Distribution Solutions Group, Inc. (NASDAQ:DSGR) Q4 2023 Earnings Call Transcript

Distribution Solutions Group, Inc. (NASDAQ:DSGR) Q4 2023 Earnings Call Transcript March 7, 2024

Distribution Solutions Group, Inc. misses on earnings expectations. Reported EPS is $-0.00035 EPS, expectations were $0.14. DSGR isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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.

While our work to architect and tool DSG for significant future growth and shareholder value creation still leaves much to be done, we accomplished important strategic goals in 2023. I will review some, not the least of which included the major acquisition of Hisco that I will discuss first. We added Hisco into the DSG portfolio, which gives us a strategically important business that more tightly binds TestEquity with Gexpro Services and Lawson. Since our purchase, our confidence has swelled with better line of sight into an expanded set of cost synergies that we are well into unlocking through the Hisco integration with TestEquity Group and combining that vertical to leverage total spend and capabilities across DSG. To review, the Hisco acquisition added over $400 million of revenue to a base of $1.4 billion, producing an annualized sales lift of more than 30%.

Hisco also created significant revenue opportunities across the DSG verticals through geographic footprint expansion opportunities like in Mexico and internal value-added capability additions for DSG through their Alliance printing and Precision Converting divisions as well as their VMI leadership in categories such as chemicals, solders, and adhesives, among others. Lawson and Gexpro Services are already activating all of these benefits. The Hisco offering is also providing expanded efficiencies in coverage and capabilities for the TestEquity Hisco combined sales initiatives. Although we closed this acquisition in June 2023, due to the seller’s earnout, our initial integration plan was not launched until November when the earnout expired. Our integration plan, which includes optimizing the spending and capabilities between Hisco and the TestEquity Group, is expected to have DSG enjoy significant run rate improvements from the Industrial Technology’s vertical by the second half of 2024.

Recall that we already announced a plan to take out $10 million of run rate operating costs from the TestEquity Group, and those actions began in the fourth quarter and were informed some by the capabilities brought by Hisco. Our 2024 cost realization for the Industrial Technology Group also includes additional cost capability and facility optimization, much of which will also be enjoyed during 2024, but an equal amount that we don’t expect to realize until 2025 or even 2026. Some additional key accomplishments by business segment include our MRO focused business, Lawson Products, had a standout year. We launched an important sales force transformation in 2023, engaging 900 highly productive field sales reps and expanding our inside sales team to about 45 people from a de minimis size.

Our plan in 2023 was to minimize the disruption of the rollout and fortify the sales force through the change process. We increasingly are leaning on data to optimize our sales force network and how to drive the productivity and opportunity to earn for our sales people, and we are in the early stages of this effort. Most importantly, this is allowing us to get better at focusing resources where we can add the most value for customers, which is critical as we continue to refine having more product, more expertise, and more value-added tools and capabilities to engage with those customers and having a more optimized and consistent sales force focus on those customers will be critical to getting our improved capabilities in front of them. This approach is working well with good improvement in rep productivity realized in both the third quarter and fourth quarter.

We committed in 2022 that the DSG merger to significantly invest in Lawson’s sales force infrastructure, which started in earnest in 2023. Although this is a multi-year, longer-term project, the early double-digit productivity lifts indicate a solid trajectory for the return we expect ahead. Across DSG, we are committed to execute on disciplined, inorganic growth through an acquisition model with tuck-ins that are both accretive financially and capability-wise. That said, some have taken longer than we expected to close, so we were excited to announce the purchase in early 2024 of the acquisition of Emergent Safety Supply as a strategic extension for Lawson Products in the safety category. Brand and line extensions in safety and power tool categories, as well as continuing to expand offerings in key product and private label categories, will collectively allow our business units to grow, improve margins, and scale into new geographies and markets with limited risk.

We expect this to improve our cross-sale value proposition to existing customers of Gexpro Services and the Industrial Technology customers of TestEquity Hisco. Gexpro Services continues to assume the leadership role in our synergistic cross-selling and upstreaming opportunities. Our Gexpro Services customers, and more broadly DSG customers, can now gain exposure on how to maximize the full range of DSG products and our expanded suite of value-added capabilities for our customers. In 2023, we saw the first efforts of a more robust cross-selling message evolved from the 2022 initial successes into a more thoughtful and cohesive approach to engaging the market. This demonstrates credibility to customers and expands our offering with more product categories and more value-added capabilities.

Gexpro Services enjoyed bringing home the first wave of successful engagements with some of our commercial and industrial customers, as well as championing wins in our aerospace and defense vertical, which translated into several million dollars for each broadened DSG engagement. Downstream synergies, selling more products and capabilities to existing customers, including customers from the acquisitions we made, opened up most significantly in our renewables category. Our 2022 acquisitions at Frontier, Resolux, and SIS set this up as those acquisitions allowed us to take former competitors and convert them to suppliers in 2023. These key channel partners coming together now offer a more comprehensive, differentiated offering to a much broader set of customers, coming from all of the acquisitions and Gexpro Services as well.

This has set up an opportunity to further drive margin improvements at Gexpro Services, although much of the opportunity is in front of us in the renewables end markets. These end markets are still extremely sluggish and drag EBITDA margins down from prior year for those acquisitions below the Gexpro Services core during the last half of 2023, where we are now addressing integration cost-out opportunities. We anticipate that the renewables marketplace will open back up in 2024, a perspective reinforced by our book-to-bill, which is trending significantly positive. Finally, with the benefit of DSG, Gexpro Services started to benefit in capturing ecommerce revenue, adding several million dollars of incremental revenue from ecommerce orders originating from large established accounts in our aerospace and defense end markets.

