Distribution Solutions at 15th East Coast IDEAS: Strategic Growth Plans

On Thursday, 12 June 2025, Distribution Solutions Group Inc (NASDAQ:DSGR) presented at The 15th Annual East Coast IDEAS Conference, outlining its strategic initiatives and financial performance. The company highlighted its growth trajectory, emphasizing acquisitions and organic growth, while addressing challenges such as market perception and leverage management.

Key Takeaways

• DSG reported pro forma revenues of approximately $2 billion, with ambitions to grow to $3.3 billion.
• The company aims to increase its EBITDA margin to 13.5%, targeting $450 million in EBITDA.
• DSG focuses on acquisitions, having deployed over $600 million in capital for 11 acquisitions.
• The company operates with a leverage ratio of 3.5 to 3.6 times, balancing growth and debt management.
• DSG is enhancing cross-selling opportunities within its 200,000-strong customer base.

Financial Results

• Revenue Breakdown:

- Total pro forma revenue stands at approximately $2 billion.

- TestEquity contributes 40%, Jexpro Services 25%, and Lawson Products 35-40%.

• Profitability:

- Adjusted EBITDA is 9.7% over the trailing twelve months.

- TestEquity’s EBITDA margin is about 7%, Jexpro Services’ between 12% and 14%, and Lawson Products’ around 12%.

• Capital Deployment:

- DSG has invested approximately $620 million in acquisitions, with an average purchase price of 8.5 times EBITDA.

• Debt and Leverage:

- The current leverage ratio is around 3.5 to 3.6 times, with $60 million paid in interest annually.

Operational Updates

• Vertical Operations:

- DSG operates through three verticals: Lawson Products, Jexpro Services, and TestEquity, each with its own CEO.

• Customer and Supplier Base:

- The company serves over 200,000 customers and works with more than 10,000 suppliers.

• Vendor Managed Inventory:

- Lawson Products employs 925 sales reps managing inventory across customer sites.

• Product Offerings and Cross-Selling:

- Lawson offers 12 product categories, with an average customer purchasing less than three.

- DSG is focused on increasing the share of wallet within existing customers.

Future Outlook

• Growth Targets:

- DSG aims to expand revenues to $3.3 billion, with half from M&A and half from organic growth.

- The company targets an EBITDA of $450 million, aiming for a 13.5% margin.

• Strategic Priorities:

- Reinforce cross-selling and expand product offerings to existing customers.

- Continue strategic acquisitions to bolster the DSG platform.

Q&A Highlights

• Long-Term Goals and Market Understanding:

- Management reiterated their revenue and EBITDA targets, addressing market misconceptions about cash flow capabilities.

• Ownership and Leverage:

- DSG plans for long-term ownership with potential dividends exceeding the cost basis.

- The company remains comfortable with a leverage ratio of three to four times due to ongoing M&A activities.

For a detailed account, readers are encouraged to refer to the full transcript below.

Full transcript - The 15th Annual East Coast IDEAS Conference:

Unidentified speaker: Thanks, Steven. So I’m gonna I’m gonna lead most of the presentation this morning. Brett may jump in on a on a few items as well and provide you really, the purpose this morning, provide you a little bit of overview of the business, and then we’ll spend a little bit of time updating you just on on overall financial performance. But quite a bit of the conversation will be surrounded around a lot of the initiatives that we’re that we’re taking on within within our three verticals. So if you look at DSG on a consolidated basis, all in on a pro form a basis, we’re about $2,000,000,000 in in revenues.

Some of you may know the history of DSG. We we put three separate companies together back in the first part of twenty twenty two. Lawson Products who is MRO focused maintenance repair and operations selling class c items. We’ll get into a little bit more detail there. Jexpro Services sells class c items into the OEM space.

And then TestEquity is is really a industrial technology provider both on test and measurement equipment, and then also electronic production supplies. So if you look at our overall results, again, about a $2,000,000,000 organization, about 40% of those sales sit within the test equity group, about 25% with injectable services, and the remaining, call it, you know, 35 to 40% sit within Lawson, both the Canadian branch piece of that as well as the historical Lawson VMI piece. Adjusted EBITDA, if you look at over over the trailing twelve months, is 9.7%. We’ve bounced around a little bit between 910%. I’ll dig into that here briefly.

