Greetings, and welcome to the Distribution Solutions Third 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, Mr. Steven Hooser with Investor Relations. Sir, the floor is yours.

Good morning, everyone, and welcome to the Distribution Solutions Group third 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.dstributionsolutionsgroup.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 on the Internet via the Distribution Solutions Group Investor page on the company's website. A replay of this teleconference will be available through November 14, 2024. Now I would like to turn the call over to Bryan King. Bryan?

Thanks, Steven and good morning, everyone. Thank you all for joining us today. We plan to share a brief overview of the quarter's results with an update on our initiatives, before opening the line for questions. Starting on Slide 4, we again reported record quarterly sales, up 6.6% compared to last year's third quarter. Although organic sales were down 2.1% this quarter, what stood out this quarter was the excellent traction we are seeing at Gexpro Services that includes new customer wins and the sequential progression that continued in certain end markets including renewables, technology and aerospace and defense. More broadly, we saw a continued lackluster industrial backdrop. However, our commitment to our shareholders is to focus on what is in our control and in that regard we are making solid progress. At Lawson, after a year of adding sales tools, reimagining our sales territories and processes and implementing focused insights for customer engagements as we dig into our transactional data, we are excited to be in a position to begin adding to our sales rep count, following a period of critical investments, new processes and reconfiguration of our sales strategies that we believe will continue to allow our reps to operate at a higher level of productivity and importantly, allow us to recruit and retain new reps in the significantly more productive territories and provide them with better tools for success. We also confirmed as part of this process, an additional 130 new sales territories. We've made good progress on integrations across DSG, most notably on TestEquity and Hisco, where we've captured more cost savings than we underwrote and are seeing the cross selling wins we had anticipated with Hisco's OEM offering getting pulled into TestEquity and Gexpro Services' legacy customers. This industrial technologies-focused vertical has made tremendous strides integrating all its acquisitions. And while it has faced a tough marketplace backdrop between excess Test and Measurement inventory in the channel and weak electronics manufacturing, the channel concerns have largely been cleaned up and the vertical is enjoying stable activity even while broader industrial activity remains weak with a growing book to bill. We need to see the key end markets that have been soft like electronics manufacturing to spool back up to be able to demonstrate the earnings leverage that we built into this vertical. Finally, the quarter highlights include announcing three acquisitions that went through a rigorous capital allocation process, where each offers a unique value proposition to customers and the DSG platform and reflects a disciplined but programmatic and active capital acquisition strategy that is hitting stride, while accomplishing defined objectives at attractive valuations. Despite an active hurricane season, DSG's consolidated organic sales improved slightly up 0.2% in the third quarter compared to the second quarter and closer to 1%, if you weigh in the ADS of the three verticals. We also have begun to lap easier sales comps from a year ago, which should be a positive as we end the year and begin 2025, despite seasonally slower months ahead. We generated third quarter consolidated adjusted EBITDA of $49.1 million or 10.5%, which is an improvement over last year's third quarter of 10% and sequentially over the second quarter of 10.3% of sales. We are committed to carefully manage our costs to create better operating leverage. We're taking a disciplined approach, but it is a journey where we do not control the end markets to optimize DSG's cost structure and sales processes with a line of sight around driving structurally higher margins and returns on invested capital. As I've said before, we are committed to building a better and more valuable business for all our partners and appreciate that the progression will not be linear, in the challenging market backdrop of the last year and longer in Test & Measurement equipment. That said, we have a committed and aligned team with a mandate to scour for levers to unlock incremental profitability and operational efficiencies, while thoughtfully challenging each other around what is the best way to serve customers going forward. Our internal mandate is to unlock incremental profitability and operational efficiencies. This discipline unlocks cash flows and identifies areas to reinvest those cash flows into high return organic and inorganic opportunities that the collective shareholder-focused team embraces with an emphasis on monitoring leverage and strengthening our balance sheet as we continue to add key capabilities and services to our platform with a commitment to make DSG a structurally better partner, long-term for our customers and customer-facing colleagues as well as a better long-term compounder for our shareholders. We've underscored to shareholders the ongoing comprehensive deep dive by our DSG management teams with strong support from LKCM Headwater team and external resources where we are looking to improve our long-term customer intimacy proposition and measure key profitability and return metrics and levers to drive them sustainably higher over time within each of our verticals. Our process is to rigorously evaluate opportunities for investment and then prioritize capital allocation to the best and highest returns on initiatives and acquisitions that drive accomplishing our long-term goals. We've maintained a healthy and active pipeline of acquisitions through the first nine months of 2024, with strategic acquisition opportunities being executed for each vertical. I'll now walk through the strategic rationale for the three most recent acquisitions and then cover other initiatives within each of the verticals, afterwards. In August we closed on our Source