Greetings, and welcome to the Distribution Solutions Group First Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Steven Hooser, Investor Relations. Sir, you may begin.

Good morning, and welcome to the Distribution Solutions Group First Quarter 2025 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 posted on the company's IR 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 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 we disclaim any obligation to do so. Management will also refer to certain 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 has also been included in the current report on Form 8-K filed with the SEC. Lastly, this call is being webcast live on the DSG Investor Relations website, and a replay will be available through May 15. 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. I want to start with some high-level comments given the murkiness in the marketplace created over the last 100-plus days by the new administration's priority of reshaping global trade patterns while prioritizing rebuilding domestic manufacturing and reinforcing trade with allies to improve long-term national security. In the long term and even in the medium term, we believe DSG will be rewarded by being well-positioned with trusted resources on the ground and in the plants alongside our customers, helping them navigate their needs with our expansive global and domestic vendor base, and the pricing and geography biases that will continue to unfold. We expect the pressures around the reordering of trade and manufacturing to increase our customer engagement and drive our profitability. We believe the current noise in the marketplace will even out as the year progresses, and we will have a better perspective on how to best reshape our sourcing efforts. As a value-added distributor, much of the value we bring is driven by our procurement team's efforts alongside our product technical expertise and the flexibility that allows us to source from the best partners and the most appropriate products globally at the best prices. As we review our sourcing efforts and vendor relationships, a modest amount of our total procurement comes from those that we can see will be the most disadvantaged trade partners based on the administration's reordering, and it is largely products for all the competitive products almost exclusively come from those same markets. Our sourcing capabilities, teamed with our on-the-ground capabilities alongside our customers, offers us an excellent position to improve our engagement and ability to earn, notwithstanding any near-term challenges the marketplace is facing. As we assess how well-positioned DSG is to help our customers navigate sourcing and supply chains, many of our organic and inorganic investments over the last few years were made to help us strengthen our efforts for this environment. We invested in ways to better serve our customers with expanded value-added capabilities across North America and even put resources closer to the manufacturers in certain parts of Southeast Asia, all as part of a perspective that expected the pressures that started before COVID under the first Trump administration. Our analysis has shown that the tariff pressures will impact only about 5% of our total direct purchases and a larger but still modest amount of our indirect purchases. In total, less than 6% of our aggregate product spend comes from China. And while we plan to work closely with our customers to offset these potential costs through a variety of actions, we do expect pricing to flow through our vendors and our pricing model even where our alternative sourcing avoids some of the more onerous tariff impacts that others in the marketplace are faced with. At the end of the first quarter, we took our first price actions where necessary to protect or improve our margins where we expect our landed costs to rise, and to support what we anticipate will be a larger investment longer-term in working capital. Our products are largely a small percentage of the overall cost to our customers, and our pricing adjustments should not be a tipping point issue for our customers, although other key inputs may have more challenging implications as they try and work those out. We appreciate our end market and product diversification as different markets will be more volatile than others as they digest this policy shift, but we remain cautiously optimistic that both our customer base and our relationships with them will be better positioned in the long run once we get a more complete view from Washington. While many marketplace participants retreat from chaos, our proactive work on DSG offers us renewed confidence in our business and its improved longer-term positioning. In the first quarter, we repurchased $11.2 million of stock with over $15 million remaining under prior authorizations. We've been active in the marketplace buying back our stock as we weigh that against the M&A opportunities that we foresee in the near term, while maintaining appropriate leverage on the business. Turning to first quarter results, our financial results were in line with our expectations, with revenue slightly softer than our budget, but EBITDA slightly ahead. We budgeted for the first quarter to be the softest based on many internal initiatives that layer up throughout the year. We delivered sales of $478 million, up 14.9% compared to the year-ago quarter. Total sales included $51 million of incremental revenue from our five 2024 acquisitions and our organic average daily sales growth of 4.3%. We are pleased with these top-line results, especially given the backdrop of trade policy noise during the quarter. While there have been questions around orders being pulled forward, we did not see that as much, although there was slightly more reticence by customers to release POs as the quarter progressed. Currency exchange impacts on our Canadian operations were a headwind, resulting in a constant currency organic average daily sales growth of 4.7%. Adjusted EBITDA for the first quarter grew to nearly $43 million, an increase of 18.6% over the prior year. We reported EBITDA margin as a percentage of sales rose to 9%, up 30 basis points from the year-ago period, and was dragged down by our addition of Source Atlantic, where we have a significant renovation of profitability project underway. Notwithstanding our early integration efforts on the Canadian unit with the Source Atlantic acquisition, we are pleased with the year-over-year net margin expansion in each of our three core verticals. Based on our disciplined execution, Lawson Products generated an adjusted EBITDA or a net margin of 11.9%. Gexpro Services reported a net margin of 12.6%, an improvement over the previous quarter, while we see a path for them to improve further over time. Finally, TestEquity reported a net margin of 6.8%, which, while better than the previous year, still falls short of our expectations for margin growth. Our continued solid progress on strategic initiatives remains our focus, and we remain confident in addressing our stated goal to more than double EBITDA over the coming three years, while lifting current EBITDA margins.