And then I’ll I’ll talk separately about some of the other key metrics that we look at, but very diverse organization. We service over 200,000 customers across the DSG platform in excess of 700,000 SKUs that that we offer to our customer base. You know, all three organizations, would say, or all three verticals, really are what we deem specialty distributors. So we are we are not the typical distributor of we’re just providing product. That is that is not DSG.

When you when you look at what we do within all three verticals, we provide a high level of of service, a high level of touch, a high level of of technical expertise that our that our customers rely upon us. We are we operate in a in a pretty fragmented market. We’ll talk a little bit about some of our m and a activities we’ve made inclusive of those that we acquired right at the acquisition right at the combination date, 11 acquisitions. That’s a big piece of our overall growth strategy. But we think that there’s plenty of opportunity out there to continue to buy organizations that help support the three verticals.

I mentioned we’re a very diverse organization. A lot of I’ve got a slide here. We’ll go through a lot of end markets. Again, 200,000 customers provides us some nice insulation around certain end markets, you know, when they’re when they’re up or down, provides us a nice diversification there from an overall end market perspective. So maybe to maybe to dig a little bit deeper on the on the value add that that we offer within all three of the of the verticals.

You know, on the Lawson side, vendor managed inventory. So without getting into too much detail, think about about a thousand sales reps out touching customers, Four to five each sales rep will visit four to five customers on a daily basis. They’ll go in. They’ll put product away. They’ll order product on behalf of the customer.

A lot of times, the customer doesn’t even know the Lawson sales rep is there. They effectively, I say, you know, sell on the concrete. A lot of times they have a contractor badge. They walk in the back door, handle all of the products, the class c parts, and so that that the customer’s looking for. So Lawson’s real real motto is, you know, when a mechanic reaches into the bin, the product is there.

So we’re anticipating demand, and we make sure that when that mechanic reaches into the bin for a hydraulic fitting, that it’s there. They can fix a scissor lift or whatever that might need to be fixed, and then that scissor lift can be rented out that afternoon. So it’s really about helping keep our customers up and running from a productivity standpoint. I would say, you know, very very similar type of, you know, offering within Jexpro services. Jexpro really selling into the OEM space, but they’re taking over effectively all the supply chain process for, class c parts as well, but it’s all going into OEM.

So it’s really going into the production environment. That allows, our customers basically to come to us and say, I don’t wanna deal with all these small bits, all these small pieces and parts that may go into production. It may be five or 6% of the overall cost of production, but it could be 60% of the individual unit pieces that go into into the production environment. You know, we we sometimes refer to them as nuisance parts where, you know, customers just don’t wanna deal with them. So they come to us and say, we want you to handle the entire supply chain for those parts.

We’ll go out, we’ll we’ll get the menu we’ll get the spec from the customer, identify the manufacturer to manufacture those, and then effectively provide all that service and delivery the product really on a just in time basis to make sure that it’s there for the for the for the production. Very sophisticated buyers on the on the JexPro services side, and JexPro has great insight into the production schedules within the customer base as well. So they know the exact product that needs to be delivered at at certain times to be able to fulfill that. So all of those we view as really high touch, high value add into our into our customer base. Tougher for our customers to walk away from that once we have those customers.

They, you know, we’re very embedded within our customers, really strong relationships, know the customers’ demand patterns really well, and and typically high retention rates from from customers. The other piece I would say is is the product side. Certainly, I just mentioned on the on the Jexpro services side, we’re out identifying and manufacturing. We’re not doing the manufacturing, we outsource manufacturing to the customer’s need. On the Lawson side, about 40% of of the products that Lawson sells are private label.

And when you think about the good, better, best hierarchy, these are at the best level. So they’re higher engineered types of products. The mechanics, the the facilities managers, those that are keeping, you know, production lines up and running, you know, love the fact that that the products perform really, really well. And there’s there’s hundreds of examples of that that I that I could go through all the way from, you know, more Teflon within a product called open and shut, than what’s it within w d 40. And those are, you know, provides for more lubricant or hacksaw blades that when they break, they only break into two pieces versus a thousand pieces.

