Lawson Products, Inc. Aktie

Greetings. Welcome to the Distribution Solutions Group Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Sandy Martin. You may begin.

Good morning, and welcome to the Distribution Solutions Group's Fourth Quarter and Full Year 2025 Earnings Call. Joining me on today's call are DSG's Chairman and Chief Executive Officer, Bryan King; and Executive Vice President and Chief Financial Officer, Ron Knutson.

In conjunction with today's call, we have provided a financial results slide deck posted on the company's IR website at investor.distributionsolutionsgroup.com. Please note that statements on this call and in today's press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions subject to risks and uncertainties that could cause actual results to differ materially from those described.

In addition, statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change, and we may elect to update the forward-looking statements made today, but we disclaim any obligation to do so. Management will also refer to certain non-GAAP measures and the reconciliation to the nearest GAAP measures are available at the end of our earnings release. The earnings release issued earlier today was posted on our Investor Relations website.

A copy of the release has also been included in a current report on Form 8-K filed with the SEC. Lastly, this call is being webcast live on DSG's Investor Relations website, and a replay will be available through March 19. I will now turn the call over to Bryan King. Brian?

Thanks, Andy. Good morning, everyone, and thank you for joining us. As events unfold in the Middle East, we are actively assessing any potential implications for our business, our customers and the impact on the broader supply chain.

Our thoughts and prayers are with the military personnel and civilians who are in harm's way and with their families. We will continue to monitor the potential implications for global markets and are committed to operating with resilience, discipline and care during this period of elevated uncertainty. We are not where we want to be at the end of the quarter, but our confidence and vision for the future remains strong. 2025 was a critical internally focused reinvestment, retooling and digesting year for DSG as well as one where we managed through some dynamic pricing and supply chain and numerous onetime cost curveballs. While it was at time a dizzingly dynamic year through our daily North Star commitment to staying focused on investing in the business with a lens on long-term value creation, our urgency to offset shifting rules in the marketplace sharpened our focus on core fundamentals of building a better DSG, enhanced focus on execution tools and talent on timely accountability across the organization and made us prioritize not delaying targeted significant investments in capabilities and talent to position the company for long-term success.

As a result, we go into 2026 with an enhanced perspective on our competitive positioning and long-term levers to drive performance across our North American and global platforms. As I reflected, we navigated challenging headwinds in 2025, including a government shutdown, shifting demand environment and macroeconomic pressures and emotions, including those driven by fluid tariffs where our diligent and largely effective efforts to recapture margin still left us short.

Our financial results fell short of our expectations in the fourth quarter and for the year, and we own that. However, besides progress in our transformative investments, we enjoyed consistent operational affirmations in the marketplace around our value-added lines of business, our teams delivered important new business and wallet share wins in each vertical, held on to business on the back of service and capabilities and made meaningful progress in our customer-facing capabilities and partnerships in 2025. We leaned in on improved discipline, heightened institutional adaptability and enhanced DSGs more broadly presented and refined value-added solutions as confirmed by the marketplace, all of which add up to real 2025 successes and maturity of the business that will make us stronger in the longer term.

Turning to Slide 4. For the full year, we delivered total revenue growth of 9.8% on 1 less selling day, resulting in $1.98 billion in annual revenue. Organic average daily sales grew by 3.6%, reflecting solid underlying execution. Cash flows in 2025 were strong. We generated $84 million of cash from operations on top of $56 million in 2024. Adjusted EBITDA finished at $175 million, short of our expectations. These results demonstrate our continued focus on cash generation, working capital efficiency and profitability. Throughout the year, demand remained healthy across aerospace and defense, semiconductor-related technology, renewables and as the year progressed, industrial power.

During the fourth quarter, we began to see demand soften in renewables in North America, which we are actively managing by pivoting growth initiatives in that sector towards the strong renewables demand growth for DSG's improved presentation of capabilities in the global marketplace. and expanding our efforts on other end markets where we enjoy exceptional customer partnerships and strong secular and strengthening cyclical momentum, such as in industrial power, technology and aerospace and defense.

Our expanded platform capabilities and ability to support our historic customers and similarly discerning customers on a more global stage are supporting an expanding and accelerating set of dialogues. As we've discussed on previous calls, our financial results will not be linear. The fourth quarter is a good example of that. However, these results are certainly not indicative of our long-term plans or confidence in the future. While we anticipate some quarter-to-quarter challenges to balance earnings with our recent commitment to accelerate our talent recruitment transitions and accelerated investments, we are committed to making decisions that prioritize driving a stronger and more profitable DSG in the longer term for all of our committed stakeholders, but recognize like in this quarter, that the timing of some of those decisions unintentionally lined up with some margin near-term pressure and tax near-term earnings more than leadership expected.

While we didn't want to delay investments and talent decisions to unnaturally smooth earnings at the expense of building a better company, our leadership team still expects much better profitability performance from our DSG platform of capabilities.

Let's turn to Slide 5 to discuss our business initiatives. Gexpro Services delivered outstanding operating results in 2025, driven by the strength of the aerospace and defense, technology and renewables end markets we serve. Despite some fourth quarter sales softness, full year organic average daily sales increased 12.3% with full year ADS up 13%. We continue to invest in the technology and industrial power end markets, driven by expanding infrastructure needs and increasing AI-driven demand.

Our order backlog and new business pipeline remains strong in both segments. While renewables slowed in North America in the second half of 2025, we shifted our investment focus towards global strategies with encouragement of exceptional partners across technology, industrial power, aerospace and defense and the power generation cycle. We are seeing a meaningful growth opportunity in India while Southeast Asia is progressing more gradually due to the timing of customer qualifications. Both regions remain relatively small today, but continue to show an excellent acceleration in prospective and current customer engagement across more of our proven value-added capabilities at DSG and Gexpro Services. Our European business remains strong with increasing diversification across multiple verticals. Gexpro Services is also expanding its value-added service offerings using robotic automation and AI-enabled tools that enhance customer capabilities across VMI, kitting, manufacturing and e-commerce solutions.

Since bringing DSG together, Gexpro Services went from approximately $350 million in revenue to just under $500 million, mostly organically. Adjusted EBITDA has expanded from approximately $35 million to $64 million in 2025, with margins expanding nearly 300 basis points to 12.8% -- this margin expansion reflects scale, broader geographic reach, enhanced value-added capabilities and disciplined execution of operational efficiencies that leverage our cost structure.

As we confidently lean into further investment at Gexpro Services, we are balancing strong optimism around marketplace pull on us to support growth opportunities with an expectation to drive earnings growth while making the important long-term investments in capabilities, geographies and talent to support performing for our customers at a level that adds to the reasons we are winning wallet share and new mandates. As a reminder, Gexpro Services launching new customer programs requires upfront investment of significant time and margin, but results in exceptionally sticky customer engagements where we are critical to our customers and our commitment to doing our job for them thoughtfully and exceptionally reaffirms the partnership between us and our customers. The upfront effort and investment can cause a bit of deleveraging of profits in any given quarter as programs ramp up or mature programs slow like the shift we felt on the margin in the fourth quarter as new programs in global renewables come on, but domestic programs slow or as we felt a year or so ago in technology.

The great news is that the new business pipeline continues to expand even as mature programs may fluctuate based on each customer's program momentum. We also continue to win significant wallet share. We rarely lose programs and expanding what Gexpro Services does as a part of GSG allows us to expand our engagement with our customers. Gexpro Services continues to be one of the most exciting growth levers for GSG. Looking ahead, we are excited and focused on investing even more deliberately in additional organic and inorganic initiatives to sustain and extend the strong long-term momentum we see at Gexpro Services.

Next, Lawson Products. Average daily sales increased 2.7% in the fourth quarter, continuing the momentum from the third quarter when average daily sales grew by 3%. Although new VMI installations and wallet share expansions led to organic sales growth throughout the second half of 2025, Lawson smaller account local revenue continued to be challenged in the fourth quarter as some of the sales force and selling tools transformation over the last couple of years have distracted our resources from doing the exceptional job our customers champion from our unique service model and that we expect. Lots of focus and tools, teamed with additional investment in talent and process improvements are focused on getting this right for our customers, sales team and for DSG. EBITDA margins were negatively impacted by a slight customer mix shift, deliberate strategic investments and an unexpectedly elevated health care benefit costs in the quarter and for the full year, which Ron will discuss in more detail in a moment.

Recently, Lawson has made strategic investments in 2 leadership roles to strengthen the team through more capabilities and accountability. We brought on Jim Slumka as Chief Revenue Officer; and Hilary Bryant as Chief People Officer. Jim joined Lawson in January 2026 and brings a proven track record of commercial transformation, having led sales and operations for a $1.8 billion omnichannel enterprise overseeing more than 2,000 sales professionals, delivering a 6-year sales CAGR of 8% and expanding gross margins by 300 basis points. He brings strong discipline around accountability, urgency, process and commitments to a team-focused enthusiasm for excellence and winning, all consistent with being a former Westpoint athlete and officer. We are thrilled to welcome Jim to Lawson and DSG and are confident on the immediate impact he will have on the organization.

Hilary brings deep global HR leadership experience, most recently managing a worldwide HR organization for a $1.4 billion industrial technologies company with approximately 4,000 employees. She offers a great complement to Jim, bringing a renewed discipline and energy to employee engagement and corporate culture while elevating a clear cadence around growth-focused expectation, urgency and rewards. These important investments alongside others that have also been recruited over the last years, put in place critical pieces to now have a stronger ensemble of experience, been there, done that leadership and collectively add meaningfully to our sales and operating foundation as we pursue improved growth and execution in 2026.

Turning to our 2026 growth priorities. We are focused on continuing to capture market share and expanding wallet share for our national accounts, including Lawson, Kent and government, while reestablishing our commitment to offering the highest level of consistent service out of our sales force for our customers. And with that, a return to growth out of our smaller local accounts driven by their efforts and the investment we have made in them. A key leading indicator of our growth is in new VMI installations or internally what we refer to as ship to locations, which we are currently ramping up after a challenging couple of years as we've been working through our sales force transformation. We continue to leverage technology to increase sales effectiveness and are improving the rigor and consistency of sales rep activity supported by our CRM tool, enhanced training commitment for new FSRs and a real focus on our DSM's consistent cadence with our established FSRs around driving growth and consistency in the customer experience.

We are also in the early stages of rolling out across our field customer-facing team, a route optimization tool that we have been developing that will give them back expensive and frustrating transit time and more of an opportunity to serve and grow our customers. Although a smaller piece of our business, our e-commerce channel continues to deliver double-digit growth, and we are encouraged that more than 30% of customers purchasing through the site are new to Lawson. As we move forward, we remain focused on commercial excellence, the customer experience and technology to accelerate growth and continuously improve how we serve our customers while also providing flexibility to our customers.

Additionally, we are working more closely with our vendor partners to deliver solutions to our customers and to support our commercial team. At our recent sales leadership meeting in February, approximately 50 vendors presented their products and services to our sales team. We are working with a number of those channel partners to improve our product costs as we have in turn invested to support them and our customers with our significant recent investments in our selling and servicing capabilities. We expect some nice progress this year out of our sourcing partnerships.

Moving on to the Canadian branch division. The team made solid operational and synergy progress in the fourth quarter and across the full year despite macroeconomic headwinds and tariff-related uncertainty that pressured industrial end markets, especially in Canada throughout 2025. As expected, fourth quarter revenue declined sequentially due to typical holiday season softness and weather, leading to operational deleverage. In 2025, we completed 4 facility consolidations with the final consolidation expected by the end of the first quarter. As we discussed last quarter, because Source Atlantic's purchase price was largely tied to tangible assets, our first full year of transformation has meaningfully derisked this investment for us, and we continue to believe this was a strong strategic acquisition to grow and scale our Canadian operations, although the revenue headwind out of the gate has us a full year behind our ambitious profitability objectives, our DSG team embraced when we acquired Source Atlantic in late 2024. And more recently, the recruited Canadian leadership team reaffirmed that underwriting.

While there is still significant profitability tuning work ahead, we are encouraged by our framework and expanding profitability, insights and discipline that we are building, the team we put in place and the path and significant progress they are demonstrating to us in the marketplace as the first year of ownership is now closed. At the TestEquity Group, we are investing at a renewed feverish pace in the long-term platform we can better see now in this vertical. A massive investment in additional leadership capabilities and tools were made in the business, especially during the last part of 2025. A shift was made concurrent with these investments around dialing up a more intense focus and intentional allocation of resources towards driving a structurally higher margin shift discipline out of a daily cadence around the vertical's growth priorities, and each team member owns specific accountability on discrete levers to impact that outcome.

When we committed to these investments, we fully expected a J-curve recovery with near-term transitions impacting performance, followed by improved revenue growth and profitability as our strategic initiatives take hold. For the full year, average daily sales increased 2% and organic daily sales grew 1%, driven primarily by test and measurement, rentals and Chambers. In the fourth quarter, revenue grew 0.9% on 1 additional selling day, supported by continued momentum in rental and refurb, chambers and T-equip. While Test and measurement end markets were under pressure in the fourth quarter, we remain focused on disciplined execution of our growth and profitability prioritization initiatives and are beginning to see the tighter strategic lens and accelerated pacing around cadence and accountability at work.

The result is we are seeing the engagement deep into the organization take place. and the firming pipeline activity evolving towards our areas of most differentiated capabilities teamed with our higher margins and return on capital opportunities, including value-added solutions used in rental, test and measurement solutions, chambers and accelerating the growth and mix around our most value-added elements of our electronic production supply offering to strengthen our margins and earnings. We are currently seeing some accelerating customer engagement building around our core test and measurement expertise, where we have reinforced with a renewed and discrete effort around rededicating resources focused on T&M customer solutions selling improve our competitive moat at a time when we believe the marketplace is past the trough, and we are seeing acceleration.

We also have major initiatives underway to simplify and unify the digital ecosystem. Enhancing the customer experience through ERP consolidation, customer service and e-commerce platform integration is foundational to our strategy, and we are actively leveraging AI applications to accelerate execution. At the same time, we are strengthening performance management, incentives and accountability as we establish new key leadership roles. We're excited about the progress Berry is making to drive a much more disciplined approach to the portfolio of value-added capabilities and products offered across the TestEquity Group vertical. And for the employees, we appreciate their support of an accelerated operational pace and accountability, including the shifting of time and resources towards more differentiated growth areas to drive his objectives around mix shift rather than only adding incremental costs and elevated areas of focus.

Looking ahead, we are actively increasing our account base and deepening penetration among our existing customers. while using new product introductions and private label offerings to expand customer choice and enhance margins. Encouragingly, a growing backlog in January and February of 2026 signals momentum to come in 2026. We recognize that the full impact of these initiatives typically takes several quarters, but we are confident they will result in a structurally stronger, more competitive, materially higher-margin TestEquity business over time. With that, I'll turn it over to Ron for details on our fourth quarter and full year financials. Ron?

Thank you, Bryan, and good morning, everyone. Turning to Slide 6 and starting with our full year results for 2025. As Brian mentioned, consolidated revenues for the year were $1.98 billion, up 9.8% compared to 2024. Incremental revenue from our 2024 acquisitions was $121.5 million, and our organic average daily sales growth for the fiscal year was up 3.6% over 2024.

