Earnings Call Transcript
Distribution Solutions Group, Inc. (DSGR)
Earnings Call Transcript - DSGR Q3 2023
Operator, Operator
Greetings, and welcome to the Distribution Solutions Group Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. 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, Sandy Martin at Three Part Advisors. Ma'am, you may begin.
Sandy Martin, Host
Good morning, everyone and welcome to the Distribution Solutions Group third quarter 2023 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 Q3 earnings presentation that has been posted on the company's IR website. Please note that statements on this call and in the 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 the non-GAAP measures and reconciliations to the nearest GAAP measures can be found at the end of our earnings release. The earnings press 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 on the Internet via the Distribution Solutions Group Investor Relations page on the company's website. A replay of this teleconference will be available through November 16, 2023. I will now turn the call over to Bryan King. Bryan?
Bryan King, CEO
Thanks, Sandy, and thank you all for joining us to review our third quarter results. In September, we hosted our first ever DSG Investor Day, which allowed our team to demonstrate the company's strong market positions in key vertical channels that offer broad and differentiated specialty distribution solutions. We also introduced our deep leadership bench and explored how customers rely on us to provide high-touch, value-added distribution solutions for their MRO, OEM, and industrial technology needs in our large addressable market of over $60 billion. It was constructive and valuable to meet and take questions from new and existing investors and sell-side analysts. We appreciate many of you joining us in Fort Worth and those who joined virtually. We encourage you to review the Investor Day deck on the Investor Relations section of our website, where we shared our strategic plans for further top-line growth, margin expansion, and free cash flow generation, as well as walking through our capital allocation priorities and plans to create long-term shareholder value. Now beginning on slide four. We reported total third quarter sales of $439 million, up over 26% from the prior year. And excluding the impact of Hisco, we increased EBITDA margin by 70 basis points. As we discussed last quarter and highlighted during Investor Day, we generated strong double-digit organic sales results in last year's third quarter, creating difficult comparisons. For the 2023 third quarter, total organic growth declined by 4%. This pressure was isolated to softness in technology-oriented markets, including semiconductor manufacturing, renewables, and test and measurement capital equipment sales. These markets have strong secular tailwinds, and we purposely added differentiated capabilities to serve these important end markets. Softness in these important end markets was partially offset by organic growth within the Lawson vertical. The capital equipment softness further highlights the importance of adding Hisco as part of the industrial technology platform moving forward, given the more recurring nature of that business. We will provide updates on the integration milestones and progress later. DSG delivered strong quarterly growth and profitability despite pockets of choppy demand. Our teams continued to focus on what we can control within the businesses as we march operating margins towards the long-term goals outlined during Investor Day. We worked hard this quarter to execute strategic operational initiatives that improve sales productivity and grow market share in each of our three verticals. For the third quarter, we reported adjusted EBITDA of $44 million or 10% of sales and adjusted earnings per share of $0.17 per share. As we signaled last quarter and at the time of the acquisition, Hisco's results will initially pressure our EBITDA margins. Excluding Hisco, our adjusted EBITDA margin would have been 10.7% for the third quarter, up from 10% in the prior year's quarter. We generated significant cash from operations of $74 million year-to-date, which speaks to the power of our model and the discipline of our working capital management. Our teams continue to perform well, and our sales transformation efforts resulted in further field rep productivity improvements. Additionally, we continue to invest in technology and remain resilient and flexible in operating the business. Moving to slide five. Let me briefly provide business updates and important sales and cost initiatives for our MRO, OEM, and industrial technologies focused verticals. Lawson Products continues to be a leader in the MRO distribution of C-parts, offering vendor-managed inventory services. During the third quarter, Lawson grew organic sales by 6.3% on a same-day basis, and we also realized a strong double-digit EBITDA margin, which increased significantly over the prior year quarter and expanded sequentially over the second quarter. This was achieved while concurrently accelerating Lawson's sales transformation initiative, which we elaborated on during Investor Day. We continue to identify wallet share expansion opportunities with current customers, as well as strong market share expansion opportunities with new customers. Our lift in sales has largely been seen by increased engagement with large strategic accounts, as well as growth in select business verticals. We are enjoying a robust and growing strategic accounts pipeline and an accelerating sales cycle, significantly enhanced through the collaborative cross-selling efforts focused on strongly embedded customer relationships of Gexpro Services and importantly, now Hisco. We continue to see mild customer-level activity softness consistent with the third quarter in our core street business at Lawson. It's not unusual for Lawson's customer order frequency to be unpredictable during the holidays. I'm pleased that the Lawson team drove nice organic growth through market and wallet share expansion. Also, we are confident that our sales transformation initiatives will better position Lawson to boost growth and customer engagement over the long term. We're finalizing our mobile-enabled CRM tool at Lawson, which will be fully rolled out during the first quarter of 2024. The leadership team at Lawson continues to support our sales reps to improve productivity, allowing them to make more money, better serve customers, and expand cross-sell opportunities. During the third quarter, our sales rep productivity increased by 18%, which represents success building on success this year. Over the last two years, we have set up a more disciplined operating structure to invest