Good day, everyone. Welcome to the Distribution Solutions Group Third Quarter 2025 Earnings Conference Call. It is now my pleasure to turn the floor over to your host, Sandy Martin. Please go ahead.

Good morning, and welcome to the Distribution Solutions Group's Third 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 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 will 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 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 Form 8-K filed with the SEC. Lastly, this call is being webcast live on DSG's Investor Relations website, and a replay will be available through November 13. I will now turn the call over to Bryan King.

Thanks, Sandy. Good morning, everyone. I'll start today with overall highlights for the third quarter and share some perspective on our view of the current market environment and DSG's progress on its ongoing strategic initiatives. After that, I will turn the call over to Ron to provide a more detailed review of the financial results. Let's start on Slide 4 with a few key takeaways. Our third quarter results demonstrate the strength and resilience of our business model, even as inflation, tariffs and higher interest rates continue to challenge parts of the U.S. economy. The organization is not standing idle, waiting for market tailwinds to pick up, but continues to push the pace of initiatives that will make DSG a more profitable, durable and growing business in the long run. We delivered 10.7% revenue growth in the quarter, supported by strong organic momentum with an average daily sales increase of 6%, plus solid revenue contributions from our 2024 acquisitions. This represents the fourth quarter in a row that we've realized an organic sales increase and puts our year-to-date organic sales increase at 4% over 2024. Demand remained particularly healthy across aerospace and defense, renewables, semiconductor-related technology and industrial power, where production demand continues to accelerate. With solid top-line performance, inclusive of the significant investments we continue to make on the income statement, we're pleased to report an increase in our shareholder returns measured through adjusted earnings per share of $0.40 for the third quarter, an increase of 8.1% compared to the same period last year. We enhanced shareholder returns with more than $20 million of share buybacks in the first 9 months of 2025, reflecting our confidence in the company's trajectory despite a challenging macro environment. We also enjoyed generating strong quarterly operating cash flow of more than $38 million with adjusted EBITDA of $48.5 million. This is on top of strong cash flow generated in the second quarter as well. EBITDA margins for the quarter were 9.4%, primarily impacted by a combination of product and customer mix shifts as well as strategic investments across the verticals. We expect these ongoing initiatives to start realizing returns and improved EBITDA margins in the coming quarters. Importantly, Barry Litwin and the investment we have made in the TestEquity team are moving expeditiously after a comprehensive review of our significant line of business opportunities. This review has led us to refine our go-to-market strategy, which now focuses more on lines of business and capabilities to unlock growth and margin expansion opportunities. Gexpro Services continues to win wallet share while investing in its capabilities and delivered another record quarter. And our Canadian branch division led by Source Atlantic showed meaningful improvement in gross margin and expense rationalization and are now in line with our shorter-term targets and offering us better line of sight on our longer-term goals. These results reflect solid progress on advancing our focus on disciplined execution of key initiatives while acknowledging we continue to invest in and refine our expanded processes and results to unlock operational efficiencies and improve profitability across the expansive opportunities in DSG. We continue to steadily dedicate resources and investment into the list of priorities around internal initiatives despite recognizing we are in a dynamic environment with pronounced quarter-to-quarter marketplace fluctuations that also impact our priority around our profitability progression. Stacking up these internal investment priorities, while essential to long-term value creation, place demands on leadership while introducing short-term financial performance pressure, particularly when end markets are less forgiving. A large thank you from our Board, investors and me goes out to our DSG colleagues for all the hard work and transformative initiatives they are tackling currently. With a broad portfolio, we are also enjoying a return to solid momentum in numerous end markets. For instance, we achieved much anticipated growth in test & measurement throughout the quarter despite continued softness still in electronic production supplies. Ron will go over other key financial takeaways for the quarter in a moment, but let's first turn to Slide 5 to cover more end market revenue trends and strategic updates by business focus.

Thank you, Bryan, and good morning, everyone. Turning to Slide 6. DSG's consolidated revenue for the third quarter was $518 million, a 10.7% increase. The $49.9 million increase was driven by a combination of strong organic daily sales increase of 6% and $23.3 million in revenue from our 2024 acquisitions. On a sequential basis, organic daily sales were up 3.1% over the second quarter. For the quarter, we generated adjusted EBITDA of $48.5 million or 9.4% of sales. Source Atlantic compressed our third quarter margins by approximately 11 bps. Adjusted EBITDA dollars were essentially flat versus the second quarter and 30 basis points lower, primarily due to product and customer mix shifts, strategic investments in the business and higher employee-related costs. Cash flows from operations was $38.4 million for the quarter. This is on top of $33.3 million generated in the second quarter. GAAP net income per diluted share was $0.14 for the quarter versus $0.46 a year ago, which benefited from a substantial tax benefit. Non-GAAP adjusted EPS was $0.40 for the quarter, an improvement of 8.1% from $0.37 per share a year ago and a sequential increase of 14.3% from Q2 of $0.35 per share.