For the year, adjusted EBITDA was $175.2 million or 8.9% of sales, and GAAP net income per diluted share was $0.18 for the year versus a GAAP net loss per diluted share of $0.16 a year ago. Non-GAAP adjusted EPS was $1.24 for the year compared to $1.44 per share a year ago. Full year margins in 2025 were 80 bps lower than in 2024, primarily due to sales mix shifts, employee-related costs and other investments. Fourth quarter revenues were $482 million, up 0.2% versus a year ago, which translated into flat organic sales compared to the fourth quarter of 2024.

For the quarter, we generated adjusted EBITDA of $35.4 million or 7.4% of sales. Each of our businesses experienced lower year-over-year EBITDA margins, primarily due to sales mix shifts, some incremental bad debt expense and higher health employee-related costs, namely health care benefits. Cash flow from operations was strong with $16.9 million for the quarter and $84 million for the full year on top of strong results in 2024. Before I move on to the individual verticals, I wanted to comment briefly on the DSG consolidated margin for the full year and for the quarter. For the full year, adjusted EBITDA was 8.9% compared to 9.7% for the full year 2024. I would break the 80 bps compression into 2 buckets. The first is primarily longer-term people investments of approximately 20 bps. The remaining 70 bps was driven by timing items and nonrecurring items such as health care costs, specific customer bad debt reserves and some lower margin to win specific customers. From a timing perspective, many of these items hit in the fourth quarter, resulting in a larger impact on our fourth quarter margins of 7.4% -- longer-term people investments impacted the quarter by approximately 25 bps.

Other items impacting the quarter that we would classify as timing or nonrecurring include health care, approximately 40 bps, customer-specific bad debt, approximately 20 bps; recruiting and leadership start-up, approximately 25 bps, mix shifts within Gexpro Services, approximately 25 bps and timing benefits realized in the fourth quarter of 2024, which is about 40 bps.

Now moving on to Slide 7 and starting with Lawson. With Lawson, full year revenue increased $12 million. Average daily sales grew by 2.6% and organic average daily sales declined by 1.2%, primarily due to lower military customer sales. Adjusted EBITDA for the year was $51.6 million or 10.7% of revenues for the full year. For the quarter, Lawson's average daily sales were up 2.7%, and its adjusted EBITDA was $7.7 million or 6.7% of sales.

In the Lawson-based business, the margin compression from the prior year was primarily due to sales mix of about 60 bps, higher health employee-related benefit costs of approximately 100 bps and employee costs and timing of incentive accruals of approximately 110 bps. As Bryan mentioned, Lawson's most significant sales initiatives focus on new VMI installations and increased share of wallet, which are leading indicators of revenue growth. We are continuing to accelerate the adoption of our CRM platform to improve sales rep productivity, grow the core business and are currently in the early stages of route optimization planning. We are also expanding our e-commerce platform. This is a cost-effective way to do business and 1/3 of our customers on the site are new. Although sales are still small on e-commerce, we experienced about an 18% revenue growth in the fourth quarter.

Turning to Slide 8. Full year sales for the Canadian segment were USD 221.4 million, up $96.3 million, primarily due to the Source Atlantic acquisition included for a partial year in 2024. Fourth quarter sales for the Canadian segment and USD were $55.1 million, reflecting some seasonal softness. Market softness for projects and manufacturing end markets persisted, mostly in Eastern Canada. However, current backlogs have increased meaningfully. Full year adjusted EBITDA was $15.6 million or 7.1% of sales, while fourth quarter margins were 6.6%. Margins were compressed slightly due to items such as first year Sarbanes-Oxley compliance work. The Bolt Supply stand-alone business drove sales by 7.8% in local currency and generated a 14% margin for the full year. We continue to make progress on planned synergies around gross margins and branch consolidations between Bolt and Source Atlantic.

Turning to Gexpro Services on Slide 9. Full year revenue was $496.7 million, representing organic average daily sales growth of 12.3% and total ADS growth of over 13%, driven primarily by end market strength in aerospace and defense, technology and renewables for most of the year. Recall that we highlighted tougher sales comps in the fourth quarter, which declined 1% on an average daily sales basis, generating $119.4 million. Full year adjusted EBITDA was $63.7 million or 12.8% of sales. For the quarter, margins pulled back to 11.7% from 13.3% a year ago on a lower Q4 sales base, the sales mix on lower renewables and some strategic employee investments. Value creation initiatives for Gexpro Services continue to include DSG cross-selling, acquisition synergies and expanded BMI kitting, manufacturing and e-commerce offerings.

Lastly, I'll turn to TestEquity Group on Slide 10. Full year sales were $783.2 million with average daily sales growth of 2%, driven primarily by Test & Measurement, rentals and our Chambers business. Organic average daily sales for the year were up 1%. Fourth quarter sales were $192.9 million with average daily sales up 0.9% versus a year ago. TestEquity's adjusted EBITDA for the year was $51 million with adjusted EBITDA margins of 6.5% versus 7.3% for all of 2024. Margins were pressured by a sales mix shift, higher bad debt expense and higher employee-related expenses, including the build-out of the leadership team and nonrecurring favorable items from a year ago. Fourth quarter EBITDA margins were similar as full year margins at 6.4% of sales. The new leadership team has aligned priorities through performance management, incentives and accountability.

Moving to Page 11. We ended the year with total available liquidity of $469 million. And for 2025, our free cash flow conversion, defined as adjusted EBITDA less working capital investment, less CapEx was approximately 85% -- in December 2025, we expanded our senior secured credit facility through 2030. The new facility includes $700 million of term debt and a $400 million revolving credit arrangement, an increase over the previous $255 million revolver. This puts us in a strong liquidity position to best drive shareholder returns through our capital allocation playbook. We ended the year with unrestricted and restricted cash totaling $75.3 million and net debt leverage of 3.5x.

We continue to prioritize growth initiatives that enable cross-channel and collaborative selling across our customer base, expand our digital capabilities across our platform and drive growth through an asset-light model. We invested $26.8 million in net CapEx, including rental equipment, and we plan to invest a similar amount of $25 million to $30 million in 2026. As we've highlighted in the past, we have invested nearly $450 million in M&A by acquiring 9 highly complementary businesses to expand our portfolio, leverage scale and grow through product adjacency and services. We closely manage working capital across our businesses and net working capital was $473.5 million. As we mentioned, DSG generated $84 million of cash from cash from operations for the year, similar to 2024 before retention payments and a testament to management's close monitoring of our working capital.

Our strong cash generation in 2025 positioned us to be more active in share repurchases. In November 2025, the Board authorized an increase to our existing stock repurchase program for an additional $30 million in shares of DSG's common stock, taking the total aggregate authorization amount to $67.5 million. In 2025, we returned $23.5 million to our shareholders through opportunistic share repurchases and have approximately $33 million remaining in the authorized pool.

I'll now turn the call back over to Bryan.

Thank you, Ron. Despite external headwinds in periods of demand volatility in 2025, we have a clear line of sight on initiatives well underway to drive sales growth and structurally higher margins. We delivered total revenue growth of almost 10%, reaching just under $2 billion, supported by mid-single-digit organic growth despite the burden on profitability of macroeconomic and policy challenges and an ISM remaining below 50 for all of 2025 and our deliberate investments into the business in 2025. As we enter 2026, our focus is firmly on execution and demonstrating a return to improved profitability with our expected growth while balancing critical long-term value unlocking investments.

Our revenue growth strategy prioritized high-margin businesses, strong and sustainable cash flow generation, disciplined capital allocation and operational excellence. We are investing to be a company that is easy to work with and for leveraging digital and AI-enabled capabilities to respond faster to customer needs, improve operational efficiency, strengthen sales rigor and capture margin opportunities. These efforts are supported by an accelerating level of data-driven insights that guide and improve decision-making and enable us to deliver our differentiated products and solutions while enhancing our customer experience.

Operating across more than 50 countries, serving over 220,000 customers with approximately 760,000 unique products requires agility and focus. We remain nimble, ready to pivot when needed to sustain growth while focusing on delivering on improved profitability. Our leadership teams are renewing our confidence to shareholders and our colleagues that we are driving and expect growth with enhanced profitability. and with a commitment to further tune capabilities and consistent service and culture that emphasizes from our field team around volume and revenue growth from both existing and new customers.

I am confident in our enhanced leadership teams and our recent investments in them across all of our verticals and their ability to execute on their re-underwritten priorities and value creation initiatives as they enjoy line of sight on building structurally higher margin and more defensive and growing businesses with a commitment to generate strong free cash flow and an aligned incentive structure around driving accelerating long-term value for our shareholders.

Our teams remain highly aligned with the shareholders and each other, collaborating and competing together to continue to win more often. Each is accountable and appropriately incentivized to deliver results for our shareholders and for DSG and all of our colleagues. We will continue to evaluate acquisitions that strategically fit and enhance our long-term competitive position to win in our current focus areas and markets or that complement them as well as opportunities that can accelerate our growth and profitability objectives to enhance and accelerate driving long-term shareholder value. In addition to strengthening leadership within our verticals, after a thorough evaluation on ways to improve and enhance our corporate strategy and M&A capabilities, we recruited Sean Dwyer to lead DSG's efforts and dedicated team while working closely with the vertical leadership and our LKCM Headwater teams.

Sean comes to us with a background in investment banking and experience leading similar efforts at large public companies. Through his public company roles, he has led over $30 billion in 36 transactions. It's great to have Sean on board to add structure, perspective and to collaboratively lead this critical component of DSG's growth strategy. As we look ahead in 2026, we're excited about the added capabilities, discipline and prioritization we've invested in across all our verticals. While most of this comes at a cost, we're confident in these investments and in the improved performance returns the investments will deliver. While the first couple of months of 2026 have seen sales growth, we expect the first quarter to remain under margin pressure as we continue to digest initiatives, and then we expect to see an improved margin expansion trajectory consistent with our longer-term objectives as we move into the middle of the year. I'm proud of the heavy lifting from our colleagues and what it accomplished in 2025. And as I reflect on where we are versus the much smaller and less evolved DSG that we pulled together 4 years ago.

We remain focused building a better DSG on its many commercial growth initiatives and ongoing process and structure optimization, and we celebrate working together to build a more valuable enterprise, one that consistently generates cash flow and long-term shareholder value. Finally, I want to thank our employees for their dedication and hard work throughout the year. Your commitment and the strength of our culture have enabled meaningful progress across our strategic priorities. We will continue to push, test and adapt as we improve long-term performance. I also want to thank DSG's Board, our shareholders, our shareholder partners and the LKCM Headwater team as we continue advancing our specialty distribution model together.

And with that, operator, will you please open the line for questions.

Your first question for today is from Amon Moll with Stephens.

I want to start on the comment you just made regarding the sales pacing year-to-date. I think I heard you say sales are up year-over-year in Jan and Feb. So maybe just can you confirm that? And if you're able to give us the daily sales pacing and the number of selling days for the quarter, that would be appreciated as well.

Yes, this is Ron Knutson. Just to add some commentary around Bryan's notes relative to the first couple of months of the year. So we have seen growth. Really, I would say, I'd put it in the low single digits. If we look at January, February versus a year ago.

ADS so far for the first couple of months, kind of flattish versus Q4, but up against a year ago. We're seeing a little bit of pressure continue within our Canadian branch business that think both Brian and I commented on in our prepared remarks. But the other verticals or the other 3 pieces of the business are seeing some growth here in the first couple of months. Relative to -- I think the second part of your question was relative to number of days and so forth as '26 develops. So on a quarter-over-quarter basis, it shifts a little bit just because of the kind of the weighting, and we've got Gexpro services on a 445. But essentially, it's relatively consistent.

First quarter of '26 has 63 selling days versus the first quarter of '25 having 63 as well.

And I just would add, is it Tommy? I thought you said it was Aimen. I was like, wait a second. So Tommy, one of the things I was referencing when I said that was that we were -- it was on the test equity vertical, and that was that we were seeing some backlog build there in orders and kind of RFPs.

So momentum, and it's really around the test and measurement side, which we've seen -- as we've seen some messaging from the manufacturers about a little bit of accelerated activity in that space. I mean January, quite transparently, I wasn't happy with the flow-through on profitability relative to how we budgeted or what I expected. And so as the fourth quarter came together in the first month of the year, while we saw some revenue lift, we still suffered some of the same challenges of adding expenses around leadership and otherwise in the first month. We're seeing improvement on that, we believe, in February and expect that again in March, so the releveraging of our cost structure with the pickup in revenue. But there just were some changeover expenses that -- and some onetimes and some things that created noise in the fourth quarter and in January.

Yes. Brian, you anticipated my follow-up, which was on margin, and you clarified your comment, but maybe I could put a finer point on it here. If I go back to the numbers that Ron gave us in the prepared remarks, there were a series of one-timers in Q4. I just added up all those basis points, and it was about 150 basis points.

So my starting point on bridging was I just took the 7.4% you reported in Q4 plus 150 gets you 8.9% as an implied baseline to start to think about the first quarter, that would be up a little bit year-over-year, though. And so based on what you just said, that makes me think perhaps that's a bit too aggressive of a baseline. Maybe we'd be -- I don't know, it depends on the monthly assumptions, but anything you can do.

Yes, that number would be consistent with how margins flowed through for the year last year. When we look at it or when I look at it, the first quarter is still going to have a little bit more margin degradation from our average last year, I think, whereas the second and third quarters, we would expect that the EBITDA margin will be back towards above what last year's average was, if that's helpful. Is that right, Ron? I looking to...

Ron?

Yes, that is right. Yes. If I go back, Q1 of 2025, we were sitting at about 9%. And Tommy, we typically -- we do get burdened with some other items that we didn't call out specifically in our comments around some payroll taxes start over on us, that typically drags our margins a little bit, even going from Q4 into Q1. The other area that I would point to is we do have some resetting of some incentive accruals and so forth, as you can imagine, lower dollars in '25 based upon performance. And we certainly budget to hit higher goals going into the next year. So we'll have to reestablish some of those accruals as we work throughout the year as well. And those typically get spread pretty evenly throughout the year until we start to reforecast to a greater degree later in the year. So we do have some, what I would call, kind of offsets or negative items that will probably push their way through here yet in the first quarter.

But I would say, Tommy, the exercise you did, which is the same one I did yesterday when I was preparing my remarks, by adding up Ron's remarks, which were prepared ahead of mine. And I did the same bridge you did and then kind of try to double check it against looking at where we were for the quarter so far. And directionally, you're right on. I think it's just going to be a little not quite -- January is not indicating to me that we're going to get to where -- the level you said.

Understood. Shifting to some more strategic questions here on TestEquity. You have new leadership there, and you've talked before and again today about refining the customer value prop, the go-to-market, centralizing some functions, et cetera. What can you share there about the progress to date and what's ahead in 2026?

Yes. So look, the pacing on the team and the depth of our leadership bench is just very different than it has been. And part of that was that we -- adding Barry was critical, but it was not just adding Barry. Barry brought with him an ensemble of other executives, and we were able to really keep so many of the people that we had that were in -- had key institutional knowledge and that we had a lot of confidence around.

