Greetings and welcome to the Distribution Solutions Group Second Quarter 2023 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Steven Hooser. You may begin.

Good morning, ladies and gentlemen, and welcome to the Distribution Solutions Group second quarter 2023 earnings call. In conjunction with today's call, we have provided a Q2 earnings presentation that has been posted on the company's IR website at investor.distributionsolutionsgroup.com. Please note that statements made 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 disclaim any obligation to do so. Management will also refer to non-GAAP measures, and reconciliations to the nearest GAAP measures can be found at the end of the earnings release. The earnings press release issued earlier today was also posted on the Investor Relations section of the 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 also being webcast on the Internet via the Distribution Solutions Group Investor Relations page on the company's website. A replay of the teleconference will be available through August 17, 2023. I will now turn the call over to Bryan King, DSG's Chairman and Chief Executive Officer. Bryan?

Thanks, Steven, and thank you all for joining to review our second quarter results. Joining me for today's call is Ron Knutson, DSG's Executive Vice President and Chief Financial Officer. Distribution Solutions Group delivered strong 2023 first half results, anchored by our industry leadership positions, our broad portfolio of products, value-added services, and mission-critical solutions, and the benefits we are starting to unlock with our significantly improved scale, coupled with our talented team's relentless focus on execution. Starting on Slide 4 of the second quarter earnings presentation, we again delivered strong quarterly sales up almost 18% in the second quarter, which included organic growth of 5%. Second quarter adjusted earnings per share was $0.52, up over 40% from the comparable prior year earnings per share. We also generated adjusted EBITDA in excess of $40 million, or a margin of 10.6%, in the quarter. This quarter represents the fifth consecutive year-over-year quarterly EBITDA margin expansion. We are extremely pleased with how the teams have executed, especially in a dynamic operating environment with a lot of initiatives that are requiring investment of internal and external resources in the first half of 2023 to accelerate unlocking future value for shareholders. Later, we will provide more commentary on important sales and cost initiatives we are currently working on, along with our discussion of the operating unit performance for the second quarter. We are excited that DSG has successfully established itself as a leader in the end markets we serve. We are positioned well to leverage our high-touch service delivery model and deepen customer relationships with our increasing breadth of value-added products and services. We are thrilled to have closed on the Hisco acquisition on June 8 and are successfully integrating processes and the team to create a unified and streamlined single platform with test equity. We fully expect to realize expanded sales productivity and meaningful cost synergies. We continue to grow significant wallet share across DSG and are identifying key cross-selling opportunities with solid contract wins through our growing business pipeline, and Hisco only expands these growth engagements. I applaud the strong collegiality and respectfulness across the collective expertise and DSG of our leadership teams we have assembled and how they have prioritized and aligned their common goals across how our verticals can best leverage the total spend and capabilities at DSG to successfully improve and expand our products and services within our intimate customer engagement model, allowing me to see quite distinctly how it will continue to translate into an acceleration in building shareholder value for all of us. In conjunction with these efforts and as a reality following many of our investments, I also expect shareholders to benefit in coming quarters and for years to come from the investments being made in process improvements underway that will accelerate free cash flow and specifically for free cash flow conversion in the back half of 2023 and 2024 to significantly improve. While we remain guarded about our current rate environment and how it could weigh on our customers, business activity remained solid through July, very consistent with our first half of the year. Our sales organizations continue to engage the marketplace using customer-centric experiences that deliver quality products and smart, efficient solutions that reinforce our value proposition to our important end markets. We are actively monitoring the demand environment and marketplace forces in each of our channels. We are leveraging DSG's strong customer relationships and focus on a customized customer experience to expand our engagement, especially getting traction with large strategic accounts. We are confident this is strengthening the company's organic growth trajectory and reducing resistance to our cross-selling efforts as we reinforce our customer-centric priority and offer more value-added capabilities in each of our verticals. Moving to Slide 5. Let me briefly provide business updates on initiatives for each of our verticals. First, Lawson Products is a leader in the MRO distribution of C-Parts, offering vendor-managed inventory services. During the second quarter of 2023, Lawson continued to make significant operational and financial progress. I'm pleased with how well the team managed pricing, freight recoveries, and organic growth within its customer base. Also during the second quarter, the Lawson team successfully aligned the sales organization to better serve our customers with key strategic field and inside sales personnel shifts. We believe critical initiatives like positioning our field sales team to become more productive with our high-touch, high-demand customers generate greater customer lifetime value. We are confident that this more balanced approach will drive sustained long-term growth and engagement with customers. Under Cesar's leadership, we took the first steps this quarter. We also continue to make strategic investments by enhancing our supply chain technology to support our customers and progressing on our digital road map. We are working diligently on the CRM go-live with enhanced mobile capabilities at Lawson. The company's investment in lead generation capabilities and CRM tools is expected to roll out in a few months. Our goal is to better enable our sales reps across all sales channels to be more productive, serve customers more