Good day, and welcome to the Distribution Solutions Group First Quarter 2024 Earnings Conference Call. Please note this conference is being recorded. I will now turn the conference over to your host, Steven Hooser, with Three Part Advisors. Sir, you may begin.

Good morning, everyone, and welcome to the Distribution Solutions Group First Quarter 2024 Earnings Call. Joining me on today's call are DSG's Chairman and Chief Executive Officer, Bryan King; and Executive Vice President and Chief Financial Officer, Ron Knutson. In conjunction with today's call, we have provided a financial results slide deck that is posted on the company's website at investor.distributionsolutionsgroup.com. Please note that statements made on this call and in today's press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results, and underlying assumptions 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, 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 our earnings release. The earnings release issued earlier today was posted on the Investor Relations section of our website. A copy of the release has also been included in a current report on 8-K filed with the SEC. Lastly, this call is being webcast on the Internet via the Distribution Solutions Group Investor Relations page on our website. A replay of the teleconference will be made available through May 16, 2024. With that, I'd now like to turn the call over to Bryan King. Bryan?

Thanks, Steven, and thank you all for joining us to review first quarter 2024. I'll be starting on Slide 4 to review overall financial results. Our 2024 first quarter sales totaled $416 million, up 19.5% on strategic inorganic growth compared to the first quarter a year ago. As we signaled on our Q4 2023 call, DSG was up against double-digit comps in the first quarter of 2023 of nearly 14% and faced continued softness in certain end markets, which we will highlight later in the call. Despite those continued pockets of softness, we maintained a positive organic trajectory on a 2-year organic basis of 4.7%, which we acknowledge is below our expectation for organic growth that we require from our investment initiatives into the business when we use a longer time horizon lens. Consolidated EBITDA margins enjoyed a sequential improvement from 8.4% in the fourth quarter of 2023 to an adjusted EBITDA margin of 8.7% in the first quarter of 2024, but we're below where we expect them to be, partially because of the pockets of end market softness, but also significantly influenced by the internal initiatives that we are executing, where there are near-term costs, but where real expense optimization and profitability and efficiency is getting unlocked. We continue to enjoy strong visibility into how those initiatives are reworking significant elements of our cost structure while visibly improving our value-added offering for our customers and customer-facing colleagues and refining the profitability discipline on that revenue across each of our 3 DSG verticals. Today, I will reemphasize DSG's overarching goals and longer-term performance milestone objectives, reinforcing our confidence in the huge opportunity in front of us and the material progress we are making, even in the face of some marketplace softness and the accountability and engagement our collective team embraces. During our 2023 Investor Day last September, we shared that DSG's long-term value creation plans and programs were based on specific commercial growth initiatives and process and structural optimization work streams. These initiatives were and continue to be a bridge for us to grow into structurally higher margins while enjoying stronger organic growth and accelerating returns on invested capital over the next several years. As stated, our 5-year goal is to increase total sales to over $3.3 billion, which our plan indicates will be driven about equally from organic and inorganic growth initiatives. And we expect that level of revenue will generate adjusted EBITDA in excess of $450 million and will significantly drive the returns on invested capital profile and earnings per share and free cash flow per share profile of this highly value-added specialty distribution business. All 3 of our verticals have a clear path with the assets we own today to deliver EBITDA margins consistent with our corporate objective. Although we acknowledge that each of the 3 verticals currently enjoys a very different fully optimized structural EBITDA margin opportunity, we believe that the 2 acquisitions we have closed this year to consolidate with Lawson improves EBITDA margins and our return on invested capital. As we shared our detailed initiatives with investors last fall, I think it is important to hold ourselves accountable with our shareholder partners on our progression, acknowledging the pockets of end-market headwinds we have faced while offering discrete data points on the numerous initiatives that are confirming the foundation today for the exciting progression we expect will continue to unfold as we move DSG towards our defined future state. In January, we acquired Emergent Safety Supply, or ESS, under the Lawson Products banner. ESS is an example consistent with our inorganic investment objective of adding a commercial growth initiative, in this case, bolstering our safety offering to our MRO and OEM customers and expanding our existing VMI capabilities inside their facilities to offer a logical product category expansion requested by our customers and sales force. We believe it is one that is ubiquitous across our customer base, allowing for an increase in wallet share of existing customers, and more earning opportunity and productivity for our sales force, allowing us to add some upgrades and talent depth in key areas of growth, while augmenting and driving more opportunities for cross-selling, not only across our MRO offering, but for our OEM relationships, where we recognized it would enhance our proposed MRO solution when introducing our MRO capabilities in categories to our OEM customer relationships. Safety is a key category where our leadership team strongly believes that investing in an improved offering was an important organic growth accelerating opportunity through our existing relationships and service delivery models. We also announced the S&S Automotive acquisition yesterday, which I will discuss in a moment. These 2 highly deliberate inorganic growth acquisitions highlight how we have identified opportunities within our DSG and specialty distribution relationships to engage businesses with product and service capabilities and deep customer relationships and marketplace presence. When combined with our existing network of offerings, this creates an enhanced DSG specialty offering, improving and deepening our value proposition to our customers and allowing for improved sales optimization and cross-sell expansions focusing on our committed lens to driving higher structural returns across DSG, the vertical the acquisition is being acquired into and higher structural returns on the acquisition itself. Reflecting on our capital allocation around acquisitions over the last 24 months, we are excited about how they significantly enhance each of our verticals' ability to accomplish our profitability objectives and customer engagement vision, as well as drawing together the 3 verticals into a solutions-focused DSG value proposition. Looking across each of our specialty distribution verticals, we continue to progress dialogues with targeted acquisitions that add product or value-added capabilities, driving more scale to transform certain categories or lines of business to accelerate our efforts towards improved marketplace leadership and to generate meaningfully higher levels of free cash flow and returns on invested capital. ESS and S&S Automotive are great examples of strategic acquisitions that benefit our customers, sales teams, and shareholders. The downstream impact of both acquisitions creates more customer engagement, more expertise in targeted