In the first 9 months of 2025, we've repurchased approximately 670,000 shares, which is positively impacting our EPS return to shareholders. Moving to Slide 7. Starting with Lawson, Q3 sales totaled $121.5 million, representing a 3% organic sales increase in average daily sales. Compared to Q2, organic average daily sales were down 2.2% pressured across most of our segments. For the quarter, Lawson reported adjusted EBITDA of $14 million or 11.5% of sales, down 110 basis points from Q2 on a sequential basis. The net margin contraction from the prior year was primarily due to continued investments in our sales transformation and higher employee-related costs, in particular, health insurance costs compared to the same period last year. We also saw some vendor price increases this quarter from tariff impacts. However, the margin impact was minimal due to strategic pricing actions that we took earlier in the year.

As Bryan mentioned, Lawson sales rep counts have increased to approximately 930, up from 860 a year ago, driven by expanded roles that continue to boost growth and productivity. We also continue to leverage our CRM platform to connect our sales reps with our customers more efficiently. Turning to Slide 8. Third quarter sales for the Canadian segment in U.S. dollars were $60 million, which included $20.1 million of incremental revenue from the Source Atlantic acquisition, which was in for the full quarter this year and only a partial quarter a year ago. Q3 revenue increased sequentially by 7.4%, which is encouraging despite tariff-related market softness for projects in manufacturing, in particular, in Eastern Canada. Excluding revenues acquired from Source Atlantic, organic sales for Bolt Supply increased 6.5% over a year ago. The third quarter adjusted EBITDA for the Canadian segment was $5.8 million or 9.6% of sales, a significant increase of 300 basis points over the second quarter. We are making good progress on planned synergies around gross margins and branch consolidations and are well on our way to how we underwrote the business. Turning to Gexpro Services on Slide 9. Third quarter revenue was strong at $130.5 million, up 11.4% from the year ago quarter from strength in renewable energy, aerospace & defense and industrial power. Organic average daily sales were up 3.7% sequentially from Q2. As Bryan mentioned, Gexpro Services adjusted EBITDA was $17.8 million, representing a record quarter. This is a 20 basis point improvement from Q2 to 13.6%. Similar to the second quarter results, operating leverage remained strong. Gexpro Services continues to invest in its business to capture top-line revenue growth and incremental EBITDA dollars, albeit at slightly lower margin percentages. Gexpro Services continues to capitalize on the acquisition in Southeast Asia through wallet share expansion and cross-selling. And just as a reminder, Gexpro Services is facing tougher sales comps heading into the fourth quarter of 2025. Lastly, I'll turn to TestEquity Group on Slide 10. Third quarter sales were $206.5 million with average daily sales up 5.8% versus a year ago and up sequentially by 5.9% over Q2. The test & measurement business improved. However, competitive pricing weighed on margins. Revenue acquired from ConRes, which was acquired in the fourth quarter of 2024 was approximately $2 million for the quarter. TestEquity's adjusted EBITDA for the quarter was $12.4 million or 6% of sales, down sequentially by 90 bps from the second quarter. Net margins decreased from 7.4% in the prior year quarter, primarily due to shifts in customer and product mix as well as higher employee-related expenses, some of which are nonrecurring and others that are longer-term investments to improve the business. Key operating initiatives in flight currently include the expansion of service offerings, acquisition integration, pricing disciplines, sales force optimization, digital expansion and cost containment.

