Greetings, and welcome to the Distribution Solutions Group's First Quarter 2023 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Steven Hooser, Investor Relations.

Good morning, and welcome to the Distribution Solutions Group First Quarter 2023 Earnings Call. In conjunction with today's call, we have provided a Q1 earnings presentation that has been posted on the company's IR website at investor.distributionsolutionsgroup.com. Please note that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied. In addition, statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change and we may elect to update the forward-looking statements made today, but disclaim no 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 was posted on the Investor Relations section of our website. A copy of the release has also been included in the current report on Form 8-K filed with the SEC. This call is being audio webcast on the internet via the Distribution Solutions Group Investor Relations page. A replay of the teleconference will be available through May 18, 2023. I will now turn the call over to Bryan King, DSG's Chairman and Executive Officer.

Thank you, Steven, and thank you all for joining to review our first quarter results. Joining me for today's call is Ron Knutson, DSG's Executive Vice President and Chief Financial Officer. Distribution Solutions Group delivered another record quarter of outstanding financial performance with expansion in both revenue and profitability. Starting on Slide 4, we delivered strong sales of 28% on a comparable basis, which included almost 14% of organic growth. In addition, we generated first quarter adjusted EBITDA of $39 million representing our fourth consecutive quarter of expanded EBITDA margin into the double-digits. We believe that our scale and breadth of products and services continue to provide competitive advantages in the specialty industrial distribution industry. Our DSG operational teams are working well together, and we're seeing good evidence of wallet share growth, volume increases and encouraging cross-selling wins as well as continued identification of initiatives to capture cost synergies across each of our verticals. The first quarter's results further confirm the financial and commercial logic of the combination that took place only a year ago, an improved business model we now enjoy. The strength across the combined expertise of our leadership team is enhancing our performance and accelerating our goal of building a best-in-class specialty distribution company with strong market leadership across several distinct but increasingly coordinated value-added verticals. As shareholders, we will continue to benefit as our team identifies and executes on numerous value creation opportunities. As we highlighted during our fourth quarter call, we continued strong sales momentum in the first quarter. Our business has successfully captured market share, delivered incremental margin expansion, and generated additional cash flow in our first fiscal period of this new year. We are actively engaging customers with the goal of providing a simple, efficient, and more value-added and customized experience, staying attentive to reinforcing our value proposition in our existing markets. We continue to monitor the overall demand environment for our products and solutions. We believe that further leveraging our strong historic customer relationships will enhance organic growth through cross-selling our expanding value-added capabilities across our channels. Moving to Slide 5, I'm pleased to discuss the previously announced plan to acquire Hisco, expected to close during the second quarter of this year. Hisco is a leading distributor of specialty products serving high-growth industrial technology applications, with 38 locations across North America and over $400 million in annual sales. This business aligns closely with TestEquity, and interestingly, several distribution investment banking colleagues who congratulated us on acquiring Hisco emphasized how well it fits with our other verticals. We are excited about how Hisco strengthens our DSG value proposition through four main aspects. First, like our existing verticals, Hisco presents opportunities to engage more with long-standing customers and to enhance our OEM and MRO efforts around electronic production supply. Second, Hisco introduces new distinct value-added capabilities across our platform, including specialty materials and products not currently in our DSG offerings, vendor-managed inventory, and logistics services. Additionally, we anticipate meaningful geographic expansion into Mexico and South America, driving sustained revenue and profitability growth. Finally, we expect Hisco to help accelerate our transition to a higher structural margin profile at the TestEquity Hisco vertical, contributing to overall DSG profitability and cash flow generation. Hisco brings us closer to the total scale and connectivity we envisioned, accelerating value creation within our leading distribution platform. Moving forward, we are enthusiastic about what lies ahead, though the deal is still subject to regulatory approvals, and we are making progress towards closing in the upcoming quarter. Before Ron reviews our financials, I want to touch on operational progress and key value drivers for each of our business units. First, Lawson Products has surpassed our initial 2023 goals, achieving significant margin expansion that investors have anticipated for years. The team excelled in price management, expense control, and customer base growth, particularly with strategic accounts and the Kent automotive line. Unique ship-to locations have grown approximately 9% over the past year, and we see ample opportunities for continued growth through current initiatives. We are making strategic investments in sales channels, including inside sales and improved web capabilities to enhance customer engagement. Lawson is also investing in lead generation and CRM tools, aimed at boosting our sales representatives' productivity. Second, Gexpro Services, a leader in supply chain solutions, delivered strong results in the first quarter, driven by growth in diverse end markets like industrial power and defense. We are seeing renewed interest in our value proposition, particularly in renewables, where we have secured new contracts. Demand for aerospace and defense continues to grow, and we expect this trend to persist, particularly in industrial power where dynamics are changing. Gexpro Services is leveraging synergies from our acquisitions for increased cross-selling opportunities, further expanding our service offerings. Finally, TestEquity experienced strong demand at the start of the year, with digital sales up 10% in the first quarter, primarily from our new e-commerce sites. Although we face challenges in tech sector capital spending, we are seeing opportunities in refurbishing rental equipment, which could provide higher margins. Additionally, the Hisco acquisition is expected to accelerate our path to a higher margin profile and enhance revenue and cash flow generation for DSG. Our team is optimistic about our prospects and the initiatives we are implementing across our operating verticals. Now, I will turn the call over to Ron to walk through the financials. Ron?