Atlantic acquisition, which generates significant scale and geographic expansion in Canada to improve our strategic North American footprint. As we discussed last quarter, Source Atlantic takes our Canadian business from a regional MRO player to a national MRO player in the country. The combined platform will have a breadth of leading positions in fasteners, safety supplies and other specialty services and offerings that each business alone lacked. Our team has spent more time with a broader set of the Source Atlantic employees which has increased our excitement about the talent, capabilities, growth culture and operational discipline the Source Atlantic team is bringing to DSG. Not every acquisition can bring the rich heritage and thoughtful stewardship of a business like Source Atlantic does where it has roots in Eastern Canada that go back to 1867. As Ron will explain further in a moment, the Canadian branch division is a new reportable segment that I felt like allows better visibility to our shareholders than having it integrated into our Lawson MRO platform allowing us all to track and follow the growth of this Canadian business. Source Atlantic brings CAD 250 million or approximately USD 180 million of annual revenue, 600 colleagues and 1,000 of new customers at DSG, enhancing our opportunity to serve our existing MRO customers and employees under Bolt Supply and Lawson Canada were important underwriting elements in our decision to pursue this acquisition as well as how to improve our strategic and revenue growth lens in Canada across DSG's three verticals. Our goal is to leverage the combined Source Atlantic Bolt enhanced position in the Canadian market to improve growth in what we broadly see as a ripe and growing Canadian marketplace for our collective DSG offerings. Next, we recently announced our acquisition of ConRes Test Equipment, a carve-out from Continental Resources Incorporated. ConRes scored very high as an accretive use of capital across our priorities. Our analysis of TestEquity's, value-added capabilities in its Test and Measurement lines of business brought to light significant opportunities to prioritize areas that bring more customer intimacy and value-added support to our customers with improvement desired in several key geographies, most notably the Northeast. The addition of a Northeast calibration laboratory and ConRes' employees offer DSG added sales and support in key growth markets in the Northeast where many of our global customers have a presence. We believe that an accretive acquisition like ConRes allows us to accelerate historical asset utilization rates, resulting in an appreciable improvement opportunity on our returns on invested capital for our specialty lines of business like rental used and calibration. We also believe in the direction adding ConRes takes our Test and Measurement line of business and engaging a more holistic long-term lens to support our customers, customer-facing associates and key vendors. ConRes reflects the transaction similar to terms and how we would assign value to purchasing a large fleet of used Test and Measurement equipment to place in inventory at what we believe is a point in time where the current market environment to grow our rental and used fleet is depressed. This allows for real upside as we did not have to ascribe value to the calibration lab, which was critical to our underwriting decision as it adds a third DSG lab in a key geography to an asset base and strategy where we are focused on unlocking additional value through more value-added services. We believe shareholders will benefit or will enjoy the benefits of immediately folding in cash flows and expanding engagement through established relationships with excellent customers. We already serve many of ConRes' top-tier national customers in other parts of the country. This tuck-in acquisition brings on day one about $12 million in annual revenues that we should be able to immediately enhance while executing towards improved asset utilization, driving our returns and margins higher. We also recently announced our Tech-Component Resources or TCR acquisition. Although smaller than the other two businesses discussed today, this one is highly strategic to our Gexpro Services business as it provides an important beachhead operation in what is being called the global semiconductor supply chain hub in Southeast Asia as a distributor of fasteners, mechanical components and other industrial products serving key existing OEM customers of Gexpro Services and now TCR. With its headquarters in Singapore and a second location in Malaysia, this business provides us with an expanded geographic footprint and an ability to pull through our best-in-class offering around products and service capabilities to best serve the expansion efforts of existing global customers. This gives our customers better access to Gexpro Services, which is a trusted partner for OEM Class C-parts in a growing critical marketplace. Expanding DSG's market potential with a critical geographic footprint for products and service offerings in these regions of the world extends opportunities in key end markets including technology, semiconductor, industrial and manufacturing. We know that Gexpro Services is well-positioned to expand TCR's products and service capabilities for a broader and more diversified selection of offerings, creating a superior customer value proposition. This small acquisition also fits well into our long-term customer strategy, while enhancing our key profitability and return metric objectives for Gexpro Services and we believe was an excellent allocation of a modest amount of capital for what it is accomplishing for existing customers and the value it will unlock. Let's turn to slide 5 for updates on our initiatives across the three business platforms, and I will share our outlook shortly. Lawson's MRO-focused vertical now includes the Canadian operating unit significantly expanded with Source Atlantic, as previously mentioned. Under Cesar's leadership, we will manage and report Bolt's financial results separately from Lawson's operations. This separation offers valuable visibility for management and investors to track our Canadian MRO growth strategy, aligning with how we will manage and measure this initiative. Currently, our MRO vertical accounts for 38% of DSG's consolidated revenues on a trailing 12-month