efficiently, be better equipped for cross-sell opportunities, and ultimately drive higher compensation for our high-performing growing sales force. Secondly, Gexpro Services is a leader in the supply chain solutions of largely C-Parts, specializing in VMI programs for high-spec OEM customers. Gexpro Services delivered strong quarter results, both sequentially and versus the prior year quarter. Customers continue to be interested in our renewables value proposition that combines expanded electrical, mechanical, and hardware product offerings with kitting supply chain services. We've accelerated our leadership position as a value-added channel partner for major OEMs, helping them with solutions, not only on the OEM side but across the growing demand around the retrofit and upgrade cycle for the installed base. We've seen recovery in the aerospace and defense vertical, and industrial power demand remains very solid. Importantly, Gexpro services value creation initiatives this year include getting additional synergies out of our acquisitions, expanded kitting and project services, and successfully launching our e-commerce platform with a focus initially on tech and aerospace and defense customers. We are also working through an expanded pipeline of opportunities where our customers are engaging us as partners to offer solutions around additional product and service capabilities. Our goal is to continue to win OEM programs where we are intensely embedded with a customer as the provider of choice. Our collaborative approach and the benefits seen through strategic combinations and bolt-on acquisitions significantly increases our resources, footprint, and collective expertise and offerings. Thirdly, moving to test equity. Vendor-managed inventory solutions continue to show sustained strong double-digit strength in the second quarter. We've seen pressure in the technology and R&D sectors, which we believe are impacted by higher costs of capital and capital expenditure delays. Our teams are learning that projects are not being canceled. However, they are being pushed out for several months. As we mentioned last quarter, we continue to see increases in rental bookings and refurbishment as market dynamics change. Significant progress has been made on reducing our lead times for chambers by over 50%, allowing us to work through our backlog of historic orders by the fourth quarter. We will begin shipping many models just in time from current stock in early 2024, which should drive expanded margins. Digital sales were up 8% in the second quarter, with growth primarily from the new test equity and tea equipment e-commerce sites. We're in the process of optimizing people, processes, and technologies as we integrate Hisco with test equity. So in addition to acquisition-related costs, we also recorded about $2 million of restructuring expenses that Ron will cover more in a few moments. We will continue to capture cost synergies and production efficiencies, resulting in improved delivery times and lower shipping costs. Regarding Hisco, we are accelerating our work to build a higher structural margin profile and are encouraged by early results. In addition, the Hisco team quickly embraced and is successfully engaging in established DSG cross-selling efforts. We expect this to have a meaningful impact on the overall profitability and cash flow generation for DSG beginning this year. With that, 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 our strong second quarter results of Distribution Solutions Group. Let me summarize Q2 results. On a combined basis, we reported strong top line and bottom-line results over a year ago. As Bryan mentioned, we reported total sales growth of 17.6% with organic sales growing 4.8% through both price and volume expansion. The second-quarter results reflect continued growth in margin dollars. GAAP reported income improved threefold, with Q2 adjusted EBITDA exceeding $40 million, the first since bringing DSG together over a year ago. Our positive momentum and movement in cash flows generated from operations continued with our focus on working capital improvements. I'll now walk through some of the specific numbers on a combined basis, of which most of this is on Page 7 of our presentation. First, consolidated revenue for the second quarter was $378 million, revenue increased 17.6% or $56.7 million over the second quarter of 2022, driven by organic growth plus approximately $43.4 million coming from acquisitions, of which $28 million was from Hisco. Second, reported GAAP operating income was $13.8 million compared to $4.1 million a year ago quarter. On an adjusted basis, excluding merger-related costs, acquisition costs, stock-based compensation, severance, and other nonrecurring items, adjusted EBITDA improved by nearly 27% or $8.5 million to $40.1 million, or 10.6% of revenues. While the percentage is down slightly from Q1, approximately 40 basis points of the decline were related to including the initial three weeks of Hisco, which we did anticipate. And third, we reported GAAP diluted earnings per share of $0.14 for the quarter compared to a loss of $0.23 a year ago. On an adjusted basis, diluted EPS was $0.52 for the quarter versus $0.36 for a year ago quarter. Turning to Slide 8, let me now comment briefly on each of the businesses. Starting with Lawson, sales were $119.1 million for the quarter. Please note that this does not include Bolt Supply as they are included in all other reporting segments. The Lawson segment average daily sales, or ADS grew 11% organically over the second quarter of 2022. The increase over a year ago was driven by strong performance within the strategic business, up nearly 25%; Kent Automotive up 21%, the core business up nearly 2.5%, and government up 22%. During the quarter, unit volume increased approximately 2.5% versus a year ago. Lawson's growth during the quarter was achieved through increased share of wallet with existing customers and new customer relationships, in particular, within strategic or large accounts in our Kent Automotive business. During the quarter, Lawson continued to build out its infrastructure to help our field sales reps become more productive. This included investments in additional account managers to help grow the strategic and government businesses, inside sales reps to assist with smaller accounts, conversions, implementation individuals, technical specialists, and we are three to four months away from rolling out our CRM tool. We're excited about these overdue investments to help the long-term growth of our field sales representatives as they expand their book of business. Lawson continues to realize steady improvements in its gross margin