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Operator: Greetings. Welcome to the Distribution Solutions Group Fourth Quarter 2022 Earnings Conference Call. At this time all participants are on a listen-only mode. A questions-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference to your host Steven Hooser. You may begin.

Steven Hooser: Good morning, ladies and gentlemen, and welcome to the Distribution Solutions Group fourth quarter and full year 2022 earnings call. In conjunction with today’s call, we have provided a Q4 earnings presentation that has been posted on the company’s IR website at investor.distributionsolutionsgroup.com. Joining me for today’s call are Bryan King, DSG’s Chief Executive Officer and Chairman; and Ron Knutson, DSG’s Executive Vice President and Chief Financial Officer. During the call, they will be providing an update on the business from an operational and financial perspective. Additionally, Brad Wallace, LKCM-Headwater Partner and DSG Advisor as well as operating company CEOs, Cesar Lanuza, Russ Frazee, and Bob Connors will be joining for the Q&A session.

Please note that statements on this call and in the press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, and 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 disclaims any obligation to do so. Management will also refer to non-GAAP measures and reconciliations to the nearest GAAP measures that can be found at the end of the earnings release.

The earnings press release issued earlier today is 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. This call is being audio webcast on the Internet via a Distribution Solutions Group Investor Relations page on the company’s website. A replay of this teleconference will be available through March 23, 2022. With that, I’d like to turn the call over to Bryan King. Bryan?

Bryan King: Thank you, Steven. And good morning, everyone. It is a pleasure to be with you. Today Distribution Solutions Group delivered exceptional performance in 2022, which we know demonstrates the power of our strategic transformation from a standalone MRO business at Lawson Products to a leading multiplatform specialty distribution solutions company with the scale and leadership to drive sustainable growth. We achieved sales records in 2022, enhanced margins and expanded profitability while reducing our net debt leverage ratio, creating more firepower for reinvestment in the business and M&A. In addition, we attained our adjusted EBITDA margin target during the second half of 2022 and most recently during the fourth quarter we delivered strong double digit organic sales growth that beat expectations realizing an adjusted EBITDA margin of 10.3% on fewer selling days.

In January and February, our business momentum continues. And this year, I believe our companies will continue to take market share, deliver margin expansion, and generate meaningful free cash flow to support DSG’s capital allocation priorities in 2023. although we are closely monitoring the macroeconomic environment and customer demand, we remain bullish about our business prospects for 2023. Turning to Slide 4 in the earnings presentation. I am pleased to report that full year GAAP revenue for the company totaled $1.15 billion, and we generated adjusted EBITDA of $123 million. We believe that our scale and breadth of products and service are competitive advantages in the specialty industrial distribution industry, although fourth quarter is traditionally impacted by seasonality and fewer sales days, our revenues grew by 42%, which included a strong comparable organic expansion of 17%.

While price contributed to this increase, we also realized organic sales wins in 2022 on momentum from growing wallet share, volume increases and cross selling among the three businesses. Ron will discuss more on pricing in a few moments. Our teams have identified an increasing number of leads based on cross selling and the potential for expanded relationships and wallet share expansion for many of our largest strategic customers. We believe that leveraging strong customer relationships set us up for continued strong organic growth in each of our three businesses. In addition, we successfully completed five acquisitions in 2022. These acquisitions produced annualized 2022 revenues of about $204 million and annualized adjusted EBITDA of an incremental $21 million.

These acquisitions were acquired for a collective 7.7 times EBITDA multiple and through our internal initiatives have lifted the contribution of these acquisitions where we have cheapened the multiple into the low sixes based upon 2022 adjusted EBITDA. Between our three dedicated corporate development professionals at the DSG level, our operating teams and the LKCM Headwater team, we are actively pursuing acquisitions that make DSG a better business and are also keenly focused on successful integrations after we close. In our pursuit of strategic acquisitions, we not only look for fit within each of our operating companies, but we also seek to find opportunities that have commercial logic for all three businesses units, bringing them closer together while enhancing each of their organic growth rates and returns on working capital investment.

We remain cautiously optimistic in our 2023 outlook and continue to be confident about our ability to manage through cycles for significant value creation. 2023 has had a strong start as the levers we have been pulling are unlocking value. We continue to build out our roadmap for initiatives to create a stronger, more enduring business without losing the advantages of three separate customer facing efforts and operating teams that manage discrete channels to market. We are committed to continuously refine and improve on what we believe are the best specialty solutions for their end markets. DSG’s trade working capital investment at the end of 2022 was approximately $350 million. We understand that prudently managing working capital is one of the best ways to drive return on invested capital and organic growth rate.