product categories, and more solutions and services catered to our combined customers throughout expanded cross-selling opportunities and better sales density. The outcome is positive with higher productivity and compensation opportunity across each sales force, while driving structurally higher EBITDA margins and returns on our invested capital. These downstream effects can be large and wide, and we believe they work toward creating durable and repeatable results and accelerate the organic growth rate of DSG. Turning to Slide 5, let's walk through key initiatives and end-market trends in each of our business verticals. Our MRO-focused business, Lawson Products, launched an important sales force transformation in 2023 with a foundation built on a structure of approximately 900 high-producing and highly motivated field sales reps. We also expanded our inside sales team last fall to approximately 40 individuals from only a few and added 14 technical product specialists. We are in the early innings of this sales optimization program, which includes fine-tuning our investments in working capital and technology tools to help our sales force's effectiveness and productivity, as well as deliberate lens around designing and optimizing new sales territories as we refocus our attention around driving opportunity for existing field sales reps and recruiting additional reps into a role with enhanced tools and opportunity. We are very pleased with early results as our productivity measured as sales reps per day increased 8% in quarter 1 over a year ago on top of 18% and 15% improvements in the last 2 quarters of 2023. We continue to analyze and leverage data to optimize our overall sales force network, including going live with our CRM tool in the first quarter as well as an enhanced order entry tablet for our field sales reps to drive ease and productivity around placing customer orders and offering more insights to our salespersons about additional revenue opportunities to grow that customer. This full implementation of Lawson CRM connects our entire sales force into the order management system, greatly improving our visibility into the sales organization and accelerating the ROI of our sales force transformation, addressing our stated goal to improve both the initial and structural earnings available to our sales force and enhance our service levels with our engaged customers, while additionally driving a productivity lift that should improve our selling expense across our total revenue base and elevate our EBITDA margin structurally higher. As I mentioned, we are in the early stages of our progression with defined milestones that should unfold this year and the next 2, and we will continue to hold ourselves accountable, reporting consistently on this key initiative. In addition, Lawson continues to concentrate on product expansion and resources that customers truly value as part of our MRO service delivery intensive VMI offering. We believe this is critical as we refine our product mix and increase our customer density, expertise, value-added tools and capabilities to engage with new and existing customers. Our process and structure optimization efforts are improving how we go to market at Lawson and effectively utilize people, processes, and products. Lawson had a good first quarter, especially considering we were up against organic comp growth of over 19% reported in the prior year quarter. The 2-year stack organic growth in the first quarter for Lawson Products was nearly 12%, plus we added a few million dollars of acquired sales from ESS for most of the first quarter. The biggest headwind to sustaining organic revenue growth this quarter was overwhelmingly government, where we have seen a delay in purchase orders, although we remain confident the dollars are there to be spent later this year. Yesterday, we announced another acquisition under the Lawson banner, S&S Automotive Group. S&S and our existing Kent Automotive business, which has enjoyed sustained leadership in our organic growth in the last few years, operate in large and growing markets in North America, such as auto collision repair and dealership aftermarket businesses. According to the National Automobile Dealers Association, there are 16,835 light vehicle dealerships in the United States. Those dealers wrote 264 million repair orders in 2023, with total parts sales of $142 billion. Additionally, only 34% of dealers have auto body shop capabilities. By adding S&S to the Kent offering, we can improve our customer value proposition with more SKUs and services tailored to this large market. Kent focuses primarily on collision repair centers in the U.S. and Canada, where S&S focuses more on auto dealerships in the Midwest, where they have strong density and market share. These business go-to-market models are similar, with both organizations offering value-added high-touch customer engagement. They each have complementary product leadership that allows each company to credibly expand their product offering with their existing customers, significantly enhancing the organic growth opportunity. We believe increasing our market density, especially in the Midwest geographies, and leveraging facilities and exceptional localized human capital will immediately increase our sales force productivity and improve our margin for our total automotive division. We are confident that combining Kent with S&S will allow us to drive our EBITDA margins for this business above our target margins for DSG and to drive our Kent and S&S returns on invested capital to specialty distribution market leadership levels. Our deliberate structural lift in the return profile and market leadership presence with this acquisition of our automotive repair line of business inside of Lawson is an exceptional example of what we have and expect to continue to accomplish with targeted strategic acquisitions at DSG. As expected, the first quarter returned to double-digit EBITDA margins for Gexpro Services. Although the core business was down slightly compared to the prior year on tough comps, sales grew sequentially by 4.2% compared to the fourth quarter on comparable days. We also experienced strong double-digit sequential and quarter-over-quarter improvements in the sales in the aerospace and defense vertical. Also in the A&D end markets, we are excited about the lift in the number of new projects and services, including new kitting awards and VMI plant production services. We are winning and implementing new program awards faster than expected, which builds our backlog and positions us well for the remainder of 2024 and onto the future. It also offers us confidence about the enhanced value Gexpro Services brings to its customers as part of DSG and with the value-added capabilities we invested in with our last couple of years of tuck-in acquisitions. And no one is more excited about the Hisco acquisition and its expanded capabilities, product lines, and strong geographic presence in Mexico than the Gexpro Services team, except perhaps Cesar and the Lawson team. Our technology end markets, which were such a drag during 2023 to profitability in the Gexpro Services division especially in the last half of last year, in the first quarter of 2024, continued to be down compared to a year ago, dragging on EBITDA and EBITDA margin for the division, partly due to the tougher comps in the first part of 2023. However, we are encouraged to see that first quarter sales to our technology customers improve sequentially compared to the third and fourth quarters of 2023, citing an increase in new orders and hopefully, messaging, we are past the trough of the semiconductor cycle. Regarding the semiconductor industry as it was an important element of the profitability that we missed out on for most of last year and some of this first quarter, we hear that most companies are signaling trough level sales in the first quarter with auto chip sales reporting better-than-expected results and core industrial sales improving. It's also worth