Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Distribution Solutions Group Inc (DSGR, Financial) achieved a record consolidated sales of $440 million in the second quarter, marking a 16.3% increase compared to the previous year, driven by acquisition-related revenue.
- The company's EBITDA margins improved sequentially from 8.7% in the first quarter to 10.3% in the second quarter, with all three verticals experiencing margin improvements.
- DSGR announced the acquisition of Source Atlantic, a leading industrial distributor in Canada, which is expected to enhance their market presence and capabilities in the Canadian market.
- The company is actively working on process improvement and structural optimization initiatives to enhance profitability and operational efficiencies.
- DSGR's leadership is committed to making the company a long-term compounder for shareholders, focusing on financial growth and strategic positioning in the specialty distribution market.
Negative Points
- Organic sales for DSGR declined by 5.7% compared to the previous year, indicating challenges in the current market environment.
- The company is facing sustained macroeconomic headwinds, including higher interest rates, which are negatively impacting industrial end markets in the US.
- The TestEquity Group's Test and Measurement business experienced a decline in sales, although there are signs of recovery.
- The Lawson segment saw a decrease in organic sales due to softness in various end markets and a lower field rep count.
- Source Atlantic, the newly acquired company, currently operates at lower margins than DSGR, which may initially impact consolidated margins until synergies are realized.
Q & A Highlights
Q: Can you discuss the recovery in the Test and Measurement business within TestEquity and the state of inventory and capital spending plans?
A: Ron Knutson, CFO, explained that there has been sequential improvement in the Test and Measurement business, with the company taking market share despite interest rates remaining high. The recovery is attributed to regaining customers and strengthening supplier relationships. John King, CEO, added that previous inventory purging by competitors has abated, allowing DSG to regain market share. However, they remain cautious about capital spending due to the interest rate environment.
Q: Can you elaborate on the softness in the short-cycle MRO business and Lawson's organic revenue?
A: Ron Knutson noted that there has been softening across Lawson's segments, including strategic customers and military, with military orders not fully recovering. The company is actively recruiting to expand its sales team, which will benefit future growth. John King added that while Lawson operates with fewer salespeople, the focus has been on driving profitability and returns on invested capital, with plans to optimize sales territories and tools for new hires.
Q: How will the acquisition of Source Atlantic impact DSG's consolidated margins?
A: Ron Knutson stated that Source Atlantic currently operates at lower margins than DSG but is expected to reach double-digit EBITDA margins by the end of 2025. The acquisition is not expected to significantly impact 2024 results but will contribute more in 2025 as margins improve.
Q: What are the expectations for the second half of 2024 regarding organic sales growth and margin profiles?
A: Ron Knutson mentioned that while they expect organic sales growth to be flat to slightly positive in the second half, they remain cautious due to the macroeconomic environment. All three verticals are expected to expand their margin profiles over the second half of 2024 compared to Q2 run rates.
Q: Can you provide more details on the strategic initiatives and outlook for DSG's business verticals?
A: John King highlighted that DSG is focused on process improvement and optimization initiatives to deliver higher structural margins. The company is investing in product development, in-sourcing, and value-added services to drive organic growth and returns on invested capital. Each vertical is expanding capabilities to better serve customers and leverage DSG's global supply chain platform.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