Thank you, Bryan, and good morning, everyone. We are excited to present the first quarter results of Distribution Solutions Group. It’s important to note that Lawson Products was not part of the Q1 results for 2022 due to reverse merger accounting treatment, but all three businesses are included in the first quarter of 2023 GAAP results. To facilitate comparisons, we have adjusted the slides to include Lawson's financial results for Q1 2022. In summary, the first quarter results showed strong performance both in sales and profits. We reported total sales growth of 28%, with organic sales up 13.7% due to price and volume increases. The results also indicate a full year of sequential margin growth, with Q1 ending above 11% of revenue. Now, let’s look at some specific numbers, primarily on Page 7 of our presentation. Consolidated revenue for Q1 was $348.3 million. With Lawson included for comparison, revenue grew by 28% or $76.3 million over Q1 2022, fueled by organic growth and about $39 million from acquisitions. Reported GAAP operating income was $16.7 million, compared to $3 million from the same quarter last year. Adjusted EBITDA, excluding certain costs, rose by $16.7 million to $39.4 million, representing 11.3% of revenue. Additionally, we reported GAAP diluted earnings per share of $0.28 for the first quarter versus a loss of $0.25 a year ago. On an adjusted basis, diluted EPS was $0.52 for the quarter compared to $0 a year ago. Moving on to Slide 8, we present the full run rate of all closed acquisitions as of March 31, 2023, assuming they had been owned for each quarter shown. Please note that Hisco is not included since we have not yet closed on it. The full run rate shows noticeable sequential margin improvement quarter-over-quarter, demonstrating the strong performance of our three operating companies. Now on to Slide 9, I will briefly discuss each business, beginning with Lawson. Because Lawson is the accounting acquiree, it is not part of the GAAP reported numbers for Q1 2022. However, we’ve included premerger results for these slides. Lawson’s sales reached $125.3 million for the quarter, excluding Bolt Supply, which is reported in the all other segment. The average daily sales of Lawson grew 19.4% organically over Q1 2022, and increased 8.7% sequentially compared to Q4 2022. The year-over-year increase was driven by notable performance within the strategic business, which rose nearly 25%, alongside 28% growth in Kent Automotive, 14% in the core business, and 40% in government. Unit volume remained flat compared to the previous year but increased about 3% sequentially over Q4 2022. The growth this quarter was fueled by enhanced customer relationships and greater share of wallet with existing clients, especially in large accounts within our Kent Automotive segment. We shipped to around 9% more unique locations this quarter than last year. Lawson has also seen steady improvements in its gross margin percentage. Despite growth with larger strategic customers putting pressure on the overall gross margin, we continue to achieve margin expansion driven by price realization, lower freight costs, and cost leverage from higher sales. Lawson's adjusted EBITDA increased to $18.5 million from $8 million in the same quarter last year, mainly due to sales and gross margin enhancements, offset partially by higher compensation costs associated with increased sales. Adjusted EBITDA for Lawson represented 14.7% of sales for the quarter, compared to 7.7% a year ago. Turning to Gexpro Services on Slide 10. Total sales for Gexpro Services were $101 million for the first quarter of 2023, an increase of $19.3 million over Q1 2022, of which $4 million was driven by acquisitions and $15.3 million from organic growth. In 2022, Gexpro Services acquired Resolux early in the year and Frontier at the end of Q1 of 2022. Excluding the impact of these acquisitions on the first quarter, organic sales grew by 18.7%, of which approximately 4% came from price. The increase in aggregate sales was primarily driven by new customers and the expansion of existing customer relationships. Gexpro Services adjusted EBITDA expanded to $11.7 million or 11.6% of sales, as compared to $8 million or 9.8% for the year-ago quarter. And lastly, I'll turn to TestEquity on Slide 11. Sales for the quarter grew $35 million or over 48% to $107.4 million, primarily driven by recent acquisitions. During 2022, TestEquity closed on three acquisitions, TEquipment and National Test Equipment in Q2, and Instrumex in Q4. Of the $35 million sales increase for the quarter, approximately $34.9 million was generated from the 2022 acquisitions. Organic sales were essentially flat versus a year ago with a decrease in Test and Measurement sales, offset by an increase in the electronic production supply sales. As previously communicated, sales in the Test and Measurement business were lumpy throughout 2022 and as expected, slowed in the first quarter of 2023 as customers have delayed expansion projects and we continue to face supply chain challenges. On an adjusted EBITDA basis, the first quarter ended at 7.1% of sales or $7.7 million, representing an increase of $2.2 million over a year-ago quarter, of which approximately $2.4 million came from the 2022 acquisitions previously mentioned. Moving on to Slide 12. From an access to capital, we have approximately $31.1 million of available cash and $70 million available under our existing credit facility. As part of our credit facility, we have also an additional $200 million accordion feature. We ended the quarter at a net debt leverage ratio of 2.7x, primarily on increased earnings. Our deleveraging that started in 2022 continued into the first quarter of 2023. For reference, at the time of the April 1, 2022, merger of the three businesses, our net debt leverage was 3.6x. This progress is consistent with our intention to prudently manage our debt levels and our leverage in the 3 to 4x range. Net capital expenditures, inclusive of rental equipment, was $5.1 million for the quarter. Before I turn the call back to Bryan for some closing remarks, I wanted to reiterate how pleased we are with the company's financial performance. We said that we are going to exit 2022 with margins exceeding 10%, which we did. We have maintained double-digit adjusted EBITDA margins into 2023, and we have substantially deleveraged the company within the first 12 months. As Bryan mentioned, we continue to be pleased with our long-term outlook. However, we are up against tougher sales comps going into the second half of 2023. All of the businesses continue to execute on their planned initiatives for 2023, which will make us a stronger company going forward. We will continue to prudently manage our balance sheet and financial position.