The teams at all three companies have a heavy focus on working capital intensity for 2023 and will continue to manage customer receivables, vendor payables and inventory investments, especially as 2023 progresses. We also appreciate that having a properly managed, robust inventory position across our key categories and confidence in our organic growth strategies reinforces our value added service delivery models. Our commitment and willingness to a disciplined working capital investment framework is good for our vendors and our customers who want us to grow with them. Our principal goal at DSG is to build profitable scale as a specialty distribution network that throws off significant free cash, growth and demonstrates attractively above market returns for shareholders.

We are confident that is unfolding with what we are seeing transpire inside of these platforms and with the numerous initiatives and shared learnings and resources that our teams have identified and are currently working on that will accelerate returns. Since we only combined these companies at the end of Q1 in 2022, we have not had the benefit of a full cycle of working capital flow through the P&L that captures measurable 12 month returns. We believe we are still in the early innings at DSG of demonstrating this compounding benefit to shareholders and colleagues alike and are committed to driving significant progress and transparency on these metrics as our platform becomes more seasoned. Before Ron covers the consolidated and operating company financial results, I would like to comment on a few areas of operational focus within each of our three companies.

Lawson Products is a leader in the MRO distribution of C-parts offering vendor managed inventory services has realized significant growth with strategic customers and the Kent Automotive division. In 2022, we recognized gross margin improvements through enhanced pricing discipline as well as improved outbound freight recoveries. Lawson is in the early stages of investing in additional sales channels to support our customers, including inside sales, strategic account managers and web enhancements. Lawson is also investing in lead generation capabilities and CRM tools, all with the goal of helping our sales representatives be more productive and allow us to better serve our customers. During 2023, we will make strategic investments in technology, including new CRM tools, an enhanced ordering platform, and building out our BI capabilities.

Cesar and the team are using these investments in technology and lead generation to build on our momentum for 2023. Gexpro services is a leader in the supply chain solutions, largely C-parts specializing in VMI programs for high-spec OEM customers. This year, we are expanding kitting and services as well as launching our pilot e-commerce platform. Bob and his team are actively working on capturing synergies from our five acquisitions closed during 2021 and 2022 regarding our end markets. Aerospace and defenses sustained double digit growth and industrial power remains strong, helped in large part by the partial recovery in the oil and gas industry. We expect slower growth in transportation due to reduced in customer project spend and moderation from the consumer and industrial vertical due to inflationary and interest rates impacting consumer spending.

We continue to see the sluggishness of 2022 continuing into 2023 in the renewables vertical as customers await government tax credit guidance for developers onshore and offshore projects, although we expect a re-acceleration in this vertical where we continue to consolidate our leadership position. Finally, demand in the technology vertical is likely to remain soft until inventories stabilize. As exhibited in 2022, we were able to more than offset headwinds in certain end markets with growth from a large funnel of new revenue opportunities we are securing from our existing customer base, signing new customers and focusing on SKU expansion. All growth opportunities that were greatly improved through adding the five tuck in acquisitions and the association with Lawson and TestEquity.

TestEquity is a leading industrial technologies distributor of specialized test and measurement equipment and solutions, electronic production supplies and customized toolkits from leading manufacturing partners. Russ and the team have accelerated their digital migration and consolidated multiple concepts and brands onto the TestEquity web platform. We expect continued strong growth in the TestEquity digital platform in 2023. We’ve also aligned teams and capabilities across TestEquity and TEquipment to leverage the TEquipment outsourced solutions more fully across the company. We believe that synergies between TEquipment and TestEquity in the product and digital sales categories will deliver further margin enhancements and operating leverage.

The Apps piece of our business now approximates 35% of our TestEquity revenue. And with our acquisitions made in 2022, this is an expanding opportunity for us where we believe we have identified more ways for strengthening position in this market and improve VMI and digital offerings to enhance organic growth across the broader DSG’s commercial growth initiatives. Now I’d like to turn the call over to Ron to talk through the financials, and I’ll be back with some closing comments. Ron?

Ron Knutson: Thank you, Bryan and good morning, everyone. Turning to Slide 5. We’re excited this morning to share with you the fourth quarter results of Distribution Solutions Group. Let me remind you that given the reverse merger accounting treatment Lawson Products is only in the year-to-date GAAP numbers subsequent to the April 1, 2022 merger date. All three companies are included for the fourth quarter GAAP results. For ease of comparing the results, the slides that we’re utilizing this morning are adjusted for the pre-merger activity of Lawson Products. Let me summarize Q4 results. On a combined basis we reported strong top line and bottom line results across the three principal operating companies. As Bryan mentioned, we reported total sales growth of 42%, with organic sales growth of nearly 17% through both price and volume.