basis, incorporating all of Lawson's acquisitions to date. On the organic front, we are investing in our sales force transformation, aiming for 900 sales representatives by year-end and looking toward 1,000 midway through next year. Through our sales territory realignment and the introduction of new technology-enhanced sales tools and data insights, we have identified 134 new sales territories that were previously unrecognized. Our team's efforts have shown that these new territories are nearly double what we had scoped before. In the third quarter, our representative count increased by 22. Although it's still early, the remapping of our territories through Lawson's new CRM is progressing well. We recognize that onboarding new representatives entails investment as they ramp up, even with a targeted book of business. Our dedication to our sales team is strong; we are equipping them with tools and support resources and actively incentivizing performance while tracking progress to ensure they can achieve more than past outside sellers at Lawson. We needed to establish these tools and measures to show our sellers and recruits that we are entering a new, growth-focused chapter of this business. We continue training all representatives in development and engagement to create more consistent order flows for our customers. Synchronized alignment of personnel and technology is essential to our territory optimization strategy, an investment we understood from the beginning when we recruited Cesar. I am particularly committed to this initiative; producing the desired results requires time and disciplined execution. I have believed in this effort for a decade as the most crucial initiative for the shareholders, sellers, and customers of Lawson. Although some technology tools and insights have taken longer to launch than anticipated and we have been slower in expanding our sales force than needed, we have made significant progress with improved accountability and have re-entered an investment growth mode centered around feet on the street, which is vital for enhancing customer engagement and revenue in a VMI-centric business. We also added the three key acquisitions that addressed areas of opportunity to drive improved margins and returns across our MRO offering this year. We already discussed Source Atlantic, and we continue to tackle operational and selling initiatives on Emergent Safety Supply or ESS, with product brand extension strategies for Lawson in the safety category. We are extremely encouraged with how our S&S Automotive acquisition is already expanding our Kent Automotive division's product offering and presence, both in the auto collision repair market and now opening more opportunities with auto dealerships. These category and brand expansion initiatives deliver growth, better margins and an ability to scale into new markets and customers. At Gexpro Services, we continue to see a resurgence of business in four key verticals technology, renewable, transportation and aerospace and defense. These end markets are now demonstrating year-over-year and strong sequential growth, which is encouraging. It is still early days, but project business also appears to be coming back and we are staying diligent with tightly managing costs on a growing sales base. We are aligning resources to stay ahead of business acceleration in certain verticals especially, technology. In Gexpro Services, we are expanding our leadership team to drive the commercial efforts to expand and deepen our customer relationships, while attracting new business. The growth in sales and managing our costs has resulted in strong net margin expansion in 2024. Our 2021 and 2022 acquisitions, which collectively had great 2022s, are now more integrated and present a stronger Gexpro Services total value-added proposition to customers. As a whole, they had a tough profitability year in 2023, as we invested in them and some of their key markets softened. As many of their end markets are firming back up, those acquisitions are starting to demonstrate their renewed earnings benefit for the Gexpro Services vertical. We continue to be very pleased with our Frontier and Resolux acquisitions, as they present expanded opportunities and we are very excited about the upside potential for TCR that we just discussed earlier. At TestEquity Group, we continue to see an uptick in our Test and Measurement sales as compared to late 2023 and early 2024, a positive sign of growing demand in market activity. In market strength is demonstrated through improving metrics in aerospace and defense technology and R&D, which we believe aligns with new fiscal year budgets. Our commitment to our key vendors and customers during the last 18 months of choppiness has resulted in gaining market share in key areas and unlocked some key growth opportunities as we remain committed to capitalizing on our improved value proposition and set of capabilities for our channel partners created by pulling together TestEquity, TEquip and Hisco, most notably, in this vertical and how they are able to better engage with the broader DSG capabilities. On the capital equipment side of this vertical, we are seeing record bookings for two months now, which we believe foretells a commitment by our customers to invest back in their business, even as we continue to face softness in our OEM order volume per invoice across certain manufacturing and markets in the U.S. and Mexico, especially with our electronic manufacturing customers. Related to Hisco, our integration actions are mostly completed. Our cost takeouts largely realized, and growth initiatives are well underway. At TestEquity, our strategic focus continues to be on expanding wallet share with customers, driving repeatable business on the consumable side, and optimizing digital selling capabilities. We believe that supply chains have normalized for our key vendors. We've grown our market share with them through persistent commitment, and our approach and platform is allowing us to expand our vendor relationships. Although business remains choppy in some areas, we are seeing the benefit of our disciplined approach and improved platform across a number of our strategic comparatives this year and are optimistic that we will see sales and margins build quickly as our end markets return. With that, I will turn it over to Ron and then come back to add some closing comments.