Despite the choppy environment in the technology market, that delayed several customers’ projects into 2024, and that created a drag on EBITDA of over $8.4 million for the year and over $2.3 million for the fourth quarter, backlogs are building and we are seeing margin improvements while it is early, Gexpro Services has started the year with a healthy book-to-bill. The previously mentioned Hisco acquisition for our TestEquity Group added significant scale to its North American operations, including Mexico. In 2023, consistent with committing to getting the Industrial Technology vertical up to double digit EBITDA margins over the next couple of years, we worked on setting up the margin improvement initiatives and as I mentioned, we indicated we had taken initiatives in November to take out over $10 million of 2024 run rate costs from the TestEquity Group, informed by the imminent opportunity in November to start the combination of capabilities, facilities and leadership with Hisco.

Today, we understand more about the opportunity to leverage spend and resources and optimize capabilities at Hisco. Examples of these include some of the following actions: we’ve rationalized facilities, restructured go-to-market, including headcount reductions, made changes to our sourcing and supply agreements, rationalized unprofitable business with customers, and streamlined e-commerce efforts that allow for optimized search engine optimization and marketing spend. There is a lot of spend opportunity yet to be unlocked here, and it won’t happen overnight. But most importantly, the commercial opportunity brought by Hisco, its people, products, capabilities and position in the marketplace to DSG is even more impactful and I am pleased with the rapid progress and collaboration out of the team since they were able to start tackling commercial initiatives together and together affecting cost and process rationalization after the earn out window expired in November.

With that, I’d like to turn the call over to Ron to walk through the financials. Ron?

Ron Knutson : Thank you, Bryan. And good morning everyone. You’ll see on the following few slides that we expanded information on the three segments to include year-to-date information as well as the fourth quarter information. Turning to Slide 6, I will first summarize our business on a pro forma basis, which includes acquisitions for the full twelve months of 2023. Lawson represents 30% of total DSG revenue, Gexpro Services represents 23% and the TestEquity Group represents 47% of revenue, all on an adjusted revenue basis for 2023. Our run rate adjusted revenue is now approximately $1.75 billion and we serve over 180,000 customers across more than 500,000 SKUs. Now turning to Slide 7, I will summarize reported results for the year and for the fourth quarter by segment.

Consolidated revenue for the year was $1.57 billion, inclusive of the premerger activity for Lawson in the first quarter of 2022. This represents an increase of $301.1 million, or 23.7%. Post-merger DSG acquired four companies, which accounted for approximately $267.5 million of the increase. Excluding these acquisitions, organic sales for 2023 grew by 2.9%, or 16.7% on a two-year stacked basis. For the quarter, GAAP sales were $405.2 million, an increase of $76.4 million, or 23.2%, primarily due to the acquisition. Excluding the acquisitions not in Q4 a year ago, organic Q4 sales declined 6.4%, solely driven by the continued delay of capital spending within the test and measurement business at TestEquity and weaker sales in the technology end market at Gexpro Services.

On a two-year stacked basis, organic sales were up approximately 10% for the quarter. Excluding these two headwinds, organic sales increased approximately 1% for the quarter. 2023 reflected strong growth in net margin dollars. Inclusive of the loss in premerger results in 2022, adjusted EBITDA increased to $157 million in 2023 from $123 million a year ago. Full year 2023 represents 10% of sales versus 9.7% for all of 2022, a favorable outcome as anticipated, the 2023 margins were reduced by approximately 50 bips from the acquisition of Hisco. For the fourth quarter, we generated adjusted EBITDA of $33.9 million, or 8.4% of sales on seasonally fewer selling days in Q4 and the sales headwinds previously mentioned. I’ll expand further at the segment level on this in a minute.

We reported operating income for the full year of $43 million, net of $40.3 million of acquisition related intangible amortization and $50.5 million of aggregate costs from stock-based comp, acquisition, severance and retention related expenses, merger and acquisition costs and other nonrecurring items. Adjusted operating income inclusive of Lawson for all of 2022 increased $19.9 million to $93.5 million. We reported GAAP diluted loss per share of $0.20 for the full year, inclusive of higher depreciation and amortization and a valuation allowance on certain deferred tax assets compared to earnings per share of $0.21 in the year ago. Full year adjusted diluted EPS was a $1.42 on higher outstanding shares. It should be noted that starting in Q4, we began including total non cash amortization expense related to the acquired entities and added these dollars back when computing adjusted earnings per share, which benefited EPS by $0.16 on a tax affected basis for the quarter.

Turning to Slide 8, let me now comment briefly on each of these segments. Starting with Lawson, sales were $468.7 million, up 9.1% for the full year. Fourth quarter sales were $109.8 million as compared to $108 million a year ago quarter. The increase for the full year and the quarter was driven by continued strong performance within the strategic business, Kent Automotive and government military categories, offset by softening sales within the Lawson core customers. Lawson’s full year growth was achieved through price, increased wallet share with existing customers and new customers in both our strategic accounts and our Kent Automotive business. As Bryan highlighted, Lawson had a really strong 2023, all while continuing to invest in the business to strategically position itself for longer term success.

