Distribution Solns Gr achieves 10.7% revenue growth in Q3 2025, boosts shareholder returns despite challenging macro environment.

OPERATOR - (00:01:27)

Good day everyone. Welcome to the Distribution Solutions Group third quarter 2025 earnings conference call. At this time, all participants have been placed on a listen only mode and the floor will be open for your questions and comments after the presentation. 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 Brian King and Executive Vice President and Chief Financial Officer Ron Knudson. 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 by but 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 8K 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 13th. I will now turn the call over to Brian King.

Brian King - Chairman and Chief Executive Officer - (00:03:26)

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 continues 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 nine 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 Test Equity 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 with which now focuses more on lines of business and capabilities that unlock growth and margin expansion opportunities. JXPro 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 expansive opportunities. In dsg, we continue to steadily dedicate resources and investment into a list of priorities around internal initiatives despite recognizing we are in a dynamic environment where 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 forgiving. 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 and 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 in 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 SGA 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 and tested measurement weighed on margins. However, our specialty products and VMI offerings continue to represent meaningful higher margin growth opportunities. The Conrez acquisition, completed in 2024 continues to perform well and has unlocked greater focus, utilization and profit opportunity as we are driving more rental and used test and 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 with him. The team developed a unifying strategy for the organization that clarified the value proposition across three core design and test, build and assembly and maintain and repair, providing a clearer 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 opportunity. 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 JXPro Services we are excited to report that JXPro 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 JXPro services Domestic manufacturing capabilities to mitigate the tariff impacts. Our Europe business remains strong overall with a growing focus on diversifying across multiple verticals. JXPro 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 jexpro 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 US 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 teams capabilities to drive a longer and larger tail to our strong top line revenue growth. While these investments slightly reduce 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. JXPro Services core strength lies in our ability to deliver industry leading total cost of ownership savings and to our valued customers through custom supply chain management programs. These programs focus on high on time deliveries, 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 JXPro 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 MA over the last several years continue to drive structurally stronger margins. We are excited and focused on investing even more deliberately.