So we did double up some of our leadership expense. When I look at the total burden at the top of that company, it's different than it was 4 or 5 months ago. But with that has come a real high level of not only cadence is different and the pacing is different, but there's a high level of kind of drill-down insight, which Russ and Mark have been doing last year increasingly for us is after we made the Conres acquisition, we were able to really get a lot more accountability around the efficiency in our rental and used business and our calibration strategy and our chambers business has been taken off. And so we've been trying to build out our Chambers offering and portfolio and our inventory and stock. And then we've been working through kind of a more cohesive strategy around the total test and measurement go-to-market kind of value proposition to the customer.

So it's not just as is isolated to margins on new product. And then on top of that, we have a lot of smaller value-added capabilities that are inside of the TestEquity Group, some of which came with Hisco and some of which were ones that we had acquired. And so by breaking them each apart and really drilling accountability and ownership on each of those verticals, we're able to see very different contribution margins amongst different ones. And so of our EPS business, we've got parts of it that are more commodity that are volume, but our cost -- our channel support to that is similar to our more discrete specialty parts of the same EPS business. And so the flow-through margin on those look quite a bit different. And so the team is really reenergizing the sales force on how they're spending their time and how we're delivering our messaging in the marketplace into our employees around where the levers are to pull a lot more attention and acceleration through the parts of the business that have very different structural contribution margins. And that's just -- that energy and that focus kind of started 100 days ago, but it's trickling down through the organization more recently.

Our Chief Commercial Officer, who's been really important to the business. We made our President of Mexico for all of DSG so that we could start to really bring our cadence together across all 3 of our verticals in Mexico so that we could have more cross-sell wins and drive total revenue growth. That's the business that he had built for Hisco. And then we added another Chief Commercial Officer at the senior executive level to really focus on these lines of business efforts. And so Barry has got a lot of confidence in all the specialty businesses that we have and how it all rolls together. And some of the profitability that is inside of that business has been masked by some of the areas that have been whipping around or where we've either had too high cost to serve relative to the contribution margin and not enough focus on the areas with our sales force on much higher contribution margin opportunities. And we're seeing that shift.

Your next question for today is from Ken Newman with KeyBanc.

I was wondering if we could start on tariffs and if you're anticipating any material impacts from the recent news and how you're thinking about price cost as we go into 2026?

You want to start that off?

Yes, I'll start it off. I know we've talked about tariffs in the past relative to the value of the imports that we do and so forth and our ability to be able to pass along the majority of those from a customer relationship standpoint. I think your question is probably more pointed towards the recent news and so forth. And I would say probably too early to tell yet in terms of what direct impact that may or may not have on DSG. Certainly, we're evaluating the situation, trying to stay really current with it as others are as well. At this point, we're moving the business forward, assuming that a lot of these costs that have come through to us over the last, call it, 12 to 18 months will probably continue to be out there until we get some further direction on where this may end up.

Ken, we've got a consulting firm that we use and are using across our portfolio companies at LKCM Headwater and we have some businesses that have been much more significantly impacted than DSG, but it's allowed us to be informed across ways and levers that we should pull and also kind of navigate or engage on the SCOTUS recent ruling. So we ended up leaving some dollars on the table last year for sure, but our team did a great job of managing both pricing as well as sourcing costs and where we source things across DSG. And so much of it was mitigated by the end of the year. And -- but that -- we did end up with certainly a drag on earnings or much of it was mitigated as we looked out prospectively for this year by actions that were taken throughout last year.

Now we've got to kind of look and see whether or not there's any additional moves that we need to make or whether or not there's going to be additional shifting in where the tariff burdens are going to be and whether or not that's going to inform any of our sourcing decisions this year, our pricing decisions this year or whether or not we're contesting or protesting that we believe that we should get any refund. So -- right now, it's really early to try and know how that's going to work.

Okay. That's helpful. And then just revisiting Tommy's question a little bit on some trends that we've seen year-to-date. Any other color that you're able to provide on the segments? And then maybe for Lawson specifically, how are you thinking about these mix impacts within that segment? And should those normalize as we move through the year?

I'll start with Gexpro Services. That was pretty easy. Gexpro Services has got several key end markets that are spooling up. The power generation space has obviously gotten a lot of attention. It's a key area for that business and its legacy or its history coming out of GE. So it's -- it will enjoy some leverage there to the positive. The aerospace and defense vertical is very important to it. We know what's going on around the world. And so there's -- we expect a firm year there with growth.

The domestic renewables business, we're about 2/3 domestic, 1/3 international historically. The domestic business is down. We really started to see it tick down in the fourth quarter, kind of mid-fourth quarter, I guess, and that trend is continuing. At the same time, as we're seeing countries like India, where we had $4 million of revenue on renewables is kind of tracking towards -- and that's 2 years ago, kind of 2024, I think we were $4 million is what I remember looking at. And this year will be $14 million.

So we're backfilling with our capabilities with our manufacturing or vendor partners and some of the renewable developers programs around the world that are backfilling but not entirely backfilling. There's also some different contribution margin dynamics as you spool up new relationships at Gexpro, as I alluded to, relative to the contribution margin on a more mature vertical or customer engagement. So as we're taking on more opportunities at Gexpro Services, which is happening more broadly than just renewables, there's some launch costs that are associated with that. We do believe that Gexpro Services margins that we've seen throughout last year are consistent with how we think that business is kind of going to continue to operate. So we don't expect a significant deterioration in the EBITDA margin at Gexpro Services this year at all. We think it's kind of operating without a lot of headroom up this year, but operating at a level that we think is about consistent with where we expect it will be this year.

On the test and test equity side, as I alluded to earlier, we're seeing strong interest in the test and measurement equipment. Our ES business is continuing to see some softness. Our electronic production supplies -- one of the key areas is our electronic manufacturing, Ron helped me with that is that kind of starting to remember how we call that vertical. But that has been an area that has been really soft for us, and we've seen some firmness in it last year. I can't remember where our backlog looks right now there, but it's the biggest part of TestEquity Group's apps business. The Chambers business is very strong. The rental and used market is getting more attention and focus for us because it has a lot higher contribution margin, and it's been -- it was a source of strength last year and with renewed strength. And some of that's focus and some of that's the acceleration in demand end markets on the test and measurement side. What else, Ron? Lawson?

Yes, relative to Lawson and what I would say around that is we continue to see an increase in our -- what we call ship to or VMI installations, in particular, in the -- in our larger locations within strategic relationships and within our Kent automotive business. I would say, a renewed focus on the core local business, where historically, if you look at the last couple of years, that's where the most pressure has been seen. And we've seen, I would say, kind of flattening out in ships there. But as Brian mentioned, we had our sales leadership meeting in mid-February and a ton of focus being put on reallocating resources to be able to grow that piece of the business, which makes up that local business, we call it core as well, is about 45% of Lawson's total revenue.

So again, Lawson has seen on an overall basis, some increase here moving from January, February. And we've got great insight into a number of locations and around specific customer wins and the accountability that Brian and I have mentioned around making sure that those sites get installed on a monthly basis with Jim coming on board here in January, a renewed focus around that, making sure that we hit those numbers as well.

Your next question for today is from Kevin Steinke with Barrington Research.

I just wanted to follow up on the earlier margin discussion. I believe in response to one of the earlier questions, you mentioned that you thought the second and third quarter adjusted EBITDA margin could be above the full year 2025 average of 8.9%. So you're thinking kind of a 9-ish is appropriate for second and third quarters?

I think we believe it's going to be relevered up higher than that, Ron. But I don't think -- I think that I'm trying to remember where we are on there, but it's if you look at last year, our second and third quarter EBITDA margins were above that 8.9%. And I think we expect that it will be consistent with that or above. Can you remember -- is that right, Ron?

Yes. Yes. I think where we're going to see probably the most pressure, as we've commented on, is really here in the first quarter. And then you're correct, Brian, relative to second and third would be an acceleration north of what we posted for the full year. And typically, that's not unusual. I mean, typically, for us, the second and the third quarters are typically the strongest quarters. And in fact, even that uplift generally starts in March. March can be one, it's a longer month in terms of selling days, so we get some additional operating leverage there. And then typically, Q3, if you look back historically, Q3 and I'm sorry, Q2 and Q3 are typically the strongest uplift in sales as well as overall margin percentages.

I just look back at it in last year's Q2 was 9.7% and Q3 was 9.4%. So versus the 9% last year in the first quarter and the 7.4% that we posted in the fourth quarter. So that kind of gives you some sense of how the quarters fit in together. And I think we've got a good number of selling days. Is it in the second quarter, Ron? Or is it March? -- trying to remember.

Yes, there's -- yes, in March, there's -- I think it's either 22 or 23 days in the month of March. And then Q2 and Q3 both have 64 selling days.

Okay. Great. Got it. Yes, that's helpful. Appreciate it. I wanted to also follow up on Lawson. You mentioned there some continuing challenges just in the small account side there, maybe some loss of focus as you've gone through this transition period. But I know you've been experimenting with various things there. I think to serve the small account customer base with inside sales force or maybe some service reps who do the unpacking. Are those the sort of things you would still want to continue to work on? I know you also mentioned e-commerce. Or is it just more kind of getting the actual sales rep back on site? -- more frequently? Any more thoughts on kind of how you kind of are approaching that.

You just kind of were through all of them, which...

That's what I was going to say, Bryan...

And I are laughing because we are smiling because you're right, yes. So I would say that the shift of some tiny customers that were too small to service with the cost to serve of having a rep go see them because their order -- order flow dynamics and the size of their invoicing was too small to have somebody there unpacking and managing stuff. I think our inside sales group and our e-commerce efforts have really helped that.

So I think that our revenue there is not where we've really lost volumes. We may have lost some ship to locations. But I think, Ron, if I remember correctly, we've actually seen pretty good traction out of that total effort even though we may have had some small ship2s. Those are not the ones that we're missing. We had -- with the compression of our sales force that we did 2 years ago as we were getting set for the new sales force initiatives that we were putting in place and the technology tools and the way that we're trying to drive productivity out of our teams, we certainly saw with that some of our smaller core customers not get the level of service that we would expect. We had less salespeople. And as you might imagine, the salespeople that we had covered the bigger customers or the strategic accounts, the national accounts that we were trying to make sure we were doing a great job for across the country first. And so that caused a natural trend of losing some of our ship to locations that just had less volume in them and a real concern on our part at the leadership level on whether or not our salespeople were with that compression and then with the distraction of a lot more strategic and new national accounts, we're spending as much time focused on the smaller street business that they used to make a lot of their money on.

So Ron and Mike Decata started to national account or strategic account initiative about a decade ago, and it's grown to where it's as large in our -- as part of a part of our business as our street business is from zero. And so we're feeding our salespeople, those national accounts. And in some ways, that may be was creating some behavioral challenges that we didn't appreciate until we got more insights out of the CRM and now with kind of the insights that better data analytics are allowing us to see and how we're keeping up with some of those smaller accounts. And also, we went out in the market and did a bunch of feedback surveys that we needed to have at my level and our investment team level to be able to triangulate with our leadership team what we were hearing in the market from a lot of those smaller accounts. And so now we've got a very proactive initiative around it. And we're seeing a relift back in those base accounts, at least the ship to number, but it's been after several years of significant declines in locations. And so you don't see it in the top line as much because you're picking up the strategic accounts and you're getting more volume through those bigger relationships.

But when you get down at the profitability level on a mix shift basis, especially if your cost to serve from a commission perspective or a cost for your salesperson is the same, you're -- we get more premium pricing out of the smaller accounts than what we do out of the bigger accounts so that you're giving up some gross or some product margin and then you're losing some flow-through contribution margin that if you just kind of held pad on that would have significantly changed the total top line revenue growth and the profitability of the business. All that was at the same time as we're investing a significant amount of dollars into the company and into the sales force.

So you saw -- if you look back 2 years on Lawson, you've seen we've got less revenue today on our MRO business than we had 2 years ago. We've got more today than we had last year. But that -- most of that decrease really came out of those smaller accounts and the flow-through on that at the same time as you were investing in paying your sales force more, offering them more tools and putting dollars back into it caused a delevering dynamic at the same time as we were making a deliberate investment. And so there was a swing in profitability there that we felt in the fourth quarter more acutely than we had in the prior fourth quarter. We knew what we were doing, but we also knew that there was going to be a J curve as we were investing back in the sales force after that compression period of getting those sellers back out there into those territories that were either open or have been consolidated. So it's -- go ahead, Ron. You daily...

Kevin, the only thing I would add to Bryan's comments, one is our strategic business, really sticky business. We've got great customer relationships, servicing multisite locations. So drives really solid, sticky gross margin dollars back to us. So we love that part of the business and continues to -- we continue to expand it and continue to make investments there to win new accounts as well. Relative to the core local customers, if we do look at ships over the last year or so, we've really been I would say, kind of flattish. And so most of that decrease that we experienced within our core local customer count took place prior to the beginning of 2025.

So -- but now it's about -- as I mentioned, they make -- they're about 45% of our total revenue. To Brian's point, it's putting some headwinds against the total sales growth that we see. And now it's a renewed focus on making sure that we can get that 45% of our revenue customer base growing again. So -- and there's change in incentives and focus and even at the sales leadership meeting that I mentioned a couple of weeks ago, a lot of focus around where that business historically had been, where we sit today and where we need to take it in the future with our sales leaders.

I want to add 2 things there because I think you asked the breadth and the complexity of the question you asked was great, but I want to make sure I hit these other points. You asked about other support services or capabilities that we put in the field. So we definitely have made a real investment. We're working on it in some key markets, but we're adding some service reps and some focused new account sellers, if you will, or reengagement sellers, so not the field sales reps that we've got historically, but to support those field sales reps so that they have the time to get back in front of some of these customers that they've not spent as much time in front of by having these service reps support them on some of their higher volume relationships so that they aren't having to go by and see the account twice.

So if you think about the way that we often serve our -- even our high-volume customers like those national accounts, they're going in and they're scanning the bins, they're putting in an order and then they're coming back a couple of days later and they're breaking open boxes and they're reorganizing and reloading all those cabinets. And so that labor component that we sell as part of our value-added -- our critical part of our value proposition to our customers by having a service tech do a route and efficiently go by those customers and help take one of those stops out then we're opening up the opportunity for those sales reps to spend more time back in the field, servicing those customers that maybe were either smaller on the street level or some of the national accounts that we're adding that need kind of early touch points high or making sure that we're getting more wallet share out of them and getting them stood up on their initial kind of building out their program.