We’re still in the early innings of implementing initiatives to help our sales team become more productive. However, we’re very pleased with the initial results of a 15% lift in sales rep productivity this quarter, on top of an 18% improvement achieved in Q3. Lawson’s adjusted EBITDA for the full year improved significantly to $63.7 million as compared to $38.6 million a year ago. This improvement was primarily driven by sales and gross margin improvements, partially offset by increased compensation on higher sales levels and channel investments to better position us on a longer term basis. For the quarter, Lawson realized adjusted EBITDA of $12.4 million or 11.3% of sales as compared to $11.5 million a year ago quarter a 7.8% improvement.

Lower sales on fewer selling days in Q4 compared to other quarters on fairly flat operating costs reduced Lawson’s net margin in Q4 versus other quarters in the year. Turning to Gexpro Services on Slide 9, total sales for the year increased 5.3% to $405.7 million. For the fourth quarter, sales were $93.2 million, down 6.9% solely from project related businesses, primarily within renewables, and continued customer delays in the technology vertical, including the semiconductor end markets. 2023 saw global semiconductor spending decline by roughly 10% as consumer electronics and automobile production drove softness and supply chains adjusted. The remainder of the base Gexpro Services business increased 6.2% with continued strength in the industrial power and renewables end markets.

Gexpro Services largest vertical is now industrial power, followed by renewables, which are expected to have secular strength for the next several quarters and years. We are continuing to invest in the business, however, are cautious about certain weaker markets and those more sensitive to current macroeconomic issues. Gexpro Services full year adjusted EBITDA grew to $45.2 million, or 11.1% of sales versus $43.2 million a year ago. For the quarter, adjusted EBITDA was $8.8 million, or 9.5% of sales. The decline as a percent of sales was primarily related to lower sales for the quarter in the higher margin technology vertical, which put over $2 million of net margin pressure on the quarter. We anticipate Gexpro Services will return to low double digit EBITDA margins in the first half of 2024 on higher sales on a relatively flat fixed cost structure.

Lastly, I will turn to TestEquity Group on Slide 10. Full year sales grew to $641.8 million, an increase of $249.4 million, or 63.6%, driven primarily by the Hisco acquisition in 2023 and other acquisitions completed in 2022. Excluding these acquisitions, TestEquity sales were down $24 million, or 8% for the year, primarily within the test and measurement business. As we’ve discussed on previous calls, the decline in this piece of our business is primarily related to delays in customers capital project spending. Fourth quarter sales were up $85.3 million to $190.7 million, with Hisco sales adding $96.6 million and a decline in organic volume of 11.4%. On a two year stacked basis TestEquity organic sales were up approximately 3.1%. TestEquity’s adjusted EBITDA for the full year was $43.3 million, or 6.7% of sales, compared to $34.7 million, or 8.9% a year ago.

Acquisitions made in 2022 and 2023 added approximately $19.7 million in adjusted EBITDA. The decline in the TestEquity’s based, business adjusted EBITDA was primarily related to lower sales levels in the test and measurement offset by cost normalization taken in Q4. For the quarter, TestEquity’s net margin was $11.8 million, or 6.2% of sales. The lower margin for the quarter was primarily related to lower sales on capital related projects, fewer seasonal selling days, and additional operating expenses related to higher health insurance claims and employee compensation. As we think about 2024 for TestEquity, we will continue to focus on the integration of Hisco and TestEquity. We remain committed to sequentially improving our margin profile as 2024 develops through higher sales synergies to be realized on the combined company and the nonrecurring nature of some of the Q4 charges.

We anticipate a stronger second half of 2024 for TestEquity as we continue to integrate Hisco and on some of the pickup in capital spending, allowing us to drive toward a double digit margin profile. Moving to Slide 11, we ended the year with nearly $300 million of liquidity, including $99.6 million of cash and cash equivalents and under $98.3 million under our existing credit facility. As you know, we amended our credit facility in 2023 from $500 million to $805 million to support the acquisition of Hisco and to free up liquidity for other acquisitions. We’re really pleased with the progress made in strengthening our balance sheet and ending 2023 at a leverage rate of 2.9 times, all while acquiring four businesses since forming DSG. Although, we continue to support a robust working capital investment, we are carefully managing inventory levels, accounts receivable and accounts payable, as evidenced by our ability to generate significant cash flow from operations of $102 million for the year.

Our cash conversion ratio defined as adjusted EBITDA, less the change in working capital and less CapEx divided by adjusted EBITDA was over 100% in 2023. Net capital expenditures, including rental equipment were $18.7 million for 2023. We expect full year CapEx to be in the range of $16 million to $20 million, or approximately 1% of revenue in 2024, and have a similar cash flow conversion goal for 2024. Before I turn it back to Bryan, I’d like to make some comments on how we see 2024 developing. As we’ve discussed, over the past two quarters, we were up against tough comps with Q4 2022 having been up 16.7%, and that will continue into 2024 with Q1 2023 having been up nearly 14%. Given our fourth quarter results and the first quarter comp that we’re up against, we expect Q1 of 2024 organic sales to be down versus a year ago in a range similar as what we experienced in the fourth quarter.

As we make traction on many of our initiatives as 2024 develops and as comps against the prior year soften, we would expect organic sales growth to turn positive starting in the second half. To achieve our internal sales plans, we will need some normalization of various end markets and some recovery of customer capital related project spending. While we recognize the Q4 margins are seasonally our weakest quarter and were softer than originally anticipated, one quarter will not slow us down from our overall strategy. We will likely feel some of this margin pressure into the first quarter, but we are committed to continuing to drive margins upward while continuing to strengthen the entire DSG platform. I’ll now turn the call back to Bryan.