Thank you, Ron. Let's discuss a few more points before we move to the Q&A. Our strategy for capital deployment and working capital investments is not unique. We focus on allocating capital to projects with the highest returns while developing a strong long-term position as a specialty distributor, emphasizing value-added services for our customers. As an asset-light company, our organic growth mainly comes from investing in trade working capital and talented personnel, as well as through mergers and acquisitions. We have made substantial investments in all three areas over the past year. The returns on our additional investments in working capital to support organic growth are exceptionally high, often reaching 80% to 100% or more, in line with the performance of our best-in-class peers. Our next best return comes from identifying and acquiring strategically beneficial acquisitions that enhance our competitiveness across specialty verticals. These acquisitions are expected to improve our ability to grow organically at a quicker, more profitable rate, which will lead to better returns on working capital and reduce the overall purchase price. We believe that Hisco, along with other potential acquisitions, will support this goal. Although we are committed to this strategy, we are not rushing to acquire anything that is merely accretive. Debt leverage is crucial for us, especially in a rising interest rate environment. Currently, our leverage is below 3x, and with the Hisco acquisition, we expect to be between 3 and 3.5x. Post-acquisition, we will have approximately $450 million of net working capital, which, along with our growing cash flow, will allow us to manage and reduce that debt comfortably. We also have a Board-approved share repurchase program to capitalize on any opportunistic buybacks if our stock experiences an unexpected decline, aligning with our strategy to enhance earnings and shareholder value creation. Our business is valued highly due to the scarcity of exceptional specialty distributors of our size, and there is significant interest from strategic buyers and private equity firms. The allure of DSG continues, as leading specialty distributors serve as strong long-term investment vehicles. I am committed to ensuring we don't sell the business prematurely when we see great potential for growth. If the market presents an attractive offer while we are generating solid cash earnings, my Board and I believe in having the flexibility to repurchase shares and explore ways to enhance value for our long-term partners. At the end of the first quarter, we had $352 million allocated to working capital, with another $100 million expected from Hisco. Our investments in working capital over the past year reflect our optimism for organic growth and increased profitability for our shareholders. Last year, we were more aggressive in our investments, particularly after the business combination and due to opportunities from subsequent acquisitions, coupled with supply chain challenges and inflationary pressures. This year, we plan to optimize our investment rather than drastically increase it. My operating team understands that managing working capital carefully is key to meaningful returns, and in times of economic challenges, it provides the best way to maintain liquidity and offer timing flexibility for growth in more stable conditions. As I mentioned last quarter, our teams are focused on managing working capital effectively throughout 2023. I aim to maintain a strong balance sheet and sound financial position, ensuring ample liquidity to pursue our long-term growth strategies that maximize shareholder value. Our main goal at DSG is to enhance our overall return profile while building a profitable scale as a specialty distribution company that generates significant free cash flow. After completing our merger transaction in April 2022, we are now seeing the benefits from our investments in working capital, our acquisitions, and collaboration across our business units. We are uncovering additional ways to leverage spending and promote cross-selling with many of our close customers. Hisco will significantly contribute to achieving our primary objectives. Besides Hisco, we are actively assessing a pipeline of potential acquisitions that align with our strategic goals and criteria. In summary, we are pleased with our performance in the first quarter and appreciate the efforts from our leadership teams in achieving sustained sales growth and improved margins over four consecutive quarters. While we are excited about our adjusted EBITDA margins of 11.3%, we are committed to taking actionable steps to substantially improve profitability in each vertical in the coming years. However, we want to manage expectations; the outcomes of our initiatives will not follow a linear path, and we do not anticipate the same growth trajectory as the previous four quarters. We recognize the challenges that our leadership teams face after a period of exceptional performance, and we will reach the next margin milestone soon, but we encourage all to temper expectations, including my own, as the path forward may not be as straightforward or steep. DSG is a specialty distribution solutions company with a leadership position across various key verticals, providing value-added distribution solutions for MRO, OEM, and industrial technology needs, targeting a combined market of $57 billion. Our vertical channels offer customers replenishable industrial parts, specialized products, and managed solutions for businesses relying on outsourced expertise and supply chain management. Our competitive advantages are clear and compelling to both customers and manufacturers, making the Hisco acquisition a logical investment for us. Thank you for your attention, and we now welcome investor questions.