So it’s a real advantage from a safety perspective. Or washers that are slightly thicker. So when you when you really crank down on that on that nut to tighten it to the bolt, the washer will not cop. It’ll stay exactly flat. So the the, you know, the the users of those products, typically, certainly, the margins are high, the price is higher, but they get longer use out of those products.

So, I’d say all three of the three of the organizations, you know, offer not only the labor piece of it and the expertise, the technical expertise, but also the the product availability as well. So we we talk about DSG in terms of the power of three in that we can provide not only the MRO solutions on the Lawson side, we can provide the the production support on the Jexpro or on the test equity side. And then we can also provide this is an example of a of an r and d lab where we may be selling or providing test and measurement equipment into an electronic production environment. So we have the ability to complement each other. It’s one of the one of the areas that we have been focusing on is really within those 200,000 customers.

What what cross selling opportunities do we have in terms of being able to sell MRO into a Jexpro services customer or into a test equity customer or or potentially vice versa. You know, one of the areas that that that is one of the you know, really why we like the specialty distribution platform, couple of couple of things to highlight here. One is strong, sticky value chain to our end customers. As I mentioned, our our revenue retention rates all in are in the area in the low are in the low nineties. Jexpro services, for example, has customer retention rates in the high nineties.

So really tremendous relationships there. I mentioned we have over 200,000 customers in excess of 10,000 suppliers that we work with across the across the platform. And then when we think about the overall, and I’ll talk about this in a minute, some of the some of the end markets and some of those some of the tailwinds and kind of what’s happening from a macroeconomic standpoint, I think it places DSE and and a DSG position. And I’ll touch briefly on on our strategic acquisitions that we’ve made over the three years here in a minute as well. But you’ll see there that, you know, we’ve if deployed almost 600,000,000, a little over $600,000,000 of capital, and our average purchase price is about 8 and a half.

So we’re out making acquisitions. In fact, we completed five acquisitions in 2024. I won’t spend a lot of time on this slide. I think I’ve already hit this, but you’ll you’ll get a view here in terms of our overall end markets that we service within the 200,000 customers. Aerospace and defense, most of that is within Jexpro services, electronic assembly, you know, most of that is within the test equity group.

And then really service, you know, many other end markets on the Lawson side with the 80,000 customers that that Lawson services. You you you probably be hard pressed to name an end market that Lawson doesn’t sell into, given the number of customers and the and the the given their presence within within all the end markets. So anywhere from hospitals to military to manufacturing to distribution centers to government, state, and local, pretty pretty well spread across all end markets. So from an overall, I would say macro standpoint, the reason why we think we’re positioned really well, and I’d probably boil it down to three. One is what what DSG offers through all of its verticals is really labor support.

In a in a really tight labor market that that we’ve experienced over many years, and and we anticipate that that’ll be out there for for many years to come. Us being able to provide that labor, even though it might be deemed kind of on a part time basis, our ability for our our sales teams to be able to provide that labor really provides a tremendous amount of value to our customers. They don’t have to worry about going out and hiring somebody to take care of filling the bins and cabinets. We show up on the Lawson side, for example, for forty five minutes a week. We do that on their behalf.

We’re in and out of there, and they don’t have to worry about a mechanic or somebody else within their shop trying to trying to do that effort. So labor, I think, positions DSG incredibly in a in a in a really strong position. The other piece I would say is onshoring a lot of manufacturing, you know, coming back to the coming back to The US, both what we support not only with injectable services, but also within test equity. I think that positions us in a in a really strong strong position as well. About 85% of DSG’s revenues are within North America.

So, again, I think that that positions us really well. And then really, everything technology. You know, it’s it’s hard you’re hard pressed anymore to find anything that doesn’t have any electronic components somehow attached to it. The refrigerator that you buy has a circuit board in it that needs to be manufactured that they’re utilizing either tapes, adhesives, solder that test equity cells into those into those manufacturers, or they’re testing those circuit boards through the test and measurement through the oscilloscopes that that test equity cells. So we think a lot of these areas from a from a macro perspective really puts DSG in a really good position going forward.

So I already I already touched on each of the three verticals briefly, but let me let me just just make a couple of additional comments here on each of the three. So Lawson Products, MRO focused, 73 old old organization, about a thousand sales reps, not quite, call it 925 sales reps. Combined revenue trailing 12, this includes the Canadian branch business as well, a little bit over 700,000,000. Lawson was the legacy standalone public company that you that you may be aware of prior to bringing it together with the other two companies that were 100% owned by by LKCM. A 100% VMI.