Bryan King: Thank you, Ron. We are pleased with 2023 and are even more excited about how our successful initiatives tackled during 2023 will drive our 2024 and 2025 performance. Our prioritized focus on cash flow generation resulted in significant free cash flow in 2023. Turning to Slide 12, we continue to operate under a disciplined capital deployment strategy that drives focus around reducing capital intensity where possible, increasing working capital efficiencies, which improves liquidity and reduces our net borrowings. We ended the year with $99.6 million of cash and have zero borrowed on our revolver while enjoying a $430 million investment in networking capital. We are focused on continuing to structurally increase the return profile of the business both through operational discipline and process improvements where we have a clear line of sight on those improvements and with our return profile additionally benefiting from key acquisitions that will enhance our long-term position in the marketplace.

While the current challenged backdrop for a couple of our end markets can create a short-term distraction, we are passionate and committed to drive this business alongside deepening bench of innovative thought leadership with strong distribution experience. We are aligned and collectively committed as large shareholders along with a shared vision from the Board to capitalize on this excellent opportunity to further build this best-in-class specialty value-added distributor. With this shared vision and the strategy we are executing, we are managing our leverage appropriately at 2.9 times at year-end and we are confident that we are well-positioned to capitalize on accretive acquisitions to drive organic and inorganic growth to build a better DSG.

We use a disciplined approach to prioritize our capital investing. Our acquisition priorities need to be informed by intensity of other operational and leadership priorities, financial leverage and periodic decisions to invest in our own stock. To that end, during 2023, we increased our share repurchase program by $25 million and repurchased 139,000 shares at an average cost of $26.09 per share during the fourth quarter. Finally, we executed a successful oversubscribed rights offering and a two for one stock split in 2023 in order to balance our capital structure and liquidity objectives prudently as best we can for all our stakeholders. As we said in the last quarter, we continually monitor macroeconomic and global shifts that may affect the dynamics and forecasts of our end markets.

We are two plus months into 2024 and given a continuation of choppiness this year similar to the end of 2023, and even with certain tailwinds expected in 2024, we expect that our first quarter organic sales compression will likely be in a similar range to the fourth quarter of 2023. We’re also seeing encouraging indications through our increased quoting activity and our book-to-bill that revenue reacceleration could be spooling back up in those softer pockets. These macro dynamics are significantly different than the invitation for expanded engagement that our customers are welcoming from the more robust offering each of the DSG verticals can now provide. Turning to Slide 13, full year and fourth quarter results demonstrated our ability to benefit from our diverse end markets to achieve a 10% EBITDA margin.

Our cross-selling initiatives are still in the early innings. Still, cross-selling is becoming more natural across our teams and we are finding better and different ways to increase sales through longstanding relationships with our best customers. We’re very pleased with our progress of acquired business initiatives and believe we can incrementally improve margins in our Industrial Technology vertical between the exciting TestEquity and Hisco synergy opportunities over the next several quarters, as well as improve margins across our other acquisitions made over the past two years. We plan to continue to act on accretive, bolt-on acquisitions that fit our M&A criteria and that reinforce DSG’s expanded aperture around high value, high touch, specialty distribution capabilities.

The acquisitions, initiatives, and actions taken in 2023 and 2024 are critically important as they deliberately scale up the profitability, capabilities, and intrinsic value of DSG across each of the business units. Setting this successful course for the next five years and beyond, we plan to continue to make good, prudent decisions that create value, improve the long-term return profile of the business and generate cash. To wrap up, as Chairman and Chief Executive Officer of DSG and as Managing Partner of LKCM Headwater, where we enjoy a very large interest in DSG. We are exceptionally well aligned and committed to our investors and DSG’s objective. You have my commitment along with the DSG and LKCM Headwater teams, that together we remain relentlessly focused around driving steep and sustained long-term value creation for our shareholders.

With that, operator, we would like to take questions from analysts and investors.

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Q&A Session

Operator: Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from Max Kane with Stephens Inc.

Max Kane: Good morning. Thank you for taking my questions.

Bryan King: Good morning, Max.

Ron Knutson: Good morning, Max.

Max Kane: Good morning. So on a sequential basis, how has 1Q consolidated DSGR revenue trended first 4Q and for the remainder of March, are there any noteworthy negative or positive factors that might change that trajectory going forward?

Ron Knutson: Yes. Max, this is Ron. I’ll take that. So keep in mind for us the seasonality that we generally experience within our overall business typically Q4 is our weakest quarter, probably followed by Q1 and then Q2 and Q3 are certainly the strongest quarters. Sequentially where we are today in terms of the first couple of months, I would call it kind of flat, versus where we exited the fourth quarter. In terms of March, it is a 21-day selling month for us this year. So I wouldn’t say, I know Bryan commented on some of the ordering process and so forth coming in, but the March is typically generally a 23-day month for us, this month a little bit shorter. So the first quarter only has 63 selling days. We won’t see quite a bit of a leverage advantage on a 21-day month as we would a 23. But to specifically answer your question, not – the first couple of months of the year are kind of flat sequentially versus Q4.

Max Kane: Got it. Thanks for the color. My second question is regarding adjust EBITDA margins kind of a similar question, but yes, on a sequential basis, how has consolidated margins trended first 4Q and are there any noteworthy factors in March that may change that trajectory?