percentage. While we're up against some mix shift headwinds as our largest customers have been growing faster, we continue to see expansion given price realization, lower net freight costs, and leveraging our costs over a higher sales base. Lawson's adjusted EBITDA improved to $16.1 million compared to adjusted EBITDA of $9.4 million a year ago quarter, primarily driven by the sales and gross margin improvements, partially offset by increased compensation on higher sales. Lawson's adjusted EBITDA as a percent of sales was 13.5% in the quarter versus 8.8% a year ago quarter. You may recall that Lawson got out of the gate with an extremely strong start in Q1 with its strongest quarter that we've seen. During the second quarter, we launched our initiative to better service our customers, depending upon their needs and size through additional channel offerings, which should improve the effectiveness and long-term efficiency of our sales force. That, combined with some of the infrastructure investments that I previously mentioned, brought down the percentage sequentially slightly. However, we are well-positioned to grow the company and a long-term margin profile. In the first half of the year, Lawson nearly doubled its adjusted EBITDA going from $17.4 million to $34.6 million and is well-positioned with these investments to grow the company on an accelerated basis. Turning to Gexpro Services on Slide 9. Total sales were $108.3 million for the second quarter of 2023, an increase of $8.5 million over the second quarter of 2022, all from organic growth. Approximately 4.4% came from volume, with the rest from price. The increase in aggregate sales was primarily driven by new customers and the expansion of existing customer relationships. Profitability improved, although mix shift was a headwind as softer sales to the semiconductor end market were more than offset with nice growth in aerospace and defense and industrial power markets. Five of the six verticals delivered year-over-year sales growth. Gexpro Services continues to expand its relationships with existing customers and attract new customers through its value creation offerings, including VMI, kitting, project management services, and the ability to deliver world-class support to the OEM production cycle. Gexpro Services adjusted EBITDA expanded to $13.1 million, or 12.1% of sales as compared to $11.9 million, or 11.9% for the year-ago quarter, and 11.6% in the first quarter of 2023. Gexpro Services continues to make incremental improvements in their margin profile in managing through varying end market cycles. Lastly, I'll turn to test equity on Slide 10. Sales for the quarter grew $38.2 million, or 39% to $136.1 million, primarily driven by the recent acquisitions. During 2022, test equity closed on three acquisitions: key equipment and national test equipment in the second quarter, and Instrumex in Q4. And in the second quarter of 2023, we closed on Hisco. Of the $38.2 million sales increase for the quarter, $43.4 million was generated from these acquisitions, and of that, approximately $28 million came from Hisco. Organic sales were down 7% versus a year ago with a decrease in test and measurement sales and a softening of the EPS sales, as Bryan previously commented on. The test and measurement piece of the business is more closely tied to customer capital projects. Our sense is that our performance is consistent with others in our space and that these projects are delayed and not canceled. We anticipate volumes will pick back up in late 2023 and into early 2024. On an adjusted EBITDA basis, the second quarter ended at 7% of sales or $9.5 million, representing an increase of $900,000 over a year-ago quarter with the softening of T&M sales and with the benefit of thinking about how Hisco's resources will begin to be leveraged as folded in through the integration plan later this year and next. The legacy test equity business had more flexibility to remove nearly $4 million of annual costs out of the company, which commenced in June. Moving on to Slide 11. During the quarter, we expanded our committed credit facility from $500 million to $805 million. We were able to accomplish this in a very difficult bank market, which validates the support of our strategy from our existing bank group, plus four additional banks that joined our credit facility. Additionally, we also issued $100 million of additional stock to existing shareholders through a common stock rights offering. These two actions allowed us to close on the Hisco transaction, pay down our revolver, manage our overall financial leverage within the guided range, and increase our capacity for future acquisitions. From an access to capital, we have approximately $44.2 million of unrestricted cash and $189.6 million available under our existing credit facility. As part of that facility, we also have an additional $200 million accordion feature. We ended the quarter at a net debt leverage ratio of 3.1x, primarily on increased earnings and taking on debt for the Hisco acquisition. So even with multiple acquisitions over the past 15 months, we've been able to deleverage the company and improve our scale and offering to accelerate further deleveraging and support additional inorganic growth. For reference, at the time of the April 1, 2022 merger date, 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. Our positive movement in cash flows generated from operations continued during the quarter with our focus on working capital improvements. Net capital expenditures, inclusive of rental equipment, was $5.7 million for the quarter, and we expect full-year CapEx to be in the range of $16 million to $22 million, most of which is a discretionary investment to grow rental assets, which also supports used T&M equipment sales. Before I turn the call back to Bryan, I wanted to reiterate how pleased we are with the company's strong financial performance for the quarter. We generated over $40 million in adjusted EBITDA for the quarter, a significant increase over a year ago and also up over a very tough first-quarter comparison. We're also very excited that in conjunction with the Hisco closing during the quarter, we expanded our credit facility, providing us more firepower to continue on our growth strategy. All of the businesses continue to execute on their planned initiatives for 2023. We will continue to prudently manage our balance sheet and financial position as we monitor current market trends. Thank you to the operating teams at Lawson Products, Gexpro Services, and test equity for their continued focus and commitment to deliver these great results and welcome to the entire Hisco team. I'll now turn the call back over to Bryan.