In 2022 we closed on five acquisitions with an annualized 2022 revenue run rate of $204 million and acquired higher EBITDA of $21 million. Broadly, the product demand remains strong. However, we are cautious given some of the macroeconomic indicators. Now, let’s talk through some of the numbers on a combined basis. First, consolidated sales for Q4 were $328.9 million. This represents an increase of 155% on a GAAP basis driven by the inclusion of Lawson Products commencing on April 1, organic growth of the businesses and acquisitions made by both Gexpro Services and TestEquity in 2021 and 2022. With the inclusion of Lawson from a comparative basis, sales increased 42%, or $97.6 million, over the fourth quarter of 2021, with approximately $60 million coming from acquisitions and organic growth of 16.7%.

Second reported GAAP operating income was $12.7 million, compared to a loss of $1.8 million a year ago quarter. On an adjusted basis, taking into account merger related costs, stock-based compensation, severance and other nonrecurring items, adjusted EBITDA improved by $16.3 million to $34 million, or 10.3% of sales, exceeding our previously stated goal of exiting 2022 at 10% and third diluted loss per share was $0.10 for the fourth quarter. However, on an adjusted basis, diluted EPS was $0.25 for the fourth quarter of 2022 versus $0.15 for a year ago quarter. Before I comment on the individual companies on a year-to-date basis, we feel really good on how our full year results progressed as the year developed. On an adjusted basis, including Lawson for the pre-merger activity, sales increased 35% and adjusted EBITDA grew to $123 million an increase of $48 million or 64%.

Now moving on to Slide 6. While slide five included Lawson for pre-merger activity and other acquisitions since the date of acquisition, Slide 6 includes the full run rate of all completed acquisitions as of December 31, as if they were owned for each of the quarters presented. As you can see from this page, our full run rate inclusive of acquisitions had seen nice quarter-to-quarter sequential growth, reflecting the strong performance at each of the three operating companies. And as Bryan mentioned, Q4 is typically our slowest quarter, given fewer selling days than Q3 at Lawson and TestEquity, and one fewer selling day at Gexpro Services and lower seasonal customer activity. Turning to slide 8. I’ll now comment briefly on each of the three individual operating companies.

Starting with Lawson recall that since Lawson is the accounting acquirer E, it is not included in the GAAP reported numbers for Q1 2022 or for the comparative GAAP numbers in 2021. However, for the purpose of these slides, we have included the pre-April 1 results. Sales were $108 million for the fourth quarter. Please note that this does not include bolt supply, as they are now included in the all other reporting segment. However, bolt supply had another great quarter, with sales increasing 25% through strong branch performance with adjusted EBITDA of 15.7% to sales. The Lawson segment average daily sales grew 20.3% organically over the fourth quarter of 2021 on an adjusted basis and average daily sales grew 5.2% sequentially over the third quarter of 2022.

The increase over a year ago was driven by strong performance within the strategic business, up nearly 25%, Kent Automotive up 20%, the core business up nearly 10%, and government up 40%. During the quarter, unit volume increased approximately 4% with the remainder being priced in mix. Lawson’s growth during the quarter was achieved through increased share of wallet with existing customers and new customer relationships, in particular within strategic and large accounts. Lawson continues to realize improvement in its gross margin percentage excluding nonrecurring items. While customer mix is putting some pressure on the overall percentage, the business realized over 250 basis points of product margin expansion, comparing how we entered 2022 versus how we exited the year.

Lawson’s adjusted EBITDA improved to $11.5 million compared to adjusted EBITDA of $6.8 million a year ago quarter, primarily driven by the sales and gross margin improvements, partially offset by increased compensation and healthcare costs. On a year-to-date basis, Lawson’s adjusted EBITDA grew $8.2 million to $38.6 million as compared to 30.4 million in 2021. Turning to Gexpro Services on Slide 9. Total sales were $100.1 million for the fourth quarter of 2022, an increase of $33.6 million over Q4 of 2021 of which $26.3 million was driven by acquisitions and $7.3 million from organic growth. In 2021, Gexpro Services closed on the Omni NEF and SIS transactions. In 2022, Gexpro Services closed on the Resolux transaction early in the year and on Frontier in the first quarter.

Excluding the impact of these acquisitions on the fourth quarter, organic sales grew by nearly 12%, of which approximately 5% came from price. This increase in aggregate sales was primarily driven by new customers with the expansion of existing customer relationships, Gexpro Services adjusted EBITDA expanded to $10.8 million, or 10.8% of sales, as compared to $4.6 million, or 6.9% for the year ago quarter. Acquisitions drove approximately 3.9 of the earnings increase for the quarter, and on a year-to-date basis, Gexpro Services adjusted EBITDA grew to $43.2 million, an increase of $19.9 million over 2021. Lastly, I’ll turn to TestEquity on Slide 10. Sales for the quarter grew $42.7 million, or over 68% to $105.4 million. During 2022 TestEquity closed on three acquisitions, Tequipment, National Test Equipment in Q2 and Instrumex in Q4.