So that's been -- that's a real focus right now of the business. It's definitely been a cost center. I mean we've layered that cost in, but it's something that we are seeing strong early indications that that's a model that we want to continue to lean into to support our FSRs. It allows our FSRs, we're not changing -- it allows them to make more money because it gets their total revenue that they can have flow through them up. And we think it does a much better job of servicing the customer at a higher level. What our marketplace surveys have told us is that our customers felt like that too often our sales rep, if they were a smaller account, they just weren't getting the attention or they were being effectively fired by us, not by them. And so there's a -- it was a real message that was consistent that we heard where they were asking for us to come back out and service them again and to give them that consistency of service that they wanted from us and that maybe over this transition period with our sales force, we haven't as consistently given to the smaller accounts. And so that's been a drag of several percentage points of growth a year, the last several years at least, that we've been making up with our national sales effort. And maybe 2 years ago to last -- so to '24, it was a bigger drag because we had that compression with our sales force. And then we probably thought single digit -- mid-single digits drag on our growth last year out of that a little bit as well. Is that fair, Ron? You know the numbers.

Maybe not quite that much that and military. I'll caveat that. But military was the other area that we saw a real shift in buying behavior that we're trying to work on reengaging because they have been historically a really good end market for us. And we're still engaged with them, but their behavior shifted significantly in dollar spend over the last 1.5 years.

Sounds good. I appreciate it. I just want to lastly ask about the M&A pipeline, given your strong liquidity and the extension and expansion of your credit facility looks like you'd be set up to explore and maybe execute on some M&A opportunities.

Yes. Look, we highlighted that Sean joined us maybe 100 days ago or less. He's been a critical addition to our team. We spent the better part of the last year, 1.5 years, really evaluating our business development or M&A and corporate strategy part of our effort. we have a really strong team -- colleague that worked -- used to work at Headwater that's been on the Gexpro services side and then helping lead that effort the last several years. We brought in Sean to add some additional muscle memory to how -- to build out a team there. He's significantly increased the funnel in just 100 days.

He's gotten a lot of buy-in from the vertical leaders and from our team about where we want to spend our time and effort. We had a few things last year that were high priorities for us that we had hoped to get done that didn't get done. I'd say that none of them are off the table, but they're -- but we just weren't able to get them over the goal line. They've been high priorities for some period of time. And then we have some things that we are focused on right now that are smaller tuck-in acquisitions that significantly bolster some areas of either strength or focus that we've got in a few of our vertical -- a couple of our verticals. And we would expect that there'll be some small tuck-in acquisitions that we'll be able to get over the goal line over the first half of this year.

Okay. Sounds good.

And those are important to driving accretive -- the ones that I'm thinking of, there's 3 of them that we have prioritized. All 3 of those will add significantly to the margin construct of those 3 verticals. But they're small. They're not -- these are tuck-ins. We have reached the end of the question-and-answer session, and I will now turn the call over to Brian King for closing remarks. Appreciate everybody's engagement and your time this morning. We look forward to stronger quarters in the future. And I appreciate everybody continuing to be supportive and engage with us. Have a great next several months.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Good day, everyone. Welcome to the Distribution Solutions Group Third Quarter 2025 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Sandy Martin. Please go ahead.

Good morning, and welcome to the Distribution Solutions Group's Third Quarter 2025 Earnings Call. Joining me on today's call are DSG's Chairman and Chief Executive Officer, Bryan King; and Executive Vice President and Chief Financial Officer, Ron Knutson.

In conjunction with today's call, we have provided a financial results slide deck posted on the company's IR website at investor.distributionsolutionsgroup.com.

Please note that statements on this call and in today's press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results and underlying assumptions subject to risks and uncertainties that could cause actual results to differ materially from those described.

In addition, statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change, and we may elect to update the forward-looking statements made today, but we will disclaim any obligation to do so.

Management will also refer to certain non-GAAP measures and reconciliations to the nearest GAAP measures can be found at the end of our earnings release. The earnings release issued earlier today was posted on the Investor Relations section of our website. A copy of the release has also been included in a current report on Form 8-K filed with the SEC.

Lastly, this call is being webcast live on DSG's Investor Relations website, and a replay will be available through November 13.

I will now turn the call over to Bryan King.

Thanks, Sandy. Good morning, everyone. I'll start today with overall highlights for the third quarter and share some perspective on our view of the current market environment and DSG's progress on its ongoing strategic initiatives. After that, I will turn the call over to Ron to provide a more detailed review of the financial results.

Let's start on Slide 4 with a few key takeaways. Our third quarter results demonstrate the strength and resilience of our business model, even as inflation, tariffs and higher interest rates continue to challenge parts of the U.S. economy. The organization is not standing idle, waiting for market tailwinds to pick up, but continue to push the pace of initiatives that will make DSG a more profitable, durable and growing business in the long run.

We delivered 10.7% revenue growth in the quarter, supported by strong organic momentum with an average daily sales increase of 6%, plus solid revenue contributions from our 2024 acquisitions. This represents the fourth quarter in a row that we've realized an organic sales increase and puts our year-to-date organic sales increase at 4% over 2024.

Demand remained particularly healthy across aerospace and defense, renewables, semiconductor-related technology and industrial power, where production demand continues to accelerate. With solid top line performance, inclusive of the significant investments we continue to make on the income statement, we're pleased to report an increase in our shareholder returns measured through adjusted earnings per share of $0.40 for the third quarter, an increase of 8.1% compared to the same period last year. We enhanced shareholder returns with more than $20 million of share buybacks in the first 9 months of 2025, reflecting our confidence in the company's trajectory despite a challenging macro environment.

We also enjoyed generating strong quarterly operating cash flow of more than $38 million with adjusted EBITDA of $48.5 million. This is on top of strong cash flow generated in the second quarter as well. EBITDA margins for the quarter were 9.4%, primarily impacted by a combination of product and customer mix shifts as well as strategic investments across the verticals. We expect these ongoing initiatives to start realizing returns and improved EBITDA margins in the coming quarters.

Importantly, Barry Litwin and the investment we have made in the TestEquity team are moving expeditiously after a comprehensive review of our significant line of business opportunities. This review has led us to refine our go-to-market strategy, which now focuses more on lines of business and capabilities to unlock growth and margin expansion opportunities.

Gexpro Services continues to win wallet share while investing in its capabilities and delivered another record quarter. And our Canadian branch division led by Source Atlantic, showed meaningful improvement in gross margin and expense rationalization and are now in line with our shorter-term targets and offering us better line of sight on our longer-term goals. These results reflect solid progress on advancing our focus on disciplined execution of key initiatives while acknowledging we continue to invest in and refine our expanded processes and results to unlock operational efficiencies and improve profitability across the expansive opportunities in DSG.

We continue to steadily dedicate resources and investment into the list of priorities around internal initiatives despite recognizing we are in a dynamic environment with pronounced quarter-to-quarter marketplace fluctuations that also impact our priority around our profitability progression. Stacking up these internal investment priorities, while essential to long-term value creation, place demands on leadership while introducing short-term financial performance pressure, particularly when end markets are less forgiven. A large thank you from our Board, investors and me goes out to our DSG colleagues for all the hard work and transformative initiatives they are tackling currently.

With a broad portfolio, we are also enjoying a return to solid momentum in numerous end markets. For instance, we achieved much anticipated growth in test & measurement throughout the quarter despite continued softness still in electronic production supplies. Ron will go over other key financial takeaways for the quarter in a moment, but let's first turn to Slide 5 to cover more end market revenue trends and strategic updates by business focus.

At TestEquity Group, we are pleased to report strong sales growth of 5.8% in the quarter, driven by test and measurement, rental and refurbished equipment, environmental chambers and modest gains in value-added fabrication services. Electronic production supplies were flat as we maintained pricing discipline. TestEquity product mix shifts created downward pressure on gross margins and higher SG&A reflected compensation adjustments and investments in additional management resources and sales incentives and employee-related costs, including health care. Several specific large new customer programs with competitive pricing in test & measurement weighed on margins. However, our specialty products and VMI offerings continue to represent meaningful higher-margin growth opportunities.

The ConRes acquisition completed in 2024 continues to perform well and has unlocked greater focus, utilization and profit opportunity as we drive -- we are driving more rental and used test & measurement interest from our customers, which is prompting us to invest and expand around how rental and used can drive deeper customer relationships, encouraging product depth and geographic reach while further strengthening the broader TestEquity platform with better margin opportunities and customer loyalty.

Barry Litwin completed his first 90 days as CEO, much of which was focused around a comprehensive diagnostic of the TestEquity business with the team and a number of resources he brought in -- brought with him. The team developed a unified strategy for the organization that clarified the value proposition across 3 core categories: design and test, build and assembly and maintain and repair, providing a clear framework for growth, customer engagement and expanded accountability around revenue and margin and growth mix objectives by lines of business. Barry has restructured the leadership architecture to strengthen execution, enhance functional ownership and refine roles across digital, merchandising and commercial sales. These changes are designed to accelerate growth, build talent depth and improve organizational speed and agility.

Barry has also identified several targeted investments in systems and e-commerce capabilities that will enhance operational effectiveness, unlock company cross-sell, reduce back-office resources and streamline e-commerce sales. The team has undertaken multiple customer satisfaction surveys to pinpoint areas where TestEquity can deliver greater value and is actively developing a refined customer segmentation and go-to-market strategy.

On the product front, the team has identified key opportunities for new product introductions and more strategic private label expansion to unlock incremental growth and drive margin opportunities. While we expect some near-term wins for various changes, the full impact of these initiatives will take shape over the next 18 to 30 months, resulting in a structurally stronger, more competitive and materially higher-margin business.

Moving to Gexpro Services. We are excited to report that Gexpro Services delivered record adjusted EBITDA dollars in the third quarter on organic revenue expansion of 11.4%. The sustained sales growth was driven by momentum in aerospace and defense, renewables and technology with an upward production ramp in industrial power. Value creation initiatives include DSG cross-sell, acquisition synergies and expanded VMI, kitting, manufacturing and e-commerce offerings. Customers are becoming increasingly interested in Gexpro Services domestic manufacturing capabilities to mitigate the tariff impacts.

Our Europe business remains strong overall with a growing focus on diversifying across multiple verticals. The Gexpro Services recent acquisition of Tech-Component Resources in Southeast Asia and an expanded investment in people and locations positions us well to continue growing with industrial and technology customers that have encouraged our presence in the Asia Pacific region. Existing global customers are also requesting Gexpro Services global supply-chain management capabilities to support their operations more broadly across the EMEA region.

We enjoy the partnership and confidence our customers show us by asking us to grow with them, both locally and globally across multiple end markets. And our expanding diversified business portfolio enables us to capitalize and grow across macro and micro business cycles. Our capabilities improve our customers' ability to succeed in an ever-changing marketplace and their confidence in us is reflected in our extremely low churn and our ever-expanding wallet share.

We also see tailwinds from influences like the Big Beautiful Bill and domestic manufacturing opportunities for U.S. customers seeking to avoid or lower the impact of tariffs. While our sales funnel, especially from existing customers feels great, we are making very strategic investments in expanding the sales team's capabilities to drive a longer and larger tail to our strong top line revenue growth. While these investments slightly reduced the near-term profitability available with increased investment in our costs from a year ago, the incremental sales we are enjoying are still driving EBITDA dollars higher, while the investments are enhancing our already strong customer retention and expanding our sales pipeline.

Gexpro Services core strength lies in our ability to deliver industry-leading total cost of ownership savings to our valued customers through custom supply-chain management programs. These programs focus on high on-time delivery, quality, lean optimization, supplier rationalization, total working capital improvement and technology. Even with our investments, we are pleased to report sequential EBITDA margin expansion once again for Gexpro Services with a 100 basis point expansion since the first quarter of this year.

Expanded geographies and value-added capabilities achieved through disciplined execution of operational efficiencies and the benefit of our strategic M&A over the last several years continue to drive structurally stronger margins. We are excited and focused on investing even more deliberately in several additional organic and inorganic priorities to continue to fuel the momentum at Gexpro Services.

Overall, Lawson's total revenue increased 3% compared to a year ago, with increases in the majority of our business lines. We enjoyed robust performance of our recent acquisitions. S&S, our automotive product category, achieved sales growth in the high single-digit range. and ESS, our safety products business, enjoyed similarly strong increases as well. Lawson's legacy business was up 2% and business development initiatives drove higher strategic accounts and government growth in the high single-digit range. Although we are not satisfied with our total sales performance for Lawson this quarter, we know that economic pressures have negatively influenced many of our customers this year. Lawson's primary focus over the past 2 years has been executing on its multiyear sales force transformation initiative.

Over the last 12 months, we've added over 60 net new sales representatives, bringing our total field sales reps to approximately 930 at the end of September. Most of our newer reps are still scrambling to build a business that covers our significant investment in them. The current environment, even with our enhanced sales resources and tools we are now providing the sales force has not accelerated the lead time to profitability on new hires at the pace we expected, but we remain committed and optimistic. For instance, while the sales force transformation is still significantly underway, we're encouraged by the positive momentum across all sales metrics.

CRM adoption now exceeds 70% and the metrics we are tracking are trending higher. Our CRM tool, which we continue to evolve, now provides valuable analytical visibility by territory and sales rep, enabling much more data-driven decision-making and targeted performance management. We are investing in deeper sales leadership resources, talent and accountability. And sales continue to ramp for Lawson's new 24/7 web platform, expanding our customer reach and enhancing engagement.

Although there is more work ahead, Cesar and the team are executing with discipline, and we are beginning to see meaningful traction from our key sales initiatives. In the meantime, we are also investing in additional sales support roles, including business development professionals, inside sales reps, strategic account managers and technical sales specialists, all to help our sales reps become more productive. We are also supplementing our field sales team with service personnel where it makes sense, freeing up more time for our business development. We are balancing our priorities around future investments as we evaluate and refine our processes to better support our sales force to best serve our customers.

On a sequential basis, our Canadian branch division sales grew by 7% in local currency in the third quarter, driven primarily by Source Atlantic. We saw better operating expense leverage with fewer restructuring impacts in the quarter. Gross margin sequentially improved as products, services, pricing and mix shift initiatives are well underway. We have improved gross margin almost 300 basis points over the last year. Ron will discuss our solid progress on EBITDA margins this quarter as well. We've completed 2 of the 4 facility consolidations and expect to finalize all major realignments by the end of the calendar year.

Although we are still in the early innings, we appreciate that Source Atlantic and Bolt Supply have an attractive market presence, strong customer relationships and a unique strategic fit in the Canadian marketplace. After a tough initial start as the project revenue in Source Atlantic quickly bled off and wasn't replaced as the Canadian economy became softer, sales and steady-state profitability at Source Atlantic has progressed nicely as the year has developed. With much of our purchase price for Source Atlantic defined by working capital and real estate, in the first full year of transforming our Canadian business, its free cash flow will have significantly derisked what we strongly believe was an excellent acquisition to transform our Canadian business. While still chasing the profitability objectives we expect to hit within the first years, it's positive to see the momentum that we're gaining as the year has developed.

With that, I'll turn it over to Ron for details on our third quarter financials.

Thank you, Bryan, and good morning, everyone. Turning to Slide 6. DSG's consolidated revenue for the third quarter was $518 million, a 10.7% increase. The $49.9 million increase was driven by a combination of strong organic daily sales increase of 6% and $23.3 million in revenue from our 2024 acquisitions. On a sequential basis, organic daily sales were up 3.1% over the second quarter.