in additional growth resources to constantly evaluate how to better serve our customers to enhance their experience while becoming more differentiated in our solutions for them. In reflecting on each of our divisions and our shared but often competing objectives of driving high-quality revenue growth while also committing across DSG to greater discipline in operating efficiency to unlock structurally higher EBITDA and margins, we pour over the initiatives, balancing the tensions and timing around investing in additional growth resources and customer experience enhancements while also optimizing our spend to unlock accelerating current profitability. While the timing of income statement investments is not always perfect and linear, the discipline and commitment from our management team and the shareholders are. Across our leadership team, we are perfectly aligned with our shareholders, and I am convinced we are doing great work, and I thank our teams for regularly. At the end of our remarks, I'll talk about our capital allocation framework for reinvesting our collective cash flow and balance sheet, but the more nuanced and often less talked about framework, but equally as critical, is how we are investing more on the income statement and initiatives across DSG to drive growth while also balancing those investments with initiatives to unlock more near-term earnings and cash flow. The sales productivity lift at Lawson is in what we consider the early innings of a broader commitment to our salesforce to help them grow their revenue engagements with resources in which we have been investing and to drive their compensation. As I reflect on a series of decisions over the last two years of coming together and the benefits of being a part of one larger DSG company, Lawson's MRO business has grown its third quarter revenue over third quarter 2021 prior to the merger by 22% and its EBITDA by 112%, taking EBITDA margins from 8.4% to 14.5% in less than two years. This is based on a collection of partially executed initiatives structured around being a part of the larger DSG family, and we are just now beginning to see the capability and cross-selling benefits accrue to Lawson and other businesses. Turning to Gexpro Services, which continues to be a leader in the supply chain solutions of largely C-parts, specializing in vendor-managed inventory programs for high spec OEM customers. For the quarter, our sales were essentially flat over the prior year's quarter. Our largest end market remains renewables, which combines electrical, mechanical, and hardware product offerings with kitting supply chain services and domestic manufacturing, of which government-funded programs support many. We are seeing green shoots in the renewables markets. Given the rapidly changing geopolitical environment, we anticipate momentum to continue in aerospace and defense, with secular tailwinds for some time. We also see strength in the industrial power markets this quarter and this year. While our programs are still intact and being renewed, we have seen the largest softness this year in our highest margin business, which addresses the technology end market as activity in pulling our product through our customer facilities is down 45% this year versus last year, creating a $6.1 million EBITDA headwind we largely made up elsewhere. That said, our pipeline across our verticals for new programs with our suite of capabilities is excellent. And although we have working quotes, timelines have slowed, likely due to the higher cost of capital environment. We continue to see growth in the retrofit and upgrade cycle for the installed base like in renewables. Gexpro Services is creating value from synergistic acquisitions, expanding kitting and project services, the successful launch of our ecommerce platform this year, and continuing to refine how we offer our expanded core products and vendor-managed inventory capabilities with the addition of Lawson's MRO and now Hisco's product leadership in key categories. We continue to emphasize embedding our products and services into new OEM programs and becoming more sticky as the provider of choice. Our customer-centric approach, combined with the breadth and scale of our strategic acquisitions, has materially expanded our resources, products, footprint, and collective expertise across the platform. Using the same two-year lens as I did with Lawson, we track the success we have enjoyed both growing and transforming the profitability of our acquisitions as they are folded into their vertical and more broadly our DSG network. We've committed to our investors that we are not buying EBITDA unless it supports our broader strategic objectives. In reviewing the five acquisitions we've added to the Gexpro Services vertical over the last two years, they have an average increase in their organic revenue of 49% and together have more than doubled their EBITDA as their value-added capabilities are leveraged more broadly across our network, allowing our offerings to our collective customers to be more uniquely differentiated. During this same period, our core Gexpro Services organic revenue has grown 10%, and our EBITDA has been largely flat. Challenges are referenced by a significant mix shift away from our most profitable and we believe sectorally attractive technology end market, which is currently in a tough part of their industry cycle and where we have visibility that our offerings will continue to secure us more programs and market share. Lastly, moving to Industrial Technologies to discuss TestEquity, along with our initiatives to integrate Hisco. With each day, we are even more confident with our decision that Hisco is key to our broader DSG strategy and our focus on rebalancing TestEquity's consumable supplies versus capital mix to support the full electronic cycle. Our major workstreams associated with integrating Hisco into TestEquity continue to progress on schedule. We are pleased to report that TestEquity's inventory is now available for sale on the Hisco e-commerce website, which is a win for us and for our customers. During the third quarter, TestEquity was under pressure from a sales standpoint, with comparable sales down in the mid-teens range, largely from pressure within test and measurement and some of the capital assets that complement an environment supporting test and measurement equipment like in a laboratory. We saw downward pressure on outlays in the technology and R&D sectors due to capital spending deferrals. And we've seen some excess products try to get pulled through the channel, especially in the second half of 2023. A year ago, it was a product supply issue, and now that has flipped to excess market supply on lower industry demand. Our customers are