Thank you, Bryan, and good morning, everyone. As with Bryan, I will keep my comments brief, but we'll highlight a few key takeaways within each of the verticals for the quarter. Turning to Slide 6. DSG's consolidated revenue for the quarter was $468 million. This represents an increase of $29.1 million, or 6.6%, driven by $38.1 million coming from our 2024 acquisitions. Organic sales declined by 2.1% versus a year ago, and we will provide average daily sales by operating segment in a few moments. From the second to the third quarter, total sales sequentially grew by 6.5%, again fueled by our acquisitions, while organic sales were up 0.2%. For the quarter, we generated adjusted EBITDA of $49.1 million, up 12.4% over the prior year, and up 8.7% versus the second quarter. Our adjusted EBITDA margin improved to 10.5%, up 50 bps compared to last year's quarter and up 20 bps sequentially. As expected, the acquisition of Source Atlantic in the quarter depressed our net margins by approximately 20 bps. We reported operating income of $18.9 million for the quarter, inclusive of $12 million of acquisition-related and tangible amortization expense and $11.5 million primarily due to non-cash stock-based compensation in non-recurring charges such as retention and acquisition-related costs and other one-time items. Adjusted operating income improved to $42.5 million, or 9.1% of sales, compared to $38 million, or 8.7% of sales compared to the year ago quarter and a sequential improvement from 8.8% of sales compared to Q2. We reported GAAP diluted income per share of $0.46 for the quarter, inclusive of a $0.40 tax benefit as required under GAAP based on the anticipated effective tax rate for the full year. This compares to a loss per share of $0.3 in the year ago quarter. Adjusted EPS was $0.37 for the quarter compared to $0.40 in Q2 and $0.35 a year ago quarter. Turning to Slide 7, let me now comment briefly on each of the operating segments. Starting with Lawson, sales were $118 million and average daily sales with one more selling day versus a year ago were up 1.4% on acquired revenue this year. Organic average daily sales were down 10% due to a lower sales rep count and certain end market and customer headwinds. In particular, the federal government contributed to approximately 50% of this decline as the ordering processes are being revamped at the federal level. Net rep counts increased between Q2 and Q3 and we ended the quarter with approximately 860 field sales reps compared to 835 at the end of Q2 and approximately 900 in the year-ago quarter. While we continue to build a stronger Lawson by investing in our sales support team, we have not yet seen the benefit of these investments roll through our financial results. These efforts take time as we are making numerous changes that will benefit our sales reps and our company on a longer-term basis. Lawson reported adjusted EBITDA of $15.5 million or 13.1% of sales down 50 bps from Q2. We anticipated more uncertainty and choppiness than results for Lawson based on a ramp of sales reps and uncertainty around end markets and larger customer activity. Turning to slide 8 as Bryan previewed, we added a new reporting segment that combines Bolt Supply House previously included in our other segment with Source Atlantic to report separately on our Canadian branch business supporting the MRO market. We call this new affordable segment the Canada Branch division which we believe adds good visibility and accountability to this somewhat different leg under our Lawson product MRO-focused business unit. Sales for this new Canada segment were $39.1 million including $24.7 million from the Source Atlantic acquisition mid-quarter. Excluding the acquired revenue sales increased 6.2% from the year ago quarter. Key operational initiatives are focused on the integration of Bolt and Source including optimizing the sales force, cost management and integrating product availability. Q3 adjusted EBITDA for the Canada Branch segment was $4 million or 10.3% of sales consisting of 14.8% from Bolt and 7.6% from Source Atlantic. Turning to Gexpro Services on slide 9. Total average daily organic sales for the quarter were up $12.9 million or 12.5% from the year-ago quarter and up 10.1% sequentially. As Bryan mentioned, the combination of many Gexpro Services end markets recovering along with new customer wins are driving the sales growth. Gexpro Services adjusted EBITDA expanded by $4.8 million to $16.4 million or 14.1% of sales up from 11.2% of sales a year ago and 11.9% of sales in the second quarter. Sequentially, adjusted EBITDA growth and margin expansion was due primarily to operating leverage from the sales increase on relatively flat operating costs. Operating leverage is benefiting us and Gexpro Services is capitalizing on cross-sell acquisition synergies, kitting offerings and digital revenue with a growing book to bill compared to the year-ago period. Lastly, I will turn to TestEquity Group on slide 0. Third quarter sales were $195.2 million with daily sales declining by 7.4% due to headwinds in the electronics assembly market or our consumables are causing softness in the electronic production supply end market. We are seeing good traction in our Test & Measurement and chambers business as 2024 is playing out but overall softness in electronic production continues. TestEquity's adjusted EBITDA for the quarter was $14.4 million or 7.4% of sales up from 6.9% as a percent of sales in the prior year quarter. Sequentially net margin compression is primarily the result of sales mix shifts due to lower consumable sales this quarter as OpEx remained flat as a percent of sales. Finally on Slide 11. Our balance sheet is strong. We ended the quarter with approximately $498 million of net working capital and $328 million of liquidity, which includes $76 million of cash and cash equivalents and approximately $252 million under our existing credit facility. During the quarter, we expanded our credit facility by $255 million with $200 million of that being a term loan and the remaining $55 million increasing our revolver from $200 million to $255 million. We closed on the Source Atlantic transaction in Q3 which added to our leverage profile. However, the credit facility expansion added significant flexibility and availability to support our growth initiatives. Leverage at the end of Q3 was 3.7 times, which remains inside of our goal of 3 times to 4 times. Net capital expenditures including rental equipment were $4.1 million for the third quarter $11 million year-to-date. We expect full-year CapEx to be in the range of $15 million to $18 million or approximately 1% of our revenues. We also realized trailing 12-month free cash flow conversion of approximately 90% resulting in ROIC inclusive of all of our acquisitions of approximately 10%. We fully understand that more mature distribution assets can generate ROICs north of 20%.

