Distribution Solutions Group, Inc. (NASDAQ:DSGR) Q1 2023 Earnings Conference Call May 4, 2023 9:00 AM ET Company Participants Steven Hooser - Investor Relations Bryan King - Chairman & CEO Ron Knutson - EVP and CFO Conference Call Participants Kevin Steinke - Barrington Research Brad Hathaway - Far View Capital Management Katie Fleischer - KeyBanc Capital Markets Operator Greetings, and welcome to the Distribution Solutions Group's First Quarter 2023 Earnings Conference Call. [Operator Instructions] Pleas ...

Financial Performance - DSG reported a consolidated Adjusted EBITDA of $113.858 million for the year ended December 31, 2022, compared to $39.417 million in 2021, reflecting significant growth post-merger[165][168]. - Lawson's revenue for the year was $324.783 million, with a gross profit of $170.753 million, resulting in an operating income of $6.536 million[171]. - TestEquity achieved an Adjusted EBITDA of $34.736 million in 2022, up from $16.107 million in 2021, indicating strong operational performance[168]. - Gexpro Services generated an Adjusted EBITDA of $43.206 million for 2022, compared to $23.310 million in the previous year, showcasing effective market strategies[168]. - Total revenue for 2022 reached $1,151.4 million, a significant increase from $520.3 million in 2021, reflecting a growth of 121.5%[174]. - Adjusted revenue for Lawson increased by 15.6% to $429.7 million in 2022 compared to $371.7 million in 2021, driven by price increases and higher sales volumes[179][180]. - Adjusted gross profit for Lawson rose by $25.8 million to $226.3 million in 2022, with a gross profit margin of 52.7% compared to 53.9% in the prior year[181][182]. - Adjusted EBITDA for Lawson was $38.6 million in 2022, reflecting a 27.1% increase from the previous year[184]. - TestEquity segment revenue increased by 48.5% to $392.4 million in 2022, driven by acquisitions and organic growth of 12.1%[186]. - Gexpro Services segment revenue grew by 50.4% to $385.3 million in 2022, with an operating income of $21.3 million, up 91.9% from 2021[190]. - The overall gross profit margin for the company improved to 33.9% in 2022 from 25.0% in 2021, indicating better cost management and pricing strategies[174]. - Net income for the company was $7.4 million in 2022, a turnaround from a net loss of $5.1 million in 2021[174]. - Net income for 2022 was $20.9 million, a significant increase from $0.4 million in 2021[330]. Mergers and Acquisitions - The Mergers completed on April 1, 2022, have significantly impacted the comparability of financial results, with Lawson's results included only post-merger[162]. - The mergers with TestEquity and Gexpro Services were completed on April 1, 2022, with Lawson Products, Inc. as the legal acquirer, and the combined entity is treated as the accounting acquirer for financial reporting purposes[228]. - The consolidated financial statements reflect the results of operations and financial position of TestEquity and Gexpro Services for all periods presented, while the legacy Lawson business results are included only after the merger date[228]. - The Company acquired $43.0 million of intangible assets related to trade names during the mergers, valued using the relief from royalty method[242]. - The Company completed mergers on April 1, 2022, issuing a total of 10.3 million shares of common stock valued at approximately $351.5 million[321][324]. - The total consideration exchanged for the mergers amounted to $353.4 million, with transaction costs of $12.7 million recorded for 2022[324][328]. - The company acquired several businesses in 2022, with total purchase consideration for these acquisitions amounting to $122.2 million[332]. - The Frontier acquisition includes a potential earn-out payment of up to $3.0 million based on performance milestones, with a fair value of $1.7 million recorded as of December 31, 2022[334]. - The company recognized