Thank you, Ron. Let's turn to Slide 12. We believe it is important, especially as U.S. and global markets evolve and change quickly to discuss with investors our approach to capital deployment. DSG's allocation of capital is focused on a disciplined balance between investing in growth, both in our core businesses as well as in strategic acquisitions that fit our model with a prudent approach to working capital intensity, leverage, and occasionally through opportunistic share buybacks. Our goal is to continue to scale the DSG platform into an even more enduring well-positioned specialty distributor with key differentiators that uniquely benefit from utilizing our high-touch, value-added distribution solutions, services, and customizable capabilities that customers clearly recognize and celebrate. Since we have built this business as an asset-light structure, we have planned for organic and inorganic growth through deliberate working capital investments as well as strategic acquisitions that are aligned with our commitment to accelerating shareholder value. Our targeted leverage will continue to be in the 3% to 4% range. And at the end of the second quarter, just three weeks post-closing of Hisco, our leverage is 3.1x. At the end of the quarter, we had approximately $476 million of net working capital with accelerating cash flow. Our investment in working capital over the last year facilitated our focus to drive organic growth that drives accelerating profitability for our shareholders. Finally, we continue to seek the highest return on invested capital opportunities with an obsessive commitment to build incremental shareholder value for the benefit of all of us. We understand and appreciate why there continues to be interest in DSG from investors. It is easy to see the long-term compounding effects of owning a leading specialty distribution company with the scale and breadth of our products and solutions. Turning to Slide 13. Our principal goal at DSG remains focused on improving our overall return profile by building and maintaining profitable scale as a specialty distribution business. Second quarter results accomplished our profitability objectives while balancing significant investments in the business. We know that adding Hisco will accelerate advancing many of our current initiatives and longer-term goals. We continue to be selective with our robust acquisition pipeline as we carefully analyze opportunities that fit our focused value-accelerating criteria. I'd like to thank all our DSG associates who are working to optimize and streamline operations, better serve our customers, and position the company to maximize its full potential. We believe that decisions and actions today from our team generate accelerated shareholder value. Before I open it up for questions, I would like to let you know that we are hosting an Investor Day on September 28 in Fort Worth. We plan to share key operational initiatives and will include a showcase of our show and tell featuring Watson products, Gexpro services, and test equity so that investors can better understand each of the unique products and solutions. We will audio webcast elements at Investor Day, but believe you may get the most benefit by attending the event live and get to know the mini DSG and LKCM-Headwater team members that are working and engaging daily across countless workstreams to build shareholder value. If you haven't registered yet, please reach out to our IR team for more details. Thank you for your time today. And now, operator, we would like to take questions from analysts and investors.