Moving to Slide 11. Our diversified business model has been structured to benefit from scale, product adjacencies and geographic footprint, leveraging 5 acquisitions completed last year. Since the merger of these businesses in 2022, we have invested nearly $450 million of cash and debt across 9 acquired businesses. And at the end of the quarter, our debt leverage remained at 3.5x. Starting at the bottom of the slide, we ended the quarter with total liquidity of $335 million, providing us with flexibility for accretive acquisitions and investing into organic growth initiatives. This foundation continues to underpin our disciplined capital allocation strategy. Again, this quarter, we achieved positive sales lift through our investment in organic growth. As a management team, we closely manage working capital within each of our verticals. At the end of September, cash and cash equivalents, including restricted cash, totaled $82.7 million and net working capital was approximately $486 million. Consistent with the second quarter, at the end of the third quarter, we had no outstanding borrowings under our revolving credit agreement. And as Bryan mentioned, we generated $38 million of cash flow from operations for the quarter as we closely manage our working capital. We continue to look opportunistically at share buybacks and returned $20 million to our shareholders this year with approximately $6 million still available under our previously Board authorized program. Our free cash flow conversion is approximately 96% over the trailing 12 months, and we compute our ROIC on a TTM basis at approximately 11%. Finally, our first 9 months of net CapEx, including rental equipment was $19.3 million. We expect our full year 2025 net CapEx to be in the range of $22 million to $25 million or approximately 1% of our revenues. I'll now turn the call back over to Bryan. We plan to continue navigating our businesses through market noise and volatility, remaining highly focused on making strategic data-driven decisions that generate long-term value and success through every business cycle. As we look at the fourth quarter, we're maintaining a cautious outlook given tougher year-over-year comparisons. That said, business activity remains steady, and I remain confident in our leadership teams and their ability to execute on their respective value-driving initiatives on their journey to build structurally higher-margin businesses that generate strong free cash flow and create accelerating long-term value for our shareholders. Our teams are highly aligned, competing together to win more and each is accountable and highly incentivized for their progress. We are investing in internal and external resources at every turn to drive an enhanced financial outcome for DSG's investors. Many of our investments in the prior years are driving solid improvements to the business. That is evidenced by our ability to report 4 quarters of sequential top-line revenue growth and have well more than doubled EBITDA by reinvesting our free cash flow and holding leverage flat since we created DSG 3.5 years ago. While some of our 15 acquisitions made over the last 4 years or so have taken more time and required more heavy lifting to get them to the targets we underwrote, we are confident that all offer strong strategic and financial accretion value to the platform we are creating and will continue to drive earnings and value for DSG consistent with how we underwrote them. Based on more recent investments we've been making on the income statement, just like the acquisition investments on the balance sheet, we should be held accountable on continuing to perform and drive shareholder profits and unlock improved key performance metrics. You should continue to expect more from us through unlocking enhanced operational performance, continued market share gains, longer-term enhanced profitability unlocks and improved business momentum relative to whatever economic end market cycles we face as we look forward to 2026 and beyond. We have a clear line of sight on how our initiatives drive intrinsic value and unlock additional value through increased future run rate earnings and deserving of a higher value assigned to the earnings we enjoy. We will continue to listen to our customers and deliver the products and services that they want and need. We, informed by our customers and our colleagues, have identified and are strongly pursuing a number of key strategic inorganic opportunities that will strongly enhance our position to serve some of our key markets. We want to personally thank everyone across DSG for embracing our performance-driven culture based on the core values of transparency, accountability, effort and empathy. I'm equally grateful to our Board and our stakeholder partners for their trust in me, our DSG leadership and the LKCM Headwater team as we continue advancing this important investment together. We continue to engage actively with the investment community, and we'll participate in 3 conferences this November, Baird, Stephens and the Southwest IDEAS Conference. And with that, operator, will you please open the line for questions.

Your first question is coming from Tommy Moll with Stephens.

Cautious is the word that I think I heard you say regarding your look into the fourth quarter. And so I'm curious, can you share what October looks like just in terms of the organic pacing? And when you say cautious, are we meant to take that as more likely than not, you could be down year-over-year organic? Or just help me parse that a little bit.

Yes, Tommy, this is Ron. I'll address that. Regarding the fourth quarter, we had 64 selling days in the third quarter of '25 and it decreased to 61 days in the fourth quarter. Last year in the fourth quarter, our sales were just over $480 million, while this quarter reached $518 million. So even though we have tougher comparisons, flat sales this quarter would translate to mid-single digits when looking at the sequential change from Q3 to Q4. In October, the situation is a bit skewed due to the 23 selling days. Typically, our average daily sales see some compression with more selling days in a month. We're not noticing any major shifts, although September was the strongest month for the third quarter. We experienced improved average daily sales from July to August and then into September. While it’s somewhat tempered, it’s not dramatically so. Another point to consider is that many of our customers have holiday shutdowns later in the year, which could pose a challenge similar to previous quarters. It's important to keep in mind the potential impact of customer holidays on sales dynamics.

I want to mention that I might have been the one using the word cautious frequently, mainly because I was considering the number of selling days for the quarter. However, this does not change how I view October compared to September. I was simply acknowledging that we had strong performance from Gexpro Services last year in the fourth quarter, which meant we were competing against a solid figure. While we experienced an increase in both average daily sales and revenue organically in the third quarter, along with volume rising across all verticals, we were just being cautious in our wording.