So vendor all vendor managed inventory, average piece price of a dollar 22. So we’re selling a lot of volume into, you know, into our customers. The buyers typically within the customer base may be a facilities manager, may be somebody who’s, you know, looking to keep a line up and running, somebody who is, you know repairing all the equipment that might be sitting at a local IDOT facility, you know within a state and local environment. And as I mentioned many end markets, but but think of this as real high touch, high value gross mark product gross margins of about 70%. You typically don’t find that, you know, within most distributors, and I think that’s evidence of our customers paying us for the labor that comes along with the product.

On the Jecksboro services side, really, you know, leading world class leading supply chain provider of class c parts. You know, tremendous historical business here. Services, really six end markets, renewables, industrial power, technology, consumer industrial, aerospace, and defense, and also transportation. You know, this this business was acquired in 2020 by LKCM through a carve out from Rexel. Formerly, it was under the under the GE umbrella as the GEX professional.

So, again, really sticky business here. 70% of the products that Jexpro provides to their customer base are manufactured to the customer spec. So that’s one of the value pieces that that this organization provides is they we take all that off off the hands of our customers and generally show an excess of a 20% return to our customers by them outsourcing it to us versus them trying to handle it internally. And then when and we think about the the the test equity group, again, about 40% of the overall revenue. This is a combination of both what we call legacy test equity as well as, HISCO, which was an acquisition that that we made in mid twenty twenty three.

HISCO was about a little north of $400,000,000 in revenue, an ESOP organization, but we brought these two organizations together and now consolidated revenues between the two of about $800,000,000. About 20% of this business is within test and measurement. So those are generally the the oscilloscopes that are testing, you know, everything from noise interference to voltage to wattage. Everything that’s being produced from a electronic perspective needs to be tested, and these pieces of equipment will will test those those items coming off the production line. And then about 80% of their business is electronic production supplies.

So think of solder, tapes, adhesives, specialty tools, safety type of items, anything to support the the production, electronic production environment. I failed to mention on the t and m side of the business, that’s a very vendor brand specific type of business, or I call it a vendor relationship business. Keysight and Tektronix are are two of our top vendors there that that we work with. Our customers typically, when they go with a certain brand, they like to stay with that brand really from a from a training and education for their for their employees. And so we have great relationships with with key vendors within within that market space.

So really quickly on cash flow and what how we think about compounding our cash flow on a longer term basis. I mentioned m and a is a big piece of our overall strategy. Again, 11 acquisitions. We’ve acquired about $800,000,000 in revenue in the last three years and about $70,000,000 of of overall EBITDA. From a from a leverage stamp debt leverage standpoint, when we brought the three companies together, we were at 3.6.

And even though we’ve deployed about 650, 620,000,000 of capital, Our leverage point at the end of last quarter was about 3.5, 3.6. So we’re reinvesting our cash flow, you know, back into the organization. We could delever very quickly if we chose to. We create a lot free cash flow, but really we’re taking that cash flow, putting it back into organic initiatives, and then also to to support the m and a strategy. On our last earnings call, we did talk about the fact that that we are in the market repurchasing shares.

So we think that it’s a good use of capital at this point. The other way I would probably describe how we manage the capital within the organization is that there’s a little bit of competitive nature nature around who gets the capital in terms of the three verticals. We we do operate the commercial side of the verticals on a stand alone basis. What we’re not doing is trying to bring all that together. We believe that, you know, we’re best suited to service our customers by keeping the commercial side of it separately.

So each of the three verticals has their own certainly p and l, has their own balance sheet, has their own working capital. All three of the management teams are incentivized around sales dollars, EBITDA dollars, and working capital efficiency. And part of that comes down to then where do we wanna deploy our capital in terms of where we get the highest return. So there’s a bit of a a bit of a competition, not only from a performance standpoint. We you know, I able to, you know, be within a lot of our meetings with our management team and our board.