noting that our renewables business has slowly ramped upward with recent sequential improvements between the fourth quarter of '23 and the first quarter of '24, and our customers are reflecting confidence in the progression. Our overall confidence in the OEM business is supported by an increase in gross margins for year-over-year results and sequential margin improvements. On a sales comparison basis, we are past our toughest quarter comparisons of the year and are excited that our project services backlog is growing. We're also excited to see a ramp in our new VMI program wins, market share growth and wallet share expansion with many long-standing customers. On a sequential basis, all of our end markets are either stabilized or growing, which gives us more confidence year-over-year, and we expect sequential improvement as 2024 develops. Also starting last year, our project-based businesses from the Frontier, Resolux and SIS 2022 acquisitions started positioning us as strategic suppliers instead of competitors with those 3 now business units of Gexpro Services, which with our expanded capabilities and touch points brought by coming together, especially in a market like renewables, that is seeing activity from customers precedent to a real revenue recovery from a tough year last year is allowing us to expand our market share. Those complementary tuck-in acquisitions enhance the expanded capabilities we now enjoy and will continue to benefit us in 2024 and on. As a refresher, adding those key channel partners offers us a more comprehensive and differentiated solution to a broader customer base, which supports our stated objective around Gexpro Services’ margin expansion plan by doing more of the value-added work around the sourcing product versus leaning more on being the leading OEM partner for spec'ing, sourcing, and managing Class C parts already in the form of a finished good product. The Gexpro Services business unit also benefits from an expanded investment in e-commerce capabilities, adding several million dollars of incremental revenue from e-commerce orders from established aerospace and defense accounts. As we mentioned last year, Gexpro Services started the year with a healthy book-to-bill pipeline, growing it as it progressed into 2024. Turning to TestEquity Group. The electronic and specialty production supplies categories remained soft in the first quarter and were impacted by difficult sales comparisons from this time last year, weighing on the OEM as well as the MRO parts of the TestEquity Group. Weakness in sales into wireless communications and semiconductor production also weighed on the OEM and MRO parts of the group. The biggest drag on revenue and profitability, though, for the TestEquity Group continues to be the test and measurement in markets, which became more challenged in late September by what appeared to be an anxiousness around continued spending on capital equipment as the extended interest rate tightening cycle started weighing on business confidence and on capital spending on R&D towards the end of last year. The revenue pressure and marketplace impacts were exacerbated by the product surplus in the channel by some of our suppliers and competitors. After a period of supply chain disruption coming out of COVID, the delayed delivery on customers' orders and perhaps over messaging to manufacturers and suppliers about where demand was playing out. A shift in customer behavior caught the channel with too much product on hand. As some try to push excess product, profitability for most was doubly impacted by weakness in sales and natural discounting and temporary pricing activity, which only further stimulates unnatural demand and customer behavior and prolongs the disruptive period in the channel. We thought much of the dynamic was done by the end of the year, but then saw some of this behavior lingering in the first quarter. We certainly believe there was a better backdrop around inventory, pricing and demand by the end of the quarter than existed throughout the fourth quarter. We believe trends will continue to normalize as the year progresses against weaker comparisons and less rebalancing of inventory in the channel, but it's taken longer than expected. While we don't have enough conviction to call an inflection around a reacceleration, there appears to be some stability returning in the customer demand, which with cleaner inventories, we expect will help profitability. Since the fourth quarter of 2023, we've identified more synergy opportunities bringing Hisco into the TestEquity Group as we now believe approximately $15 million of cost synergies will be realized during 2024 as we work through integrating Hisco and TestEquity, up from the $10 million that we indicated was our estimate at the end of 2023. Real progress is being made, although expenses associated with integration efforts are still flowing through, masking some of the underlying progress to structural margins. Hisco Mexico TestEquity Mexico, for instance, have been integrated, and 4 facilities have been closed as well as some duplicative warehouse headcount has been relieved. In the U.S. and Canada, another 5 consolidations have been completed and 2 more are in process. This footprint rationalization saves over $1.2 million annually. One of the facilities allows us to exit a less-optimized own building that we believe will also release $4.95 million of cash back to the balance sheet as we sell it. Additionally, given the softness of sales in the T&M business, we are actively identifying and accelerating further opportunities for cost rationalization. Adjusted EBITDA for the TestEquity Group improved but is down versus a year ago. However, gross margins have stabilized despite sales headwinds over the last 2 quarters, and gross margin initiatives identified during our underwriting across our recent acquisitions are starting to yield a meaningful impact at levels ahead of where we underwrote at this point, masked some by the noisiness of the soft end markets and the continued inventory channel messiness and softness in the test and measurement marketplace. We realize it will take several quarters to see the real run rate benefits of our structural changes to improve overall margins. But as an example, by building the first layer of strategic pricing discipline in the pricing model at Hisco for their small customers, differentiating pricing from their largest customers, we saw gross margins increase by almost 150 basis points across all of Hisco just in the first quarter. TestEquity Group is a big ship to turn, and we're very pleased with the Hisco acquisition, both in how this complementary and strategic acquisition improves the mix shift towards a more recurring OEM and MRO offering as well as enhances the profitability and scale of this industrial technologies business unit with more consumables and lower price points that serve the electronics assembly and lab equipment customers. With Hisco's addition, the steep engagement this business unit now has with Gexpro Services and Lawson is remarkably different as they work together with real added benefits on working to expand their collective engagements with their long-standing customers and new ones that have requested us to bid on contracts with a lens towards a broader DSG set of capabilities. Distribution Solutions Group serves a broad diverse set of end markets with over 180,000 customers. We deliver and ship from strategically located distribution and service centers to customers throughout North America and Europe, Asia, South America, and the Middle East. Our decentralized operations that maintain brand identity and integrity, coupled with an integrated growth platform, offer DSG's customers access to unique, differentiated, high-touch products and solutions, sourcing advantage and expertise through businesses that leverage best practices to deliver world-class service to our customers every day. With that, I'd like to turn the call to Ron to walk through the financials.