telling us that higher capital costs continue to drive capital expenditure delays, and our vendors continue to reiterate our market-leading distribution position within these categories. In conjunction with our workstreams to integrate Hisco and rebalance the collective cost structure, we identified and recently commenced action on over $10 million of annual run rate cost savings that will improve the overall margin profile going forward in the Industrial Technologies vertical. The earnout period has passed and we are implementing these initiatives, along with the sales team's collaboration and other mission-critical activities. Our vendor-managed inventory, or VMI, solutions, continue to show sustained growth and are on track to show their highest profitability to date. Our chambers business continues to perform well, and we anticipate accelerating product line growth as well as gross margin expansion in this business. We have rebaselined operating expense spend across the industrial technology vertical to better position us heading into 2024 as we focus on driving profitability of this vertical to our stated goal of exiting 2024 at a 10% or higher EBITDA margin. We continue to capture cost synergies and production efficiencies, resulting in improved delivery times and lower shipping costs. As we discussed at Investor Day, we're accelerating workstreams to build a higher structural margin business that benefits from expanded engagement around cross-selling through our other verticals and businesses. Looking back across the last two years of acquisition performance in our Industrial Technology vertical, four of the five are structurally more profitable with higher earnings, although three of them have been challenged at some level of revenue softness from the current capital spending pressure TestEquity has also faced. Our enthusiasm continues to build as we uncover all the capabilities and levers and how Hisco will significantly transform this vertical and the broader revenue and profitability opportunity across the DSG platform. Bringing leadership and expertise in key product categories, embedded strategic customer relationships, expanded industry engagement, value-added services, and a prominent presence in Latin America for the other verticals to draft. With that, I would like to turn the call over to Ron to walk through the financials. Ron?
Ron Knutson, CFO
Thank you, Bryan and good morning, everyone. Turning to slide seven, let me summarize Q3 results. Consolidated revenue for Q3 was $438.9 million, up $91.8 million or 26.4%. Although acquisition revenue in 2022 and 2023 resulted in incremental sales of $106.3 million, organic sales declined by 4.2%. If we look at this from a cumulative two-year basis, organic sales were up approximately 11% versus 2021 through a combination of strategic price and volume expansion. Third quarter results reflect strong growth in margin dollars. We reported a $9 million improvement in adjusted EBITDA, growing to $43.7 million or 10% of sales and an increase of 25.9% versus last year's adjusted EBITDA of $34.7 million. As Bryan mentioned, excluding Hisco, our adjusted EBITDA would have been 10.7% for the quarter. Reported operating income was $12.8 million compared to $22 million a year ago quarter, excluding nonrecurring merger related costs, acquisition costs, stock-based compensation, severance and other nonrecurring items, operating income would have been $26.7 million, up from $25.7 million in the year ago quarter. We reported GAAP diluted loss per share of $0.03 for the third quarter compared to earnings per share of $0.42 a year ago. On an adjusted basis, adjusted diluted EPS was $0.17 for the quarter versus $0.32 for a year ago quarter. This reflects the impact of acquisition related D&A expenses and higher share count compared to the prior year period. We continue to show strong cash flow generation from operations and good working capital management with $47 million of the $74 million cash generated from operations being realized in the third quarter. We ended the quarter with unrestricted and restricted cash of over $100 million. Turning to slide eight. Let me now comment briefly on each of the businesses. Starting with Lawson, sales were $114.5 million, up 4.6% for the quarter and representing a 6.3% increase on a same-day basis. The increase over a year ago was driven by strong performance within the strategic business, Kent Automotive, and government military. As Bryan mentioned, the core street business was somewhat softer, which continues into the fourth quarter. Similar to the second quarter, Lawson's growth in Q3 was achieved through increased wallet share with existing customers and new customers in both our strategic accounts and our Kent Automotive businesses. As we discussed at our Investor Day, Lawson's initiatives to transform the sales team were executed this past summer, which resulted in an 18% lift in sales rep productivity this quarter. Lawson's adjusted EBITDA improved to $16.7 million compared to adjusted EBITDA of $9.7 million a year ago quarter. This increase was primarily driven by the sales increase in gross margin improvements, partially offset by increased compensation on higher sales levels and channel investments to better position Lawson on a longer-term basis. Lawson's adjusted EBITDA as a percent of sales was 14.6% in the quarter versus 8.8% a year ago quarter and improved sequentially from 13.5% in the second quarter of 2023. Turning to Gexpro Services on slide nine. Total sales were $103.2 million for the third quarter, essentially flat versus $103.7 million in a year ago period. Like last quarter, Gexpro saw a decline in sales in their highest margin technology end market, offset by growth in aerospace and defense and industrial power markets. The leadership team is reallocating resources to better align with demand to maintain profitability and margin goals set for the business for this year. Gexpro Services' largest vertical is renewables, which are expected to have secular strength over the next several quarters and years. We are reinvesting and growing the business and being cautious about weaker markets or ones more sensitive to current macroeconomic issues. At Gexpro Services, we are focused on existing relationships and market share gains from new customers through our value creation offerings, including kitting, project services and the ability to deliver world-class support to the OEM production cycle. Gexpro Services adjusted EBITDA was $11.6 million or 11.2% of sales versus $12.5 million or 12% of sales for the year ago quarter, with much of the decrease being a shift driven by sales mix. Realigning our costs to align with our sales and improving gross margins will benefit us yet this