It’s interesting to see a little bit of the competitive nature amongst the three management teams. But then, certainly, we’re looking at where’s the best place to deploy the capital in terms of acquisitions and what provides us the the highest rate of return as well. I’m not gonna hit on this on the m and a side. We’ve got a couple of slides in here really just identifying where we think some of the opportunities are here. I would say our pipeline continues to be strong.

We it’s, you know, probably on a weekly basis. I’m seeing a teaser sheet. I’m seeing a book. We’re seeing some some level of of of an opportunity that’ll that’ll come across our desk. You know, one of one of the questions that we get asked quite a bit is how do you go out and source acquisitions?

And really, I would say it’s it’s threefold. One is our our m and a team is out looking for app opportunities all the time. Our management teams are really well embedded into into the environments that they compete within, so they’re bringing opportunities. And then certainly LKCM, you know, really our our private equity, you know, firm that that owns about 78% of our shares. They are known as a preferred buyer in the marketplace, and so they many times have insight into organizations that are coming to market, you know, before we may even see them from a management standpoint.

Just overall from a financial perspective, and then we’ll we’ll certainly open it up for q and a. As I mentioned, we’ve been bouncing around between 910% from an EBITDA standpoint. When you look at the three verticals, the test equity group is operating at about 7%. They represent about 40% of our revenues. The JexPro services vertical has been operating in the anywhere between 1214%.

And then on the Lawson side, you know Lawson’s been operating, We spent many years at Lawson getting Lawson to 10%. And and really when you look at the last few years, every quarter has exceeded this. I think this last year on the Lawson side, we’re sitting at about 12%. So strong performance, yeah, I would say within all three of the verticals. And again, we bounce around a little bit.

On the m and a that we’ve made, we talked about this on our first quarter call. The last couple of quarters, Source Atlantic that we acquired, it’s really a distribution company covering the Eastern Part Of Canada, a great asset, really long established organization in excess of a 100. We bought them. They were kind of single digit, mid single digit EBITDA. We knew that they were gonna compress our our margins a bit, but we have a path to get them north of 10% that we feel very confident in.

So when you look at the last couple of quarters, really impacted by 50 to 60 bps just from the consolidation of that into our into our business. And then we talked, you know, quite a bit about this in terms of just where we are from a a leverage standpoint. You know, working capital runs at about 496,000,000. Again, we have targets within all all three of the verticals. You know, really, you know, our ability to return capital to our our our shareholders through some of the share buybacks and also through a rights offering that we did as part of one of our acquisitions for Hisco back in 2023.

So just really quickly from a management perspective, you know, I would say we’re probably as well aligned as we can be in terms of we’re all heavily vested in in the overall performance of the organization. We have three separate CEOs within each of the verticals. I mentioned that we run each of the verticals on a on a stand alone basis from a commercial perspective, and then really complemented with the LKCM team. We have probably 10 to 12 individuals within LKCM led by Brian King, who’s our our our chairman and CEO, And then probably another 10 to 12 individuals supporting DSG. It’s a it’s a critically important investment that LKCM has.

So we we leverage that relationship all the way from, you know, m and a opportunities to to deploying of capital and and so So on a and I should mention certainly on a non compensated basis. So Brian’s not taking any pay as a CEO or chairman, and there’s no scrape off in terms of in terms of fees being paid to LKCM either. So when the stock price increases, everybody wins. So let me do this. So why don’t we I know we’ve got probably seven or eight minutes left.

Why don’t we just open it up for questions, and we can take it from there. Thank you. Yes? Sure. Yep.

Okay. So so on the one, so we we had an investor day. Yes. Oh, sure. Yep.

Yeah. So so I think there were three questions there. One is where we see this on a longer term basis. The piece was what doesn’t the market understand about about DSG. And the was what’s the vintage on some of the funds that hold?

How many years how many years are left? Yeah. So I’ll the I’ll take that that one. So we we had an investor day back in September of twenty twenty three. And I wouldn’t say this was formal guidance, but I would say that we put some targets out there, really getting us from 2,000,000,000 to 3,300,000,000.0 in revenues, and about half of that was was m and a, and the other half was organic growth, kinda in the mid single digit range.