Thank you, Bryan, and good morning, everyone. Turning to Slide 5. I will first summarize our business, which includes our acquisitions for the trailing 12 months. Lawson represents 31% of total DSG revenue, Gexpro Services 23%, and the TestEquity Group represents 46% of revenues. Our run rate adjusted revenue is now approximately $1.73 billion. And as Bryan mentioned, we serve over 180,000 customers across more than 500,000 SKUs. Now turning to Slide 6, I'll summarize the reported results for the first quarter, and then I'll break out each reporting segment. Consolidated revenue for the quarter was $416.1 million. This represents an increase of $67.8 million or 19.5%, primarily driven by the 2023 and 2024 acquisitions. Excluding the acquisitions, organic sales declined by 8.6% on a comparable day basis, however, grew by 4.7% on a 2-year stacked basis. The organic decline versus a year ago was driven primarily within the Test & Measurement business and very strong comps from a year ago in all verticals. On a sequential basis versus the fourth quarter of 2023, organic sales grew by 2.1% as we saw several end markets such as technology strengthen sequentially and also realize continued strong sales in aerospace and defense. Q1 of 2024 reflected growth in net margin dollars of $2.2 million versus the fourth quarter of 2023. As indicated on the Q4 2023 earnings call, we expected margin pressure in the first half of 2024. While the quarter ended with softer sales, our margin profile came in line with our near-term expectations. For the quarter, we generated adjusted EBITDA of $36.1 million or 8.7% of sales, a sequential improvement over 8.4% in Q4, and I'll expand further at the segment level here in a minute. We reported operating income of $2.8 million for the quarter, net of $10.7 million of acquisition-related intangible amortization and $16.2 million of aggregate costs from stock-based compensation, acquisition, severance and retention-related expenses, merger and acquisition costs and other nonrecurring items. Adjusted operating income was $29.8 million as compared to $32.8 million a year ago quarter and $28 million in the fourth quarter of 2023. We reported GAAP diluted loss per share of $0.11 for the quarter, inclusive of higher depreciation and amortization and a valuation allowance on certain deferred tax assets, compared to earnings per share of $0.14 in the year ago. Adjusted diluted EPS was $0.25 for the quarter on 4.2 million more shares outstanding than a year ago. Turning to Slide 7, let me now comment briefly on each of the segments. Starting with Lawson Products. Sales were $118.2 million, down 4.2% on comparable days, primarily from very strong comps a year ago of nearly 20%. As compared to the fourth quarter, sales increased 7.6% or 4.2% on a same-day basis. This growth was driven by the acquisition of Emergent Safety Supply in January, which contributed approximately $2.3 million in sales in the first quarter, plus organic daily growth of 2.2%. Growth continues both over a year ago and sequentially within our strategic and Kent Automotive customers, offset by softening sales to the Lawson core customers. As Bryan highlighted, Lawson is coming off of a really strong 2023, all while continuing to invest in its business to strategically position itself for long-term success. We are still in the early innings of implementing initiatives to help our sales team become more productive while fine-tuning our sales investments to grow sales. We're very pleased with the initial improvement in our sales rep productivity, resulting in an 8% lift this quarter on top of 18% and 15% realized in the last 2 quarters of 2023. We have open field sales rep positions that we are actively recruiting for in the right territories that should help drive sequential sales growth in future quarters. For the quarter, Lawson realized adjusted EBITDA of $13.4 million or 11.4% of sales. While this is down versus a year ago quarter on lower sales in our 2023 investments, sequentially, adjusted EBITDA grew by $1 million with a slight margin expansion. Turning to Gexpro Services on Slide 8. Total sales for the quarter decreased 2.3% to $98.7 million, however, increased 4.2% on comparable days from the fourth quarter of 2023. As discussed in the past, comps against the prior year are tough given the flattening of sales in the technology end market in 2023. That vertical was down nearly 26% from a year ago quarter. However, we are seeing signs of improvement as Q1 2024 sales within that end market exceeded sales in both Q3 and Q4 2023 on a stand-alone basis. 2023 saw global semiconductor spending decline roughly 10% as consumer electronics and automobile production drove softness in supply chains adjusted, which certainly is impacting our year-over-year comparisons. Two acquired businesses, which sell into the renewables space also put pressure on year-over-year comps. Excluding the technology and renewables end markets, sales grew 3% over a year ago quarter and 4.2% over Q4, giving us additional confidence for the remainder of 2024. Gexpro Services has continued to see strong demand in the aerospace and defense vertical being up 24% over a year ago and 15% over Q4. We continue to invest in the business, attracting new customers and new opportunities within existing customers. However, we are cautious about certain weaker markets and those more sensitive to current macroeconomic issues. As expected, through some modest recovery in sales, along with a focus on gross margin improvements and cost controls, we returned to double-digit margins for this quarter. Gexpro Services EBITDA was $10.8 million or 11% of sales despite margin pressure of approximately $1.7 million from the technology vertical and acquired businesses supporting renewables. Lastly, I will turn to the TestEquity Group on Slide 9. Q1 sales grew 74.3% to $187.1 million, an increase of $79.8 million driven by the 2023 acquisition of Hisco. Excluding Hisco, TestEquity sales were down 14.6% in Q1 and 6.5% on a comparable day basis versus Q4, primarily driven by continued weakness in the Test & Measurement business. As we've discussed on previous calls, the decline in this piece of our business is primarily related to delays in customers' capital project spending associated with continued higher interest rates and an imbalance of demand against the improved supply chain disruptions from a year ago. Excluding the Test & Measurement market, sales grew nearly 1% over Q4 on 3 additional selling days. TestEquity's adjusted EBITDA for the quarter was $11.6 million or 6.2% of sales. With the expected pressure on sales, the business has stabilized from a margin perspective. We are actively taking actions to protect our margins within the TestEquity Group and also realizing savings from the integration of Hisco. As we think about the remainder of 2024 for TestEquity, we will continue to focus on the integration of Hisco in TestEquity. We remain committed to sequentially improving our margin profile as 2024 develops through higher sales, synergies to be realized on the combined company and proactively rebalancing our cost structure. Between the merger savings and other cost normalization, we're focused on delivering approximately $15 million of cost savings in 2024. We anticipate a stronger second half of 2024 for the TestEquity Group as we continue to integrate Hisco and see some additional pickup of capital project-type spending. Moving on to Slide 10. We ended the quarter with approximately $284 million of liquidity, including $85.6 million of cash and $198.3 million under our existing credit facility. A portion of that availability has now been utilized to fund the purchase of S&S Automotive. We continued to focus on strengthening our balance sheet and ended the first quarter at a leverage rate of 3.0x. The acquisition of S&S Automotive subsequent to the quarter does not significantly change our leverage profile given the strong double-digit acquired EBITDA of that business. Although we continue to support a robust working capital investment, we are carefully managing inventories, accounts receivables, and accounts payable. Our cash conversion ratio defined as adjusted EBITDA, less the change in working capital, and less CapEx divided by adjusted EBITDA was nearly 110% on a trailing 12-month basis and approximately 75% for the first quarter. Net capital expenditures, including rental equipment, were $2.9 million for the first quarter. We expect full year CapEx to be in the range of $16 million to $20 million or approximately 1% of revenue in 2024. Before I turn it back to Bryan, I'd like to make some comments on how we see the remainder of 2024 developing. As we've discussed over the past 2 quarters, we were up against very tough organic sales comps with Q1 of 2023 having been up nearly 14%. Q2 2023 organic sales were up nearly 5%. Given some of the sales pressures that we continue to see, in particular in the Test & Measurement business, offset by some strengthening in other end markets, we expect Q2 organic sales to be flat to down low-single digits as compared to a year ago. However, up sequentially from Q1 of this year. As we make traction on many of our initiatives in 2024 and as comps against the prior year soften, we would expect organic sales growth to turn positive starting in the second half. To achieve our internal sales plans, we will need some normalization of various end markets and some recovery of customer capital-related project spending. While we realized Q1 margin expansion over Q4, our focus continues to be on improving margin profiles within all of our segments on a sequential quarterly basis.