Fair enough. And on the consolidated EBITDA margin percentage side, any big callouts that should drive a variance, whether positive or negative versus the 9.4% that you just reported?

Yes. The only thing I would mention is that both Bryan and I have addressed some of the investments we are making in the organization. If I analyze the changes either sequentially or compared to a year ago, even a 110 basis point increase from last year, I would estimate that about 30 basis points of that are due to our ongoing investments in the organization. I would attribute approximately 80 basis points to factors that I would consider timing-related or nonrecurring, such as incentive accruals or the initial acquisition of customers at a lower margin along with advance inventory purchases made last year. As I reflect on the changes from quarter to quarter, it's clear that while we have permanent investments in the business, there is also a significant amount of fluctuation related to timing. This observation holds true even when viewed sequentially. Currently, we do not foresee any significant one-time items, whether positive or negative, in the fourth quarter that could significantly impact our results.

Yes. The momentum with Gexpro is encouraging to observe. You mentioned some of the key factors driving this, and I am curious about how sustainable this recovery appears to be.

Look, Tommy, Gexpro has got a pretty broad base of wallet share and new customer wins that it's continuing to enjoy and its backlog or funnel is larger than it's been in the past of new business opportunities that they're pursuing. We've invested significantly both in being able to address some existing customers' needs in locations that are costing us some money that we've spooled up as well as some employees that we've added that are prior to getting the benefit of revenue, but where we have good visibility that there's a spooling up of more organic opportunity there. The acquisitions that we've added to Gexpro Services over the last 4 years, going back even right before the merger are adding to the capabilities that particularly with the environment that we're in on the tariff side are allowing us to improve the supply-chain opportunity, both kind of domestically as well as more broadly for a number of the customers that we've served for a long time. And it's getting attention from customers that we haven't served for a long time. So the sales cycle in Gexpro Services is long. As we know, it's the longest that we've got. The retention is very high. But we've made a lot of investments there besides just the acquisitions that are adding talent and capability and some relationship sellers that are helping continue to build out the pipeline. Now, there's 3 or 4 of the verticals that are hitting on cylinders and then there's the industrial power vertical that's getting stronger. And when you have 2 or 3 of your verticals that are firing on those cylinders, you look at those relative to what you've got in your backlog in the verticals that are not performing at peak level at all and you try and assess where you're going to be a year or 2 from now. And I don't have enough of a crystal ball there, but it feels very good, and it feels resilient.

Last question for me on the Lawson sales force initiatives. You mentioned that there are still some in-flight pieces there. So maybe just give us a state of the union?

Yes, there's still a lot happening with our sales initiatives. We've been working on improving internal processes while also trying to grow our sales force, which may have delayed our progress. However, now that we are filling open territories, we're seeing positive volume growth. We're continuing to invest significantly in our transformation efforts, including adding resources to support the sales force. We're also piloting initiatives to enhance our selling leadership and provide better tools and support in key markets, aiming to improve customer service and increase revenue from existing customers. While metrics like CRM and order flow are moving in the right direction, the pace of onboarding new sellers and achieving profitability has been slower than anticipated. We're reassessing whether further adjustments are needed and if our approach to supporting new sellers can be enhanced. Additionally, some segments of our customer base, particularly smaller job shops, are experiencing slower growth compared to our larger strategic accounts, which are performing better.

Your next question is coming from Ken Newman with KeyBanc.

I ended up joining the call a little bit late. So sorry if I missed it. But did you speak to how much tariff-based pricing benefited sales this quarter? And just any thoughts about how you think about price cost into the fourth quarter across the businesses?

We didn't. However, I want to highlight that this quarter experienced strong volume growth alongside revenue growth. For the first time across all our verticals, we saw volume growth. Lawson, in particular, faced challenges with pricing not benefiting us, but we have returned to volume growth there. We also experienced volume growth in our other verticals. Ron can provide more specific insights on pricing. We didn't introduce any new initiatives this quarter, but we did see some tariff activity at the beginning of the year. We’ve been very transparent with our customers, especially at Gexpro Services, where we maintain large relationships and contracts. We clearly communicated the specific dollar impacts on these relationships. While we don’t have complete visibility on all the tariff costs affecting us, the impact on our business has not been as severe as it has been for some of the other companies we own. In fact, DSG has managed this situation better compared to many other businesses I’m involved with. Ron, do you have anything to add?