Thank you, Ron. With regard to the recent hurricanes, our employees and families impacted by the storms are safe and there were no material disruptions or significant financial impacts. Customers in the affected areas were down between two and six days, mainly to power outages which I'm certain presented a challenge for many of our DSG families as well. In fact too often we can get wrapped up in strategy and financial metrics as we focus on driving the outcomes we expect and miss the humanity of a business like DSG. Ours is a company whose successes and operational improvements like the many in this last quarter are really the reflection of a lot of dedicated good people putting tremendous effort forth in the face of lots of marketplace uncertainty as their leadership like me continue to think through ways to evolve and improve this commercial platform to be the best it can be. With many of those new initiatives and timely accountability expectations requiring even more work from them in the next period. All of our successes happened because of all of the committed colleagues across DSG's business unit and I want to thank them from all of us who represent the shareholders. Our businesses have lapped 2023 softness and will compare against somewhat easier sales comparisons over the next several quarters. But I'm more focused on demonstrating to my fellow shareholders about all the progress made by our employees across countless initiatives in a more benign marketplace backdrop by getting back to our 2022 growth trajectory. We are not letting off the gas as we tackle more growth plans and initiatives, making strategic investments, and controlling all controllables as best we can. We are carefully controlling all cash outlays expenses and working capital management. The U.S. manufacturing Purchaser Managers Index or PMI numbers this fall continue to track around 47. A PMI, as many of you know, below 50 may signal more contraction than expansion in the intermediate term, which we don't like, but it is the environment we are managing within. But like all shareholders in our management team, I can't wait to see this business when PMI is back in an expansionary mode. While we continue to prepare for choppiness in the demand environment for certain end markets, we are also starting to enjoy a resurgence in some of our key OEM end markets as well as improving demand in orders and Test & Measurement in our Chambers product categories, which we believe are all early indications of recovery for some broader key areas of our business. We also are eager for the election to be behind us soon, eliminating one more overhang to customer behavior as we are also encouraged that the Fed's very recent monetary policy shift towards starting to loosen with rate cuts should also restore confidence in more reticent customers and some encouragement towards growth in sluggish end markets. For the many markets that are already experiencing end market recovery, we are encouraged and expect that others will return as uncertainty and macroeconomic pressures ease. Our DSG model is built on a competitive approach to capital allocation. And at the core, our fortified competitive mode is repeatedly being demonstrated and being affirmed in the marketplace a clear differentiated value proposition for our customers by delivering deep technical knowledge, extensive surface capabilities and reliable sourcing of products, while also sourcing complex and scarce products. We believe that DSG is presented with a large marketplace opportunity to continue consolidating some key capabilities, reducing complexity for our customers and improving our sales force's ability to communicate our unique value. It is driven by high level of fragmentation of niche product and service offerings that complement or expand our competitive position in the market while beneficially enhancing our diversification strategy across customers, suppliers, end markets and geographies. We see a substantial addressable market across a diverse set of end markets in the MRO OEM and industrial technologies-focused specialty distribution categories that include products and services where we have intimate experience and relationships across DSG and LKCM Headwater's resources. Our verticals and increasingly DSG as a company enjoy a trusted, proven track record of resiliency through business cycles that benefit from our asset-light model and tight working capital management. Distribution Solutions Group is built to generate significant free cash flow that offers us as aligned stewards the flexibility to reinvest in key areas to improve our business and its return profile or to return capital to shareholders. We are consumed across our team and all the resources we can wrangle with a focus on creating an exceptional platform for vendors, customers and employees alike, with a paramount commitment towards a disciplined prescriptive approach to unlocking significant shareholder value that collectively sets up DSG to compound returns at an elevated level for many years to come. We remain as excited and confident about our strategy and DSG's future prospects. Lastly, from a capital allocation perspective, we will continue to run an active, but highly focused strategic M&A playbook which continues to enjoy a robust pipeline of active opportunities. While we continue to lean into facilitating an efficient and disciplined integration process to hold all accountable to capture the full opportunity set around these investments we are making with shareholder capital. We will do this while making sure that all of our leaders appreciate the metrics we expect to effectuate, encouraging them to prioritize and unlock higher return projects as timely as possible, as we all appreciate how unlocking those sustain our primary objective which is to drive elevated value creation in the near and long-term at DSG. With that, operator, let's open the line for questions.