I'll now turn the call back over to Bryan. Thank you, Ron. The first quarter met our near-term targets, especially given the continued softness in the several end markets highlighted, and we're pleased to see positive trends in many verticals that have been under pressure for several quarters. Turning to Slide 11. DSG's capital allocation framework remains disciplined and flexible, encouraging healthy competition for capital across our businesses. At the core, we believe in the compounding effect of cash flow reinvestment in the business on a per-share basis. With a focus on bridging to higher structural margins, we believe that inorganic growth provides strategic opportunities for bolt-on acquisitions that provide us scale, geographic density, new customer channels, cross-sell opportunities, and product or service level category expansion, all with an objective to enjoy sustained and structurally higher returns on invested capital, more driven by organic growth than inorganic growth as the platform matures. Finally, the capital allocation equation will not be complete without focusing on prudent debt paydowns and opportunistic share repurchases. These allow us to rebalance the company's weighted average cost of capital and return capital to the shareholders, especially as the platform matures. Combining our asset-light model and increasing working capital efficiencies improves our overall liquidity position, allowing us to reduce our net borrowings. Let me wrap up my comments on Slide 12. The first quarter showed sequential top-line and bottom-line progress against challenging prior year sales comparisons and some very real pockets of soft demand. Lawson had solid margins as we continue to dial in a number of the key initiatives and acquisitions for our longer-term opportunity to take this unique VMI offering to structurally higher margins. Gexpro Services returned to double-digit margins as expected and enjoyed seeing its collection of end market verticals firm up confidence in their OEM schedules for the back half of the year based on communication with us, building backlog, and excitedly, we saw new programs indicate that organic revenue growth based on market share wins is happening enhanced by our DSG platform capabilities and the acquisitions that we have added to the platform to improve our value propositions. And the TestEquity Group's margin stabilized despite continued end market challenges, while the heavy lifting integration is progressing as scheduled, while yielding more synergy cost wins and the commercial confidence in what Hisco brings to DSG continues to build across all the verticals. All 3 leadership teams on these verticals have been challenged with the environment we are in and the number of value unlocking initiatives we are working with them on. I want to personally thank them and their colleagues for their consistent effort and value-creating accomplishments they are delivering for us, the shareholders and how accountable the collective team is holding each other to. We're very pleased with the hard work and progress coming out of our corporate development team on acquisitions that provide DSG with product and solution expansion and extensions in our business units and with their collaboration with the business unit leadership teams as they work to facilitate an acquisition all the way through its integration. Our M&A playbook is active, and we are excited about our current pipeline to continue to deliver largely directly sourced, extremely commercially enhancing high return invested capital, accretive acquisitions that fit our objective to build a best-in-class, high-value, high-touch specialty distribution business for our shareholder partners, our customers, and importantly, our DSG colleagues. Additionally, as I highlighted, because of the continued evidence we see and customers acknowledge for expanded opportunities for cross-selling, spanning our premier specialty distribution company, with great enthusiasm, we have expanded and dedicated more resources to a cross-business unit commercial initiative to grow cross-selling revenue and also to leverage value-added capabilities to improve the success of each vertical in their own marketplaces. As DSG's Chairman, CEO, and largest affiliate shareholder, we fully align with our public investor partners to drive long-term value creation for our shareholders. Investor outreach continues to be our focus. We will attend the Barrington and KeyBanc conferences in May and the East Coast IDEAS Conference in New York in June. With that, operator, we'd like to open the call for questions.