Our first question today is coming from Kevin Steinke from Barrington Research.

Ron, I appreciate your comments there about the fact that maybe the margin improvement won't be as when you're going forward as it has been, but obviously, you've hit that and now exceeded that near-term 10% goal that you had discussed. And when you get Hisco layered in, you expect that to accelerate improvement in your structural margin profile. Have you given any thought about what kind of the next target could be that we should think about in terms of adjusted EBITDA margin? Or is it kind of too early to commit to a particular number?

This is Ron. I'll take that and then maybe Bryan will add a couple of comments as well. We haven't publicly shared any specific percentages, but as we noted in both Bryan's prepared remarks and mine, we exceeded our initial plan for the first quarter, improving by 300 basis points compared to Q1 last year and 100 basis points over Q4. We finished Q4 at 10.3%, reaching $11.3 million. I want to emphasize that there were no significant one-time items that significantly boosted our results in the first quarter. As Bryan mentioned, all three businesses are benefiting from the measures we implemented in 2022. While it may be too early to commit to a specific percentage, we are seeing the positive effects of our actions from '22 continuing into '23. I also pointed out in my prepared remarks that we are facing tougher comparisons as we move into the latter half of the year. Furthermore, as Bryan indicated, the improvements won't be as linear, and we are investing in all three companies as well. Nevertheless, we are very pleased with both the net margin expansion and the gross margin expansion for the first quarter. I'll pause here and see if Bryan wants to add any comments.