year and beyond. Lastly, I will turn to TestEquity, including Hisco on slide 10. Q3 sales grew to $207.7 million primarily due to $106.3 million of acquired revenue, offset by a decrease of 13.2% in organic sales. Given the strong third quarter organic growth from last year on a cumulative two-year basis, TestEquity is still up approximately 3.7% compared to 2021 sales levels. As Bryan mentioned, test and measurement sales were soft, and our Q3 key supplier shipments through the entire channel were down even more dramatically than the TestEquity results might suggest. In other words, TestEquity performed well in Q3, especially given the market dynamics in this space. While we continue to see choppiness in capital spending, the bright spots in the quarter were the continued growth in the chambers business, enhancements within our BMI offering and progress within digital into our own brand offering. Although not a big part of the business, we do value our owned brands as a way of improving the mix of higher margin business over time. TestEquity's adjusted EBITDA for the third quarter was $14.3 million or 6.9% of sales. In EBITDA dollars, this was an increase of $4.2 million or 42% over the same period a year ago, of which approximately $8.3 million was generated from the acquired businesses. Although we are actively making progress to optimize the expense structure through the TestEquity and Hisco integration, we are working on operating expense rebaselining to align sales to align with sales volumes for TestEquity, which includes Hisco. While this is a work in progress, we've made good progress this year, which collectively should exceed $10 million on an annualized basis. Moving on to slide 11. We ended the quarter with $279 million of liquidity, including $80.5 million of unrestricted cash and cash equivalents and $198.3 million under our existing credit facility. Our amended credit facility was expanded earlier this year from $500 million to $805 million. Over the last 18 months, we've reduced our net debt leverage from 3.6 times at the close of the merger on April 1, 2022, down to 2.9 times, all while acquiring four businesses. We continue to focus on deleveraging the balance sheet through operating and working capital improvements with our target leverage ratio remaining in the three to four times range. Although we continue to support a robust working capital investment portfolio, we are carefully managing inventories, accounts receivables, and accounts payables, as evidenced by our ability to generate cash flows from operations of $47 million for the quarter. Net capital expenditures, including rental equipment, were $14.7 million for the first nine months of the fiscal year, and we expect full-year CapEx to be in the range of $16 million to $20 million or approximately 1% of revenue. With that, I would now like to turn it back over to Bryan.
Bryan King, CEO
Thank you, Ron. Let's turn to slide 12 to recap our capital allocation framework. DSG is focused on a prudent balance of organic and acquisitive growth where we use a disciplined approach to track working capital intensity, leverage, and periodic discussions and decisions to invest in our own stock. Our goals at DSG are to scale our business even further while improving the return profile of our specialty distribution platform, benefit from our fortified competitive moat in our verticals with unique and well-positioned products and solutions, serve our customers with high-touch, value-added specialty products, services, and solutions, maintain our asset-light capital structure with planned growth through sustainable working capital investments as well as highly strategic acquisitions that expand our offerings and improve our unique and highly differentiated value proposition for our customers. Finally, all creating long-term shareholder value by elevating our earnings structure and generating significant cash flow per share. Turning to slide 13. Third-quarter results demonstrated our ability to benefit from our diverse end markets to achieve a 10% EBITDA margin or 10.7%, excluding our recent Hisco acquisition. As your partners and as the leaders of the business, we are excited shareholders as we see significant levers, some of which are outlined on slide 13, available to us to unlock significantly higher earnings over the coming years regardless of how the current economic cycle unfolds. We are committed to working hard on the elements of the business that we control, like the current focus on improving salesforce productivity, sharing best practices, and reducing costs across DSG where scale and we're pulling together businesses with redundant capabilities that allow us to continue to uncover spending we can eliminate, which continues to be an everyday opportunity where the management teams are collaborating and finding new opportunities. Additionally, constructive collaboration is a key part of our cross-selling initiatives, which are a priority and are both growing and paying off. We are finding better and different ways to increase sales through long-standing relationships with our best customers. Enhancing our offering and value to our customers is adding to our management team's enthusiasm as they see an expanded opportunity complementing the DSG platform we are building with the Hisco acquisition and the role it plays in accelerating differentiated revenue growth initiatives. We also identified more cost reduction benefits and margin improvement opportunities as Hisco becomes more integrated with TestEquity in our Industrial Technologies vertical. We are committed to driving our elevated margin objectives in that business in that vertical over the next several quarters, similar to what we've done in the other verticals. We continue to engage in numerous discussions around strategic assets to buy, and we have accelerated interest from businesses that see the value in and want to be a part of the differentiated specialty distribution business we are building with DSG. Several of them we would like very much to add to our business, and we expect we will get the opportunity to. But we have a high bar and a disciplined framework and commercial logic that must exist for us to add businesses to our fold and then expect a lot of profitability growth as we optimize them for the benefit of each of our verticals, consistent with the financial success of our last 10 acquisitions like we've outlined today. All of our management teams have to be supportive and committed that an acquisition is key to their success and own that accountability for us to bring an acquisition on board and for it to enjoy similar success to what we've enjoyed. With that, operator, we would like to take questions from analysts and investors.