a gain on bargain purchase of $1.4 million related to the acquisition of NEF, reflecting the excess of net assets over the consideration transferred[336]. Financial Position and Assets - Total assets increased to $1,215,610 in 2022, up from $491,360 in 2021, reflecting a growth of 147%[253]. - Total stockholders' equity increased to $562,995 in 2022 from $165,769 in 2021, reflecting a growth of 239%[253]. - The Company had $348.0 million of goodwill as of December 31, 2022, up from $104.2 million in 2021, indicating significant business acquisitions[290]. - The allocation of consideration for the mergers included $148.3 million in current assets and $119.1 million in other intangible assets[328]. Cash Flow and Expenses - The company incurred interest expenses of $24.3 million in 2022, compared to $16.7 million in 2021, reflecting increased debt levels[174]. - Selling, general and administrative expenses for Lawson increased to $208.7 million in 2022, up from $192.3 million in 2021, primarily due to higher compensation and severance costs[183]. - Net cash used in operating activities was $11.0 million for the year ended December 31, 2022, primarily due to increased accounts receivables and inventories[207]. - Net cash used in investing activities was $126.7 million, mainly due to acquisitions completed during the year[209]. - The company incurred interest expenses of $24,301 in 2022, up from $16,737 in 2021, indicating increased borrowing costs[255]. - Net cash paid for income taxes increased to $13,813 from $2,998, reflecting a significant rise in tax obligations[261]. - Net cash paid for interest rose to $22,153 compared to $15,395, indicating higher financing costs[261]. Operational Challenges and Strategies - Supply chain disruptions have led to increased supplier costs and lower gross profit margins, prompting DSG to implement price increases in 2021 and 2022[161]. - TestEquity is currently facing challenges due to a semiconductor chip shortage, which is expected to recover in 2023[158]. - Lawson plans to enhance sales team productivity and expand product offerings to existing customers while attracting new clients[154]. - Gexpro Services aims to increase wallet share with existing customers and expand geographically in its six key vertical markets[160]. Audit and Compliance - BDO USA, LLP was engaged to audit the 2022 consolidated financial statements, ratified by stockholders at the 2022 Annual Meeting[229]. - The Company’s internal control over financial reporting received an adverse opinion as of December 31, 2022, indicating significant deficiencies[235]. - The financial statements for the year ended December 31, 2022, present fairly the financial position of the Company in conformity with generally accepted accounting principles[234]. - The historical consolidated financial statements of TestEquity and Gexpro Services had not been audited prior to their inclusion in the Form 10-K[229]. - The Company’s management is responsible for the financial statements, while the auditors express an opinion based on their audit[248]. Inventory and Revenue Recognition - The majority of the company's revenue is generated through the sale of specialized products, with less than 5.0% coming from Vendor Managed Inventory services[280]. - The company evaluates the collectability of accounts receivable based on historical experience, with reserves for bad debts recorded as necessary[282]. - The company’s inventory is primarily valued using the first-in-first-out method for the Lawson segment and the weighted average method for TestEquity and Gexpro Services segments[283]. - The Lawson segment generated revenue primarily from MRO product sales, with revenue recognized upon transfer of control to the customer[345]. - Revenue from customers is recognized when obligations under the contract are satisfied, generally upon delivery of products or services[341].