Thank you. At this time, we will now be conducting a question-and-answer session. Our first question is coming from Tommy Moll with Stephens. Your line is live.

Good morning and thank you for taking my questions. Bryan I wanted to start on Gexpro. It's now three quarters in a row where there's been a sequential step up in revenue there, although the rate of that increase improved. I think you were up double digits third quarter versus second quarter. So, what can you do to unpack the shape of that recovery for us? And what if any visibility do you have going forward there? Thank you.

Yes. Ron might want to assist with this, but the end markets we've emphasized, specifically the renewables and semiconductor sectors that struggled last year, have shown improvement as we moved into the latter part of the year. While it's not yet at the levels we've experienced previously, the situation is considerably better than it was as we closed out last year, which was particularly challenging for both renewables and semiconductors. We addressed these issues consistently in our quarterly calls last year, and the softness in those markets affected our investments in the acquisitions we made to integrate into Gexpro. We focused on investing in those acquisitions rather than scaling back last year. Typically, when making acquisitions, companies aim to achieve synergies, but in our case, we noticed that the synergies were more evident in revenue generation rather than in reducing operational costs for companies like Frontier and Resolux that I referenced earlier. Consequently, we increased our investment in those businesses while the end market was declining, which had a combined negative effect on profitability last year. Now, those end markets are beginning to recover, and we are seeing improved performance from those acquisitions, which in turn is helping to enhance our earnings leverage.

No, I think you hit it, Bryan. I mean as we look at aerospace and defense has been strong over quite a few of the past quarters. The technology side, which for Q3, our low point there was really Q3 a year ago and that technology end market for us not quite double sales from where we were a year ago quarter, but pretty close. So that is a really nice recovery for us. And then certainly on the renewable side, primarily wind, that segment, that end market continues to march up sequentially for the first three quarters of this year as well. So, yes, I think those are really the, I would say, the three main end markets that are driving the majority of the growth.

