Good day, and welcome to the Distribution Solutions Group Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. 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's second 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 IR website at investor.distributionsolutionsgroup.com. Please note that statements on this call and in today's press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results, and underlying assumptions 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 release issued earlier today was posted on the Investor Relations section of our website. A copy of the release is also included in a current report on Form 8-K filed with the SEC. Lastly, this call is being webcast and on the Internet via the Distribution Solutions Group Investor page and on the company's website. A replay of this teleconference will be available through August 15, 2024. I will now turn the call over to Bryan King. Bryan?

Thanks, Steven and good morning, everyone. Thank you for joining us this morning and on a packed earnings day for many of you. We will try and move through our prepared comments expeditiously while welcoming follow-up conversations from you if we may be of further help. Starting on Slide 4, I want to provide introductory comments about the quarter and speak in some depth about our recently announced acquisition of Source Atlantic. Then Ron will cover the financial results for the quarter in detail. Together, we will provide some thoughts around the second half of 2024, and I will incorporate an update on our progress on some of the strategic initiatives at Lawson, Gexpro Services and the TestEquity Group as well as on DSG. First off, I'm very pleased with our second quarter results in several key areas. Consolidated sales grew to a record $440 million, up 16.3% compared to last year's second quarter, driven by acquisition-related revenue lift. Although DSG's second quarter sales, excluding acquired revenue declined on marketplace sluggishness consistent with the last several quarters and against tough sales comps relative to last year's second quarter our quarterly organic sales base did show improvement sequentially, growing by almost 4% compared to this year's first quarter. Each of our verticals made solid progress in the quarter on important strategic initiatives despite the challenges from sustained macroeconomic headwinds that include higher interest rates that appear to be negatively weighing on most all of our industrial end markets in the U.S. Notably, we do continue to see the sequential recovery in certain end markets as we start to lap some easier comps from later last year, especially in areas where we have previously highlighted. We will discuss this more in a few moments. Our consolidated EBITDA margins enjoyed a sequential improvement from the 8.7% from the first quarter to a double-digit EBITDA margin of 10.3% in the second quarter. All three of our verticals experienced sequential EBITDA margin improvement from the first to the second quarter. We enjoyed good visibility in our initiatives to reformulate DSG's cost structure and drive structural margins and returns on invested capital higher. Our operational improvement and profitability initiatives are being strategically matched with our deliberate actions on how we are reinvesting our cash flow and expanding balance sheet flexibility. Our leadership team is committed to making DSG the highest possible long-term compounder for our valued shareholder partners. We are fully committed to this mission and eagerly await a more constructive macroeconomic backdrop. Switching gears and moving to Slide 5, the team and I are very excited to share details on our announcement to acquire Source Atlantic, which we expect to close in a few weeks. As many may already know, Source Atlantic has long been a leading industrial distributor providing value-added products and specialty services in the Canadian market. Last year, their annual sales totaled approximately CAD $250 million and their revenue has continued to grow. This business began in the 1860s and has been under the Irving family's stewardship for the past 80 years. Through our M&A diligence, we discovered this to be an exceptionally clean business with excellent customer and supplier relationships, nurtured around a tremendous culture the Irving family has fostered. Our acquisition of Source Atlantic creates significant scale and geographic expansion potential by executing its strategy to grow our footprint, value-added services, and incremental product offerings across Canada, allowing us to enjoy line of sight towards a leadership offering for our colleagues and customers in Canada. With minimal customer overlap with our Bolt Supply customers and our Lawson VMI customers, we have a lot of white space in Canada. Our existing MRO customers and employees under Bolt Supply and Lawson Canada are important to our decision to pursue this acquisition. This new opportunity will allow us to grow faster with our combined MRO solutions and specialty services, which we prioritize as an exciting strategic opportunity for our shareholders, colleagues and customers. Our acquisition of Source Atlantic expands DSG's Canadian MRO addressable market to approximately $41 billion, which is expected to grow annually by 4% to 5% through fiscal 2028.

