms of better looking for ways to better serve our specific needs of our customers with such a diverse customer base that we have within A segments and different end markets, but both sides as well, we're very carefully working with a field in our sales team to develop different testing in different ways to continue to become stickier, and being able to allow our more precious time for our sales team to be in front of customers. So that's something that you continue, you continue to hear us talking more and more about it over the next coming quarters as we continue to develop these different ways or alternative ways of serving different customer sites.

I would also add, one of the things that has been most exciting for us has been the ability to look into how for instance Gexpro Services tight relationship with their OEM customers is pulling Lawson's MRO and some of the TestEquity engineered procurements solutions into those engagements. And so that's in some ways, that's another channel expansion to market for Lawson, because it may require, it really does require a different way to service those accounts, because Gexpro Services already has people embedded inside of those OEM facilities. And so the Vendor Managed piece of it can be picked up by Gexpro Services, and their colleagues, even though the product and the revenue is going to be hitting on Lawson's top line. So I hope that's helpful.

Yes, that is absolutely. Thanks for the color. You obviously had some nice adjusted EBITDA margin expansion there in the quarter, but you did call out higher compensation and health care costs. Can you just maybe elaborate on that a little bit more and how meaningful that was?

Yes, Kevin, this is Ron. Good morning. So on the compensation side, that was really more variable in line with our organic growth in sales. So, it was sizable dollar amount just to support for the sales team and support the higher organic growth 15% that we saw for the quarter. On the health care costs across three companies was about 60 bps on our margins. So all in it was about a $2 million increase in our costs just in the third quarter. And so what we saw, I would say is across the three companies, probably higher claims coming in the first quarter seem to settle down a little bit in the second quarter, and then jumped on us a little bit again, in the third quarter in particular, within the Lawson business was the probably the biggest driver of that. So yes, to answer your question about 60 bps on our net margin just on the health care alone.

Okay, thanks for the detail. You've talked about in the past the goal of exiting 2022 with an adjusted EBITDA margin of greater than 10%. Is that something we should continue to think about? I know the fourth quarter is seasonally slower, generally lower, but just trying to think about how to think about the margin exiting the year?

Yes, Kevin, this is Ron again. So you're spot on in terms of seasonality. The fourth quarter is typically a little slower for us, really across the three companies. And generally three to four fewer selling days as well. In fact, we've had 60 selling days in Q4 of 2022 versus 64 in Q3, so it does cause a bit of a kind of deleveraging effect on us. But once we get past the fourth quarter again, I can't give you a specific number on formal guidance for the quarter itself relative to the 10%. But as we enter into 2023, certainly, we're looking to expand those margins, really based upon the continual organic growth that we're seeing, the M&A that we've talked about, a lot of the initiatives that are taking place across all three companies in terms of sales expansion, as well as some cost opportunities that we're identifying as well, which we feel that more of those will be realized in '23, than what are currently coming through the P&L in '22. So we feel really good about the first part of 2023, relative to margin expansion, again, understanding that Q4 softens up a little bit not dramatically, but just a little bit, and then we're off to the races again in the first quarter.

Okay, great, thanks for all the color. Appreciate it. I've got to jump on another call here. But I will catch up with you some more tomorrow. Thanks.

Sounds good, thanks Kevin.

Thank you, Kevin.

Our next question is coming from Brad Hathaway with Far View Capital. Please go ahead.

Good morning, Brad.

Hi, everyone. Hi, good morning. Thank you so much for the incremental financial disclosure and for the capital allocation discussion, that was really helpful appreciate that. With regards to, I guess obviously, potential recessions are top of mind for everyone right now. And as we're all getting to know better the businesses that are included in the new DSGR, I would love to just maybe if we get to discuss qualitatively, kind of how Lawson but especially TestEquity and Gexpro kind of responded in a recessionary environment in terms of new kind of factors that impact demand volatility, detrimental margins, and things like working capital, just obviously, not necessarily numbers, but just maybe help us better understand some of the factors that influence how each, each of the three businesses behave in a downside scenario.