Of the $42.7 million sales increase for the quarter, approximately $33.9 million was generated from the 2021 and 2022 acquisitions while organic sales increased 14.5% with approximately 7% coming from price. As we anticipated, sales in the test and measurement business was lumpy in the latter half of 2022 and is expected to continue into the first half of 2023 given some of the continuing supply chain challenges. Customer orders remain strong and we are able to ship product quickly upon the receipt of the product. However, delivery has been sporadic due to the ongoing supply chain issues. On an adjusted EBITDA basis, the fourth quarter ended at 9.9% of sales or $10.5 million, representing an increase of $5.9 million over a year ago quarter of which approximately $3.8 million came from the 2021 and 2022 acquisitions previously mentioned.

On a year-to-date basis TestEquity’s adjusted EBITDA improved by $18.6 million to $34.7 million through both organic growth and the acquisitions. Moving on to Slides 11 and 12. Since Bryan will discuss our approach to capital allocation in a few moments, I will mostly cover the items on Slide 12. From an access to capital, we have approximately $24.6 million of cash and $77 million available under our existing credit facility. Also, as part of our credit facility, we have an additional $200 million accordion feature. We ended the quarter in a net debt leverage ratio of 3.1 times on increasing earnings. During 2022, we realized a nice deleveraging of the company. At the time of the merger, our net debt leverage was 3.6 times. We finished 2022 at 3.1 times, and now early in 2023, we are sub-three.

This progress is consistent with our intention to prudently manage our debt levels and our leverage in the three to four times range. Net capital expenditures, inclusive of rental equipment was $4.4 million for the quarter and $11.3 million on a year-to-date basis. Before I turn the call back to Bryan for some closing remarks, I wanted to reemphasize our strong Q4 and year-to-date results as we brought the companies together. The three operating companies are performing extremely well, and we are very pleased with the sequential quarter-to-quarter improvement as 2022 developed, in particular being able to expand our adjusted EBITDA margins in Q4 despite fewer selling days. All three operating companies have exciting initiatives planned for 2023 that will make us a stronger company on a combined basis.

While the fourth quarter was strong in the first couple of months of 2023 are running ahead of our internal plans we are also paying close attention to the macroeconomic trends in the marketplace, and we will prudently manage our financial position as 2023 develops. I’ll now turn the call back over to Bryan.

Bryan King: Thank you, Ron. Turning now to Slide 13. Our business combination was built to outperform, and we are pleased with our strong performance in 2022 in what remains a complex operating environment. Our fourth quarter efforts resulted in organic and inorganic growth of 42% compared to last year’s quarter and our margin enhancing efforts have resulted in combined adjusted EBITDA margins of over 10%. All three operating companies performed at or above our expectations last year. Our combined platform has proven scalable and our high performing collaborative teams capitalizing on our unique and diverse channels to market, products and solutions. Since the transaction last year, we have fully aligned senior management compensation with shareholders through pay for performance plans in 2023.

These comp plans link our sales teams to ambitious cross selling goals for strategic or large accounts. LKCM Headwater professionals continue to support each operating company and major initiative with additional resources with no management fee, pulling in trusted operating partner relationships and service provider resources that we’ve used consistently over the last two decades to also help us in other industrial distribution efforts. This analytical and operational support in collaboration with the talented operating teams, is fully aligned with investors to capture market share, improve financial and operational performance, generate cash and create long term shareholder value. In 2023, we are prudently executing against our capital allocation strategy by analyzing the best long term ways to drive shareholder returns with our collective resources by assessing one; investment opportunities in our core businesses; two, paying down debt with free cash flow; three, selectively buying back our stock and four, investing in highly strategic and accretive acquisitions that add economic value, commercial durability and accelerated organic growth to our platform.

We will continue to be disciplined with our capital investments, prioritizing the highest growth opportunities that strengthen our businesses and deliver exceptional returns for our shareholders. Finally, DSG is a leading multi-platform specialty distribution solutions company, providing high touch value added distribution solutions for the MRO, OEM and industrial technologies markets. With a combined addressable market of $57 billion dollars, These asset light businesses offer customers replenishable industrial parts and products as well as specialized products. In addition, we also offer managed solutions for companies that have decided to outsource labor and supplies with secure supply chain management. We believe that our unique solutions oriented approaches are competitively advantaged, and resiliently compelling to customers, colleagues, and manufacturers alike.

Thank you for your time today. And now we would like to open up the line for investor questions. Operator?

Operator: Certainly. Your first question for today is coming from Ken Newman at KeyBanc.

Ken Newman: Hey, good morning, guys.

Bryan King: Good morning, Ken.

Ron Knutson: Good morning, Ken.

Ken Newman: Good morning. So for my first question, sorry if I missed this Ron, but did you quantify how demand has trended in January and February, just both on a consolidated basis and across the segments?