I think you expressed it well, Ron. To add to Kevin's question about structural margins, we have shown that the business can now generate over 11% structural margins, which we expect to continue increasing over time. When we combine TestEquity and Hisco, we've indicated that this will help bring both of them up to similar margins as the total company achieved this year, although they are starting from a lower base. Additionally, we've discussed how Lawson benefits from contribution margins when revenue is rising, and bringing the businesses together opens up new customer opportunities for Lawson and could lead to growth that has been challenging. There are some exciting initiatives that Cesar and his team are working on to support this growth and enable our salespeople to acquire new customers or better serve existing ones to increase wallet share. As we implement more of these efforts this year, we anticipate that Lawson's structural margin, which was 14.7% this quarter, will continue to rise, significantly improving from what we have seen in recent years. This is part of our overall strategy to integrate DSG, and we believe the entire company will benefit. I don’t expect this to be a straight path; we did see a notable increase between last quarter and this one of over 100 basis points. It’s important for us to have a measured outlook, particularly when considering other public distributors. We have analyzed their performance over the past 30 years, and while our goal is to achieve several hundred more basis points, we recognize that this will take us 3 to 7 years to reach where we believe the business can go. I hope that clarifies things.

Yes, absolutely. Very helpful commentary. So where are we in terms of the journey with pricing? I don't know, Ron, did you mention the overall contribution to your 13.7% organic growth from price? And if not, what was that? And then I guess that would kind of play into the tougher comps perhaps as you move forward this year in terms of starting to lap some of those price increases?

Yes, I didn't specify the consolidated figure, but out of the 13.7%, approximately 10 percentage points were related to price. The remaining 3.5% to 4% came from volume on a consolidated basis. All three businesses are actively implementing pricing strategies, and we are seeing some residual effects from the actions taken in 2022 continue into 2023. You are correct that this will impact the more challenging comparisons later in the year. We are still observing some vendor cost increases, although they have eased compared to 2022. All three businesses are diligently managing and looking to increase their gross margin percentage through not only necessary pricing actions but also various initiatives involving freight and rebates, with some costs reflected in gross profit as well. This is contributing to an increase in sales based on a higher sales base. Overall, we are making good progress and are dedicated to expanding the gross margin percentage over time. To sum up, around 10% of the 13.7% was price-related for the quarter.

Got it. No, great. That's helpful. Just wanted to touch too on Lawson and it seems like some really strong momentum there. And you mentioned the 9% growth in ship-to locations. Any more just commentary on what's contributing to that? You discussed your expansion to new sales channels and what have you and just trying to get a sense of the momentum that's building there and perhaps could continue to build as you start to roll out some of the CRM tools and build out those sales channels.

Certainly. I’m happy to start, and then Bryan can add to that. We are very pleased with the Lawson results for the quarter. The 14.7% improvement that Bryan mentioned is a significant achievement. This increase primarily stems from sales growth and gross margin expansion, as well as effectively leveraging our cost structure, which we anticipated. We previously discussed achieving a 30% to 40% flow-through on the Lawson business, and it was evident in the first quarter of 2023. The 9% increase in unique ship-to locations is a key metric we track across all business segments. This growth is a result of the investments made not only in 2022 but also in previous years, particularly in developing strategic accounts with major customers. We've focused on creating long-term relationships, servicing many of their locations, and implementing effective pricing and rebate strategies. Our investments in strategic account managers and customer support have also been critical for both the Lawson and Kent automotive businesses. Over the past five years, these areas have shown the strongest growth, thanks to our ability to build solid relationships with larger, loyal customers, despite encountering slightly lower gross margins. Nevertheless, we’re still experiencing gross margin expansion on a consolidated basis. We are driving growth from both existing and new customers, and the unique ship-to locations are a significant factor in our overall growth.

Okay. Great. I just wanted to ask lastly here about what you've seen in April in terms of sales growth trends. And you mentioned some moderation in a few markets perhaps related to the economy, but it doesn't sound like that's a meaningful headwind at this point, I guess. So just any costs on April and the trend and the economy.