Your first question is coming from Kevin Steinke of Barrington Research.

I wanted to start off by asking about the organic growth and the breakdown of price versus volume. Is kind of roughly half and price and half volume the way to think about that 5% organic growth in the second quarter? Or if not, can you give me the breakdown there?

Yes, Kevin, this is Ron. I can jump in on that one. So it varied a little bit by each of the three individual companies. If you look at Lawson's organic growth of 11%, about 2.5 points of that was volume and the rest being price. Gexpro Services, of the 8.5% organic growth, kind of split 50-50, a little bit north of 4% on price and it's the same on volume. And then on the Test Equity side, organic, we mentioned that they were down about 7%. About 2% of that was price and down the offset to that was lower volume. So all in, if you kind of take the weighted average between the three operating companies, kind of flattish, maybe up just slightly in volume and then with price being the remainder of that. So hopefully, that breakdown by company is more specific than maybe what you asked, but hopefully, that answers your question.

Well, that's great. Yes. No, that's perfect. And I know you touched on that in some of the segment discussion as well. But okay, great. So I think you mentioned in your prepared comments that business activity has remained solid in July. Should we think about similar type volume trends on the organic side continue into July? And have we largely lapped the benefit of the price increases that you've been implementing?

Yes. I'll jump in on that one as well. So, I would say that we'll start lapping some of the increases that we put in place more so in the second half of the year, in particular on the Lawson business, more of those changes took place in the second half of 2022. So we're in the early stages of starting to lap some of those. And I think the pricing piece for Test and Gexpro was probably a little bit more dynamic throughout 2022. So I think that's probably a little bit more consistent. But on the Lawson side, we're probably lapping some tougher numbers in the second half of the year. And as we think about just overall what we've seen so far here in the month of July, flattish to kind of where we were in the second quarter, flattish to down just a little bit. We continue to see a little bit of softening yet within some of the end markets. But again, it varies a little bit by operating company as to where we're seeing that. And you end up with some kind of strange dynamics based upon how the calendars fall. So that impacts our average daily sales, especially Gexpro Services, which has basically a five-week July. Typically, we see a little bit of compression in the average daily sales number. So, but kind of flattish as I think about where we're at today versus the reported numbers in Q2 on a consolidated basis.

Ron, I would like to provide more detail on the pricing actions related to Lawson. Ron, could you give specifics on our performance with Lawson and where we implemented pricing changes last year? It’s important to note that these changes did not occur in July last year. To directly address your question, July included both benefits from volumes and pricing regarding Lawson. I believe we had a specific pricing initiative for Lawson in late August or September.

It was just.

We provided support regarding the pricing adjustments. Last year, we had limited ability to implement price changes for the longer cycle aspects of Gexpro Services until later in the year. To put Gexpro Services into context, we saw pricing adjustments occur as contracts reset amid inflationary pressures. This year, pricing actions have become more dynamic instead of being concentrated on specific days, blending more with what we observe in the sourcing of specific SKUs. As we reflect on 2023, it’s less straightforward to identify exact timing for these pricing changes. Regarding sales, we did notice some softness in Test Equity. We are pleased with the acquisition of Hisco, which aligns with our long-term goal of increasing MRO and OEM repeat activities, contrasting with the legacy Test Equity business that mostly relied on test and measurement equipment sales, which were higher capital expenditures for customers. We’re actively engaging with customers, although there has been a decline in their interest to replace or expand equipment. However, we anticipate a resurgence in order flow. The most noticeable softness within our DSG platform comes from the historical Test Equity segment tied to capital spending. Interestingly, we’ve also seen a shift where customers, due to deferrals in purchases, are seeking more rental equipment, which typically offers a higher gross margin. This influences how we allocate investments into our rental fleet. Specifically regarding Test and Measurement, we have encountered challenges on the Test Equity side concerning capital spending, but we have seen some supportive trends in revenue. Historically, the chamber side has negatively impacted margins and revenue; however, we are now clearing old orders locked into higher costs and expect to alleviate that burden in the fourth quarter after addressing the backlog. Additionally, we've enhanced our contract manufacturing capabilities for the chamber side, positioning us to accelerate revenue growth there and achieve healthier margins.