For the quarter, we generated adjusted EBITDA of $48.5 million or 9.4% of sales. Source Atlantic compressed our third quarter margins by approximately 11 bps. Adjusted EBITDA dollars were essentially flat versus the second quarter and 30 basis points lower, primarily due to product and customer mix shifts, strategic investments in the business and higher employee-related costs.

Cash flows from operations was $38.4 million for the quarter. This is on top of $33.3 million generated in the second quarter. GAAP net income per diluted share was $0.14 for the quarter versus $0.46 a year ago, which benefited from a substantial tax benefit. Non-GAAP adjusted EPS was $0.40 for the quarter, an improvement of 8.1% from $0.37 per share a year ago and a sequential increase of 14.3% from Q2 of $0.35 per share. In the first 9 months of 2025, we've repurchased approximately 670,000 shares, which is positively impacting our EPS return to shareholders.

Moving to Slide 7. Starting with Lawson, Q3 sales totaled $121.5 million, representing a 3% organic sales increase in average daily sales. Compared to Q2, organic average daily sales were down 2.2% pressured across most of our segments. For the quarter, Lawson reported adjusted EBITDA of $14 million or 11.5% of sales, down 110 basis points from Q2 on a sequential basis.

The net margin contraction from the prior year was primarily due to continued investments in our sales transformation and higher employee-related costs, in particular, health insurance costs compared to the same period last year. We also saw some vendor price increases this quarter from tariff impacts. However, the margin impact was minimal due to strategic pricing actions that we took earlier in the year.

As Bryan mentioned, Lawson sales rep counts have increased to approximately 930, up from 860 a year ago, driven by expanded roles that continue to boost growth and productivity. We also continue to leverage our CRM platform to connect our sales reps with our customers more efficiently. We are also pleased with the activity and engagement of Lawson's enhanced e-commerce channel, which we launched earlier this year. As we work through modifications to the site, we are realizing improved customer conversion ratios.

Turning to Slide 8. Third quarter sales for the Canadian segment in U.S. dollars were $60 million, which included $20.1 million of incremental revenue from the Source Atlantic acquisition, which was in for the full quarter this year and only a partial quarter a year ago. Q3 revenue increased sequentially by 7.4%, which is encouraging despite tariff-related market softness for projects in manufacturing, in particular, in Eastern Canada. Excluding revenues acquired from Source Atlantic, organic sales for Bolt Supply increased 6.5% over a year ago. The third quarter adjusted EBITDA for the Canadian segment was $5.8 million or 9.6% of sales, a significant increase of 300 basis points over the second quarter. We are making good progress on planned synergies around gross margins and branch consolidations and are well on our way to how we underwrote the business.

Turning to Gexpro Services on Slide 9. Third quarter revenue was strong at $130.5 million, up 11.4% from the year ago quarter from strength in renewable energy, aerospace & defense and industrial power. Organic average daily sales were up 3.7% sequentially from Q2. As Bryan mentioned, Gexpro Services adjusted EBITDA was $17.8 million, representing a record quarter. This is a 20 basis point improvement from Q2 to 13.6%. Similar to the second quarter results, operating leverage remained strong. Gexpro Services continues to invest in its business to capture top line revenue growth and incremental EBITDA dollars, albeit at slightly lower margin percentages. Gexpro Services continues to capitalize on the acquisition in Southeast Asia through wallet share expansion and cross-selling. And just as a reminder, Gexpro Services is facing tougher sales comps heading into the fourth quarter of 2025.

Lastly, I'll turn to TestEquity Group on Slide 10. Third quarter sales were $206.5 million with average daily sales up 5.8% versus a year ago and up sequentially by 5.9% over Q2. The test & measurement business improved. However, competitive pricing weighed in on margins. Revenue acquired from ConRes, which was acquired in the fourth quarter of 2024 was approximately $2 million for the quarter. TestEquity's adjusted EBITDA for the quarter was $12.4 million or 6% of sales, down sequentially by 90 bps from the second quarter. Net margins decreased from 7.4% in the prior year quarter, primarily due to shifts in customer and product mix as well as higher employee-related expenses, some of which are nonrecurring and others that are longer-term investments to improve the business. Key operating initiatives in flight currently include the expansion of service offerings, acquisition integration, pricing disciplines, sales force optimization, digital expansion and cost containment. With over 34,000 customers, our go-to-market strategy will continue to evolve to better service our customers with expanded offerings.

Moving to Slide 11. Our diversified business model has been structured to benefit from scale, product adjacencies and geographic footprint, leveraging 5 acquisitions completed last year. Since the merger of these businesses in 2022, we have invested nearly $450 million of cash and debt across 9 acquired businesses. And at the end of the quarter, our debt leverage remained at 3.5x. Starting at the bottom of the slide, we ended the quarter with total liquidity of $335 million, providing us with flexibility for accretive acquisitions and investing into organic growth initiatives. This foundation continues to underpin our disciplined capital allocation strategy. Again, this quarter, we achieved positive sales lift through our investment in organic growth. As a management team, we closely manage working capital within each of our verticals.

At the end of September, cash and cash equivalents, including restricted cash, totaled $82.7 million and net working capital was approximately $486 million. Consistent with the second quarter, at the end of the third quarter, we had no outstanding borrowings under our revolving credit agreement. And as Bryan mentioned, we generated $38 million of cash flow from operations for the quarter as we closely manage our working capital. We continue to look opportunistically at share buybacks and returned $20 million to our shareholders this year with approximately $6 million still available under our previously Board authorized program. Our free cash flow conversion is approximately 96% over the trailing 12 months, and we compute our ROIC on a TTM basis at approximately 11%. Finally, our first 9 months of net CapEx, including rental equipment was $19.3 million. We expect our full year 2025 net CapEx to be in the range of $22 million to $25 million or approximately 1% of our revenues.

I'll now turn the call back over to Bryan.

Thank you, Ron. We plan to continue navigating our businesses through market noise and volatility, remaining highly focused on making strategic data-driven decisions that generate long-term value and success through every business cycle. As we look at the fourth quarter, we're maintaining a cautious outlook given tougher year-over-year comparisons. That said, business activity remains steady, and I remain confident in our leadership teams and their ability to execute on their respective value-driving initiatives on their journey to build structurally higher-margin businesses that generate strong free cash flow and create accelerating long-term value for our shareholders.

Our teams are highly aligned, competing together to win more and each is accountable and highly incentivized for their progress. We are investing in internal and external resources at every turn to drive an enhanced financial outcome for DSG's investors. Many of our investments in the prior years are driving solid improvements to the business. That is evidenced by our ability to report 4 quarters of sequential top line revenue growth and have well more than doubled EBITDA by reinvesting our free cash flow and holding leverage flat since we created DSG 3.5 years ago.

While some of our 15 acquisitions made over the last 4 years or so, where we continue to track our underwriting and integration performance have taken more time and required more heavy lifting to get them to the targets we underwrote, we are confident that all offer strong strategic and financial accretion value to the platform we are creating and will long drive earnings and value for DSG consistent with how we underwrote them.

Based on more recent investments we've been making on the income statement, just like the acquisition investments on the balance sheet, we should be held accountable on continuing to perform and drive shareholder profits and unlock improved key performance metrics. You should continue to expect more from us through unlocking enhanced operational performance, continued market share gains, longer-term enhanced profitability unlocks and improved business momentum relative to whatever economic end market cycles we face as we look forward to 2026 and beyond.

We have a clear line of sight on how our initiatives drive intrinsic value and unlock additional value through increased future run rate earnings and deserving of a higher value assigned to the earnings we enjoy. We will continue to listen to our customers and deliver the products and services that they want and need. We, informed by our customers and our colleagues [ learned ], have identified and are strongly pursuing a number of key strategic inorganic opportunities that will strongly enhance our position to serve some of our key markets.

We want to personally thank everyone across DSG for embracing our performance-driven culture based on the core values of transparency, accountability, effort and empathy. I'm equally grateful to our Board and our shareholder partners for their trust in me, our DSG leadership and the LKCM Headwater team as we continue advancing this important investment together. We continue to engage actively with the investment community, and we'll participate in 3 conferences this November, Baird, Stephens and the Southwest IDEAS Conference.

And with that, operator, will you please open the line for questions.

[Operator Instructions] Your first question is coming from Tommy Moll with Stephens.

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

Yes. Tommy, this is Ron. I'll jump in on that one. So just a couple of points relative to the fourth quarter. First, when we look at the number of selling days within the quarter, keep in mind that we had 64 selling days in the third quarter of '25, and we go down to 61 days in the fourth quarter. And if you look at what we did a year ago in the fourth quarter, all in, our sales were a little bit north of about $480 million. And certainly, this quarter posted $518 million.

So as we think about it sequentially, we're -- even though we're up against tougher comps, even flat sales here in the quarter results in kind of mid-single digits looking at it sequentially going from Q3 into Q4. I will say, when we look at October, October is a little -- it gets a little skewed because there's 23 selling days in the month of October. And typically, our ADS normally gets compressed a bit when you have more selling days within a particular month.

So I would say we're not seeing any dramatic shifts, although as the third quarter developed, September was our strongest month within the quarter as well. So we saw acceleration, improving average daily sales as we went from July into August and then into September. So I'd say that it's tempered a little bit, but nothing dramatically.

The other piece I would just state and maybe it's a little cautious as well is a lot of our customers go through various types of holiday shutdowns and so forth around some of the holidays and later in the year. So it's not that we're anticipating that, that would be anything more than normal in terms of what we've experienced in previous [ four ] quarters. But just keep that in mind as well where there's always a little bit of -- we're always up against a little bit of a tougher situation just given what some of our customers are doing around the holidays.

And I would just say, Tommy, I was probably the culprit on using the word cautious as much as anybody, and it was mostly just thinking about the number of selling days for the quarter. But it doesn't reflect on how I feel about October relative to September. It was just a statement that I was making relative to thinking that we had really -- we did have strong performance out of Gexpro Services last year in the fourth quarter. And so we knew we were going up against a good number there. And while we had volume and we had both average daily sales and revenue organically were all up in the third quarter as were volume finally across all the verticals. And so that was a nice thing to see in the third quarter, and -- but we were just being cautious in our language.

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

Yes. The only thing I would say there, Tommy, is that -- and I think both Bryan and I covered this in our prepared remarks to some degree relative to some of the investments that we're making into the organization, if I break down the movement either sequentially or from a year ago, even 110 bps from a year ago, I would say that probably about 30 bps of that are investments that we're making into the -- that we continue to make into the organization. And really, I would attribute probably 80 bps of that more towards, I would call it timing or nonrecurring type of items around incentive accruals or start-up of some customer -- attracting customers initially at a lower margin to us purchasing -- advance purchasing some inventory last year.

So as I think about kind of that bridge from quarter-to-quarter, clearly, there are some items that are permanent that we continue to invest in the business, but there's also quite a bit of movement on some of these items that I would call more timing. And that pretty much holds true even looking at it sequentially as well.

There's nothing in the fourth quarter that we have visibility to that is anticipated significant large onetime items or positive or negative that we have visibility to today that we would see coming through in the fourth quarter.

Yes. On Gexpro, the momentum here is nice to see. You called out some of the drivers. And I'm just curious how durable does this -- does the contour of the recovery feel?

Look, Tommy, Gexpro has got a pretty broad base of wallet share and new customer wins that it's continuing to enjoy and its backlog or funnel is larger than it's been in the past of new business opportunities that they're pursuing. We've invested significantly both in being able to address some existing customers' needs in locations that are costing us some money that we've spooled up as well as some employees that we've added that are prior to getting the benefit of revenue, but where we have good visibility that there's a spooling up of more organic opportunity there.

The acquisitions that we've added to Gexpro Services over the last 4 years, going back even right before the merger are adding to the capabilities that particularly with the environment that we're in on the tariff side are allowing us to improve the supply-chain opportunity, both kind of domestically as well as more broadly for a number of the customers that we've served for a long time. And it's getting attention from customers that we haven't served for a long time.

So the sales cycle in Gexpro Services is long. As we know, it's the longest that we've got. The retention is very high. But we've made a lot of investments there besides just the acquisitions that are adding talent and capability and some relationship sellers that are helping continue to build out the pipeline. Now, there's 3 or 4 of the verticals that are hitting on cylinders and then there's the industrial power vertical that's getting stronger. And when you have 2 or 3 of your verticals that are firing on those cylinders, you look at those relative to what you've got in your backlog in the verticals that are not performing at peak level at all and you try and assess where you're going to be a year or 2 from now. And I don't have enough of a crystal ball there, but it feels very good, and it feels resilient.

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

Yes. I would say there's a lot still in-flight there. I think we've been trying to build the plane in the air. And so for sure. So we probably took too long to start focusing on growing our sales force again because we were trying to get more of the internal process improvements and tools available to the sales force. And so that gave us more of a J curve on our volumes and our ability to serve our customers at the level that we want to. And so now that we've been adding and filling back in territories that were open, we've been able to return to positive volume growth there. And so that's been a while coming. But we are still putting a lot of dollars against the transformation.

So there's dollars associated with resources that we are adding to support the sales force that we've called out in the call and we've talked about for some time, and we're continuing to put more of those resources in place. We're doing some pilot initiatives to try and look at how adding more selling leadership talent as well as tools and support personnel in key markets might be able to help us drive both a better customer service and more wallet share growth and to turn back on a number of the customers that we see in different markets that are not as actively using our solutions. So that's -- there's a lot still going on there.

The good news is that the metrics like CRM and sales or order flow per day or salespeople that are participating on making orders every day. Those metrics are still moving in our favor. They haven't moved as fast. The ability to spool up our new sellers and to get them to a level of profitability at the pace that we had expected 2 years ago when we were starting this initiative and part of the reason why we held off hiring new outside sellers or growing that sales force again was that we thought that we would be able to add a bunch of tools and get the sales professionals to the level of revenue that carried them much faster. That's been slower than we would like for it to have been. And while we're seeing some positive movement there, we're not seeing it at the level that we expected 2 years ago. And we don't know whether or not there's more tweaking that we need to do, which we believe and more sales leadership resources that we're putting in place to drive more support of those new sellers and how we onboard them.

But also we're looking at whether or not the sluggish environment that we're in for a lot of the customers that are the smaller job shops that Lawson sells that are much lower dollar per revenue per year relationships than we would have in a Gexpro Services, for instance, that part of our customer base has been more sluggish than the other parts of our customer base where we've got larger relationships, including the larger relationships that we have at Lawson, where those larger strategic accounts are continuing to grow.

Your next question is coming from Ken Newman with KeyBanc.

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

We didn't. But what I would tell you is that this quarter was -- had strong volume growth, not just revenue growth. And so that was for the first time across all of our verticals, we enjoyed volume growth again. Lawson, in particular, has struggled with pricing being to our benefit, but volume being against us. And so we returned to volume growth at Lawson. And we had volume growth at the other verticals. The pricing is -- Ron, can probably speak specifically to that.