So Kevin, for April, we've continued to see pretty positive results. There has been a bit of moderation in some end markets, particularly in the Test and Measurement area within the TestEquity business. However, on a consolidated basis, our April sales are generally in line with where we finished the first quarter. A couple of our verticals are up, while losses have increased compared to the end of the first quarter, and T&M is slightly down. With the addition of services, there's a bit of a mix, but we're observing growth on the renewable side, especially as we compare to weaker numbers from the previous year. Overall, we're optimistic about April's sales results and do not see any significant concerns for the month.

Kevin, I want to add that we spend a significant amount of time assessing all of our collective end markets and figuring out how to maintain balance between MRO and OEM, which Cisco helps facilitate. We are optimistic about what we are building for the long term, particularly regarding the correlation between different industries and economic conditions. Currently, we are observing positive changes in the renewable sector, which faced challenges due to a tough backdrop. However, we anticipate improvements as our strategy, implemented by Bob and his team, to create a more comprehensive offering in this market takes effect. Although we haven't yet seen peak levels in this sector, the acceleration is against much easier comparatives from a year ago. Aerospace and defense are strong areas for Gexpro Services right now, even though we initially had concerns about the semiconductor market, which has softened compared to last year, affecting our first quarter slightly. Nonetheless, we have seen some stabilization compared to the beginning of the year. Despite the uncertain environment, our end markets are performing well. We have emphasized that capital spending is cautious across our portfolio, particularly impacting Test and Measurement Equipment, which has shown sluggishness in the first quarter as customers postpone capital decisions. Some of this slow performance stems from lead times and product availability. However, we are noticing a trend among well-capitalized customers who are inquiring about rental and used equipment, which carries higher margins but affects revenue. In contrast, Hisco does not face the same exposure in Test and Measurement Equipment but has ongoing programs that we have identified, which are performing well without significant weakness in their end markets. There are always end-of-life programs, like those related to COVID testing kits, but we are simultaneously acquiring new programs that go beyond just replacing lost revenue.

And the next question is coming from Brad Hathaway from Far View.

Thank you for the outstanding performance this quarter. I'm really impressed with the organic growth and the incremental margins. I didn't expect to see an 11% growth this quickly, so great job on that. However, I would like to delve deeper into the cross-selling opportunities, particularly between verticals, which you've discussed previously, as well as within verticals. I believe you mentioned something regarding Gexpro in this context, and I would appreciate more details on the opportunities you see, especially between Gexpro and Lawson, as well as within Gexpro and TestEquity.

I'll take the lead on this, and then I’d like your input to refine my points. Brad, the example of renewables I mentioned is one of the strongest cases demonstrating how consolidating these acquisitions within a vertical has accelerated our opportunities. Additionally, it aligns with what Bob called the power of three, which has been instrumental in energizing his sales team at Gexpro services to leverage their established relationships. Regarding renewables, we needed to secure some critical OEMs in that space. We already had some, but not all. The acquisitions have enabled us to engage deeply with specific customers where we could offer a broader set of solutions. On the renewable front, there was a major OEM in the wind sector with whom we lacked significant engagement. One of our acquisitions filled that gap, and several of our Gexpro solutions acquisitions were strategically chosen to greatly enhance our ability to offer solutions—not just to existing OEMs, but also to one we acquired. This has empowered Bob and his team to present a more comprehensive set of offerings. We have focused on addressing all essential components within the towers, connecting the base to the turbine, as well as handling retrofits and overhauls. We wouldn’t have achieved this integration without our acquisitions. This approach also incorporates MRO elements and elements of Lawson's offerings into our discussions. We are integrating Lawson's capabilities effectively, achieving strong traction with key OEMs—where we already had deep relationships through jet services—to displace former providers of MRO and DMI services. The strength of our collaboration has made this possible, and we aim to engage closely with customers to understand their specific needs. While we are enhancing our back-office and warehouse automation, we're avoiding over-reliance on automation in customer interactions, which has proven successful. We anticipate continued success in this area, although we’re just beginning to explore cross-selling opportunities. Our dialogue is broad, and while our individual wins may be fewer, they are still significant for our financial performance, aided by an expanded customer base of 40,000 new clients from Hisco.