I'm just wondering how we should think about adjusted EBITDA margins. As we look to the second half and beyond, I think you mentioned, Ron, that 40 basis points sequentially of the margin versus the first quarter, the 40-basis point headwind just from inclusion of Hisco. And you also talked about plans to improve Hisco margins. I mean, we started to run in some tougher comps, I guess, in the second half. Should we think about just layering in Hisco being largely offset by organic margin expansion? Or how quickly can you start to improve the Hisco margins? Just any color on margin direction would be helpful.

Yes, I can begin. You're correct about the impact of Hisco on the sequential margins from Q1 to Q2. We anticipated this when we announced the Hisco transaction, knowing it would lower the overall margin in the short term. However, we expect that as we progress through the integration process, which is already underway, those margins will align more closely with the overall margin profile of DSG. In the second quarter, Hisco was only active for three weeks, so we must consider their full contribution in Q3 and Q4. It’s difficult to determine if this will be completely balanced out by margin growth from our other segments without providing specific guidance for the upcoming six months. We have clear objectives and action items regarding Hisco's integration, and we have mentioned some cost measures that Test Equity has implemented to support improvement starting in Q3. Gexpro Services continues to perform well, and they have the capability to target growth in certain end markets, where we see ongoing margin expansion both organically and from the Lawson side. I hope this provides some context about our actions moving forward without committing to a specific percentage for Q3 and Q4.

Yes, Ron, I want to add to that regarding Hisco. I want to highlight that we have an earn-out component in the Hisco transaction that is due at the end of this quarter, or in October, if I'm correct, Ron.

Yes, October.

There are factors involved in ensuring they achieve accurate numbers for that opportunity, which are centered around genuine profitability growth and their targets. Currently, it seems challenging for them to meet these expectations. However, we maintain a strong relationship with the management team and want to support them in navigating October while managing their margin profile. This will facilitate the actions we implemented in June as we look forward to the integration of the businesses on the Test Equity side. This is why we highlighted the $4 million in actions taken for Test Equity, while not detailing the initiatives that Hisco's management team is considering as the two businesses merge. We want to provide them every opportunity to succeed and hope they can achieve the earnout. There are gross margin initiatives being pursued across that entire vertical, which we expect to see in the third and fourth quarters, particularly related to Test Equity and future potential with Hisco. When considering long-term structural margin opportunities for the entire business, Hisco's integration has two significant advantages. First, the combination of Hisco and Test Equity is expected to result in a higher structural margin than either would achieve alone, and this improvement is anticipated to come more quickly due to the actions we have taken on the Test Equity side. Our goal has been to achieve a double-digit EBITDA margin for Test Equity by year-end, independent of Hisco's involvement. That has been the operational target for the team over the past 18 months, and we remain optimistic about their progress toward this goal. Additionally, the stabilization and repeat volumes from OEM and MRO, which now account for over two-thirds of revenue, are especially critical as we witness a decline in tested measurement revenue and capital spending within the Test Equity segment. Despite this, we have seen an 8% growth in Test Equity's digital segment last quarter. Although consumables are growing, capital spending has softened, which affects the division significantly. This should enable us to optimize our cost structure and margin strategies. The value-added capabilities of Hisco are creating opportunities to revisit Gexpro Services and Lawson, which has the highest structural margin profile due to its contribution margin. We're seeing possibilities to integrate some capabilities of Hisco back into Gexpro Services and the Test or Watson functions. Moreover, Gexpro Services offers value-added capabilities that allow us to explore collaborations across the Test Equity and Hisco platforms, particularly on the margin front. Furthermore, we've observed strong initial success with the Hisco team, who have become valuable players and identify real opportunities for cross-selling, specifically the capabilities from Gexpro Services and Lawson with their customers, especially in areas where they are more established, along with the geographic expansion enabled by the Hisco transaction south of the border.

Your next question is coming from Ken Newman of KeyBanc Capital Markets.

So Ron, you provided very detailed answers to a lot of my questions. I'll just ask one more here.

Ken, it's 30 years of being asking the questions that you're asking. Yes, given that I've been on the other side of these calls for so many years, it's hard for me to resist, not trying to offer some color that I'll probably get in trouble with my team afterwards.