No, I think you've covered it, Bryan. Just to add a bit more detail, the overall 6% organic sales increase can be broken down into approximately one-third from pricing and two-thirds from volume. Regarding Bryan's point, all three verticals experienced a rise in unit volume this quarter, which is encouraging. We've implemented some pricing actions earlier in the year at Lawson and continued to adapt as tariff pricing and cost increases came into play, but overall, there hasn't been anything significantly impacting our margin percentages.

Got it. No, that's very helpful. Maybe for my follow-up, I think I saw Lawson and TestEquity margins saw some mix and labor-related headwinds this quarter. Curious, how long do you expect those higher labor costs to stay on? When do you expect those to roll off? And any visibility on kind of mix normalizing within those 2 businesses?

We've made additional investments in sales for both businesses, which include commissions and support to boost revenue in the test and measurement segment, as well as enhancing our sales force capabilities. We've also added a significant number of sellers at Lawson who are not yet profitable or contributing to our bottom line. Additionally, we’ve invested in talent and senior leadership in these two areas, along with expenses related to healthcare, severance, and other costs. While we have been addressing compensation over the past couple of years for our teams, the increase in SG&A has been intentional and aimed at driving future revenue growth and customer service.

Okay. Let me ask this in a different way. I understand it’s difficult to predict right now. However, if you consider a typical recovery period, when do you expect to return to your targeted operating leverage? What volume do you think is necessary to achieve that 20% to 25% EBITDA flow-through?

Yes. I believe we are at a point where we should begin to see the investments we made in personnel at Lawson start to yield positive results. When you bring on a significant number of new sellers and add substantial resources to support them, the associated expenses can hinder operating leverage. Historically, Lawson has achieved operating leverage in the range of 20% to 30% or more. We anticipate that as the sales team matures over the next year, we will start to see that kind of leverage return to the business. In contrast, TestEquity has presented a different situation. There are two main dynamics at play. Firstly, our applications have remained flat and previously negative, though we are seeing a recovery in the unit volume for test and measurement. However, this has come with a change in product mix that has also affected operating leverage even as we invest in SG&A. This complicates our ability to predict operating leverage for the TestEquity Group, as we have intentionally increased expenses in SG&A while addressing leadership changes to better position the business for improved operating performance than what it historically achieved.

Yes, I think you've covered it, Bryan. When I look at DSG as a whole, many of these other factors, like health insurance, caused most of the impact at TestEquity and Lawson. These can be quite variable; in some quarters, they work in our favor, while in others, they do not. This quarter, they didn't work in our favor. Overall, across the DSG platform, this resulted in a 20 basis point impact on our EBITDA margin for the quarter. Additionally, regarding the mix that Bryan mentioned, test & measurement sales increased from about $30 million in the second quarter to around $35 million in the third quarter. This segment of the business typically operates at a lower margin percentage, which has contributed to some downward pressure. We're also facing competitive pricing challenges, particularly affecting TestEquity more than Lawson this quarter.

Your observation is valid. It's important to note that TestEquity faced a mix shift dynamic. While we experienced a promising recovery in test and measurement activity, the development of a new relationship initially impacted our gross margins in that segment. Additionally, there were challenges in health care, including a bad debt allowance for a non-paying customer, severance costs, and expenses related to establishing new leadership. There were several factors affecting the SG&A line, including an inventory allowance. In total, there were multiple elements contributing to the financial variance.

Your next question is coming from Kevin Steinke with Barrington Research.

I wanted to just follow up on the Canada branch margin, really nice sequential improvement there. It sounds like you still have a couple of facility consolidations to go. But I'm just trying to think about the sustainability of that margin going forward as well as if there's still a little room for additional uplift there.

Go ahead, Ron.

Yes, Kevin, we typically divide that business into two parts, the legacy Bolt Supply business and the Source Atlantic business. I would say that Bolt is continuing to perform very well with margins around 13% to 14%. It's getting a bit complicated due to the merging of branches. However, when we evaluated the acquisition of Source Atlantic, we anticipated that it would exceed 10% on its own. So even when averaging Bolt and Source, we should be above 10%. We are progressing, but we are not yet at our target. We definitely aim for margin expansion there, and we may experience some fluctuations in the results for Q4. Generally, for DSG and including the Canadian operations, Q2 and Q3 are typically the strongest quarters. Therefore, we may see some impact on sales due to the timing of the holidays and other factors. Overall, we are on the right track, but we are not at our goal yet.

Appreciate everybody participating this morning. Thank you for your time. We are encouraged by what we're seeing out of the business, and we appreciate everybody's attention there.