I would add, Brad, just there's an excess of 300 active leads. I think we talked about this on the Q4 call, where we are incentivizing our sales teams across all of the companies to bring these leads that Bryan referenced into the other organizations. So we're actively working in excess of 300 leads. And it has been realized sales multimillion already coming through. Now some of that happened in 2022. But I would say it's on a steeper scale as we enter into 2023. So I mean, it's not an 8-figure number yet from a sales perspective, but it's a few million dollars that we've been able to realize on top line growth.

And the next question is coming from Katie Fleischer from KeyBanc Capital.

On for Ken today. I wanted to follow up on your pricing question from earlier. Can you clarify if price cost was positive to margin? And what's the expectation for the rest of the year?

Yes, Katie. You're referring to the 10% pricing I mentioned earlier. We've observed more of this recently, especially in the first quarter as we are reflecting on the price increases from 2022. However, as we move into the second half of the year, we don't expect pricing to consistently stay at 10% for every quarter moving forward. Considering the timing of some actions we took in 2022, those decisions were likely made later in the year, possibly pushing Q2 pricing against fewer challenges, but we may face more headwinds in the latter half of the year. I’m not sure if that fully addresses your question, since we haven't provided any formal guidance on overall pricing expectations. Nonetheless, I can confirm we're still implementing pricing adjustments across our businesses in 2023, as we've experienced vendor cost increases. We're not absorbing those costs internally; instead, we're passing them on to customers. Overall, customers have generally been understanding and accepting of these price increases in 2022 and so far this year. We're having some discussions with certain customers about possibly tightening these increases, but overall, they seem supportive and understand the rationale behind our actions.

Your question was clear regarding whether our price adjustments are sufficiently addressing the inflationary pressures we are experiencing from our vendors. The short answer is yes, they are. In more detail, we have successfully captured more margin and continue to do so. The distinction between specialty distribution and broad-line or commodity distributors is significant, especially during times like these. Our other services and capabilities provide us with the flexibility we need to ensure we protect our margins not just on products but also on the value added through additional services and support. We are committed to ensuring we are rewarded for the full range of capabilities we offer, beyond just the cost of the products we sell. This approach has positively impacted both our gross margin and EBITDA margin levels.

And Ron, just to clarify one point that you made there. You mentioned before that the vendor cost increases, those are starting to moderate, correct?

Yes.

Another question here. So you talked about easing lead times in some of the individual businesses. I was wondering if that's impacting inventory decisions at all. And if you think that could lead to faster backlog monetization at the customer level?

We have definitely noticed an improvement in our supply chains. Actions taken last year and prior helped us ensure product availability for our customers, which increased our working capital investment and inventory levels. This year, we plan to focus on tightening our working capital investment. The various sectors within the company are addressing this. The returns have been strong due to the increase in EBITDA accompanying our working capital investment, and we believe there is room for further improvement. However, we are somewhat anxious about product availability for our customers and whether being more aggressive or stocking more in response to vendor inflation is subsiding. This change allows us to manage a leaner inventory with more confidence. Regarding customer purchasing behavior, we are seeing a shift. Our customers are now giving us forecasts of their needs, and we often hold inventory until it is required, either at their site or on the production line for Gexpro solutions. This has led us to better understand what we need to maintain on our balance sheet, moving away from stocking large quantities at their production facilities. While customers have been somewhat conservative in their requests, their end-market production schedules may differ from what they ask us to hold. This conservatism was partly due to their previous concerns about having essential products available. However, this situation has not resulted in significant increases in their inventory. The only place where we have observed longer lead times is in Test and Measurement Equipment, where customer behavior has changed over the last few months. We do have a backlog there, but in most other areas, we are not experiencing backlogs, rather we have visibility on upcoming deliveries. Some backlog exists in the chambers business, where we couldn't manufacture quickly enough to meet customer demand, which contributed to margin compression in recent quarters due to rising component prices with flat top-line revenue. We are addressing this issue and expect to see an improvement in margins and revenue as the year progresses. Ron, do you have anything to add?

Bryan, I think you made a good point. We are definitely seeing some easing when it comes to product availability. However, we don't believe that there's been a decrease in demand from our customers; they had previously stocked up on inventory at high levels. In our EPS business, especially with Test and injection services and Lawson, we experienced nice volume increases, not just in price. Therefore, we're not observing a significant pullback from our customers as they aim to normalize their inventory levels. Additionally, Gexpro Services is well integrated into the production processes of our customers, which allows them to accurately anticipate future needs and source products in a timely manner to support their production cycles. In the Lawson business, there are certain items that our customers have on back order, but that situation is quite limited to specific SKUs. Overall, we’ve noticed a reduction in back orders, indicating that the supply chain is becoming more manageable for us to acquire that product.