Ron Knutson: Yes. I’ll jump in on that one as well. So, as you know, we don’t provide formal guidance in terms of the year. I know both Bryan and I made some comments in our prepared remarks that we do feel that will experience some of the margin pressure in Q1, similar to what we saw in Q4, just given where the overall sales are trending out. So nothing – I would say nothing unusual there in terms of what we’re expecting here in the month of March either. But again, without getting into too much specifics, I think we’re going to continue to see a little bit of that margin pressure here in the first quarter and probably early into the second quarter.

Max Kane: Thanks for the color, and I’ll turn it back.

Ron Knutson: Thanks, Max.

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

Kevin Steinke: Hey, good morning, Bryan and Ron.

Bryan King: Good morning, Kevin.

Kevin Steinke: Good morning. I wanted to ask about, Ron, your comments about looking to return to positive organic growth in the second half of 2024. And you said it would be somewhat dependent on pickup in your some of the softer end markets. But just trying to get a sense as to your line of sight into potential pickup in those end markets. I know you talked about the pipeline building in Gexpro for technology and renewables, and then it sounds like you expect some capital spend return on test and measurement equipment and TestEquity. So just any more color on your expectations on the pickup and demand and the line of sight you have there?

Ron Knutson: Yes. So – yes, go ahead, Bryan.

Bryan King: Either one of us. But Kevin, Ron gave some and you just highlighted the three areas that we’ve been most focused on, because they’re where we’ve seen the only real softness. If you look at the Industrial Technology division or TestEquity, $23 million, of the $24 million of drag that we had on revenue last year was specifically from the test and measurement equipment. And there were specific inventory destocking dynamics that were going on in the marketplace there. And we maybe made the wrong decision, but we decided to step out of selling equipment at margins that we saw some competitors kind of try and blow out inventory to get their inventory levels at the end of the year right sized. And so that overhang of normalization of inventory levels from some of our peers seemed to work through the system.

And we’ve seen quite a bit more requests for the activity level of quotation has gone up quite a bit as we’ve gone into this year, although, and we know that our customers have budgeted for spend, but we’re not seeing the spending dollars being released yet at the pace that we would want to see to feel like that that business is normalized, but we expect that it will. And we also aren’t seeing as the more undisciplined approach and some of our competitors have kind of gotten out of the marketplace with their inventory positions that they took on when our channel partners were struggling to get product. It was kind of the same issue that we’ve seen in other parts of our businesses, not just at DSG, where the supply chain led to people puffing orders or expanding their efforts to try and gather inventory.

And then there was a destocking level that we saw and we saw it in other end markets as well at DSG towards the end of last year. The most acute spot where we felt it and saw it was at test and measurement. And we may made of it, and we wrestled a lot with the decision on whether or not to participate in the marketplace as people were selling stuff at margins that were significantly lower than what we’ve historically sold test and measurement equipment for and that’s abated itself. On the renewables side, we’ve just seen a delay in some of the project spend and also some of the MRO packaging that we’ve kind of our kits that we put together to be able to address some of the reworks of a lot of the installed base on the renewable side. But our book-to-bill is as high as I’ve seen it in the renewable space currently.

And so we expect that to flow through in revenues, but it’s still been sluggish of getting back to the levels that we would expect out of an area that we’re really excited about participating in as a leader to that end market in front of us. On the semiconductor side, we took a pretty good punch last year. I tried to highlight it specifically with the actual dollar drag that we had. Revenues were down 50% in the semiconductor space for Gexpro last year. It had the biggest impact on our earnings for the Gexpro division. That $8.3 million – $8.4 million drag that we had for the year on EBITDA. That end market is still kind of book-to-bills, not where we’d like to see it yet, but our customers, we’re still engaged with them, and we’re working currently on ways to expand our current wallet share with them.

And as we also – it’s kind of been interesting, we’ve seen a shift with one of our customers in particular, and another one that we’re working with, where some of their production is moved away from the U.S., at the same time, as we’re working actively with a number of customers on new expanded fabrication capacity in the U.S., which we all kind of think would expect with the CHIPS Act. But it’s not been kind of as seamless as we’d like to see, as we’ve seen some shifting overseas from customers at the same time as we’re seeing new plants being built domestically. So there’s some choppiness still in that end market, we expect it by the second half of the year. That’s really where the back half of the year element that we’ve kind of laid out there for Gexpro.

We expect to see more of a renewed or restored level of activity there on the semiconductors. The other end markets have actually held up quite well. And so if you take those challenges out, our organic growth rate, we would have had flat to positive organic growth in each of those verticals without those headwinds.

Kevin Steinke: All right, makes sense.

Bryan King: The only other thing, Kevin, in terms of just thinking about headwinds that we had last year, but also celebrating the great work that was done would be the sales force kind of transition that we did at Lawson. We got the benefit of more productivity out of our sellers. We’ve reorganized some of the ways that they serve their customers, and some of the efficiency with which we lean on those sellers in their particular selling territories. And so that has created some level of choppiness that – we think that – we kind of – we knew that it would probably lift margins but create some drag on organic growth last year. We just didn’t expect that we would also have the drag on the other two verticals at the same time.

So we thought we’d get the benefit of the EBITDA flow through with a little bit of a drag on organic sales growth at Lawson, while we would also – we were enjoying through the first half of last year and into the third quarter, really strong end market, still strength on a blended basis across the other two verticals, which we thought would kind of not highlight as much the drag of the sales force reorganization on organic growth. But that was very much of a deliberate objective to be able to bring the structural profitability of Lawson up closer to where we think it should be over time.