Financial Data and Key Metrics Changes - Consolidated sales for Q4 were $328.9 million, representing a 155% increase on a GAAP basis, driven by the inclusion of Lawson Products and organic growth of 16.7% [37][47] - Adjusted EBITDA margin for Q4 was 10.3%, exceeding the previously stated goal of 10% [73][81] - Full year GAAP revenue totaled $1.15 billion, with adjusted EBITDA of $123 million, reflecting a 64% increase year-over-year [47][57] Business Line Data and Key Metrics Changes - Lawson Products achieved a 20.3% organic growth in average daily sales over Q4 2021, with significant contributions from strategic business and Kent Automotive [59] - Gexpro Services reported total sales of $100.1 million for Q4, an increase of $33.6 million year-over-year, with $26.3 million from acquisitions and $7.3 million from organic growth [40] - TestEquity's sales grew by $42.7 million, or over 68%, to $105.4 million, with approximately $33.9 million from acquisitions and organic sales increasing by 14.5% [41] Market Data and Key Metrics Changes - The renewables vertical is expected to see a reacceleration as customers await government tax credit guidance, while demand in the technology vertical remains soft until inventories stabilize [31][32] - Customer orders remain strong across all three businesses, with no destocking observed, indicating a healthy demand environment [69][70] Company Strategy and Development Direction - The company aims to build profitable scale as a specialty distribution network, focusing on significant free cash flow and above-market returns for shareholders [27][65] - Strategic investments in technology and lead generation capabilities are planned to enhance sales productivity and customer service [30][50] - The company is actively pursuing acquisitions that enhance organic growth rates and returns on working capital investment [49][113] Management's Comments on Operating Environment and Future Outlook - Management remains cautiously optimistic about the 2023 outlook, with strong momentum continuing from 2022 [26][46] - The company is closely monitoring macroeconomic conditions and customer demand while maintaining a focus on operational efficiency and margin expansion [80][81] Other Important Information - The company successfully completed five acquisitions in 2022, producing annualized revenues of about $204 million and adjusted EBITDA of $21 million [48][72] - The net debt leverage ratio improved from 3.6 times at the time of the merger to 3.1 times by the end of 2022 [62] Q&A Session Summary Question: How has demand trended in January and February? - Management indicated that there has not been a destocking trend and overall customer conversations remain positive, with a focus on inventory replenishment [69][70] Question: What are customer conversations like regarding inventory needs? - Customers are not destocking but are looking to fill inventories, indicating a stable demand environment [70][90] Question: What is the company's approach to capital allocation and M&A? - The company prioritizes organic growth opportunities but remains selective in pursuing M&A that significantly enhances organic growth rates and shareholder value [93][113] Question: What enabled the sequential margin expansion in Q4? - The margin expansion was attributed to continued growth throughout 2022, effective management of operating expenses, and contributions from acquisitions [117][119]

Financial Data and Key Metrics Changes - Total sales grew 46% to $347.2 million, with organic growth of 15% and acquired revenue contributing 31% [10][34] - Adjusted EBITDA for the quarter was nearly $35 million, achieving a 10% margin [10][37] - Diluted earnings per share increased to $0.84, with adjusted diluted EPS at $0.64 compared to $0.25 a year ago [37] Business Line Data and Key Metrics Changes - Lawson Products reported sales of $109.4 million, with organic growth of 16.8% driven by strong performance in strategic accounts [41] - Gexpro Services achieved total sales of $103.7 million, with organic growth of nearly 14% [44] - TestEquity's sales grew by $48.9 million, representing a 72% increase, with organic growth of 16.9% [47] Market Data and Key Metrics Changes - Demand remained strong across most verticals, with the exception of renewables, which faced headwinds [60][61] - Five of the six vertical markets experienced double-digit growth, particularly in aerospace, defense, and consumer industrial sectors [61] - The company noted a steady demand environment, with no significant signs of softness in customer orders [64] Company Strategy and Development Direction - The company is focused on enhancing its specialty distribution network and driving significant free cash flow [23] - A robust acquisition pipeline is in place, with ongoing evaluations of tuck-in acquisitions to support growth [25][79] - The management team emphasizes disciplined capital allocation and prioritizes internal growth initiatives alongside potential acquisitions [76][81] Management's Comments on Operating Environment and Future Outlook - Management expressed caution regarding the economic outlook for 2023 but noted strong current demand [14][60] - The company is prepared to manage through economic cycles, leveraging past experiences during downturns [15][93] - There is confidence in the ability to generate cash flow and manage working capital effectively, even in softer economic conditions [20][93] Other Important Information - The share repurchase program has been expanded to return capital to shareholders when appropriate [22] - The company has invested significantly in working capital to support growth and align its business operations [17][50] Q&A Session Summary Question: Demand side observations and backlog visibility for 2023 - Management noted consistent activity levels and no significant delays in customer orders, with a focus on MRO and OEM markets [60][64] Question: Pricing actions and their impact on organic growth - Price increases contributed significantly to organic growth across all segments, with specific percentages provided for each business line [70][71] Question: M&A strategy in light of macroeconomic uncertainty - The company remains cautious about aggressive acquisitions but is actively pursuing attractive tuck-in opportunities that align with long-term goals [75][79] Question: New channels to market for Lawson Products - Lawson is exploring diverse channels to better serve its customer base and enhance sales team efficiency [83][85] Question: Impact of higher compensation and healthcare costs - Increased compensation was aligned with organic growth, while healthcare costs had a notable impact on margins [87]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol Name of each exchange on which registered Common stock, $1.00 par value DSGR NASDAQ Global Select Market FORM 10-Q (Mark One) ☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For quarterly period ended September 30, 2022 or ☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange A ...