Ron Knutson: No, Ken, we did not give specific numbers other than just indicating that it’s outperforming our internal plans. I would just say that the growth that we saw in Q4 really continued into January and February, but we’ve not identified specifically a percentage in terms of the increase over the prior year in the first couple of months. But I will say, I think across all three companies, we feel really good about the start that we’ve had here in the first eight weeks of the year and we’re excited to jump off to a really strong start here for the year.

Ken Newman: Got it. I guess the next question kind of piggyback off of that is maybe just a little bit of color on what customer conversations are like across the three businesses. I’m curious, are customers coming to you with higher inventory needs or are they destocking within the Lawson business where are you seeing customer backlogs growing across the other two businesses? Any color there would be helpful.

Ron Knutson: Yes. Sure I can —

Bryan King: Ron you can start on that.

Ron Knutson: Yes. Sure. Let me jump into that. And we may pull Russ and Bob and Cesar into commenting as well. So from an overall customer perspective, I would say generally speaking, across the three companies, we’ve not necessarily seen a destocking taking place. I would say that within all three businesses, again, we feel good about the start of the year. I would say that from a pricing perspective, we’re probably feeling a little bit of pushback on some of our larger customers. But generally, I would say overall, from a DSG perspective, those conversations are still going very well. All three companies are seeing some vendor cost increases continue to come through and we’ve been, I would say, very successful in being able to manage through that both in 2022 and here early in 2023. So I don’t know if Russ or Bob or Cesar want to jump in relative to any customer feedback around stocking levels, but I’ll open it up to them.

Bryan King: One of you guys jumping on it. It’s a little bit different between our short cycle and our long cycle business. So, Cesar, why don’t you talk about short cycle for a minute and then Bob or Russ can talk about long cycle.

Cesar Lanuza: Sure, Bryan. Hi, Ken this is Cesar speaking. When we go across the different segments that we serve, and as you know, we do manage about a little bit over 80,000 customers, different size, different market segments. We continue to see the need to fill up the beans and the cabinets and their inventories to keep their lights and parts moving around. Like Bryan said, this is a short cycle business and we’re not so far within the first eight weeks of the year. We continue to see the same momentum that we saw from a fourth quarter. And we continue to be cautiously optimistic about the investments that we’re doing and growing the business both within our current customer base and also capturing new customers. So like I said, we continue to see within the short cycle of customers requiring our products.

And as you know this through our vendor manage inventory, which is over the big chunk of our revenue, basically, we become an extension of our customers in this tight labor market. We’re there for them every day.

Bryan King: So said another way, we’re seeing and feeling still volume, some volume growth there not saying destocking at all in the short cycle. Bob, why don’t you get the longest of the long cycle? Russ is in between the two on the OEM front. Bob can we hear you?

Bob Connors: Sorry guys. Yes. Ron can I go back to —

Bryan King: Bob is in Admiral’s Club. He’s the one guy who’s a little bit away from us. Thank you, Bob, though.

Bob Connors: So I would say that in 2022, we saw five or six verticals growing double digit with renewables lagging and then five of five acquisitions growing double digits. So we still have tailwinds coming over into 2023. I would say that we’re starting to see a pickup in backlog with renewables. We’re seeing more and more customers are looking for supply rationalizations, and they’re looking for us to expand the product line and capabilities to better support the growth for instance, in renewables, AMD has been very strong and it’s continuing to build and grow. And then industrial power is back strong for us. So our largest verticals industrial power and renewables are starting to show some promising tailwinds and we’ll navigate through any headwinds that come with a slowdown in transportation and CNI technology, as Bryan communicated earlier.

Bryan King: Russ, .

Russ Frazee: I can comment briefly. This is Russ with TestEquity. Our short cycle business continues to perform as it did last year. We still see growth in our VMI business. The longer cycle capital expenditures are still there. Those budgets from our customers, the cycle is a little bit longer getting those approved this year, but we still see that business there.

Ken Newman: Perfect. That’s a really good color across everybody. I appreciate that. Maybe one more before I pass it on. Bryan, you talked about prudent capital allocation and disciplined M&A I mean the heightened macro uncertainty. That said, you’re still at the bottom of your targeted net leverage range. I just want to clarify, should we take those comments to mean that M&A is still the highest priority for capital allocation? And if so, just maybe provide some color on how active the pipeline is today in terms of deal sizes and multiples and whether you see higher rates materially impacting your ability to close deals this year?

Bryan King: Yes, I appreciate that question, and I know it’s probably on everybody’s mind. We are at the lower end of our target range. The team that we’ve got working on opportunities. I’d say that when we allocate and I frame up the capital allocation objectives that we’ve got and how we’re looking at it, there’s no doubt about it, we view investing in our organic growth opportunities as our top priority. It’s got the highest incremental returns on invested capital. It’s got the most amplified impact to shareholder value creation. But having said that, when we look at our M&A opportunities, we’re being very selective. And we do have a very strong robust pipeline right now that we’re working through some things that we thought we might be able to pull to the table within the end of last year.