Kevin Steinke: Okay, thank you. And just following-up on that, when you talk about the expectations for a better second half of 2024. In discussions with your clients, how much does the macro outlook play into the building pipelines and what have you? I guess, we’ve just been hearing more generally from various companies that they’re getting more comfortable with the way inflation is trending and the possibility of interest rate cuts at some point this year. Is that kind of factoring into your clients thought process and starting to move forward with some spend on some of the more interest rate sensitive things like renewable development, et cetera?

Bryan King: Yes. Kevin, I mean, for me, the best example of that is just seeing the book-to-bill on some of the markets that have been more sensitive to inflation or to interest rates like the renewables. So the renewables have the highest book-to-bill currently of any of the markets that we serve. But that in and of itself to me is an indication that there’s confidence in that end market anyway, which has been probably the most sensitive of our end markets to interest rates and kind of the overhang or concern about a recession. And they are moving forward with projects in their engagements with us around the request for proposals, and then obviously booking orders with us. But those won’t translate into the revenue lift, we don’t think, until later in the year than the first quarter.

That’s probably the best industry for me to use as a proxy for the question you asked. But I do think that there’s two other elements that we’re seeing is just like we were able to destock some quite a bit during last year, we watched our customers do the same. And so the concerns that we all had about inflation, and every time we reordered a product being having pricing pass through on us from our vendors. We had customers who were experiencing the same from us. And then everyone was puffing their orders some or carrying more inventory, both because of the concern about an inflationary price increase, as well as the concern around supply chain disruptions. Tested measurement was an area where we had seen a real overhang on supply chain disruption and distributors like us or rental companies that are similar to us took – kind of went out and took inventory positions in an effort to try and smooth the challenging backdrop that we had from the vendor or the manufacturer getting us product.

And once that manufacturer and many of our manufacturers started being able to deliver product more seamlessly again, all of us started looking at how much incremental working capital we’d put in place during 2022 and we started taking dollars out of it. So we worked down our working capital last year, and with interest rates high, carrying working capital is a real burden. It has a real cost to it, where when you’re in a much lower interest rate environment, you don’t really charge yourself as much for carrying that extra inventory. So we think that a lot of that overhang of working capital is worked through the system, and business activity levels are good across most all of our industries. And so the choppiness that we have felt kind of with test and measurements starting in September, and then through the semiconductor before that, and then with renewables delayed through the fourth quarter and the first quarter, it’s definitely put a bit of a drag on our organic growth objectives that we had put it out there for everybody, but it’s not put a drag on it in any way that gives us any lack of confidence in where we’re headed.

The other part that’s been really very much more reassuring has been and we just came out of all day, yesterday, we were – in the last two days, we had leadership from the three companies, mostly led by really the Gexpro team getting together, having the Hisco team there, working through how they’re tackling more cross selling and more shared customer relationships. And while that’s taken probably, it’s slower to get some of these bigger customers to migrate or to change where they’re buying their content from and leaning on for services. We’re seeing significant amount of interest and we also have a much – we have a better go-to-market message today about the consolidated ways that we can or the collaborative ways that our three verticals can work together when we talk to a prospective customer.

And that’s evolving even more now that we’ve got Hisco’s capabilities in the fold. Hisco really has a lot to share in terms of capabilities, both with Lawson and Gexpro services. And we knew that when we started chasing Hisco years ago and thought that it would be a critical piece, a linchpin piece to our broader DSG strategy. And we’re just in the last couple of days being able to listen to the way that the Hisco team is working with the Gexpro Services team, for instance, on specific customers that have asked for us to bring the three verticals capabilities together to solve some major manufacturers objectives. That’s been probably the most encouraging and fun for me to see.

Kevin Steinke: Okay, great. Just lastly, I wanted to ask about the organic revenue trends in Lawson Products. You mentioned continued good progress with strategic Kent Automotive and government verticals, but some softening in Lawson’s core customer base. The organic growth rate just stepped down a bit sequentially 3Q to 4Q. Have you seen a more noticeable softening in that core customer basis or anything we should be thinking about as we kind of move into 2024 here on that front?

Ron Knutson: Yes, Kevin, this is Ron. So yeah, you’re spot on in terms of where we saw most of the strength in 2023 was our strategic business. We continued to develop good customer relationships, servicing more of their locations. The Kent Automotive business continues to grow nicely. And so for us it’s a real balance, right. In terms of the sales rep productivity that we were able to achieve 15% on top of 18% in the third quarter. So we feel really good about that. Where we are seeing some weakness is within the core base, which does make up about 50% of Lawson’s customer base now. And I think, I would say it’s probably twofold. One is, as we’re signing more strategic accounts and more Kent Automotive business, we really have to have a focused effort on how that customer gets serviced.

And I think part of that is probably naturally taking a little bit away from probably a little bit of cannibalization from our core customer base. The nice piece that we’ve done, really, throughout 2023 is we’ve made really pretty significant investments in inside sales, technical sales specialists, lead development reps, really the infrastructure that can help support our sales reps. And we have them actively working on those core customers that we’ve not seen a sale for in the last couple of months, let’s call it. So, yeah, a little bit of weakness there. But I would say that there is a heavy, heavy focus internally within Lawson. Not only do we need to be able to support these other growing kind of pieces of our business, but really getting our way back into our core customers to make sure that we can see growth there as well.