We didn't take any new initiatives this quarter than we did have some tariff activity that we did at the beginning of the year. And we've been very transparent with our customers, like particularly at Gexpro Services where we have large relationships and contracts where we're being very open and transparent in showing exactly what the specific dollar impact is on a relationship. And we don't have full capture on all that we -- of the tariff costs that are flowing through. But the impact to our business has not been as dramatic as it's been for some of the other companies that we own. In fact, it's been much more manageable for DSG than it has been on a lot of the businesses that I'm associated with. Well, Ron, any other additions there?

No, I think you covered it, Bryan. The only thing maybe just a layer deeper, just that overall 6% organic sales increase. If we look at price volume mix there, about 1/3 of that was price and about 2/3 of that was volume. So I think to Bryan's comment, all 3 verticals saw volume -- unit volume increase this quarter, which is positive. And we have taken some pricing actions certainly earlier in the year at Lawson and then throughout as the tariff pricing or the cost increases are coming through, but nothing significantly that's burdening our overall margin percentages.

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

Yes. Look, I'll take it first. We've had some additional investments that we've made on the sales side on both those 2 businesses, be it commissions or support to higher revenue on the test & measurement piece of the business or the specific tools and capabilities that we're adding to our sales force support and as well as adding a significant number of sellers at Lawson that are not yet profitable or contributing to the P&L.

So -- and then we've also had investments on the SG&A side in talent or senior leadership across those 2 verticals. We also had some expenses there that related to health care and some severance and other things that we had that flowed through. So I wouldn't say that it's specifically inflation across more broadly across our costs. I mean we are taking compensation actions at times over the last couple of years to support our team across those verticals in all of our verticals. But the real step-up in SG&A has been very deliberate, and it's focused on trying to drive revenue growth and customer service in the future.

Okay. Maybe to ask this in a different way. And obviously, I know the crystal ball is clear as mud right now. But if you think about a normalizing upcycle, at what point do you kind of get back towards your targeted operating leverage? How much volume do you think you need in order to kind of support that 20% -- 20%, 25% EBITDA flow-through?

Yes. Lawson, I think that we probably -- and Ron, you may more specifically be able to address this. But the investments that we've been making in Lawson at the personnel level, I think that we are probably in a spot where we would expect that the leverage there to start working back in our favor. Any time you spool up a significant number of new sellers and you add a lot of resources around them or above them to support them, that level of expense has been very much a drag on operating leverage. And historically, the operating leverage at Lawson has been in that 20% to 30% or higher. And we would expect that over the next year as we see the performance and the maturity -- maturing of the sales force that we'll start enjoying that sort of leverage again in that business. That's certainly the way that we're modeling it.

On TestEquity, it's been a little bit of a different. You've had 2 dynamics there. One, we've got our apps now where it's flat. It's been negative, and we've had a return to growth on the test & measurement unit volume side, but there's been a mix shift there that has impacted the operating leverage of the business at the same time as we've been investing in SG&A. So it kind of muddies up as you put it, the ability to try and extrapolate what our operating leverage is at the TestEquity Group because we've been putting a significant amount of deliberate expense into the SG&A line to try and with the leadership change at the top to try and get that business organized in a way that we think is going to offer significantly better operating leverage than that business had historically operated around.

There's parts of the TestEquity group that have really significant contribution margin associated with it. And then there's parts of it like the test & measurement new business that's not going to have as much operating contribution margin, but has good stickiness associated with our customers as well as returns on invested capital on that business unit. So I guess that's about an answer that may be about as muddy as the question, I apologize, but that’s it. Ron, any other offerings there that you could help me on?

Yes, I think that's all you [ explained ] it, Bryan. And when I look at it even across DSG in total, most of some of these other items around health insurance, for example, most of that drag happened at TestEquity and at Lawson. And so that's -- those are typically pretty spiky. It's just some quarters you get favorability, other quarters, it goes the other direction on you. And this quarter went the other direction. And if I look at that kind of across the DSG platform, it's a 20 basis point drag on our EBITDA margin just for this quarter.

And so -- and then the mix piece that Bryan referenced, if you look at test & measurement, they went from about $30 million in sales in the second quarter to about $35 million here in the third quarter. And so that piece of the business certainly operates at a lower margin percentage for us, and that's putting a little bit of downward pressure along with getting into some larger customers from a pricing competitive standpoint as well, which put some drag, I would say, more specifically on the TestEquity business this quarter than on the Lawson side. But this is adding to the muddiness of it, right? And Lawson’s shift -- customer shift in -- more larger strategic customers is putting a little bit of pressure on the Lawson margin...

Your call out there is a fair one. We would note that TestEquity had both a mix shift issue or mix shift dynamic. I would call it an issue because we like the fact that we were -- we saw a nice recovery in the test & measurement activity. But we did have a relationship there that we were spooling up a new relationship with them and it had a drag initially on the gross margins for the quarter in the test & measurement part of the business.

And then we also had -- you had -- you called out health care. We had -- we've made a bad debt or receivable allowance there for a customer that's not been paying. We had some severance, we had some additional expenses to spooling up new leadership. And so there were a number of moving parts on the SG&A line that were -- and there was an inventory allowance there. So I think that there was maybe 4 buckets that added to a lot of the dollar delta there.

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

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

Go ahead, Ron.

Yes, I'll jump in on that. So, Kevin, yes, if we look at -- we typically break that business into 2 separate pieces, right? The legacy Bolt Supply business and then also the Source Atlantic business as well. And I would say Bolt continues to perform really well in that 13%, 14% margin rate. It's getting a little muddy because of combining the branches and so forth. But we clearly when we underwrote the acquisition of Source Atlantic, we had a path to exceeding 10% on that business on a stand-alone basis. And so even on a weighted basis between Bolt and Source, we should be above 10%. Again, we -- it's -- we're well on our way. We're not where we want to be yet. And so we would certainly look to see margin expansion there.

I think they'll see some of the probably lumpiness a little bit in Q4 results as well. If you look at typically really across DSG, but inclusive of the Canadian operations, Q2 and Q3 are the strongest quarters typically. So, you get a little bit of deleveraging effect on slower sales as based upon some of my comments earlier just around holiday timing and so forth. But I'd say well on our way, but not where -- we're not at the end state there for sure.

Okay. Great. That's helpful. I had to jump to another call here but appreciate you taking the questions.

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Bryan King for closing remarks.

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

Greetings, and welcome to the Distribution Solutions Group Second Quarter 2025 Earnings Conference Call.

[Operator Instructions]

Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Steven Hooser. Sir, the floor is yours.

Good morning, and welcome to the Distribution Solutions Group Second Quarter 2025 Earnings Call. Joining me on the call today are DSG's Chairman and Chief Executive Officer, Bryan King, and Executive Vice President and Chief Financial Officer, Ron Knutson.

In conjunction with today's call, we have provided a financial results slide deck posted on the company's IR website @investor.distributionsolutionsgroup.com. Please note that statements on this call and in today's press release contain forward-looking statements concerning goals, beliefs, expectations, strategies, plans, future operating results, and underlying assumptions subject to risks and uncertainties that could cause actual results to differ materially from those described.

In addition, statements made during this call are based on the company's views as of today. The company anticipates that future developments may cause those views to change, and we may elect to update the forward-looking statements made today, but we disclaim any obligation to do so.

Management will also refer to certain non-GAAP measures, and reconciliations to the nearest GAAP measures can be found at the end of the earnings release. The earnings release issued earlier today was posted on the Investor Relations section of our website.

A copy of the release has also been included in a current report on Form 8-K filed with the SEC.

Lastly, this call is being webcast live on DSG's Investor Relations website, and a replay will be available through August 12.

I will now turn the call over to Bryan King. Bryan?

Thanks, Stephen. Good morning. We appreciate you all joining DSG's call today. We are pleased to deliver solid operational results with strong top and bottom lines, along with robust cash flows from operations for the second quarter.

Our results reflect the dedication and resilience of our teams and the quality of the leading VMI and value-added services capabilities assembled in DSG that propel it forward. Many of our end markets have exciting tailwinds, and we continue to focus on what we control in a few pockets of unevenness.

Internally, we've set higher, more challenging budgets than the street expects, and we hold each other accountable for meeting or exceeding these objectives on a monthly and quarterly basis.

For the second quarter, we reported strong sales and realized substantial forward progress, including sequential margin improvements in each of our verticals.

There were many important milestones and achievements accomplished in the second quarter as part of our commitment to transform DSG and its business units into a much more profitable and resilient platform for growth.

Many of these accomplishments are not yet reflected in the strong earnings progression to date.

The efforts and successes are the reflection of a dedicated passion across our teams for our work to build a much larger and sustainable engine to compound shareholder value, further expanding over time DSG's culture built around a clear vision of collaboration, accountability and alignment committed to delivering value embraced by the customers, suppliers and employees and exceptional value creation for the shareholders.

As a company, our vision is to deliver world-class global supply chain capabilities and services with a differentiated value proposition to our over 200,000 customers across a diverse set of end markets each day.

Before we discuss our second quarter results, I'd like to share some background on our newest operating CEO, hired to transform the TestEquity Group, Barry Litwin. Barry has over 30 years of experience and transformational leadership in highly relevant industries, having previously served as the CEO of Global Industrial.

Our team has collaborated with and invested behind Barry on various projects before his recent DSG appointment, and we have witnessed his ability to unlock value and drive execution in multiple situations.

He is a proven strategic and operational leader who excels at transforming complex businesses, recruiting talent, and driving operational excellence.

In addition, Barry has extensive experience in expanding companies through innovative multichannel go-to-market strategies. And many of the end markets that Barry worked with in prior roles overlap with TestEquity's current customers.

Barry did a deep dive on TestEquity for the Board from a consultative perspective and came away confirming his confidence that TestEquity was well-positioned and presented a unique opportunity for him to rapidly unlock and accelerate significant value creation while transforming its uniquely positioned capabilities and scale into the clear leader in its marketplaces.

For our next phase of growth at TestEquity Group, the Board, DSG, and LKCM Headwater leadership teams, and I all believe that Barry is the ideal person to lead this vertical.

I also want to recognize Russ Frazee for his dedication and commitment over the past 7 years, which positioned TestEquity, combined with Hisco, to build and leverage the infrastructure and take TestEquity to the next level.

We asked Russ, who is gifted with a strong operational skill set, to step into the CEO role during a challenging moment as we were presented with the prospect of pulling together several key businesses that today represent the TestEquity Group, which is over 3x larger than when he started.

With his tireless effort and talent, Russ played a key role in integrating the acquisitions, some of which were tuck-ins, but Hisco was as large as the base of businesses it was blending into.

Working with his team, Russ was able to rationalize and capture synergy cost savings and create a cohesive business platform that is well-positioned for various complementary talents to leverage for enhanced organic and inorganic growth, profitability, and long-term position in the marketplace. We are very appreciative of how this has all transpired.

Now, moving to Slides 4 and 5. We will start with a discussion of our key takeaways from the second quarter and then walk through the strategic initiatives for each of our operating businesses.

On a consolidated basis, we achieved second quarter sales of $502 million, representing a 14.3% increase in sales compared to the same quarter last year.

Total sales expansion was based on a combination of inorganic revenue and a 3.3% growth in our organic daily sales for the quarter. Although some seasonality is inherent in this number, we were pleased to see sequential daily sales growth of 2.4% over the first quarter.

Our consolidated adjusted EBITDA margin increased to 9.7% in the second quarter, which compares favorably to the 9% margin in the first quarter. We are pleased to report that all of our business verticals achieved sequential quarterly improvements in their respective EBITDA margins.

I will discuss this by business vertical in a moment, but despite the uncertainty and choppy global macroeconomic backdrop this year, we continue to drive momentum in significant end markets, including aerospace and defense, technology, and renewables with growing demand in the pipeline for industrial power.

Production supplies and Test and Measurement continued to be soft, as did the industrial demand in the Canadian market in the quarter, and tariff disruptions continue to create noise and hesitation in decision-making with customers, which I will discuss more in a moment.

In addition to our margin expansion this quarter, we also realized a notable improvement in our cash flow from operations of $33 million, allowing us to continue repurchasing shares, an effort that commenced in the first quarter.

Through strong cash management, we ended the quarter with no outstanding borrowings under our revolving credit facility that Ron will cover in more detail.

Turning to our strategic initiatives. Our sales force transformation at Lawson continues with work on talent acquisition and territory planning, which is still in flight. We knew that taking on a transformation of this magnitude for a 70-plus-year-old organization would be a multi-year process, as it involves a full system upgrade and reset.

Specifically, rewiring the tools and productivity opportunity and accountability of a 1,000-person sales organization from the ground up requires time and resolve, a consistent and purposeful strategy, and a clear message internally and externally as part of effective change management.

What management committed to with the employees, shareholders, and Board takes time and requires patience from all.

Over the past 18 months since the launch, our deep dive into the quickly evolving data continues to offer key learnings that have been instructing us on how to adjust our efforts around processes, priorities, and people, and we are iterating and reprioritizing as necessary.

Although revenue growth and sales rep productivity are some of the best indicators of early success, we also know that driving adoption at a level where results are consistent through the use of new sales procedures, tools, and technology takes time.

And early wins where consistency is shaping up include the following: one, implementing a complete CRM with adoption rates now exceeding 70%. Recall that the CRM system did not exist a year ago, and we are continuing to customize the user experience to drive better productivity gains.

Secondly, driving additional accountability with better data and more manageable dashboards at the sales leadership level with daily and weekly KPI objectives.

Third, rebuilding our rep count, adding approximately 90 in the last 12 months in stronger markets, while seeing a decrease in the turnover of seasoned reps.

Fourth, implementing a data-based approach on the skill set of successful sales reps, pre-hiring attributes.

Fifth, first steps and wins on improving the number of reps placing daily orders; and sixth, launching a completely refurbished web platform, now realizing over 10,000 customer visits daily to support a more flexible and expanded go-to-market strategy to supplement our leading VMI offering to meet certain VMI customers where they want to engage us.

I want to highlight a few of these wins, all of which have real deliverable opportunities still in front of them, against continuing execution on KPIs, as it's easy to forget how much progress is being made along the way, as we all acknowledge this is a long journey to accomplish this transformation.

We know that a sustainable sales transformation of this magnitude is a multi-year strategic initiative, requiring us to scope it on the front end as having a real dramatic opportunity for positive impacts on organic growth and scaling opportunities, profitability and margin expectations, and accelerations around returns on invested capital.

While we always want to see faster results, we are confident the team is making solid progress, and we have insights into how we expect continued improved results across the KPIs.

While we are pleased with the progression, we're also refining processes where we've seen less early progress in the data than we hope to see. For example, new rep productivity in the first 12 months remains flatter than we expected compared to previous years, and it's prompted us to reprioritize numerous actions to drive more productivity gain on this KPI faster.

But we recognize there's a lot of noise in this objective at this early juncture, where it doesn't yet reflect the seasoning of many of our initiatives, we're not waiting to see, but instead have initiated approaches to refine processes.

We are improving the hiring process criteria for the first time in many years, providing better warm leads upon hiring a rep into an open territory, implementing mentoring programs, and enhancing training, among other initiatives.

And still to come, our initiatives focused on route optimization to create better density within a territory, as well as additional service reps to supplement the workload of field sales reps. This places existing field sales representatives in a much better position to grow their business and earn more commissions.