As a follow-up, I wanted to ask Ron about the fourth quarter and the pacing in October. You've been active in mergers and acquisitions, so I would like any insight you can share on organic trends compared to the acquired revenue you expect to book in the fourth quarter. Additionally, regarding the margins, you achieved a double-digit range for consolidated EBITDA margin for the second consecutive quarter. Is there any reason to expect that this won't continue into Q4? Thank you.

Yes, Tommy. As of now, one month into the fourth quarter, our sales levels across DSG remain relatively consistent with what we experienced in the third quarter. There have been no significant changes from Q3 to today. For Q4, despite having fewer selling days, we anticipate being able to maintain a double-digit margin range, even with a couple fewer selling days this quarter. This is important to us because each selling day generates approximately $6.5 million to $7 million in sales. Losing two selling days results in about $14 million in sales, and with a total of 61 days compared to 64, we still believe we can achieve a double-digit EBITDA range.

Thank you, both. I'll turn it back.

Thanks, Tommy.

Thank you. Our next question is coming from Kevin Steinke with Barrington Research. Your line is open.

Thanks. Good morning.

Hey, Kevin, good morning.

Wanted to just start off by asking about Lawson and you talked about roughly 130 new sales territories there I believe. I think you mentioned greenfield. Are those all greenfield? Or are there some kind of dividing up all the territories to make them more efficient from just a routing perspective? I'm just trying to get a sense as to how much more kind of revenue opportunity you're creating with those new sales territories?

Ron, I'll let you tackle it even though I'm the enthusiastic voice here.

Sure. The majority of these are new territories where we believe we can successfully place sales representatives compared to the past. As you know, we are actively working on optimizing our current territories with our existing sales reps. Although our overall rep count is lower than it was a year ago, we have seen an increase sequentially in the third quarter. We are now using a more data-driven approach to identify opportunities for placing sales representatives where they can be successful right from the start. While we continue to refine our current territories, I would classify these primarily as new markets where we think we can successfully deploy a representative from day one.

I would add that the way these opportunities have been characterized to me is that they are net new compared to where we were at our peak of representatives. We have been reorganizing and working to make routes and territories more efficient, ensuring that the territories available to new hires offer significantly larger scoped revenue than what we may have provided in past years. It is important for us to ensure that the representatives we hire are more productive from the start, equipped with the tools we’ve given them and the scope of larger available revenue. Additionally, we have developed an internal team that has proven effective on the strategic account side and has also done well within the military sector, although the military is currently facing challenges due to the order entry shifts the government is experiencing, which has affected many distributors and caused delays at military bases. Regardless, we have a sourcing and new business development team in place to support those representatives in expanding their street business. Consequently, we have implemented numerous initiatives aimed at driving success in our growth plans for our sales team moving forward.

Okay. Fair enough. That's helpful commentary there. But you mentioned there the wanting to hire more aggressively obviously. Just what is the pipeline look there in terms of your ability to find reps? And I know it's very early days, but any initial indication of your ability to...

We are currently in the onboarding phase and believe we have more tools to offer. We have larger initial territories and are being more intentional in the type of representatives we hire. With years of experience in growing the number of reps and understanding the challenges of attrition, we recognized the need to have the right tools and data in place before recruiting. Our goal is to find the best candidates possible, and we are making significant efforts in this area. We are confident that we can reach a total of 1,000 representatives by mid-year next year, which means adding 135 net new reps between now and that time.

To emphasize Bryan's point, historically we would hire around 18 to 20 sales reps each month. However, in the third quarter, our average monthly hiring has increased to about 30. This represents a 50% increase compared to our historical hiring rates. While it can be challenging to find top talent, we are committed to this process and have observed a positive trend in hiring rates during the third quarter.

Okay. That sounds good. I appreciate all the comments. I got to jump to another call here, but thanks again. I’ll turn it back over.

Thanks, Kevin.

Thanks, Kevin.

Thank you. Our next question is coming from Brad Hathaway with Far View. Your line is live.

Hi, guys. How are you doing?

Good morning, Brad.

I was just wondering if kind of qualitatively you could talk a little bit about I guess the path from where return on invested capital is today to that 20% level and how you kind of think about bringing DSGR in that direction?