We didn’t get done by the end of the year and we’re still working through trying to make sure that they’re the right fits. But they have to, for me, not only have significant financial accretion to compete with the financial accretion we would expect on the organic side or other capital allocation opportunities like buying back shares or paying down debt, but it also has to have strong commercial logic. And that’s one of the frameworks that we really push hard on with both our M&A team and our three management team leads on each of the verticals. If they’re bringing something to the table, we want to see it be super accretive to Bob’s Gexpro Services business, for instance. And we want to see there be an opportunity to drive his organic growth rate higher.

But we also want to use a lens that’s constructive around what is this going to do for Cesar and Russ. And so what we have found is that the areas that we’re most focused on right now are largely ones that certainly on the larger end ones that are going to significantly enhance the organic, long term organic growth rate and what we think is the ability to accelerate shareholder value creation for the platforms. And so there are things that we’re working on actively that I would expect that we’re going to have some success here in the first half of the year of being able to announce some real accretive moves for the platform. And we’re excited. The teams are demonstrating that the value of the platform and the initiatives that we’ve got to unlock value is real and it gives us even more confidence in our ability to add to that narrative very selectively with some things that we had targeted long before we brought the businesses together.

So, interestingly, several of the things that we’re working on right now were objectives of ours several years ago that if we were able to consummate the DSG platform, that there would be some very key assets out there that we would be able to rope in. And we’re close to getting them roped.

Ken Newman: That’s solid color. I appreciate that help.

Bryan King: We would not have been able to rope them if we well, we would have been fired up about one of them at Headwater for sure, but they are far more valuable to the combination of DSG.

Operator: Your next question for today is coming from Kevin Steinke at Barrington Research.

Kevin Steinke: Good morning, everyone.

Bryan King: Good morning, Kevin.

Ron Knutson: Good morning. Kevin.

Kevin Steinke: I want to start off by asking about the sequential strength in adjusted EBITDA margin that you saw, particularly in the Lawson and TestEquity businesses. You had nice sequential increases in margin despite for fewer selling days in those businesses as you called out. Any thoughts on what enabled those businesses or the company overall to achieve that nice sequential margin expansion? Was there anything kind of one time in there, or what would you maybe kind of attribute that to?

Ron Knutson: Yes, Kevin, this is Ron. So I’ll jump in on that. I would say no real onetime items. I think it really was just a continuation of the growth that we saw throughout 2022 and all three companies are certainly managing operating expenses closely. We’re seeing certainly some lifts from the acquisitions that were made earlier in the year as well as 2021 and then also a keen focus on margin percentage; commercial margin, and product margin. So, no, I really wouldn’t say I mean we were very pleased with the 10.3% that we posted for the fourth quarter, but not really any one time items in there that were a benefit.

Kevin Steinke: Okay, great. It just sounds like really solid operating performance then. Okay. I also wanted to ask about your organic growth drivers for the long term. You mentioned continued increases in wallet share and increasing cross sell leads. Maybe just give us a little bit more color or any metrics around where you see the cross selling coming] from wallet share expansion coming from or initiatives that you’re working on to really ramp up those growth drivers?

Bryan King: Kevin, let me just touch on it first and then we’ll pass it off to the rest of the team. But when we were on a quarterly call, I think the last quarterly call maybe we alluded to the fact that we’d had kind of a consolidated initiatives forum in Chicago in August where we got a number of the sales leadership of each of the businesses and our operations kind of team that was working through synergies and both commercial synergies as well as cost savings. And all that’s continuing to unfold and accelerate as we’ve continued to expand engagement between the businesses and as we’ve expanded engagement between the businesses and I went to Bob’s Sales Leadership 120 people, and all three of Russ, Cesar and myself joined Bob in kind of an open forum to talk to all those 120 sellers and kind of lead folks for Gexpro services and where they are today their momentum and enthusiasm for how to work together collaboratively and the way that we’re rewarding people inside of the organization for uncovering ways to accelerate organic opportunities is exciting and it seemed you could feel the energy level amongst the colleagues there.

The number of specific leads that we have that we’re working right now is twice the number that we had at this time three months ago when we were on the last call. So when we alluded to 80 or 100 leads that we thought that we had where different companies could pull one of the other platforms through, that’s expanded. Significantly it’s doubled or more. And we expect that to continue. The longer lead time or longer selling cycles are real, so but they’re bigger dollars. So, like, if you think about it, Gexpro services and their relationships where they’re embedded in a customer. Those customers are eager for some of the capabilities of Lawson or TestEquity, but the lead times on those large customers are often longer. We’re getting more SKU congruence, certainly across our digital efforts.