We purposely invested in our sales team going into this transformation process. Today, our average rep compensation is 25% higher than it was just a couple of years ago, even with the new hires bringing our average rep tenure down almost 25%.

We have a plan for the total compensation to reps to continue to climb as they embrace the tools and processes provided, while also restoring better operating leverage and profitability to the company after 2 years of investment in the sales team and tools have deliberately contracted EBITDA and margins a bit.

Although Ron will cover this in detail, I would like to note that even with the investment taking place from dollars and the distraction of this project, Lawson's average daily sales increased by 2.6%, accompanied by a sequential expansion in their EBITDA margins, which rose to 12.6% in the second quarter.

While compressed by recent investments, it still troughed at a level not contemplated prior to the DSG merger. We are pleased with this average daily sales and earnings margin progression, particularly given all the changes and investments implemented in the sales organization over the past year.

However, to accomplish what we know is possible, we fully realize there is still a lot of work to be done under Cesar's leadership. We are enthusiastically committed to it and what it will do for the long-term value of Lawson and DSG.

Moving to the Canadian division. We can describe our performance in Canada as if it is a tale of 2 Canadas. Bolt Supply, located in the Western side of Canada, is a legacy MRO business that demonstrated its typical seasonal sales lift in local currency during the second quarter and achieved strong double-digit EBITDA margins, nearly 16% on a stand-alone basis.

Source Atlantic, which we acquired in 2024, is a significantly different business in terms of footprint and offerings. Our new executive leadership team recruited to supplement the capable leadership at Source Atlantic and Bolt Supply to constructively pull all team members together and lead a pan-Canadian lens is working timely and constructively through our underwriting objectives that all embraced to set it up to be a structurally different earnings engine partnered with Bolt Supply and DSG than it was as a stand-alone business.

However, Source Atlantic has been heavily impacted by declines within many of its top customers as MRO and service spending has contracted at the same time as projects have rolled off and have not been replaced with new ones, primarily due to cautious business behavior due to regional economic anxiety surrounding uncertain tariffs.

Our results with our customers are consistent with those of other businesses in the region, especially in the Eastern Canadian provinces this year. Stepping back and comparing Canada's 2025 manufacturing sector versus the U.S. manufacturing PMI this year, the U.S. index reports a more stable overall operating environment.

On the other hand, the U.S. contrasts with Canada's manufacturing sector, which has shown a steep decline in the first half of 2025.

Notwithstanding these differences, excluding acquired revenues, our Canadian division's revenues increased 2% on a constant currency basis and EBITDA margins expanded by 130 basis points sequentially from the first quarter to 6.5% in the second quarter, which has been supported by the early innings of our integration work as well as helped by the energy and effective leadership brought by the Source Atlantic and Bolt Supply teams and the key executives added to bring the companies together as a best-in-class Canadian specialty distributor.

We have confidence in our team and all are planning, and I expect that this business will generate substantial shareholder value over time. We know we acquired a great business with Source Atlantic at a very fair value for our shareholders that we embraced knowing it would require significant effort from management to unlock all the value that comes with what we still very much like about their attractive market presence, strong customer relationships and unique strategic fit with our existing Bolt Supply and Lawson Canadian businesses.

Our Canadian division team is meeting objectives in terms of planned synergies of facility consolidations and gross margin expansion, which includes approximately 290 basis points improvement with Source Atlantic since we've acquired it.

Many of these profitability enhancements are not yet flowing through the P&L. There is still much of our underwriting objectives to unlock earnings and compounding value yet to be done.

Still, we are pleased with the progress and energetic resolve of the team despite the challenging macroeconomic pressures they have faced in certain Canadian regions almost immediately after our purchase of the business.

At Gexpro Services, we continue to drive momentum in large end markets that include aerospace and defense, renewables, and technology. We are also seeing the backlog fill up for industrial power, which is encouraging as that was an area of softness that we highlighted last quarter and is a key historic end market of leadership for Gexpro Services.

Based on our acquisition in Southeast Asia and a number of key hires and facility investments, we are working on a large and growing pipeline of new customer development activities, some of which are already committed to us.

Also, there is a growing book of cross-selling business development as we collaborate on these with Lawson. We've mapped a successful playbook to win wallet share and new mandates by including new products and services, and are seeing some leverage in securing more of our DSG chemical and MRO capabilities, enhanced by strong revenue recruitment performance in the first half of the year.

Our outlook anticipates that sales comps in the second half of 2025 will become more challenging as we cycle through strong sales that began midyear last year. But we remain enthusiastic about the very real momentum Gexpro Services is gaining in the marketplace.

We are pleased to report an EBITDA margin expansion for Gexpro Services in the second quarter to 13.4%, representing an 80 basis point increase from the first quarter and twice what we enjoyed when we started our transformation of the business when we acquired it in 2020.

Expanded value-added capabilities brought to the vertical through strategically identified and pursued acquisitions starting in 2022 are helping drive Gexpro Services EBITDA margins higher than they would have been structurally considered attainable with the capability set in 2020 and are helping bring enhanced credibility with existing and prospective customers around expanding how they think about our value add for them and are leading to wallet share gains and acceleration in new business opportunities.

Our deliberate investment in talent, largely focused on expanding the dialogues around our enhanced capabilities to solve customer challenges, should continue to drive our growth objectives, primarily by focusing on our growing commercial sales pipeline as discussed last quarter.

We are also monitoring potential headwinds in the domestic renewable sector, even as our international pipeline is expanding. Gexpro Services continues to expand its presence as a global supply chain leader at the request of its current customers, incredible best-in-class prospective ones.

And we have every reason to expect it will continue to grow and scale its services and C-Parts offering as a VMI provider of choice to the most discerning OEMs, and we will continue at DSG to look for ways to invest in supporting their growth momentum.

Lastly, moving to TestEquity Group. As I mentioned at the beginning of my remarks, we recently announced a leadership change and believe Barry is well-suited to take us to the next level of growth in this business.

As expected, we saw softer electronic production supply sales and lower test and measurement revenues, resulting in average daily sales down 1.2% for the quarter.

Seasonality typically creates tailwinds with active summer projects, which pushed our sequential daily sales lift to 1.7% in the quarter, but some of the lack of consistent revenue uptick in the quarter that we had expected to see, we and others in the marketplace are now believing was impacted by some customer behavior that could be tied to timing purchases around better clarity on the tariff impact to their businesses and to the cost and availability of products from several of our leading vendors.

Of note, Hisco's performance did improve this quarter as evidenced by positive sales growth in the second quarter compared to the same period last year. Sales are also up sequentially from the first quarter at Hisco, which is supported by non-tariff product offerings and a broad range of source selections.

TestEquity continues to be better and better positioned with more product offerings, with more structural earnings opportunities tied to them, and with more market share gains in their channels reflected to us by our largest vendors.

By offering used equipment and rental options, and calibration activities at TestEquity or expanding our chambers availability that are made in the U.S. or expanding our sales efforts around our attractive printing and conversion businesses acquired with Hisco or our TestEquity Group's specialty products VMI offerings, collectively, we enjoy a wide range of significantly higher margin opportunities to grow profitability.

Our Conres acquisition late last year gave management, which has been busy with integration efforts across TestEquity Group, a renewed focus on that business and the service elements around it, yielding strong profitability growth and improvement in fleet utilization year-to-date.

Reviewing the host of offerings with Barry emphasizes that TestEquity Group has a collection of key high-value-added business capabilities that enjoy current EBITDA contribution margins in the 20% to 40-plus percent level that need to be more emphasized as part of the allocation of resources and the go-to-market strategy, where resources and focus could better optimize total group profitability.

Rental and used test and measurement equipment enjoyed the most recent shot in the arm of attention with the immediate success of acquiring Conres into our fleet, adding customers, equipment, geography, and key personnel that more than complemented our larger TestEquity offering.

As we've reflected, TestEquity's customer value proposition, which is appreciated by those closest to it, needs a better ability to communicate its evolved commercial message post integration as it is rooted in differentiated products and services where the combined offerings acquired via TestEquity, TEquipment and Hisco, along with the key tuck-in acquisitions have strengthened the opportunity for customer intimacy through the host of value-added service offerings, not too dissimilar from what we've done at Gexpro Services but in the TestEquity case, third-party engagements offered that we needed a much more evolved commercial effort and go-to-market strategy to tie together the very logically enhanced and complementary offering to the customers.

While the revenue and EBITDA performance in this vertical has been short of our expectations thus far, the synergy cost savings and platform are ready for a leader like Barry to drive a refined go-to-market strategy and deliberateness around how to emphasize the levers for enhanced profitability.

We are encouraged by Barry's early assessments around the very real opportunities to drive a cohesive and aligned strategy in the organization and simplify complexity.

He believes that after spending time assessing his team and the resources he is adding to them that he has the tools, offering, and people to be successful. With tremendous focus and energy and a proven ability to successfully execute with similar products and end markets earlier in his career, improved even by the broader DSG support, he is quickly and confidently constructing the strategies and game plan around shorter-term and longer-term opportunities that TestEquity Group enjoys to accelerate value creation and earnings.

And although he continues to learn and evaluate the business, Barry has already accelerated communications and set up meetings each week that have a well-defined purpose and objectives to encourage his sales, products, and supply chain teams on levers to pull.

Barry has brought a fresh perspective, and we are encouraged by his commercial insight and energy as he quickly builds ownership, alignment, and accountability.

With that, I'll turn it over to Ron for details on our second quarter financials.

Thank you, Bryan, and good morning, everyone. Turning to Slide 6. DSG's consolidated revenue for the second quarter was $502 million.

This represents a 14.3% increase, with the $63 million increase being driven by the 5 acquisitions closed in 2024 and organic growth. The company's organic average daily sales were up 3.3% versus a year ago and up 2.4% sequentially over the first quarter.

For the quarter, we generated adjusted EBITDA of $48.6 million or 9.7% of sales. As expected, Source Atlantic compressed our second quarter margins by approximately 60 bps, and excluding this acquisition, net margins would have been 10.2%.

The 9.7% compares favorably by 70 bps to the first quarter and adjusted for Source Atlantic is essentially flat with the year-ago period. As Bryan mentioned, all verticals realized sequential margin improvement over the first quarter.

We reported operating income of $26.8 million for the quarter, which included $11.7 million in intangible amortization from acquisitions and another $1.4 million of severance and other noncash charges.

Adjusted operating income improved to $39.9 million versus $38.9 million a year ago and $34.4 million in Q1. GAAP net income per diluted share was $0.11 for the quarter versus $0.04 a year ago.

Adjusted EPS was $0.35 for the quarter compared to $0.40 in the year-ago quarter on fewer shares, offset by higher interest and depreciation expense. And lastly, we generated over $33 million of cash flow from operations for the quarter compared to approximately $21 million a year ago quarter, as we accelerated our focus on working capital improvements.

Now moving to Slide 7. Starting with Lawson, Q2 sales totaled $124.3 million, representing a 2.6% increase in average daily sales, which includes acquired revenue. Organic ADS was down 1%, entirely driven by lower military sales volume.

Sequentially, compared to the first quarter, organic ADS was up 1.6% due to broad-based growth across most end markets. For the quarter, Lawson reported adjusted EBITDA of $15.7 million or 12.6% of sales, up 70 bps from Q1 on a sequential basis.

The net margin contraction from the prior year was primarily due to continued investments in sales transformation compared to the same period last year. We continue to manage margins around the tariff impacts and do not anticipate a negative effect on Lawson's margins this year.

Turning to Slide 8. Second quarter sales for the Canadian segment in U.S. dollars were $55.9 million. The business benefits from typical seasonality, which is somewhat offset by noise around the tariffs.

Excluding revenues acquired from Source Atlantic, organic sales increased 0.7% and were up 2% on a constant currency basis. Q2's revenues increased sequentially by 10.5% from Q1 or 6% on a constant currency basis, primarily due to seasonality.

The second quarter adjusted EBITDA for the Canadian segment was $3.6 million or 6.5% of sales, expanding 130 bps over Q1. Excluding Source Atlantic, the second quarter adjusted EBITDA for this segment would have been 15.9%, which would represent Bolt Supply on a stand-alone basis.

As we've discussed in the first quarter, softer sales at Source Atlantic, primarily within their larger accounts, have put downward pressure on net margins for the Canadian branch. However, we are making good progress on planned synergies around gross margins and branch consolidations.

Turning to Gexpro Services on Slide 9. Second quarter revenue was strong at $127.8 million, up 18.2% from the year-ago quarter. Organic average daily sales were up 2.4% sequentially from Q1.

Gexpro Services' adjusted EBITDA was $17.1 million or 13.4% of sales, up from 11.9% a year ago and compared to 12.6% in the first quarter. Operating leverage remains strong, and Gexpro Services continues to capitalize on the acquisition in Southeast Asia through wallet expansion and cross-selling.

While momentum in most end markets is strengthening, Gexpro Services is up against tougher comps headed into the second half of 2025. Lastly, I'll turn to TestEquity Group on Slide 10.

Second quarter sales were $195 million, with average daily sales down 1.2% versus a year ago, however, up sequentially by 1.7% over Q1. We continue to experience flat electronic production supply in the test measurement business.

The revenue acquired from ConRes for the period was approximately $1.9 million. TestEquity's adjusted EBITDA for the quarter was $13.5 million or 6.9% of sales, up sequentially by 10 bps from Q1.

Net margins were down from 7.8% in the prior year quarter, primarily from deleveraging on a lower sales base. Moving to Slide 11 and starting at the bottom of this slide. We ended the quarter with total liquidity of $314 million, which is our foundation for executing a disciplined capital allocation strategy.

Starting from the left, we invested in organic growth, which generated positive organic sales through a combination of market share expansion, internal initiatives, and wallet share expansion with existing customers.

We have driven scale, added product adjacencies, and footprint through our 5 acquisitions completed in 2024. We continue to closely manage working capital within each of our verticals.

At the end of June, cash and cash equivalents, including restricted cash, totaled $62 million, and net working capital was approximately $491 million. Debt leverage at the end of the quarter was 3.5x. And through tight cash management, we had no outstanding borrowings under our revolving credit agreement at the end of Q2, representing a net paydown of $28 million from the end of the first quarter.

And as Bryan mentioned, we generated $33 million of cash flow from operations for the quarter. As a reminder, we have also invested approximately $450 million in cash in 9 acquired businesses since our merger transaction in April of 2022, all while maintaining our leverage in the mid-3s.

During the first 6 months of the year, we also returned $20 million to our shareholders through our share repurchase program, and we currently have approximately $6 million still available under our previous Board-authorized program.

Additionally, we are still tracking at approximately 90% free cash flow conversion over the trailing 12 months and have a TTM return on invested capital of approximately 11%.

And finally, our first half net capital expenditures, including rental equipment, were $10.6 million. We expect our full year 2025 net CapEx to be in the range of $20 million to $25 million, or approximately 1% of our revenues.

I'll now turn the call back over to Bryan.