And then from an EBITDA perspective, getting that 200,000,000 up to 450,000,000 or about 13 and a half percent. So again, today, we’re operating, you know, around 10% if you if you take into the effect of the the dilution effect of the most recent acquisitions. So we’ve not we’ve not changed those goals at at this point. In terms of what and I’ll have Brett maybe jump in on on these as well. In terms of what the what we think the market doesn’t understand, there’s, you know, there there’s there’s a lot to to understand here.

Right? In terms of, you know, we’re trying to simplify the story. There’s the three verticals that we operate separately. So when people dig in, they they they’re trying to dig in and understand the three verticals. I think one of the the pieces that that is underappreciated is is just the amount of of cash flow creation that we can that we can make as an organization.

As I mentioned, you know, we have the ability to delever very quickly if we’re not investing back into acquisitions. I think that’s that’s a bit misunderstood as well. And so let me anything Brett you wanna add to either the vintage or maybe the market Yeah.

Brett: Speaking of the mic here. Yeah, Brian King has been investing in private businesses for many decades and formalized that effort into the LKCM headwater. So we’re on fund four right now and one of the challenges of private equity is that if you buy an asset, you have to do work on it and then sell it. So the beauty of this platform is that we can really own it in perpetuity, that’s the idea. So we put all this work into this and we wanna be able to benefit from that in perpetuity versus having to sell it.

So to answer your question specifically, we actually own it in several vehicles inside the firm. So it’s probably about five or six vehicles. So that’s, it’s not like you’re gonna see a lot of stock come to market anytime soon.

Unidentified speaker: So

Brett: some of the vehicles that own it right now are evergreen funds. They don’t have an end of life. There are some funds that do have an end of life, so you could see the ownership ebb and flow a little bit, but you’re not gonna see 78% of the stock come to market. I have that number off the top of my head but I mean there’s so fund two is probably the one that comes to market or has an end of life that’s probably two years out with ability to extend that. But the other thing to know about our LPs is that we work for mostly high net worth, non institutional taxable clients and so they have a long runway as well and they want to invest alongside us in this project.

So again, if the question is more around are we going to see a lot of stock come to market, probably not. Well so the way that And that’s the goal, right? So Brian King has stated that he would like to be able to pay a dividend at some point that’s greater than our cost basis in the company. So that kind of gives you a sense for the longevity of how we’re thinking about this.

Unidentified speaker: We do. Yeah. Yeah. Yep. Yeah.

Yeah. So we so we we’ve publicly said that, you know, we’re comfortable in that three to four times range. And so, you know, we we saw that get down to, I think, the low point was either three or 3.1 within the last within the last, you know, call it twelve months or so. We made five acquisitions in 2024. So we, you know, so it it it found its way back up to the mid threes, let’s call it.

But you’re right. We we’re paying about $60,000,000 in in interest right now. And but m and a is a big piece of our growth strategy. Right? I mean, we think that there’s a lot of of companies out there that can really add value into into the DSG platform.

So, you know, if we if we were to get down in the in the mid to low twos, let’s call it, it probably means the m and a side of it has slowed down. So, you know, we’re still we’re still in that growth mode right now, you know, from an m and a perspective where, you know, we don’t feel like we’ve hit, you know, overall capacity where we can just solely focus on the organic side of the business. So, you know, I would envision that we’ll be in that three to four range, you know, in in the immediate future just thinking about, you know, all of our m and a activities. Yeah. Yeah.

Yeah. It is. Yeah. Yeah. I know I know we’re starting to run out of time here.

But, yeah, we are on the on the on the Lawson side, you’re exactly right. A ton of effort going into expanding share of wallet within our existing customers. Lawson, for example, we have 12 product categories, and our average customer buys less than three of those product categories. So to your point, there’s there’s a lot of opportunity there. Now every customer is not gonna buy all 12, but there’s certainly opportunities to to expand that.

And we’re we’re working on, you know, pricing and commission and so in order to to to make that, you know, more attractive for our customers and and for our sales reps to push those other categories. We do. Yeah. We know exactly. Yeah.

We know exactly. And we we know by customer which what SKUs are buying, what product category. More importantly, what holes are open, what, you know, where what customers are not buying safety, what customers are not buying, you know, you know, nuts and bolts, either the fastener category, etcetera. Yeah. Yeah.

We’ve got that visibility. Yep. Thanks, everybody. Appreciate appreciate the interest.

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