DSGR - Distribution Solutions Group Inc. (DSGR) Q4 2023 Earnings Call Transcript

2024-03-07 15:52:04 ET

Distribution Solutions Group, Inc. (DSGR)

Q4 2023 Earnings Conference Call

March 07, 2024 9:00 AM ET

Company Participants

Steven Hooser – Investor Relations-Three Part Advisors, LLC

Bryan King – Chairman and Chief Executive Officer

Ron Knutson – Executive Vice President and Chief Financial Officer

Conference Call Participants

Max Kane – Stephens Inc.

Kevin Steinke – Barrington Research

Ken Newman – KeyBanc Capital Markets

Brad Hathaway – Far View

John Krueger – JAG Capital

Presentation

Operator

Greetings. Welcome to the Distribution Solutions Group Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Steven Hooser. You may begin.

Steven Hooser

Good morning, everyone and welcome to the Distribution Solutions Group fiscal year 2023 and fourth quarter 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 2023 financial results slide deck posted on the company's Investor Relations 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 that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied.

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 disclaim no obligation to do so. Management will also refer to non-GAAP measures and reconciliations to the nearest GAAP measures can be found at the end of the earnings release. The earnings press 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 on the Internet via the Distribution Solutions Group Investor Relations page on the company's website. A replay of this teleconference will be available through March 21, 2024.

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

Bryan King

Thanks, Steven, and thank you all for joining us to review our 2023 annual and fourth quarter results. Let's begin with Slide 5 to review top-level financial results, our 2023 annual sales totaled $1.6 billion, up more than 36%, and comparable sales increased by almost 24% despite ending the year with a choppier sales environment in a few important end markets, most notably technology and renewables. We did see some destocking of inventory by our customers, mirroring our own efforts to optimize working capital within the channel collectively, which contributed to a 6% decline in organic sales for Q4. While this backdrop did not meet our expectation in the near-term, our two-year organic stack sales increased almost 17% for the full year. Our marketplace traction around expanded value-added capabilities offers us confidence that we assembled a platform of complementary specialty capabilities that will enjoy sustained market share growth.

We ended 2023 with $157 million in adjusted EBITDA, up nearly 28%, and an EBITDA margin of 10%. During 2023, we generated significant cash from operations of $102 million, translating to a strong free cash flow conversion. 2023 was a successful year for Distribution Solutions Group, with tremendous work to drive long-term value balanced with a mindfulness towards current profitability and cash generation. I congratulate our team on a job well done in what became a more choppy marketplace environment in September. Throughout the year, we invested with confidence in key long-term initiatives, while adding critical talent and depth to our leadership teams. Our employees have fostered a culture of collaborative accountability, essential for driving revenue growth and achieving sustainably higher profitability, a goal shared by all stakeholders. This is being realized through enhanced cross-selling and value-added customer engagements, which are gaining traction in the marketplace.

By streamlining processes and optimizing resources, the team is making strategic improvements that support increasing the consolidated EBITDA margin into the teens and ensuring all business verticals operate with a margin above 12% within the next few years. These efforts align with our Investor Day objectives from September to elevate total EBITDA to over $450 million in the next five years. As eager as I am to demonstrate to our shareholder partners over the coming 24 months and beyond how current levers are driving future performance, the progress was not expected to be linear, even though we have strong line of sight on attaining our outlined objectives.

As the environment shifted, we exercised additional patience with some process retooling that we knew would result in significant profitability improvements. We were unable to start our DSG TestEquity Hisco integration and profitability improvement plan until their earn-out window for Hisco eclipsed in November. Despite this, our disciplined execution around our long-term strategy delivered, one, revenue and margin growth, two, demonstrated improved profitability and returns, and three, reaped significant free cash flow that collectively created a lot of shareholder value. Most importantly in 2023, we further optimized the initial foundation created by pulling together DSG, which will allow us to sustain high-value creating years through the foreseeable future....

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