Operator, Operator
Thank you. At this time, we will be conducting our question-and-answer session. Thank you. Our first question is coming from Kevin Steinke with Barrington Research. Your line is live.
Kevin Steinke, Analyst
Hey, good morning.
Bryan King, CEO
Good morning, Kevin.
Ron Knutson, CFO
Good morning, Kevin.
Kevin Steinke, Analyst
I wanted to start off by asking about the pockets of choppy demand or demand softness related to the technology vertical, renewables, and test and measurement equipment. Do you think this situation will continue as long as the cost of capital remains high? Do you have any insights from your customers about when we might see a turnaround or improvement in those areas? I know you're optimistic about those segments over the long term, but I'm curious about your thoughts regarding the current environment for the next couple of quarters.
Bryan King, CEO
Kevin, that's a valid question, and I was actually asked the same thing yesterday in a different setting. We anticipated that the renewables market would begin to grow after the Inflation Reduction Act or the renewal of the production tax credit. There were numerous projects in the pipeline that we were aware of, and our market share is quite strong there. So we expected to benefit from that. However, as interest rates increased and the cost of capital rose, it dampened some of the financial advantages of the production tax credit because those projects are mainly financed at the project level. Consequently, there have been delays associated with these projects, but there remains significant pressure to initiate them. We find ourselves in a holding pattern where we’ve experienced increased interest, and we predict an uptick in demand in renewables, particularly in the retrofit area. Our recent acquisitions in Gexpro were strategically aimed at boosting our capabilities in electrical, mechanical, and kitting, making us a vital supplier for the long-term maintenance cycle of existing renewable infrastructure. We anticipate that these projects will eventually be released, but we are still in the early stages of seeing them take off. On the semiconductor and technology fronts, Gexpro Services has faced a challenging environment, as I previously mentioned. Historically, this has been our most profitable market. While we believe that North America will benefit from the CHIPS Act long-term, there has definitely been a slowdown in customer demand for our products. Many of us have invested in semiconductor stocks and have witnessed the volatility in that sector. One customer in particular has faced more challenges in their demand for our products, negatively affecting our revenue beyond what would typically be expected from the semiconductor activity in North America. Regarding test and measurement, we have seen significant delays in purchasing. Over the past year, we made some strategic pricing decisions that, to be honest, likely impacted us more than anticipated as market conditions weakened. There was a reseller customer we had supported for years whose margins became unattractive compared to the capital we had tied up, leading us to part ways with them, which further affected our revenue during a tough industry backdrop. In aerospace and defense, while Gexpro Services has performed well in MRO, TestEquity has faced challenges in that segment. We know our customers are financially healthy and have capital spending needs, but they have postponed purchases of test and measurement equipment due to the broader macroeconomic factors. It is difficult to predict when these markets will rebound. We feel confident in our market share but do not expect a significant recovery in the fourth quarter. The trends observed in the fourth quarter align with those from the third quarter, although test and measurement sales have improved. We have seen some recovery in the early part of the fourth quarter compared to the low point in the third quarter, suggesting that deferred purchasing may be resuming. Some of the inventory players have been more aggressive on pricing, causing us to hold back. We were designing and quoting projects for customers with whom we have longstanding relationships, only to have others undercut our prices. We have tried to maintain a disciplined approach to protect our margins, which has impacted our volume in the test and measurement sector this quarter.
Ron Knutson, CFO
Kevin, this is Ron. I would like to add one more comment to Bryan's remarks. As we approach the next couple of quarters, it's important to remember that we will be facing some challenging comparisons in the fourth quarter and the first quarter of 2024 compared to 2023. All three of our businesses saw solid organic growth in the fourth quarter compared to the fourth quarter of 2022 and 2021. Just keep in mind that these tough comparisons will be a factor as we move into the fourth and first quarters of next year.