Bryan King: Ron, I want to just add something. Kevin, the salesforce transformation that we took on last year was one that was very deliberate around trying to expand profitability of Lawson. And it was both to expand profitability of Lawson, and it was absolutely focused on being able to expand the earnings opportunity for our outside sales team. And so to do that, we had to make sure that they were spending their time where they needed to be, spending it to drive longer term traction and revenue growth. And a lot of the time when you really broke it down, a lot of their time was being spent on a lot of very small customers that we don’t want to leave, but we needed to manage how our outside salespeople were engaging with them.

And so when you really fully burdened their time and our resources, a lot of those little accounts were not profitable on a contribution basis. And so we knew that. That’s part of the reason why we’ve addressed them with some other tools on ways to cover them, so that the outside salesperson is not spending as much time inside of those accounts. So that core has got some movement in it. And so it’s not – so when I look at it, and I look at the drag in different pockets of it around organic revenue growth right now, I have to take some of the noise out of how we’re serving those customers differently today. Because we’re actually making more money on how we’re serving them on less dollars that are coming through that channel, that small, tiny end of our channel.

And so there’s that compression element that we had to tackle. And certainly with not having as much of a tailwind of economic growth last year, at the end of the year, at the same time as we were doing that compression, it slowed the organic growth rate of loss like we anticipated it would, but more than we probably anticipated, just because of the backdrop.

Kevin Steinke: Okay, fair enough. Thanks for taking the questions. I will turn it back over.

Ron Knutson: Thanks, Kevin.

Bryan King: Thank you, Kevin.

Operator: Your next question is from Ken Newman with KeyBanc Capital Markets.

Ken Newman: Hey, good morning, Ken.

Bryan King: Hey, Ken.

Ken Newman: Morning. So, first, I guess, obviously, it sounds like a bit of a slow start here into 2024. I think it sounds like you expect the benefits from the cost out initiatives and improving activity, maybe in the second half. Curious, I mean, do you think the operating leverage for EBITDA is able to get back to that, your target of 20% to 30% starting in the second half? Or is that more of a 2025 opportunity at this point?

Ron Knutson: Yes. Just to make sure I understand your question. Your question is on the flow through, correct? On the operating leverage?

Ken Newman: Correct. Incremental EBITDA margins?

Ron Knutson: Yes. We believe that we can get there in the second half of this year. I mean it’s not a – we don’t believe that that’s going to take us into 2025 to get there. I think that it’s a natural follow through to some of the commentary this morning, just around seeing a stronger second half than the first half for us. So we’re not – even though we’re seeing some margin pressure here in the first quarter, as we look at bridging our way from Q1 into Q2 and into Q3, we clearly see incremental margin lift as we work sequentially from quarter-to-quarter. So, yeah, we’ve not backed away from that overall, call it 25% operating leverage as sales start to turn here later in the year.

Ken Newman: Got it. Okay.

Bryan King: Just to make sure that, I understand the question. I don’t know that, if anything, as we’re taking out expenses and we’re improving operating leverage in the business, the operating leverage has not been taken down. We’ve certainly suffered over the last several months into the fourth quarter, the January, February trend consistent with that, just the challenge of having fixed costs that are not getting carried by as much top line revenue. And so there’s the negative contribution margin that’s dragged some on EBITDA. But at the same time, we have very deliberate cost out measures that were in place that we had identified and been working through over the last 18 months, and many of those we couldn’t really tackle till November with the Hisco earn out being eclipsed.

And so there is we should see and be able to talk about the $10 million that we alluded to in our last conference call, earnings call that we started tackling on the TestEquity is now being matched up with another $7 million or so that we’re able to work from the other side of the merger on kind of pulling together the Industrial Technology side. So there’s $17 million that we’re working on, costs out there that we should be able to realize this year. That’s something that, while we’ll get more visibility on it in a better kind of back half of the year selling environment is only taking operating leverage at some level up from whatever it was baselined before. We’ve also got spending leverage opportunities that we’re taking on where we’re able to improve our leverage on each dollar spent across the DSG platform.

So that’s in addition to we had been working on that starting 18 months ago. Some of that didn’t roll all the way through the P&L last year. And then there were still initiatives that we were able and are able to tackle that are discrete initiatives that we identified as we’ve been working through the total consolidated spend objectives on the DSG platform. Those are expanding the operating leverage opportunity in the future. And so I want to make sure that we understand where the baseline is. Whatever the baseline was beforehand, we’ve not taken it down, we’ve actually expanded it. But our challenge has been having these in market softness pockets that are a real distraction for all of us. And then just I want to see more organic revenue growth out of our cross selling and getting to that sooner.

And it’s taken a little bit more time to knock down some of the targets that we’d laid out there for specific customer opportunities that we have a line of sight on.

Ken Newman: Yep. No, that makes a lot of sense. And it actually kind of leads a bit into my follow up here, which is maybe a follow up to Kevin’s last question here on Lawson. I mean Ron, is there any color on what pricing benefits have been in that segment this quarter? Because obviously you guys have seen or talked a little bit about customer destocking, maybe offset by some inflationary pricing benefits. Just how do we think about the flow through of price, through sales and margins, both into this last quarter and then first quarter, maybe the rest of the year? Because I would imagine that flow through might be a bit more extensive on the pricing aspect rather than on the volumes.