The biggest challenge with returns on invested capital comes from making acquisitions and investing capital before we realize the associated earnings or any earnings growth. The expected synergies from cost savings or accelerated revenue growth take time to materialize. Our recent M&A activities have indeed impacted our returns on invested capital, as we expect to see a decline initially while we expand our base. However, as we do this, we should begin to see improvements over time. For instance, regarding the acquisitions we've completed this year, including the ConRes close yesterday, we averaged around eight times EBITDA for those acquisitions. We anticipate that as we integrate them in the coming year, the valuation will adjust to about six times EBITDA. This process represents the initial step in aiming to raise our return on invested capital for the 2024 class of acquisitions after accounting for the upfront capital expenses and before fully realizing the earnings benefits. Last year, we made acquisitions in 2022 and 2021 that faced challenges in their end markets as we streamlined some shared or duplicate costs between Hisco and TestEquity. Now that we've eliminated those costs, we anticipate leveraging our earnings model, which will positively impact our return on invested capital. We've been effective in managing working capital, though it has been somewhat challenging over the past few months due to fluctuations in some of our markets. Our inventory hasn't fully reset, and our receivables have not been reduced. Last year, we achieved over 100% conversion, and currently, it's at 90% for the trailing 12 months. We expect to see improvements in this area since we've been operating at about 80% for the last two quarters. Additionally, the primary driver of improvement will come from top-line growth. As we focus on cross-selling and revenue synergies from integrating new capabilities, we anticipate enhanced profitability per revenue dollar and improved organic growth across our customer base. We are pursuing acquisitions with the expectation that they will contribute to organic revenue growth and strengthen our value proposition for customers, which is essential for us to reach our goal of exceeding the 20% threshold. The pace of our acquisitions compared to the size of our core business is not as intense as it has been in recent years.

Got it. That's very... helpful.

You can tell me if that's helpful.

Yeah, good. That is helpful. So I mean, I guess it sounds like A, it's the maturation of the acquisitions you make obviously you lay out the capital ahead of time and then the earnings and whatnot improve. I mean is there also an opportunity on the working capital side as well to kind of increase the efficiency of the balance sheet?

We've been focused on improving our efficiency and have made significant strides with the help of external resources. While there is still some progress to be made, it represents tens of millions of dollars relative to our invested capital, rather than hundreds of millions. With acquisitions in the range of $240 million to $260 million a year, our primary goal is to double the EBITDA from those acquisitions. We aim to acquire businesses generating $30 million in EBITDA and increase that to $60 million. Achieving this involves integration, improved purchasing, and leveraging benefits from our investments. Reflecting on the '90s when companies like Fastenal and Grainger made acquisitions relative to their size, we are now at a point where our base and offerings are established, allowing us to benefit from accumulating the right capabilities and achieving organic growth. We have seen this model succeed over the past 20 years as we acquired distributors, and we anticipate a similar outcome with DSG as we continue to compound earnings from our acquisitions. Growing these earnings streams leads to very high incremental returns on invested capital from our accretive acquisitions. Although the initial capital investment is burdensome, if the acquisitions are strategic and fit well within our model, they enhance returns across our platform. This approach positions us for significantly higher returns on invested capital in the long term.

Got it. That makes sense. So just mathematically, obviously, the denominator doesn't change much, because you lay out the capital upfront and then current EBITDA is well below what you kind of believe fully synergized, fully operational, future EBITDA will be. So the numerator increased a lot with the denominator. Awesome. I appreciate the color on that.

Brad, I reviewed the revenue levels from 2022 and aimed to create a more stable environment for our analysis. I used the 2022 model to assess our new cost structure and incremental margins, which significantly enhances our return on invested capital, even before considering our upcoming acquisitions. Initially, we anticipated that the acquisitions would boost organic revenue growth, but we've experienced some volatility in our end markets. We've also been implementing necessary adjustments, like with the Lawson sales force, which, while disruptive, are essential for future growth. Although these adjustments present challenges, using the 2022 revenue base to analyze earnings leverage demonstrates a substantial impact on our return on invested capital.

Got it. That’s very helpful. Excellent. Thank you for the explanation. Appreciate it.

Yes. Thanks. Appreciate it Brad. Always lots of questions.

Thank you. As we have no further questions in queue at this time, I would like to hand it back to Mr. King for any closing remarks.

Thank you, operator. I appreciate everybody's interest in DSG. We continue to have a lot of confidence in what we're building here for the long-term, as well as in intermediate and short. We're excited about the team we've got, the assets that we've assembled, the colleagues that we have working with us and we appreciate your interest. On Halloween Day today, everyone stay safe and enjoy family time, if you can get it. And we look forward to visiting with you in follow-up conversations for the next quarter. Thank you all so much, for your time. Bye.

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