Sure, I'll begin addressing that and may invite others to join in. Brad, looking at the broader picture, we've invested significantly in working capital this year, primarily due to the integration of our companies and working towards SKU alignment. I can confidently say that we have the necessary working capital in place. Despite inflationary pressures, we are positioned to manage a larger revenue base while observing a reduction in our working capital intensity by several percentage points. Historically, we've been able to free up substantial cash from working capital, even during softer periods, such as those we experienced during the COVID cycle. As for how we responded during that time, particularly with Gexpro, it’s worth noting that Gexpro actually saw growth in top-line activity outside of project revenue during COVID, with non-contractual revenue remaining stable and even increasing in 2020. This improved our profitability as we leveraged our position as a key supplier, allowing us to enhance our gross margins, which then positively impacted our financials due to tighter growth initiatives. We have made significant investments in Gexpro Services, especially as a crucial vendor for many of our OEMs amid the supply chain challenges stemming from COVID. This required us to take strategic inventory positions. With ongoing inflationary pressures, we chose to hold some inventory at pre-price increases with suppliers, although we anticipate this will ease during a recession, should one occur next year. At TestEquity, our primary challenge during COVID was related to our vendors. Supply chain issues among major vendors like Keysight and Tektronix hindered our sell-through on equipment, despite ongoing demand. The softness we observed largely affected MRO activity, similar to what we experienced at Lawson. Our main challenge was ensuring we could supply our customers rather than facing end-market softness. I often reflect on the operating leverage within these businesses, recognizing that different factors influence our operations. While we’ve faced negative operating leverage, we continue to invest in growth and acquisitions, and we are still in the early stages of realizing the benefits from consolidating our operations. We are working through potential cost savings from consolidated purchasing and other back-office efficiencies, which have yet to impact our financials. There are also advantages from our general support of three G&As, and if we end up in a market where revenues decline, we are prepared to take cost actions as we did during the COVID recession and previous downturns. We have a clear vision of potential cost reductions that can be made, given the current organic growth environment. Are there any additional points we should discuss? Bob, Russ, or Cesar, do any of you have insights regarding the impact of detrimental margins or thoughts on incremental profitability costs if we face headwinds next year?

Yes, Bryan, I think, first of all, we're fortunate that we have decent executives leading these businesses. Just our experience with GE and Rexel over the past 30 years. I mean, first thing you do is you look at your customers and a recessionary environment, customers are asking you to help rationalize their supply chain, they want to go to fewer and fewer suppliers. So that becomes a strategic supply chain. They're looking for labor productivity. They're looking for value engineering, everything that that we excel at. So to me, when we walk into a situation that headwind environment, we just view it as an opportunity. Bryan had communicated earlier, you can still drive SKU expansion, you can still drive wallet share, you can still drive new business development, you can still drive cross-selling. And we've identified over 120 new opportunities collectively for Gexpro Services, TestEquity in Lawson just mining the install base. So our thought process is we'll just reallocate resources and continue to expand to take share in a multi-billion dollar vertical market.

With TestEquity, we've actually changed the structure of the company somewhat since the first recession with COVID. We've added product lines that will lower end product lines that people customers fill and to purchase even in a down cycle. And that means frankly, we're increasing our business digitally, exponentially every year. So as we go to market digitally, that makes it much easier to get to the recessionary times.

So to Brad, we've added 3,600 SKUs in the last 90 days on our digital platform, as part of our investment in working capital over the last six months, which has occurred in Test, Gexpro Services, and Lawson as well. Can you discuss the additions from the SKU perspective that you've implemented?

Sure, sure. I can start with that one. We basically through our digital platform, monitor what customers are looking for that we don't currently stock. And as we go through that, we expand our product lines, and we expand the stockable product lines as we go forward, adding new products to our digital platform. And that automatically increases the sales as customers look for those items that we have them and have them in stock. And that tends to increase our sales exponentially.

Yes, Bryan, on the Lawson side, it’s quite similar to what Bob mentioned regarding Gexpro Services. We view these times as opportunities to continue supporting our customers, who are seeking partners to help them lower costs and save money. Our team actively assists customers in navigating these challenging periods by reallocating our resources and capitalizing on cross-selling opportunities across our various portfolio companies.

And Brad, you're familiar with Lawson's performance in just a couple of years ago, and in 2020. So we had the ability to cash flows to Bryan's point in the cash flows remained really strong during that time period, on the working capital side, and from a cost perspective, as well. So we know what levers to pull. In fact, our EBITDA margins were flat, even though from the previous year 19 to 20, even though sales fell off quite a bit. So, we know what levers to pull to make sure that we can still continue to deliver the financial performance.

Great, that's very helpful. Thank you. That was a very useful discussion. It's good. Good to learn more about Gexpro and TestEquity, especially because obviously we have more experience with Lawson historically. Thank you very much. I think, congrats on a great quarter and looking forward to continue to see what you're building here. So thank you.

Thank you, Brad for your support.

Okay, there appear to be no further questions in queue. So I will hand it back to Bryan King for any closing comments.

Okay, thank you, operator. Thank you for those that participated today, we appreciate your interest in DSG. We're excited about where we are, we certainly are further along in many of our initiatives, and we expect it to be by September 30. The businesses are performing at or above how we imagined they would. And our visibility at this point in time continues to give us a lot of confidence in the near term, as well as the intermediate term. Although we appreciate and are respectful of the changing environment with interest rates and inflation. I want to particularly call out the effort of our management teams and their colleagues over the last six months. As we've been working together, there's been a tremendous amount of effort by everybody to get to where we are today. And we really appreciate our employees across DSG working as hard as they have to make the business teed up for the prospective year as profitably and successfully pulled together as it is. So thank you for everyone's efforts. And we look forward to talking to you either throughout this quarter please reach out to us or we will hear you, hopefully engage with you at the end of the year. Thank you everybody. Bye.

Thank you, ladies and gentlemen, and this does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.