Well, for my question, we are hearing more this earnings season about customers revising orders as lead times are improving, especially in some of these electrical components that maybe you guys touch a bit with Test Equity and Gexpro. Curious if you're seeing that today? And how do you view that impacting demand at all in coming quarters?

There are two ways to approach your question. First, I can discuss how lead times have affected our purchases, and second, I can outline some actions we took about 15 months ago when we were concerned about lead times. Over the past two years, we have increased our working capital intensity across our businesses and verticals. Currently, we have the opportunity to adjust our working capital investment in a way that will allow us to streamline it over the next 3 to 9 months. We saw good free cash flow conversion in the last quarter, and I expect improvements in the next 6 to 9 months as well. We also have initiatives focused on reviewing our inventory stocking levels, which we adjusted due to concerns about inflation, lead times, and freight costs. We believe we can free up some capital tied up in working capital during this period. Additionally, Gexpro Services has been impacted by a chain of communication where anxiety about production levels has affected customer forecasts. With reduced concern on their part, we're now getting clearer insights into their production needs, allowing us to manage our inventory more effectively. We're less worried about not having enough stock to meet their OEM requirements and understand why they have adjusted their forecasts to us.

And Bryan, to clarify my question here. I'm more concerned about your view of the demand that you're seeing; are customers pulling back on orders because it used to take about 3 months for the product widget and now it takes back to the normal 3 weeks? So, they don't have to place their orders as far in advance. Are you seeing that today?

Yes, that's been something that we've talked about over the last six months and I think I even alluded to it on the last call was whether or not we were going to see some destocking at our customer level that would have some influence on our own order levels that we were seeing. And I think that some of that's going, is absolutely taking place. If it was happening, we were seeing it happen some in the last quarter because we're not seeing right now an acceleration in it. But I had said this and I think certainly, I said it to some of the investors but I think I said it in the last quarter's earnings call that I've been calling out for three to six months for our team to be anticipating that we were going to see some destocking at the customer level because their concerns about lead times and availability were so peaked a year ago that they stocked deeper themselves. And so we're seeing the public side, we're seeing some of our customers look like they're working inventory levels down on working capital. And we think some of that's been playing out as a dampener on our own performance over the last three months or maybe even longer. But we aren't seeing a steepening of that yet this quarter because we didn't see any more of that happening, we don't think during the month of July. Any more is more than what we saw in the second quarter. But yes, we have had a lot of internal conversations about how much of that was taking place and so I think it's a very fair call-out on your part. Ron is any more color on that? You may have some more specific areas where we're seeing it or where we might have seen it.

Yes. I would like to add that on the Lawson side, we operate as a short-cycle business, making it challenging for our customers to accumulate inventory. They typically don't need to stockpile. We adapt quickly to our customers' needs, so the impact on the Lawson side is likely minimal. For Gexpro Services, we have long-term agreements with our customers, and I concur with Bryan that there hasn't been any significant reduction beyond what we normally expect. Gexpro Services is closely tied to the production cycle, and while we may have noticed a slight increase last year, it hasn't dramatically affected our results from quarter to quarter.

And Ron, I've been reflecting on what I previously mentioned, and it's helpful to hear your perspective. Gexpro Services has long-term contracts that require us to hold inventory. Consequently, that inventory has remained on our balance sheet. Currently, as customers pull inventory as needed, they aren't maintaining significant buffer stock, which places the burden of that buffer on us. This means we can start reducing our own inventory levels now that customer urgency has eased, leading to potential cash flow improvements for us. Regarding Test Equity, there are some products with shelf-life considerations, but I haven't seen this as a significant issue in our discussions. I remain concerned and continue to inquire about it, but so far, the feedback has indicated that we haven't experienced any problems. Ron addressed the short-cycle aspects of Lawson effectively, so I won't add anything further on that matter.

We appear to have no further questions in the queue. I'm now going to hand back over to Bryan for any closing remarks.

Thank you, operator. We appreciate everyone participating today and your support for what we're doing with DSG. The businesses are integrating very well. As mentioned earlier, it's crucial to understand that we have many moving elements. We've made some decisions to invest in the business, and we highlighted some of those investments during the second quarter. We are very pleased with how these are affecting our outlook for the business in terms of structural margins and long-term value for shareholders. We look forward to discussing this in more detail during our Investor Day at the end of September, and we invite any investors or analysts interested in DSG to join us in Fort Worth for that day. Thank you again, and enjoy the rest of your summer.

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