Our first question is from Tommy Moll with Stephens Inc.

I wanted to start on S&S. I presume that was a directly sourced deal. So any context you could give us on a relationship there, how the deal came to you and then also just the go-forward on integration? And while I'm at it, Bryan, you said some complementary things about your development team. You want to put a bogey on how many more deals you'll get over the finish line this year? It sounds like the pipeline is full.

Thanks, Tommy. Let's begin with S&S, and I'll let Ron provide some additional details. The Kent Automotive division was acquired around 20 years ago.

Yes, 20-plus.

Over 20 years ago, is the kind of a line of business inside of the Lawson Products business model, very similar, but just largely discrete set of SKUs for collision and maintenance repair work on automotive. And S&S was the best competitor that was competing with us in the Midwest. And they had built a really strong, dense market share. They were started in the 60s, I think, early 60s, 2 families owned them. And the operating family that had kind of taken over from the original founding family had done an extremely good job running the business. We began discussions with them a couple of years ago, and it has taken a considerable amount of time and effort from both sides to finalize a transaction. It was crucial for enhancing value in the Kent Automotive division, and our leadership and corporate development teams, alongside the sellers, remained dedicated to the process. We couldn't be more thrilled about the acquisition we've made over the past few years. This one took a lot of effort from a lot of people, not to take anything away from others that we've done. But yes, it was direct source, it was direct dialogue. There were lots of nuances to work through, but it provides a tremendous amount of EBITDA margin uplift and strategically an opportunity for complementary product leadership to drive structurally higher organic revenue opportunity for both sides over the coming years. As we've started to do more work on Lawson Products and I'll digress just for a second, I know I'm going to get trouble for this.

There are areas within Lawson that currently do not have the same EBITDA margin as our domestic U.S. Lawson business. We are identifying opportunities to improve the EBITDA margin and returns in the core Lawson segments.