Bryan King, CEO
That's a good point, Ron. Along those lines, I want to mention two other things I didn't cover. When we acquired Hisco, we knew about a couple of programs they had, such as their strong relationship with Abbott and their COVID testing kits program, which has seen a significant decline. We anticipated some softness in these areas when we purchased the business. Hisco's performance has aligned with our expectations, and we are pleased with the top line results. There were some construction programs and a few pharmaceutical initiatives that are phasing out; the construction aspects were tied to Abbott, while some pharmaceutical programs were mainly related to COVID. We have visibility on new programs that haven't yet impacted the profit and loss statement, and we expected some fluctuations in the top line, which doesn't concern us. Additionally, part of the challenges we've faced involves driving EBITDA margin and profitability while enhancing salesforce productivity with Lawson. We've focused on achieving solid, profitable revenue growth and have had to be disciplined about potentially walking away from some customers. This approach may lead us to make difficult decisions regarding pricing, especially in an environment where we see market discrepancies. While this may necessitate a reduction in top line figures, our aim is to maintain strict margins, pricing discipline, and ultimately meet our EBITDA goals.
Kevin Steinke, Analyst
Great. That's all really good color and insight. I appreciate that. The performance in the Lawson business was impressive as you noted with the 18% increase in sales rep productivity. So as I look back about 18 months ago, it looks like the salesforce headcount is down a bit, but as you noted, productivity up significantly. So maybe you can just refresh us or walk us through the steps that you've taken to really drive productivity in there and how that's been playing out for you?
Bryan King, CEO
I'd love to answer that question, because I get excited about it, but Ron lives it every day. Since he's been at Lawson overall these years, so Ron, why don't you jump in on it first, and then I'll follow up even though it's a topic we enjoy.
Ron Knutson, CFO
Sure, Kevin. You've been following our sales efforts for several years now, and we are very happy with the progress at Lawson, moving from high single-digit EBITDA to a steady range of 13% to 14%. When it comes to our field sales reps, we're making significant investments in them as they are vital to our success and work hard every day to visit our customers. We've aimed to support them by providing additional resources. For instance, we are launching a more advanced CRM tool in the first quarter and have created support roles, including service and inside sales reps, to enhance our sales channels. Our focus is on helping them become more productive by defining their territories better and creating repeatable revenue streams. You're correct that our field headcount is lower than last year, but our priority isn't just the number of heads; it's about identifying successful territories that can offer our sales reps customers and leads, which ultimately leads to higher commissions. The 18% growth we've seen results from various initiatives over the past months, including redefining territories and exploring new revenue opportunities. Our strategic accounts have continued to grow strongly; they are dependable customers that provide our sales reps with a manageable size of accounts to service consistently. We're really enthusiastic about improving productivity and expanding our outreach to more customers.
Bryan King, CEO
Just because it's a favorite topic for us to dig into, Kevin, I want to add to Ron's comments. This year, we decided to make a significant investment in additional resources to support the outside salesforce. Looking back, many of us have been conditioned over the last eight to ten years, during my time at Lawson, to believe that we needed to grow our outside salesforce to increase revenue and gain leverage through their efforts at the street level. This required more presence in the field to improve our EBITDA margins. However, our perspective has evolved. We believe there are many efficiency gains we can provide our salesforce by equipping them with more tools and support resources from the home office, and sometimes additional help at customer locations. For instance, having a support technician available to assist with inventory management allows salespeople to focus on finding ways to increase revenue, reach more customers, and serve them better. We have identified growth opportunities with customers while also recognizing that our salesforce was spending time with customers that were harder to grow or on tasks like organizing inventory on-site. On the technical side, we have added experts and plan to enhance our technical expertise at the home office, providing more support for our field salesforce. The goal is to significantly reduce the historic turnover rate in the Lawson field salesforce. As a result, our sellers can dedicate more time to seeking revenue growth opportunities. Over the past year, our strategic accounts revenue has grown over 20% year-over-year, specifically 23%.
Ron Knutson, CFO
Yeah.
Bryan King, CEO
Our business has seen progress in the pipeline, particularly due to our association with DSG and a focused strategy on selling to larger accounts where we can achieve mutual growth. The street business, which includes smaller accounts, has remained mostly stable, experiencing a slight decrease of about 1%. We are encouraging our salespeople to be more mindful of their time spent at various sites and to actively seek opportunities to increase revenue, as we want them to earn more. We believe that enhancing their efficiency and productivity will lead to higher compensation, thereby reducing turnover. We have previously mentioned that turnover has historically cost us over $20 million annually due to excessive churn within the salesforce. Our strategy has shifted towards providing better support for our existing team rather than constantly expanding it, which has resulted in a slight reduction in the number of field representatives. However, our overall spend has not decreased significantly. The inside sales rep support for outside sales reps, along with technical and service support, means that total headcount has not decreased as much as the initial reduction in the outside salesforce might suggest.
Kevin Steinke, Analyst
Okay. Great. Thanks for all the insight. I have to jump to another call here. But again thanks for all the commentary. I'll turn it over.
Bryan King, CEO
Thanks, Kevin.
Ron Knutson, CFO
Thanks, Kevin.
Operator, Operator
Thank you. Our next question is coming from Tommy Moll with Stephens Inc. Your line is live.
Tommy Moll, Analyst
Good morning and thank you for taking my questions.