Thank you, Ron. Our overarching mission at DSG is to invest in exceptional businesses and talented individuals and to utilize and leverage technology to gather and analyze data, improve productivity, and expand the breadth of our products and services, resulting in compounding returns and driving significant cash flow.

We also believe that a well-executed customer intimacy strategy, combined with a team built to drive operational improvements and efficiencies, will enhance our value proposition for customers and drive profitability.

Often, financial results are not linear. However, we dedicate an extraordinary level of strategic work and data analysis to our initiatives, driving accountability across the operating companies and their leadership teams that share a passion for achieving targeted results.

The teams are aligned through incentive structures that support value creation, and DSG's management team also actively collaborates with the LKCM Headwater operations team to drive the business toward an inflection point, focusing on short- and long-term targets related to profitability, cash flow, and returns on invested capital.

We know that productive work streams and the disciplined execution of our strategic initiatives over time will achieve repeatable and compounding results. This is our proven approach to maximizing long-term value for all stakeholders, and we continue to have a strong line of sight on how our initiatives are driving intrinsic value as they unlock an increase in future run-rate earnings.

Part of the reason we have confidently used some of our free cash flow this year to buy back shares as we digest some of the operational initiatives around our recent acquisitions and deliberately work through securing our next strategic acquisition opportunities.

I want to thank our dedicated team for their tireless efforts and unwavering commitment to serving our customers and advancing our long-term strategy, ultimately contributing to our success, especially in an uncertain macro environment.

I would also like to thank our supportive Board and all of our shareholder partners for trusting me and the entire DSG and LKCM Headwater team with this critical investment. We are focused, energized, enthusiastic, and increasingly well-resourced with talent, and all exceptionally well aligned. Thank you.

We continue to work diligently on our Investor Relations efforts with an active IR calendar that includes investor conferences and non-deal roadshows throughout North America. We will be in Chicago in August for the IDEAS Conference and in New York City in early September for the Jefferies Conference, with plans for a non-deal roadshow in the Baltimore, Philly area in the fall as well.

And with that, operator, will you please open the line for questions?

[Operator Instructions]

Our first question is coming from Tommy Moll with Stephens.

To start, just a quick one on anything you can do to frame third quarter expectations for us. Ron, maybe you could give us the July pacing or any insight you have in the quarter-to-date for daily sales?

And then margin-wise, any reason for a meaningful difference on a consolidated basis for that EBITDA margin up or down versus the second quarter performance?

Sure. Sure, Tommy. So let me start with just a couple of general comments relative to July, where we've seen it trend out. And when we look at it, I would say it's relatively consistent with where we were in the second quarter.

If you look at it on an average daily basis, it does get compressed a little bit just because of the fact, Gexpro Services has 24 selling days, and typically we have more selling days, it naturally just compresses the ADS a little bit on us.

But generally speaking, we've not seen, I would really say, any major movement from the trends that we saw in the second quarter. I think those trends have continued here in July.

And I know Bryan, through his prepared remarks and some of my remarks as well, talked a lot about some of the end market strengthening. And I would say that those have continued kind of on that same pace as well.

Bryan made this comment, as you look at the individual verticals, Gexpro Services is certainly up against tougher comps moving into the second half of the year. Lawson products are actually up against easier comps as we move into the second half of the year.

So we'll probably see a little bit of netting effect there as we move throughout the rest of the year. But based upon our sales here in the second quarter, even comparing that against Q3 and Q4 a year ago, we should be able to see some nice increase on a year-over-year basis moving into the second half of the year.

Relative to margins, we certainly don't provide any formal guidance, and certainly, I would say there was really not anything highly unusual in the second quarter that would impact us either way as we move throughout the rest of the year.

Certainly, we have internal targets and a forecast that Bryan referenced as well, that we certainly are holding ourselves accountable to continual margin expansion as the business develops. But there's nothing that we see in the near term, or at least over the next 6 months, that our sense is would swing that one way or another.

Keep in mind, Q4 does have 61 selling days, and we just came off the second quarter with 64 selling days. So we do normally see a little bit of margin compression in the fourth quarter, just given the number of selling days.

Q3 has 64 selling days as well. Hopefully, that helps a little bit.

Yes. As a follow-up, I wanted to ask about the Canada branch consolidation for any kind of operational update you can give us there.

Yes, I can speak to that as well. So we are early in the process, and we've committed to consolidating 4 locations here in 2025. Two of those locations, we've been through the process here, and the other 2 will be completed by the end of the year.

There's an additional 2 that we're looking at. When we initially made the acquisition, we had preliminarily identified 6 locations that we thought had some pretty significant overlap.

So certainly on target there relative to seeing some of those savings. Those consolidations have gone, I would say, extremely well at this point. No major disruptions. And then the other piece, I just wanted to touch on, as we think about the Canadian branch, the gross margin expansion that we underwrote the business to, we're able to realize that as well.

And then lastly, I can't help but call out Bolt Supply, really strong quarter, nearly 16% EBITDA margins, great leverage here in the quarter on solid sales and good execution at the branch level.

So I just wanted to place a point of emphasis on really strong performance on Bolt on a stand-alone basis here in the quarter.

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

I wanted to just ask about longer-term margin goals, specifically with Lawson and also TestEquity, in light of, obviously, you've got some investment going on in Lawson with the sales force transformation and now new leadership at TestEquity.

Have you given a little bit more thought again to how you think those margins on an adjusted EBITDA basis for those segments can achieve or trend over the long term?

Yes. Kevin, I'll start with TestEquity. And I would say that as over the last 6 months in particular, it really started with the ConRes acquisition, and we've been so focused on getting through integration and cost savings and integrating the sales force across the operational platforms that we've acquired.

I think that some of the optimization of profitability outside of the rationalization, if you will, of some of the costs to pull together the cost structure into one platform had left us not drilling down into the driving or optimizing some of the profitability by the specialty offerings that we have that make up a big part of the total revenue at TestEquity Group.

So I'd say that the ConRes acquisition gave us an opportunity to really do a lot more line-by-line analysis of profitability across our specialty offerings and brought attention to the levers to pull to unlock more value out of just the ConRes side, our rental and used, refurb, and calibration efforts.

And so we did unlock some profitability there. But what it highlighted was how many business lines we have that have structurally very different contribution margins and, really, by division, have operating margins that are pre-corporate that are operating up and over 40%.

So we feel confident in what we've said all along, which is that there's a line of sight for what we're trying to accomplish with the TestEquity Group to get to the double-digit EBITDA margins or so.

We had one noisiness in the quarter on our EBITDA margins on TestEquity Group. The tariffs and disruption this year have been hard on some of our channel partners, and we had a bad debt allowance that we reserve for a customer that took EBITDA margins down 80 bps in the TestEquity Group just which was a minority channel partner for a government contractor that we have to sell through.

And unfortunately, their business has been very significantly impacted in the way that they run their business by their cash flow available to support paying their obligations. So we would say that we see a nice progression there. We see the levers to pull, and we've got a really nice portfolio of much higher earning opportunities.

On Lawson, we didn't tackle the Lawson sales force transformation without having a very specific objective to get the structural or get the profitability of Lawson to where we could scale it into the levels that we haven't yet seen in EBITDA margin.

But we knew that to get there, we were going to have to make a significant investment in the sales capabilities or tools. We needed to invest in our sales force, both in the tools that we offer as well as the way that we compensate them.

And we needed to ultimately recruit as we're adding salespeople, recruit more deliberately, the sort of talent that we want to add to new hires. And so all that is an in-flight process. We are seeing a lot of good granular results.

It's not yet flowing through the P&L because of the investment that we've done there, and a lot of the results have not yet reflected the effort and the deliberateness that we put into it.

All that should drive structural EBITDA margins up into the mid- to high teens at Lawson over time. I continue to believe that that business should be a 20-plus percent EBITDA margin offering. And there's nothing that I'm seeing that would indicate that that's not what we should be shooting for.

It's going to take time. I don't want anybody to put that in their model for this year and next year, but we have a good line of sight on how to get there. No, absolutely. Understood. Yes.

Also, just following up on Lawson. Any updates on the military market? Does that still continue to be relatively murky? And how did the business perform organically, excluding that headwind from the military?

Yes. Yes, Kevin, I'll take that one. So as you know, we've been talking about the military over the past several quarters. We did see a little bit of a movement upward here in the second quarter as we had some orders ultimately get released.

In fact, knowing that it was a drag versus a year ago, though, we had made a comment in our prepared remarks that Lawson organically was down about 1% versus a year ago. If you exclude the military effect out of that for the quarter, we were up about 0.5%. So it did have an impact on a quarterly basis versus a year ago.

And so we're seeing some lights of encouragement, there is maybe the best way to phrase it. Again, we saw a tick up in ADS on the military business in the month of June. It's a sporadic business, those too. So it can come and go from month to month.

I would say that the slight tick up we saw in June, we haven't seen in July. But at the same time, we're starting to lap some of those compressed numbers from a year ago as well. So it's effectively already in our run rate.

Certainly, we've not taken our eye off the ball there. We continue to work with the procurement individuals on all bases. Our sense is that we're not certainly losing market share. In fact, when I look at it by customer and by locations, we're still actively selling into the locations that we sold into a year ago. It's just at a very compressed level.

So I think part of the good news there is that we've not seen any of the individual locations stop purchasing from us.

And Ron, I would also, I think, add a call out, which I think is important, and it's part of the affirmation that we're getting on the efforts that our team has been trying to drive through the sales force transformation. But our street business, our base business, has finally started growing some.

So we've enjoyed now many years of strategic accounts growth at Lawson. And we've watched our business shift towards strategic accounts from street business or base business, if you will.

And so we talk a lot about the military. We talk a lot about the strategies. But for the last better part of a decade, we've watched our base business be neglected. And we've had a slow bleed out of it over the years as our sales force has both compressed, but also before that, paid their attention more towards the strategic accounts that we were delivering to them.

And we've started to see with the sales force transformation, the first signs of our base business growing. And so we had positive core business growth over the course of the last number of months, including for the quarter. Is that fair, Ron?

Yes. Yes. That's a great color. Yes.

That's a really important data point that we didn't have in our prepared remarks, but it is something that we're watching very closely that we will continue to emphasize with our sales force.

[Operator Instructions]

Our next question is coming from Ken Newman with KeyBanc Capital Markets.

This is Ethan on for Ken. Yes. For my first question, I want to ask if there's any pricing contribution around tariffs for this quarter, and whether price cost was neutral or positive for you guys? And then any color you guys can provide on the price cost for the third quarter or into the second half?

Yes. So I'll take that initially here. So from an overall tariff perspective, we've communicated this over the last couple of quarters, just given the multiple different changes that are happening through the process.

Generally speaking, we're not expecting any compression from a margin perspective when we look across the 4 verticals, including the Canadian business. We've been able to manage our way through that on some of the tariff pieces already.

We have the ability to work really closely with our customers, not only from a pricing perspective, but also from a sourcing perspective. If you look at some of DSG's really strong capabilities across all the verticals. It's on the procurement side.

And so we proactively reach out to our customers when we see their purchasing from certain products that are coming from certain countries where the tariffs may be going up, and help them manage their way through that process.

So we're not seeing any net-net effect from a margin perspective. And certainly, we have a model that keeps getting updated almost on a weekly basis, as changes are being made that give us pretty good insight into where some of that exposure may sit, and the specific customers we need to work with, and the specific countries of origin as well.

So hopefully, that answers your question without getting into too much detail. If you look at probably the largest -- so I think we made this comment on the last call as well, about, call it, 6% of our product purchases are coming from China. So it's not a huge piece.

And certainly, that's where I think some of the tariff -- it seems like that's where we're seeing probably the biggest swings in terms of exposure, and it's a relatively small piece of our product acquisition.

Then for my follow-up, I know you guys touched on Gexpro earlier, but what are your guys' expectations ramping into the back half? I know the comps get harder, but is a 20% incremental EBITDA margin still the right way to think about things?

Yes. I'm not sure I would try and quantify the overall EBITDA margins. We saw a nice flow-through here in the quarter, getting to, call it, 13.5%, 13.4%.

Again, even though they're up against stronger comps in the second half of the year, many of their end markets are on an upward trend. We feel we've got some good visibility into backlogs. And our expectation is that piece of our business will continue to be really strong in the second half of the year.

And I think Bryan had mentioned there's one end market in particular, where it was a little soft, that even that market has started to turn positive on us. So we feel good about where that business is at today.

Again, it gets impacted a little bit based upon the number of selling days in the quarter and so forth, but we feel good about the progression of that business and more specifically, just kind of the upward trend of the majority of the end markets that they operate in.

So Bob and the team have done a phenomenal job around wallet share expansion within existing customers, winning new business. It's performing really, really well.

I'd just add this color, just like with the sales force transformation initiative at Lawson, we have made and will continue to be making significant investments in Gexpro Services that are flowing through the P&L.

So we compressed margins at Lawson, leaning into the sales force, if you look at the last 2 years, and those investments took EBITDA margins down before now, they're starting to climb back up.

Gexpro Services has had the benefit and continues to have the benefit of really good momentum on the top line, which has allowed us to still have EBITDA margin progression while at the same time, as we're really leaning into some investments, particularly on the commercial capabilities.

I mean, the sales leadership and a number of selling kind of senior selling professionals, as well as adding a lot of square footage around, like our Asian effort. So even though we've quadrupled the amount of capacity that we can support off the little TSR acquisition that we did in Asia last year, and not realized any incremental lift on EBITDA there because we've been leaning so hard into it on investing.

And that's built a very large revenue funnel of future revenue for Gexpro Services. So there's a tension on timing around how EBITDA is going to continue to progress and also the core offering of Gexpro Services outside of the specialty elements that we've added to it, which are performing very well right now on those acquisitions we did in 2022, who are really most all, if not all, of which are EBITDA margin accretive to the structural margin that Gexpro Services would normally enjoy, which I've said before, when we bought Gexpro, it was a 6.5% EBITDA margin business, and that was in 2020.

And we've unlocked a lot of structural margin that's about double that EBITDA margin at the core level. But then it was the incremental acquisitions, the strategic inorganic efforts that we did that blended that margin up to the 13.6% or so that we enjoyed this quarter.

So, depending on where we're getting the revenue, growth is going to dictate how that flows through the EBITDA margin line. And also, depending on our pacing of investing in the business is going to create some noise in the contribution margin that you might see.

But the contribution margin that you alluded to at 20% has been what we've enjoyed even with a lot of the investments we've been doing, but that has some to do with the mix shift to where the revenue is coming from.

So we do feel a lot of momentum in the business there.

Thank you, ladies and gentlemen. This concludes today's question-and-answer session. So I would like to hand it back over to Mr. King for any closing remarks.

Well, we appreciate everybody's time today. We know it's a busy day for earnings, and we appreciate the time that everyone offers us.

We continue to be very optimistic about what we're building at DSG and the progress that we've made since we brought the business together 3 years ago. It's more than twice the business that it was, and we've continued to believe that it will be twice the business it is today, hopefully, 3 years from now.

So with that, I'll look forward to taking calls from people or seeing you all on the road. Thank you for your time. Have a good summer.

Thank you. Ladies and gentlemen, this does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.