Okay. That's helpful. And then just one last question for me. So I wanted to clarify on the margin cadence commentary from earlier. Should we expect an outsized move to margin sequentially versus normal seasonality? Is that what you're trying to get at?

Yes. Let me make sure I understand your definition of an outside movement beyond seasonality.

Yes. I guess just in terms of the sequential moves versus the normal seasonality, you're saying it's going to be less linear than it was in the past. In terms of sequentially, is that you're expecting an outsized difference versus prior years?

Let me address that from a seasonality viewpoint. Generally, Q2 and Q3 are our strongest quarters. We did see a nice boost in the first quarter, but typically, Q2 and Q3 are the strongest, with Q4 usually being the weakest due to fewer selling days, and Q1 following after Q2 and Q3. Our discussion about the improvement we observed, which is 300 basis points compared to the same quarter last year, highlights that the comparison between the second quarter of 2022 and Q2 2023 may not be entirely linear. Considering where we ended the first quarter, we still expect to achieve margin expansion and operational leverage alongside our top-line sales growth. To sum up, while we don't anticipate a 300 basis point improvement every quarter throughout 2023, starting with more than 11% sets us up nicely for sequential growth as the year progresses.

So Katie, I touched on that at the end of my prepared remarks. I want to emphasize that as we consolidate these businesses and assess our current position, we are clear about our long-term goals. However, we have decided not to provide near-term milestone guidance for EBITDA margins. A year ago, we firmly stated that we were at approximately 8.3% to 8.6% EBITDA margins and anticipated finishing the year with a run rate exceeding 10%. In reality, we slightly surpassed that, achieving around 10.4%. Currently, we have improved to an operating margin of 11.3%. We recognize that we face a substantial journey towards establishing a different structural EBITDA margin objective for this specialty distribution business. However, we don't expect to gain hundreds of basis points annually as we did previously. While that is a possibility, we believe we will continue to set significant milestone objectives across each segment. As these segments improve from their historical performance, it will lead to a blended margin for DSG that aligns with my expectations for a scaled specialty distributor. It's important to note that this process will not be linear. We are integrating Hisco, which presents opportunities to leverage the TestEquity Hisco vertical, and we expect substantial progress in their EBITDA margin over the next year, contributing to the new blended rate. Lawson should also benefit from cost leveraging across the platform and opportunities at the contribution margin level, leading to improved performance. Gexpro Services has built strong relationships with their OEMs, which makes it challenging to raise prices like we can with transactional MRO activities, as seen with Lawson and the MRO side of Hisco. On the OEM side, negotiations tend to be more stable, and Gexpro Services has excelled at collaborating with their OEM customers, which should positively impact our margins as we gain more scale and pricing actions continue to flow through, unlike the more straightforward pricing dynamics seen at Lawson.

Katie, I want to direct your attention to Slide 8 of the presentation, where we show the margins that include all the acquisitions. In Q2, which supports our points, our adjusted EBITDA percentage was 9.6%, factoring in all acquisitions made since the pre-acquisition period. The GAAP reported figures were 8.3% in Q2 a year ago, but if we look at the current figures, including all the acquisitions, the adjusted EBITDA remains at 9.6%. This illustrates our point about not expecting a 300 basis points change compared to last year. The margin percentage was not inclusive of the acquisitions, showing 9.6% in Q2, 9.9% in Q3, and 10.3% in Q4. This relates to the actions we took in 2022, which have positively influenced our performance later in the year, resulting in some tougher comparisons in the second half.

I would now like to turn the call back to Bryan King for closing remarks. Thank you, operator, and thank you for those that joined us today for the call. And absolutely, thank you to all those folks that work for DSG for allowing us to have a great quarter and continuing to operate so well together as we look prospectively at what we're building. So thank you for your interest in DSG. We're excited about being your partner, and we are optimistic about the business that we will continue to be together with you on. Thank you.

We look forward to talking to you next quarter. Have a great day.

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