Financial Data and Key Metrics Changes - The company reported consolidated sales of $321 million, representing a 139% increase on a GAAP basis due to the inclusion of Lawson Products [37] - Organic sales growth was nearly 12%, with a like-for-like increase of approximately 34% or $80.6 million over the second quarter of 2021 [38] - Adjusted EBITDA improved by $11.7 million to $31.7 million, translating to 9.9% of sales [40] Business Line Data and Key Metrics Changes - Lawson Products generated sales of $107.3 million, with organic sales growth of 13.1% compared to the second quarter of 2021 [43] - Gexpro Services reported total sales of $99.8 million, with organic sales growth of 6% [48] - TestEquity's sales grew by over 44%, with organic sales increasing by 10.6% in both the Test & Measurement and Electronic Production Supplies businesses [52] Market Data and Key Metrics Changes - The company experienced strong demand across all operating segments, with increasing customer backlog in TestEquity indicating robust market conditions [36][64] - Gexpro Services maintained gross margin percentage despite inflationary pressures, indicating effective management of supply chain costs [50] Company Strategy and Development Direction - The company continues to focus on an acquisition strategy, having closed four acquisitions in 2022 that are expected to generate annual revenues of over $180 million [15][16] - Management emphasized the importance of cross-selling opportunities among the operating companies to enhance service offerings and customer value [60][61] Management's Comments on Operating Environment and Future Outlook - Management noted no significant slowdown in unit volume shipped, indicating strong customer demand despite economic uncertainties [63][64] - The company remains confident in achieving adjusted EBITDA margins above 10% by the end of 2022, driven by revenue synergies and cost management [70][71] Other Important Information - The company ended the quarter with $17.9 million in cash and $406 million in outstanding debt, maintaining a net debt leverage ratio of 3.6 times [41] - Management highlighted the successful integration of acquisitions and the ongoing evaluation of new acquisition opportunities [17][18] Q&A Session Summary Question: What progress has been made on cross-selling among operating companies? - Management indicated that customers are receptive to expanded service capabilities, leading to quick conversions and enhanced value propositions [60][61] Question: Is there any indication of economic slowdown impacting the business? - Management reported no signs of slowdown in unit volume shipped and noted strong customer demand reflected in increasing backlogs [63][64] Question: How are price increases being managed across segments? - All three companies have successfully passed along price increases to offset supplier cost increases, with approximately 7% of the 12% organic growth attributed to price [65][66] Question: What factors are driving adjusted EBITDA margin expansion? - Management cited strong demand, effective cost management, and revenue synergies as key drivers of margin expansion [67][70] Question: What is the status of the acquisition pipeline? - The acquisition pipeline remains robust, with ongoing activity across all three platforms and targeted multiples of 7 to 8 times [73][75] Question: What are the order trends and seasonality expectations? - Management expects the second and third quarters to be stronger due to more selling days, with consistent trends observed early in the third quarter [85][86] Question: How is cash flow generation expected to normalize? - Management anticipates cash flow generation to return to normalized levels in the latter half of the year, following initial merger-related costs [95][96]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) ☒ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For quarterly period ended June 30, 2022 or ☐ Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file Number: 0-10546 DISTRIBUTION SOLUTIONS GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 36-2229304 (State or other jurisdiction ...