Thank you, Bryan, and good morning, everyone. Turning to DSG's consolidated revenue for the first quarter, we reported $478 million. This represents a 14.9% increase, driven largely by $51 million from acquisitions in 2024, along with organic average daily sales growth of 4.3%. When we exclude the impact of foreign exchange on our revenues, our organic average daily sales were 4.7%. For the quarter, we generated adjusted EBITDA of $42.8 million or 9% of sales compared to 8.7% in the year-ago period. This represents an increase of $6.7 million over a year ago, with $4.9 million generated from the 2024 acquisitions. Our reported operating income for the quarter was $20.1 million, including $11.6 million in intangible amortization from acquisitions and another $2.7 million of severance or non-cash charges. Adjusted operating income improved to $34.4 million or 7.2% of sales, flat with the year-ago quarter as a percent of sales. Our GAAP net income per diluted share for the quarter was $0.07, compared to a net loss of $0.11 a year ago. Adjusted EPS of $0.31 for the quarter compares favorably to earnings per share of $0.25 in the year-ago quarter.

Thank you, Ron. The DSG management team fully aligned with our LKCM Headwater ops team continues to actively drive the business to maximize long-term value. While we focus on fully realizing underwritten synergies for each of our acquisitions, value-accretive organic growth initiatives remain a high priority. We have five highly strategic acquisitions completed in 2024, and our M&A pipeline continues to grow. As I discuss every quarter, we are building a compounding engine. We are focused on fully realizing the capital allocation goals and high performance from those deployments. These actions drive our compounding engine, and our leaders in each unit continue to compete for capital while collaborating on expanding market share. We believe that executed well, we will grow EBITDA faster than our competitors with a sustainable long-term growth trajectory.

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

Thanks for taking my question. I want to start with a quick one on daily sales trends, and then we'll pivot to a more strategic discussion. But just looking at the Q1 performance, you were up almost 5% constant currency organic. Any change to that trend for April? Anything you picked up that might be worth calling out as we calibrate our own expectations would be helpful.

Yes, Tommy, I can comment on what we're seeing here so far in the month of April. I would say that compared to a year ago, it's tempered slightly versus what we reported in Q1. Although looking at April sequentially against Q1, it's relatively flat. We are impacted a little by the number of daily sales. For example, Gexpro Services has more selling days in April, which compresses the ADS number a little, and we see the same on the Lawson side. So, I would say no major changes as April has developed in terms of what we saw in Q1. Lawson is up against tougher comps in the first half of the year and easier comps in the second half, while Gexpro Services is experiencing the opposite situation.

If we look at the test and measurement sector, we haven't seen a lot of accelerated order flow. We've been worried that POs have been held up. While there has been interest in test and measurement equipment recently, the OEM side has seen some strengthening, but the POs have been slower to get released compared to what we expected.

Thank you both. I wanted to then pivot to a Lawson discussion. You described the trends in the first quarter, which were down high single digits. My question is for more detail on military sales and the sales force rebuild.

On the military side, we were up against tough comps. The trend on military has been relatively flat. About 40% of the drop we saw from the previous year came from military. However, we did see sequential improvement within strategic accounts and core accounts during the first quarter, even with the military side being flat.

We have continued to invest in our salesforce transformation. We added a net 10 reps from year-end to March, and we're working toward our goal of reaching 1,000 reps in the second half of 2025. While the productivity of our new reps is not where we want it to be yet, we are confident that the investments will benefit both new and tenured sales representatives over time.

We are up in terms of total sales reps in April as well. Our goal remains to reach 1,000 sales reps in the second half of the year. We're placing reps in new territories, which can be challenging initially, leading to a higher turnover, but ultimately we believe it will pay off.

The CRM is helping drive better performance as we've seen our rep productivity increase. While our initial expectations were higher, we still improved our productivity from the start of the quarter to the end.

I wanted to ask about the M&A pipeline. You mentioned that it continues to build, and I am curious if this environment is creating more opportunities for you or affecting valuations.

This environment does create opportunities, and we have several potential acquisitions in our pipeline. However, we're taking a measured approach to acquisitions as we integrate recent ones. If the right opportunity presents itself from a motivated seller, we would pursue it, but we are also focusing on buying back our stock.

I'm curious if there are signs of potential reshoring or onshoring of manufacturing that could benefit you long-term.

We believe longer-term opportunities are being created. Sourcing capability is strong in Gexpro Services, and we have been improving our ability to source nimbly. While there is anxiety around the stability of supply chains, we are well-positioned, and we've anticipated these shifts in trade policies.

I wanted to ask for some color on Source Atlantic margins going forward. Any insight on how to think about the compression in coming quarters?

For Source Atlantic, we're aiming for a path to 10% EBITDA margins, but we face some pressures on overall sales from the market. While we expect improvements from consolidating locations, the sales levels may push the timeline for reaching that margin goal into next year.

We believe that the consolidation of operations will enhance profitability. However, we're dealing with some uncertainty in the Canadian market right now due to trade and economic factors, which makes it harder to predict performance too far in advance.

Thank you. As there are no further questions on the lines, I would like to turn it back over to Mr. King for closing remarks.

I appreciate everybody's interest in DSG and taking time out of their busy morning. We are excited about the continued partnership and the value we're building for shareholders. Thank you.

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines now, and we thank you for your participation.