Bryan King, CEO
Hey, Tommy.
Ron Knutson, CFO
Good morning, Tommy.
Tommy Moll, Analyst
I wanted to continue discussing the Lawson theme. Bryan, you mentioned several times the pressures or uncertainty within the core street business. What is the current situation regarding leading edge demand from your customer base?
Bryan King, CEO
It's challenging for me to explain. There are many customers in that street business, totaling tens of thousands. Over the years, it's been difficult for us to analyze this. We're working on a more advanced CRM tool that will provide us with better data. Currently, about a quarter of our salesforce is testing it, and it will be implemented across the entire salesforce at the start of the first quarter. This will improve the data we can access. I am particularly concerned about the recessionary pressures we're experiencing in the economy since these customers are typically smaller businesses, like welding shops or small manufacturers, who might only spend a few thousand dollars a year with us, or even less. Overall, that segment appears to be soft, as we saw a 1.4% decline compared to the larger strategic sectors, which experienced significant gains quarter-over-quarter. This reflects the economic strain in the US due to higher interest rates and a slowdown in business activity. However, we are not noticing these issues with our larger strategic customers. Certain industries are showing some signs of weakness, but the larger accounts seem to maintain healthier business activity levels across the board. I am concerned that our salesforce, in focusing on efficiency and productivity, may not be visiting the smallest customers as frequently as before. We conducted an activity assessment about four or five years ago with LKCM Headwater, which revealed that we were losing money on the smallest segment of our customer base—about $20 million a year or more. We realized we needed to help our sales team turn these relationships into more profitable ones without abandoning these customers. We've been working hard to develop a solution that allows our salesforce to continue serving these clients while ensuring they are not overwhelmed, enabling them to grow their business without over-serving those smaller customers as we had in the past.
Tommy Moll, Analyst
Thank you, Bryan.
Bryan King, CEO
I guess I'm trying to say, Tommy, there may be some decline in that small street business that isn't solely economic. It could be that we just aren't engaging with them as often.
Tommy Moll, Analyst
Yeah, I follow. Thank you. Zooming up to the consolidated company level, you've outlined some of the cross currents in terms of the demand environment. I just wondered if you could give us a reasonable expectation for fourth quarter if we just compare to the third quarter results, you did $439 million of revenue, 10% EBITDA margin. Do you have a sense of whether those two points are flat, up, down quarter-over-quarter, if you roll it all together? Thank you.
Ron Knutson, CFO
Yeah. So Tommy, this is Ron. A couple of things to note regarding Q4. We have 61 selling days in the fourth quarter compared to 63 in Q3, which will clearly have an impact. Everyone understands that 61 days may not really equate to a full 61 days. As we look at the first month of the quarter, we are observing a similar mid-single-digit total sales decline, excluding Hisco since they were not in the prior year’s figures. Considering this for Q4, it’s unlikely we will see a quick turnaround, especially in November and December. It wouldn’t surprise me if the trend we experienced in October continues for the rest of Q4, adjusted for an ADS basis. Regarding the overall adjusted EBITDA percentage, historically, we see a slight compression compared to 63 or 64-day quarters due to our fixed versus variable operating cost structure. There is typically a small amount of compression in the fourth quarter, nothing dramatic, but it is noticeable over time. Given the current revenue trends, we anticipate a similar slight compression in the fourth quarter compared to what we saw in Q3.
Tommy Moll, Analyst
Thank you both. I appreciate the insight and I'll turn it back.
Bryan King, CEO
Thanks, Tommy.
Operator, Operator
Our next question is coming from Brad Hathaway with Far View. Your line is live.
Brad Hathaway, Analyst
Hi, everyone. I appreciate your time and insights from this quarter. I have a question. It appears that most of the weakness is still in the test and measurement equipment segment. In the 10-Q, I noticed you expressed optimism about a recovery in that area during the first half of 2024. I'm interested to know what factors lead to that optimism and how you gain visibility into it.
Bryan King, CEO
Great question. I think there are a few factors that contribute to our optimism. First, we've noticed a slight improvement from the low point we experienced in July, and we're starting to see an uptick in our test and measurement activity levels. Although activity is still down, there is greater visibility around order interest and performance is improving compared to the lowest point. Additionally, we've strategically chosen to refrain from pursuing certain revenues due to what seemed to be irrational inventory destocking among some market players, where we maintain a strong position. We hold the largest inventory position and account for a significant portion of key vendors' North American sales through distribution. We aimed to avoid disrupting pricing, but maintaining that discipline meant potentially losing revenue that might have typically gone our way if we had engaged in more aggressive price discounting. Historically, there were stricter discount boundaries enforced by our vendors, but those became more relaxed recently as some distributors attempted to offload inventory. We believe that phase is behind us, which adds to our optimism. Lastly, we've made a strategic decision following 2022 to focus on enhancing our margin discipline and ultimately improving EBITDA margins at TestEquity. We were unwilling to continue selling into a channel with a low margin for us, even though it represented significant volume. This volume became more challenging to manage given the weaker industry backdrop, which further amplified our situation.