Lawson Products, Inc. (LAWS) Q1 2022 Results Conference Call April 28, 2022 9:00 AM ET Company Participants Steven Hooser - IR Bryan King - Chairman Ron Knutson - EVP and CFO Operator Good morning, everyone. Welcome to the Lawson Products First Quarter 2022 Earnings Call. As a reminder, this conference call is being recorded. Now I will turn the call over to Steven Hooser, Investor Relations, to provide introductions and read the safe harbor statement. Please go ahead. Steven Hooser Good morning, and welcom ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol Name of each exchange on which registered Common stock, $1.00 par value LAWS NASDAQ Global Select Market FORM 10-Q (Mark One) ☒ Quarterly Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For quarterly period ended March 31, 2022 or ☐ Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For ...

Financial Data and Key Metrics Changes - Lawson Products reported consolidated sales of $102.1 million for Q4 2021, an increase of $4 million compared to the previous year, despite having one less selling day [21] - Average daily sales grew by 5.7% year-over-year for Q4 and 19.7% for the full year 2021 compared to 2020 [6][21] - Adjusted EBITDA margin for Q4 was 8.3%, and for the full year, it was 8.6% [6][38] - Consolidated gross margin percentage was 52.9% for Q4, slightly down from 53.1% in the previous year [22][26] Business Line Data and Key Metrics Changes - MRO sales rep productivity improved by 8.6% year-over-year [22] - Historical loss in MRO business saw average daily sales increase by 9.6% over Q4 2020, while Bolt Supply increased nearly 27% [26] - Partsmaster sales were impacted by a slowdown in military procurement, but military activity is expected to rebound in early 2022 [11] Market Data and Key Metrics Changes - Strategic accounts growth was down 2.4% sequentially for Q4 but up 9.7% compared to Q4 2020 [13] - Non-oil and gas customers represent 93% of the total strategic account customer base, with significant growth in industrial customers [13] - Government civilian segment sales were down due to lower PPE sales compared to 2020, but growth is anticipated from new contracts [16] Company Strategy and Development Direction - The company is focusing on organic growth initiatives, including investments in people and processes, particularly in the SLED markets [8] - The integration of Partsmaster is complete, and both Partsmaster and Bolt Supply have performed well, reinforcing confidence in future acquisitions [12] - The company is adapting to supply chain challenges and inflation by implementing price increases and managing costs effectively [9][40] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the growth trajectory in 2022, citing improvements in customer backorders and operational efficiency [18][63] - The company is confident in its ability to manage through supply chain disruptions and inflation, with a focus on maintaining customer relationships [24][66] - Early signs of customer demand in 2022 are positive, with mid-to-high single-digit increases in average daily sales compared to the previous year [71] Other Important Information - The company plans to invest $10 million to $12 million in capital expenditures in 2022, focusing on expanding distribution capabilities [34] - The company ended Q4 with $91.3 million in liquidity, positioning it well for future investments and acquisitions [36] Q&A Session Summary Question: Insights on labor shortages impacting organic growth - Management noted an increase in new customer inquiries due to labor shortages, with revenue retention slightly improving to just under 91% [44][46] Question: Size of investments in growth initiatives - Investments in growth initiatives for Q4 were approximately $300,000 to $400,000, with expectations for continued investment in early 2022 [53][56] Question: Outlook for standalone business growth - Management refrained from providing formal guidance but indicated positive trends in early 2022 sales [76][79] Question: Inventory build outlook - Management is comfortable with current inventory levels and does not anticipate significant increases in 2022 [81][83] Question: Activity in oil and gas accounts - Management acknowledged some volatility in oil and gas accounts but emphasized strong relationships with loyal customers [90][92] Question: Gross margin outlook for 2022 - Management expects stable gross margins, with ongoing cost increases being offset by price increases [94][96]