Kent has shown remarkable leadership in organic growth over the past couple of years, achieving strong organic growth even in this first quarter. However, we needed increased density to elevate EBITDA margins into double digits from where they were sitting, and this accomplished that goal exceptionally well. Not only did it bring EBITDA margins to double digits immediately, but it also provides us with strong visibility to achieve margins that are in line with what we believe we can attain over time with Lawson. So we're doing some of the same analysis with other lines of business inside of Lawson as we are across our other verticals. That's where the corporate development team is spending a lot of their time. We've identified across each of our leadership teams, areas that we can fill in to try and bring the whole to a higher value-added proposition with trying to drive performance out of different verticals that we've got even inside of each of the 3 business units, if you will, more broadly. And they do have a lot on their plate. There are other opportunities that we're pushing forward on that we think are key to our objectives to meeting our longer-term defined goal. I don't want to go too deep into the pipeline. We have a funnel, and I'm not sure if you want to give more details on it, but most of it comes from direct sources, which requires a significant amount of effort. We begin conversations like we did with S&S and others that we've pursued, and it's difficult to predict how long it will take to reach closure. Hisco was another example that was very much a direct source. We spent years in discussions with them before trying to move things forward. We didn't have a clear understanding of the timeline for reaching a closing agreement, but we were confident there was significant value if we could secure it. The other party was also dedicated to partnering with DSG in this scenario. Ron, do you have anything to add?

Yes, I would like to add that a significant part of Kent Automotive's growth in recent years has come from building relationships with auto dealerships as well as focusing on collision repair shops. S&S Automotive has concentrated on auto dealerships. Therefore, I believe this positions us well to expand SKU availability among all end customers, with very little to no overlap among end customers and SKUs.

I wanted to follow up on the outlook you provided. Ron, I appreciate the context on the second quarter from a revenue standpoint. I wanted to ask on margin, just to make sure I heard you correctly. Did I hear you say for each segment and then obviously for the consolidated results, you're looking for margins to be up sequentially in 2Q? And if I did hear that correctly, any noteworthy callouts on that trajectory would be appreciated.

Sure, Tommy. You heard that right. We have visibility into the first month of the quarter regarding organic sales. We expect to face some sales pressure against the 5% organic growth we achieved in the second quarter of '23. Additionally, there seems to be ongoing pressure in Test & Measurement that is lasting longer than we initially expected late last year. As for margins, you understood correctly. Our expectation for the second quarter is to see sequential margin improvement across all three verticals. Individually, there are initiatives taking place within Lawson, Gexpro Services, and TestEquity Group that will allow us to make an informed comment. We believe we are on a favorable path as 2024 progresses, and we expect to see some sequential improvement. As you know, we do not provide formal guidance, so I cannot give you a specific number, but we anticipate sequential improvement from where we ended the first quarter.

Just to add to what Ron mentioned, with the close of April, we observed a slight increase over the past two months compared to the fourth quarter and the early months of the first quarter in the Test & Measurement segment. So we're hoping that what that is indicating is more clean channel in terms of inventory overhang. And we are feeling like there is money out there to spend on test and measurement equipment. It's just a matter of the confidence that the customer has in letting that spending on more of a capital asset loose.

Our next question is from Kevin Steinke with Barrington Research.

So I just wanted to ask about the Lawson sales representative headcount, about 860. It seems to be down a bit from where it was historically, but you also mentioned that you had open positions that you're recruiting for and you want to build that out in certain territories. So maybe just talk about the trend in the Lawson sales rep headcount, both kind of from an attrition standpoint and where you'd like to grow it, how do you like to grow it going forward?

Sure. Kevin, I'll take that. So yes, as we commented in our prepared remarks, we are down slightly from an overall headcount perspective. And I would say that it's not overly unexpected through some of the changes that we put in place through 2023 to help our sales reps become more productive, along with some of the shifts that we've talked about in terms of building out our inside sales team and so forth. We did expect that we would take incrementally a few steps down just in terms of the total count. We are actively, in the marketplace, recruiting for additional sales reps, and I would say probably better defining the territories that we believe that can drive our sales on a go-forward basis. We are now looking at more of a combination of really very specific market data in terms of those end markets that we believe can really provide an opportunity for us, not only for where some of our existing sales reps are at, but also new territories that we can enter into. We understand that it's not entirely unexpected to see a decrease in our sales representative count. The presence of both field and inside sales representatives can affect our average daily sales, as the total number of salespeople actively selling comes into play. However, we see this as part of our growth strategy as we progress through 2024.

I'm going to address that. Kevin, as part of Cesar and the analysis we conducted, we brought in an outside consulting firm to evaluate what we needed to do to ensure our representatives could earn more while also managing our cost to serve effectively. At one point, we had nearly 1,100 representatives and many territories. Currently, we have about 900 defined territories. This means we reevaluated the structure of our territories to ensure that sales representatives, especially new ones, have a better chance of success and can achieve profitability for us more quickly. We are implementing a variety of tools that will assist our team. However, a significant part of our insights comes from reassessing the territories we managed, which may have been under-resourced or in need of restructuring. This process becomes challenging when there is already someone assigned to those territories. Therefore, it was essential to ensure that, despite some personnel turnover, we were gradual in filling those positions. This allowed Cesar and his team to effectively evaluate how to consolidate and reorganize our territories, as well as improve the routing structures for our salesforce. And so that all is going to allow both higher level of productivity and compensation for our reps, and it's also going to drive our cost to serve down over time. And so, Ron, several years ago, when we were shareholders and I wasn't in the chair I'm in, was giving metrics around cost to serve. And at one point, it was up in the 30s, I think if I remember, and we were trying to get 1% of selling costs a year out of the business. We are now in a position to see that what used to be 25% might now be 15% regarding the total productivity and volume we expect from our sales representatives. This suggests that the representatives could earn 30% or 40% more than their average compensation in the past. Ideally, we want their compensation to be about 30% to 35% higher, or possibly 40% more, compared to a couple of years ago. There are 70 openings, including 35 new territories and 35 backfills. Is that too much detail, Ron?