I know that Russ’s team has added a whole lot of product into our digital effort of SKUs that we are stocking. And so that’s driving some organic growth that we’re enjoying, and then we’re looking at ways to continue to, I used an analogy when we first put the businesses together that we have three legs of the stool. And what we believe is that a lot of these accretive, tuck in acquisitions have elements of looking more like a brace between the legs. And we’re continuing to try and think about ways to tighten up the engagements between the different legs of the stool without in any way compromising the energy and the momentum that each of the businesses are enjoying individually or the way that they’re serving their customers historically and currently.

So we don’t want to distract them, but we do want to add to their sales volume. Anybody else want to add color to that?

Bob Connors: Yes Bryan. What I would say is a couple of things. First, the collaboration in terms of the cross selling between Gexpro Services, Lawson and TestEquity, it’s really starting to gain momentum. And we track the business development pipeline that’s evolving and expanding on a weekly basis to see where we need to add resources and support to help close opportunities. The receptiveness of customers has been the most impressive. Gexpro Services, we do very well at supply chain management solutions, but when we hear customers, they want us to expand into MRO, and they want us to expand further into adding the TNM product line. It’s just easier to plug and play rather than to build it individually. So the receptiveness from customers has been very good.

I’m beyond impressed with the success that we’ve had building our pipeline injects for services, not just with DSG, but with our acquisitions. We recently won a large renewable order with an OEM that really the platform of having four businesses together allowed us to win the project because we had domestic manufacturing capabilities as well as a diversified supply chain providing electrical, mechanicals, and hardware. So we’re really excited with the momentum that we’re seeing with our businesses.

Kevin Steinke: All right, great. Well, that’s all very helpful, color. I appreciate that. I did want to ask Ron, I don’t know, did you call out the percentage contribution to the organic growth in the quarter from price? On a consolidated basis?

Ron Knutson: Yes. So on an all in basis, Kevin, we were, our organic growth increased 16.7% for the quarter. And if you look across the three companies; price, Lawson was about 4%, Gexpro Services, about 5%, and TestEquity close to the 7%. So about five of the call at 17 was price related, with the remaining 12 being volume and mix.

Kevin Steinke: All right, that’s great. I mean that actually, that contribution from price is, I think, down a bit from the last couple of quarters, implying maybe some increase in volume growth. It sounded like you may be implemented some more price increases early in 2023, but I assume maybe not at the same level as we saw in 2022.

Ron Knutson: Yes. I think that’s a fair comment. Certainly ’23 also gets a little bit of the benefit from the carryover from actions taken in ’22. A little bit different within the three organizations, but we’re still getting some lift based upon the actions in ’22. And then I would say specifically within Lawson, we did have an action here at the beginning of the year as well.

Kevin Steinke: Okay. Is there any specific point? Is it where we started in 2023 lap, larger price increases and we should think about that as being a bit of a headwind or is that not really something that you’re factoring into your thinking in terms of the growth outlook?

Bryan King: Yes, I wouldn’t say that there’s any specific time in terms of just a specific date that we’re going to come up against a hard relapse. The actions that were taken throughout 2022 were really throughout the entire year. So we’ve not drawn a line in the sand and said, hey, Q2 is going to be a lot harder just because we’re up against some of these other actions. I think all three companies were very proactive throughout 2022 and managing those overall margins. So we’re not really factoring that in terms of a hard date that we’ll be up against some really tough numbers. And certainly we’re still managing that very close here in ’23 as well. So it’s not something that we’ve got through 2022 and we’re putting to the side and we’re proactively managing those overall margins in ’23 as well.

Bob Connors: Yes. I would just add that there’s real pricing discipline efforts that are still ongoing beyond just inflation. And so there’s the inflationary lens and trying to get make sure that we’re capturing any costs increase that we’re feeling not just on product but across the organization. But there’s also pricing discipline opportunities where we had in congruence, either in acquisitions that we acquired or in our own legacy engagements with customers, some of which were on contracts and some of which were more just dynamic, dynamically priced, but where we maybe not kept up with what was the appropriate pricing strategy around the service levels that we’re offering in the marketplace. And so there is — we continue to have very constructive efforts around continuing to capture some additional margin.

And I wouldn’t say that we can separate. We’ve got some price increases. Those price increases are largely reflective of either where we think our value is relative to our peers in the marketplace and the costs coming through our supply chain and any internal operating expense cost structure creep that we’ve seen with inflation. And then you’ve got a second issue that we knew that we had as an opportunity in front of us when we kind of got under the hood on the businesses and started working with them together was just absolutely making sure that we’ve got strong pricing discipline, which has been a hallmark of how we’ve, at least at LKCM Headwater, have thought about expanding and lifting margins over time. So I’m really proud of the efforts.

Not all of them are easy as you can imagine, I mean, for some of the conversations, particularly around different customer verticals and long cycle engagements trying to talk about pricing when you’re trying to work through contracts and where there’s lots of, a lot of leverage, or maybe leverage is the wrong word. A lot of strength that your customer has in the marketplace because they’re savvy and they’re big customers, but the conversations have been exceptionally constructive and the receptivity of even the large customers has been very good.