Thank you, Bryan and good morning, everyone. Turning to Slide 6, I'll summarize reported results for the quarter, and then I'll break out each of the reporting segments. I'm excited to share these results given the step-up in our adjusted margin as a percent of sales and also in realized dollars for the quarter. Consolidated revenue for the quarter was $439.5 million. This represents an increase of $61.6 million or 16.3% primarily driven by 2023 and 2024 acquisitions. Excluding the acquisitions, organic sales declined by 5.7% versus a year ago. However, it grew 3.8% sequentially over the first quarter. The sequential increase was driven by the continued recovery in many end markets such as Test and Measurement, technology, renewables and some project-related business. Q2 2024 reflected significant growth in net margin dollars of $9.1 million, up over 25% versus the first quarter. Our margin profile came in line with our near-term expectations and exhibits the strength of our model on a modest sales increase. For the quarter, we generated adjusted EBITDA of $45.2 million or 10.3% of sales, a sequential improvement over our margins of 8.7% in the first quarter. We reported GAAP diluted income per share of $0.04 for the quarter. Adjusted EPS was $0.40 for the quarter, up from $0.25 in the first quarter. Turning to Slide 7, let me now comment briefly on each of the operating segments. Starting with Lawson, sales were $121.1 million, up 1.7% on comparable days from a year ago, primarily from very strong comps a year ago quarter and the S&S Automotive acquisition that closed earlier this quarter. As compared to the first quarter, sales increased 2.5%. This growth was driven by the acquisition of S&S Automotive in May. Excluding this acquisition, organic sales were down 4.2% from the first quarter due to softness in various end markets. Turning to Gexpro Services on Slide 8, total sales for the quarter increased 8.6% to $107.1 million over Q1. We feel good going into future quarters that these end markets will continue to expand, allowing us to leverage our operating expenses. Gexpro Services EBITDA was $12.7 million, a sequential increase of $1.9 million over the first quarter. Lastly, I'll turn to TestEquity Group on Slide 9. Second quarter sales grew 45.1% to $197.5 million, an increase driven by the acquisition of Hisco. TestEquity's adjusted EBITDA for the quarter was $15.4 million or 7.8% of sales. We remain committed to 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, which are starting to be realized. We ended the quarter with approximately $210 million of liquidity, including $56.9 million of cash and cash equivalents and $153 million under our existing credit facility. Our leverage rate of 3.2 times at the end of the quarter is well within our stated range of 3 times to 4 times. Moving on to Slide 10. We expect full year CAPEX to be in the range of $15 million to $20 million. As we discussed over the past two quarters, we were up against tough organic comps. While these comps become easier in the second half, we see softness in our shorter-cycle MRO business, offset by continued recovery in various end markets within our OEM and industrial technology verticals. I'll now turn the call back over to Bryan.

Thank you, Ron. Turning to our capital allocation framework on Slide 11. Our DSG model works well because we are committed to a disciplined approach to capital allocation and building a business that will sustain driving a long-term compounding effect for exceptional shareholder returns. As part of that framework, our leadership team is focused on managing working capital, leading to stronger cash flows for deliberate reinvestment. Our trailing 12 months of cash from operations was $106 million on trade working capital. In our DSG journey over the last two-plus years since the merger, we've proven that strategic bolt-on acquisitions are providing our platform with scale to sustain and drive higher long-term organic growth. As we move into the second half of 2024, we are confident and enthusiastic about our prospects to grow and create shareholder value. DSG serves large fragmented marketplace needs with specialty offerings. Since we merged these companies just over two years ago, we have discovered new ways to cross-sell, in-source products and further leverage our scale to unlock value. We'll continue to work on DSG's targeted investor outreach. In August, we plan to attend the Midwest Ideas Conference in Chicago. With that, operator, we would like to open the call for questions.

Thank you. Our first question this morning is from Kevin Steinke from Barrington Research. Kevin, your line is live. Please go ahead.

Thanks and good morning. I wanted to start out by asking about the Test and Measurement business within TestEquity. It sounds like some recovery going on there. Last quarter, I got the impression that maybe that market was recovering a little more slowly than anticipated. Can you talk about the pace of the recovery there and what you expect for the second half?

Yes, I'll jump in. Thanks for that question, Kevin. So we mentioned this a little bit on the first quarter call that we were starting to see some sequential improvement in the Test and Measurement business really as each month surpassed in the first quarter. We continue to see that trend here in the second quarter as well. Even though we feel like there's some market recovery, certainly interest rates really haven't moved since the end of the first quarter. I'd probably describe it more that we're taking share. We've continued to work hard with our top suppliers to gain more of their business. As we think about the rest of the year, certainly, the overall interest rate environment will probably still put some pressure on that overall end market.

Kevin, just to add to that, we messaged through the end of the fourth quarter and again at the end of the first, that there was some purging of inventory taking place by some competitors. A lot of that seems to have abated itself, so we're picking back up the same customers. We do think that there are some green shoots. We are seeing some end market customers that are returning. But we’re still being cautious in terms of capital spending until we see interest rates improving.

Okay, that's all very helpful commentary. I appreciate it. And Ron, you mentioned that you're seeing some softness in short-cycle MRO and you saw some organic revenue softness in Lawson in the second quarter. Can you expand on that a little bit more?

Yes, so Kevin, as we look at the segments, we have seen some softening across most of those segments, especially military. We're actively out recruiting and hiring new sales members. We have plans to hire nearly 70 individuals by the end of the year. But we remain cautious on the Lawson side right now.

Yes. Kevin, I think your intuition is right. What’s surprising is the longer cycle OEM visibility across some of our markets is firming. We're layering back growth and filling in optimized sales territories. We're managing with fewer salespeople than we did a year ago. But we're in a much better position to grow with these changes.

I want to put one additional data point out there. We're a more profitable organization within Lawson now. Although we saw sales pressures in the second quarter, the net margin dollars realized is up almost $9 million going from Q1 into Q2. So structurally, we're a more profitable business. We feel we're in a much better position to go out and fill some of these open territories.

Okay, thanks. I appreciate the commentary. I will turn it back over.

Great, thanks Kevin.

Thank you. There are no further questions at this time. I would now like to hand the floor back to Bryan King for closing remarks.

Thank you, operator. Thank you, everyone for joining us today. We look forward to talking to you for the next quarter's earnings and have a great balance of the summer.

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