No, that's fine, Bryan.

Our next question is coming from Katie Fleischer with KeyBanc Capital.

I'm on for Ken Newman today. I was wondering if you could give a little bit more color on the commentary from the government orders that drove some of the weakness in Lawson and maybe when you would expect an inflection in that.

Yes, I mentioned that earlier, and Ron can provide more details on it. The government changes its order entry system approximately every 5 to 7 years, which can be disruptive for those of us selling small components into the Class C parts for the government. Additionally, there was significant spending that we anticipated and can observe approaching, but there was a notable delay in some expenditures during the first quarter. There was a balance across a diverse group of customers in our core business at Lawson and the government sector. The decline from the first quarter of the previous year for Lawson was similar in those two areas, while strategic accounts showed growth in the first quarter compared to a year ago, indicating ongoing engagement with those relationships. However, this was a significant factor hindering Lawson's organic growth in the first quarter. Ron, do you want to...

Yes, Bryan, I would just add to that. You're exactly right about the ordering system that we and others are now required to use. It's just a longer process, Katie. We noticed some of that decrease compared to a year ago in that end segment for us. The military business is a significant area for Lawson, with strong demand for the Class C consumable parts we offer. We have not lost any major locations where we have historically seen substantial volumes. Therefore, we are not worried about losing customers in that sector. It is more about timing; we believe that demand will return to us largely throughout the remainder of 2024. It won't all come back in one quarter, but we expect it to gradually improve as 2024 progresses.

Okay. That's helpful. And then just one more on Test & Measurement. So I know you mentioned that it's difficult to have a really strong sense of when these markets are going to inflect just based on the limited visibility. But what are some signs that you would look for from your end markets or from your customers that would give you confidence that this demand is starting to come back?

Yes, Bryan, do you want me to touch on that one?

Yes. Why don't you hit that, Ron, and at least start it off? Thank you.

Yes. When we examine the Test & Measurement business, we see that March performed better than both January and February, returning to levels similar to those in November and December. We believe that this business has stabilized at the bottom for now. What I would say is that in the Test & Measurement segment, I see it as divided into two areas. One, TEquipment, which is one of the acquisitions made about a year ago, sells primarily handheld units at a lower average purchase price. That business saw a sequential increase from Q4 to Q1 of this year. This is a positive indicator since we continue to see a slight decline compared to the same quarter last year, but there was an increase from Q4 to Q3. I believe it's a positive indication that there is increased demand for lower-priced items. We are still experiencing some pressure with larger items. However, March was the best month of the quarter for us, and we are maintaining a strong connection with our customer base, with no significant customer loss. What we are hearing from customers is that their capital expenditures continue to be postponed. The other aspect we discussed in the Q4 call was a perfect storm that unfortunately went in the wrong direction. Demand decreased mainly due to delays in capital projects caused by higher interest rates. Soon after, the supply chain issues related to that market were resolved. This led to a surge in pent-up supply around mid-2023, which coincided with a downturn in demand.

So hopefully, that helps. But Bryan, certainly, any additional thoughts you may have on that. I think Ron laid out a nice framework. When we examine TestEquity and Hisco, as well as that division, we experienced a low point in January and February. We reached the bottom of the lowest average volume we were observing specifically in Test & Measurement. And that's really, for us, looking at the desktop larger versions as opposed to what we're selling through TEquip or the flute type handhelds. And Keysight and Tektronix would be our largest vendors there by far. And there was a nice kind of inflection point, it appears, but 2 months isn't a trend because we still got lots of kind of concern about what's going on, on the true demand side. But some of the messiness in the channel and some of the activity in terms of quoting picked back up, and we saw by March, the revenue levels and then April stepped up again back to kind of where they were at the highest level during the 3 months of the fourth quarter, not yet by any means back to where they were in the first half of last year or even the third quarter. The positive aspect is that we have noticed a decline in activity. We are also examining the OEM side of our collaborations with Hisco, which involve similar types of customers and industries. In those segments, we are observing percentage declines in OEM programs that remain active. If you consider wireless and communications or industrial electronics, Hisco is experiencing some volume activity in the OEM programs, but there have been declines. This highlights a more significant impact we are observing at TestEquity regarding the purchase of test and measurement equipment. It appears that some of the issues are related to these industry verticals. They may not be generating as much revenue from their OEM facilities, or if they're facing challenges in their own markets, they are likely reducing their spending on R&D equipment in their labs.

Thank you. As we have no further questions on the lines at this time, I will turn the call back over to Mr. Bryan King for any closing remarks.

Well, that's, I think, it. We really appreciate everybody's time. Obviously, we've got still a lot of moving parts in the business. We are very encouraged with the work and accountability that our teams have been putting in across each of the 3 verticals. And we've got a lot of confidence in the business that we're continuing to build and how we can drive returns on invested capital and structural margins over the coming years. Thank you for your time today. We look forward to speaking with you again when we report our second quarter results in early August. And have a great day.

Thank you. This concludes today's conference, and you may disconnect your lines at this time, and we thank you for your participation.