Kevin Steinke: Okay, that’s great to hear. That’s all I had. I’ll turn it back over. Thanks for taking the questions.

Bryan King: Thanks, Kevin.

Operator: Your next question for today is a follow up question coming from Ken Newman. Ken, your line is live.

Ken Newman: Hey, thanks for squeezing me in for just one quick follow up. Bryan, a year ago we talked about getting above that 10% EBITDA margin run rate, which obviously you did here at the end of 2022. But I think we also talked about targeting 20% to 25% EBITDA flow through for the combined businesses. That’s obviously been a bit lower this year, just given the moving pieces on the macro. Curious, I mean do you think you can get back to that operating leverage target this year? Or is it still too tough just given all the volatility in the operating environment?

Bryan King: Well, it’s a great question and I thought where you were going was not only the operating leverage or flow through, but ultimately where do we think we’re heading on EBITDA margin. I know that’s where we’re all headed. And I would say that it’s different for each of the businesses. As we can see right now, we’re still working through so many different value unlocking and accretive we’ve got a lot of initiatives going on right now. And a lot of initiatives that we see as real opportunities not only to grow top line wallet share, market share, but some of those initiatives require absolutely investing in the business today. So while I think that while I have a lot of confidence in what we’re doing is going to flow through, it’s going to create some noisiness in terms of contribution margin, the way you and I might think about it in a static environment because we’re definitely committed to unlocking some additional longer term structural margin opportunity across the platforms.

And if that drags our operating leverage down a little bit on our expected revenue lift this year and some of the revenue lift we wouldn’t get if it wasn’t for these initiatives, then it creates some noisiness. The Lawson, for instance, is just very different right now. First of all, Lawson is where we’re investing a lot. So to be clear, Lawson has been the largest contributor to the highest amount of operating leverage that we’ve got in the platform. And so almost every lens that we use on all of our conversations, even when Bob is looking at a way to make an acquisition that’s going to really improve a vertical position that he’s got or his competitive position, in a vertical marketplace. We’re also asking, okay, what does that do to the operating, what does that do to the organic growth rate of Lawson and how much contribution might drop or operating leverage might we get in the Lawson vertical?

And so using a historic framework on Lawson and having been a shareholder now for a decade or longer and been the largest customer of Lawson even before that, I knew, and we all knew what a gem Lawson was, but we also knew what a challenge Lawson had been to get organic growth or inorganic growth moving. And so the great news is that we’re getting that. We’re getting that in some ways helped by the other two verticals. And much of what we’re focused on today is not only continuing to drive that, but now it’s given us some real momentum with Cesar’s leadership to really go in and look at ways to invest in even more opportunities for growth or giving our sales force even more tools to give them more bandwidth so that we can get more operating leverage off of them longer term and they’ll be able to make more money.

And so there’s some really exciting things, but I think it’s noisy on the operating leverage side, particularly as it relates to Lawson and I think we’ll have a lot of contribution margin out of Lawson in this year. I do think that some of that we’re going to put back into operating expenses. So the operating leverage there is not going to be quite what the 40% that we at times enjoyed when there was an investment going back into trying to drive the organic growth rate higher.

Ron Knutson: Yes, Bryan, I would just add on that, and Ken when we look at the growth of the adjusted EBITDA from a year ago quarter, about $8.6 million of that growth of the call it almost $17 million was organic growth. And as you carve out the incremental sales from the acquisitions versus the organic sales, I mean, we still, on a consolidated basis, saw operating leverage flow through at about 23%. And I think we’ve kind of guided to between 20% and 25%. So we still even with some of the investments that Bryan referenced that all three companies are making, we felt kind of right in the middle of where we’ve guided that operating leverage to be on a consolidated basis.

Ken Newman: Got it. Very helpful. Thanks, guys.

Bryan King: Yes.

Ron Knutson: Absolutely. Thanks for the questions.

Operator: We have reached the end of the question-and-answer session and I will now turn the call over to Bryan for closing remarks.

Bryan King: Thank you. Appreciate our questions today. We appreciate the interest in DSG. Absolutely appreciate the leadership of our management team and all of our colleagues out in the field. We’ve enjoyed a great first nine months together and now it’s eleven months and the momentum continues to offer us a lot of confidence and enthusiasm around bringing these businesses together and the opportunities that we are more discreetly able to see and to try and tackle in front of us that we think it’s going to not only enhance our existing strengths in the marketplace, but also give us a stronger platform for growth and enhance shareholder value. So with that, thank you very much and we look forward to any followup conversations or calls. Please reach out for or reach out to us. We’re absolutely eager to engage, but we got our heads down and we’re all aligned as shareholders along with you all and look forward to continuing to be your partner. Thank you.

Operator: This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.