Brad Hathaway, Analyst
Okay. So it's kind of cycling some things that are internal that you kind of are already in control of as opposed to making kind of a macro prognostication on when T&M will recover?
Bryan King, CEO
Yes, it's likely a combination of factors. There are indeed some internal elements we are dealing with, but we also believe that customers have been slow to allocate funds for replacing or upgrading their test and measurement equipment, which is ultimately pending in our pipeline. However, we are not making a prediction about the economy; rather, we are focusing on our customers' requests for quotes and the discussions we're having with them, as well as observing the long-term demand for equipment from our customers.
Brad Hathaway, Analyst
Got it.
Bryan King, CEO
But I would be concerned about trying to make a call on it. But I'm less concerned that we're making the call versus the fact that we think that we've got better visibility right now than we did 60 days ago.
Brad Hathaway, Analyst
Understood. Great. You reaffirmed that with TestEquity you anticipate reaching 10% EBITDA margins by the end of the year, up from about 7% today. How much of this projected improvement is due to the recovery in demand you see in the business heading into 2024, as opposed to the integration with Hisco? Is there a way to delineate the factors contributing to this significant enhancement?
Bryan King, CEO
That's a very fair question. The cost side opportunity we've mentioned is currently over 100 basis points, specifically between 100 to 150 basis points, where actions have already been taken but haven't yet impacted results. There's still further potential to optimize the entire industrial technologies sector, and we are working together with the Hisco and TestEquity teams to unlock that potential, although it has been identified but not fully acted upon. Additionally, there are gross margin initiatives in progress, as well as dynamics we've noticed, particularly in test and measurement, which we expect to benefit from as we move forward. These gross margin initiatives across the Industrial Technologies sector should contribute positively as well. Together, I believe these factors are largely controllable, comprising about two-thirds of what we need to achieve our business objectives, while the remaining third relates to demand normalization rather than growth. I explored this calculation recently and find it challenging to reach over 10% without a more optimistic outlook by the end of next year. Demand has not remained as weak as it was in the last quarter, and we are not fully engaging with the demand that exists due to a chaotic marketplace. However, if the market stabilizes and we tap into more demand, along with the initiatives already mentioned, then we should be able to meet our targets.
Brad Hathaway, Analyst
Okay. Thanks. Lastly, congratulations on reducing the leverage to below 3%. Achieving that just six months after Hisco is quite impressive. It seems like you're optimistic while still maintaining high standards for future mergers and acquisitions. Is that a reasonable interpretation?
Bryan King, CEO
We're optimistic. We'll start with that. We've got a really robust pipeline of projects that we're working through right now. So there are different stages of the diligence or lockdown, but trying to get them right, and the disciplined framework is one that we just want to make sure we're reiterating because there's not an urgency on our part to spend liquidity unless it absolutely fits our commercial objectives as well as our financial objectives for the business. But there are things that we are actively working on, and they're of all different sizes at this point.
Ron Knutson, CFO
Brad, I’d like to add a thought to Bryan's point. You can see from our balance sheet that we currently have over $100 million in cash. The third quarter was very strong for us in terms of cash generation, producing $47 million from operating activities, and a total of $74 million year-to-date. This was mentioned in our prepared remarks, which has helped bring our leverage down to 2.9%, despite limitations on how much cash we can use to offset our bank-defined EBITDA leverage. I wanted to emphasize our cash position because it directly relates to your question about acquisitions. Currently, we have $280 million available through our revolver along with our cash, plus an additional $200 million accordion feature in our credit facility. We believe that from a liquidity perspective, we are well-positioned to seize opportunities as they arise.
Brad Hathaway, Analyst
Fantastic. Well, hopefully, you can find another Hisco out there. Excellent. Well, thank you all very much. And…
Bryan King, CEO
We have some ideas on that. There’s been significant interest, as I mentioned in the prepared remarks, from various parties wanting to be involved in what we are building. There are businesses and assets available that align well with our goals and would be valuable additions to our operations, helping us achieve our long-term objectives. We’ll see how this unfolds. Additionally, we have specific objectives in place where we believe we can make strategic acquisitions that align commercially without taking on excessive risk.
Brad Hathaway, Analyst
Yeah. No, that's excellent. Well, thanks again, and obviously, we look forward to seeing if anything develops.
Bryan King, CEO
Thanks, Brad.
Operator, Operator
Thank you. We have reached the end of our question-and-answer session. So I will now hand the call back over to Mr. King for his closing remarks.
Bryan King, CEO
Thank you, Olie. We look forward to speaking with everyone again when we report our fourth quarter results in early 2024. Additionally, we'll be presenting at the upcoming Baird Conference in Chicago on November 7 and at the Stephens Conference in Nashville on November 15. We hope to see you all there. If you're there, please come up and say hello. Have a great day and go Rangers. Thank you.
Operator, Operator
Thank you. Ladies and gentlemen, this does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.