Ron Knutson: Yes, I would say, Ken, really, in the first half of the year, we were getting more of the price increases that were put in place later in 2022 that flowed through into early 2023. We look at our overall unit volume being shipped out the door. I would say that it’s kind of flattened out in that core. So we saw more of a decline in the core volume in the first half of the year and then really in the second half of the year and even here into January and February, it’s kind of hit that what we would call kind of a low point and has been running relatively flat. So, I think that some of that pressure that we saw on the core business is really more so, took place as we were transitioning some of the sales reps earlier in the year with some of the disruption that we did, or I wouldn’t call it maybe disruption, but it was some of the plan changes, but we’ve kind of leveled that off at this point and we don’t see volumes decreasing here in the second half of 2023.

And actually it’s ticked up a little bit here in January and February. So, but you’re right. I mean, 2023, a big chunk of our overall growth was really related to price.

Bryan King: Especially in the first half of the year. Because we had significant pricing initiatives that Ron and Cesar and each of the teams put in place during 2022. And as we eclipsed those in 2023, we had the first half of 2023, we were getting the benefit of the 2022 pricing initiatives that had not rolled through for the full 12 months. And most all that was done by early or mid last year. I’m trying to think, Ron, if you can give us any specifics about pricing initiatives that we took on last year, there’s some small ones inside of, like Gexpro on resetting contract terms at around 12/31 metrics. And so when we’ve got a contract, those pricing resets don’t take place until the contract resets. But in terms of dynamic pricing activities, I’d say outside of kind of some dynamic pricing initiatives, we took some specific pricing actions during the inflationary. More the higher inflationary periods that we were feeling in 2022, coming from our suppliers.

Ron Knutson: Yes, that’s right. There was limited price. I mean, we were very selective around price increases in the second half of 2023. But you’re right, Bryan, that the majority of it was the carryover effect of what we did in 2022 and then being surgically going after just specific products or specific areas that we knew we had to keep margins up on in the latter half. But it was pretty limited.

Ken Newman: Got it. That’s helpful. Maybe if I could just squeeze one more in here, just on the supply chain. I know there’s a lot of moving pieces, but curious if you have any color on just how much of your inventory is coming from over the water. Maybe from the Red Sea and the shipping lane dynamics there, and maybe just any color on whether you’re seeing some impacts from transport and logistics expenses, creeping one way or the other.

Bryan King: Yes, from an expense standpoint, on the transportation side, we certainly felt more of it in 2022, 2023 really seemed to normalize for us. We’ve not seen anything 10 at this point. That is starting to have a dramatic impact on us. From an overall cost standpoint, we’re just not seeing it yet. If it’s yet to come, but we’ve not seen it here in the second half of 2023, or at least in the first couple of months into 2024.

Ron Knutson: On your middle question on margins, I’ve been reminded in here that we do have very specific initiatives that are more surgical, that are a part of our gross margin strategy, that we’re walking gross margins up in some different parts of the different verticals, in different parts of the – in – that’s – but that’s not going to be, that the sort of stuff where you see 10 bps or 25 bps at a time. That’s not kind of the more pricing initiatives that we took. That would be the ones that you would wonder whether or not, when you see a top line number, whether or not that’s volume versus pricing, these are more very specific gross margin objectives that we’ve got that are taking place at the vertical levels to drive gross margins up to a more appropriate level.

Ken Newman: Got it. Very helpful. Thanks.

Ron Knutson: Yep.

Operator: Your next question is from Brad Hathaway with Far View.

Bryan King: Morning, Brad. We lose Brad.

Operator: One moment. Brad, your line is live.

Brad Hathaway: Do you hear me now?

Bryan King: We got you. Yes. I was worried that 75 minutes into the call that we lost you completely.

Brad Hathaway: No, understood. I’ll try to be quick.

Bryan King: No, you’re good.

Brad Hathaway: So appreciate the incremental color on kind of, I guess, some of the macro headwinds because I guess, obviously, I think people kind of look at the overall macro environment and feel more benign about it. But I guess the PMI is sub 50 and you’re seeing some things in your specific industries. What I was curious though, to ask, that’s having been covered pretty well, was with regards to Hisco. So you haven’t really started the integration yet till December, correct?

Bryan King: Yes. I’d say that we started taking some actions in November, but they really didn’t have any impact to either top line or profitability.

Brad Hathaway: Okay.

Bryan King: But yes, that’s right. So we weren’t allowed to start taking actions until November. Really in November, when we started moving things around, it was on the TestEquity side, not on the Hisco side.

Brad Hathaway: Understood. Because I think for, I guess, now we’ll call TestEquity or Industrial Technologies. You made a comment that you kind of see this midterm path to, I think, 12% margins, if that’s correct. And I guess I was wondering, is the Hisco integration the major factor in that, or are there other building blocks you can kind of point to, to get from where we are now and kind of TestEquity to that kind of more midterm goal?

Bryan King: Yes, so there are other building blocks. Brad, the way that I kind of have bridged it is that, in my mind, in any way, and that we’ve got very discreet numbers that we’re working through. But there’s about 200 basis points of cost leveraging or spend leveraging on an EBITDA basis, kind of 200 basis points of revenue that we have a line of sight that we’re working through this year, or that we should get the benefit of this year. There’s another equal amount that won’t flow through the P&L until fully flow through it until the 2025, or in some cases, 2026. So there’s kind of a total of 400 basis points that the team has identified in kind of synergistic opportunities there. And then there is in addition to that, and that’s across the total volume of that Industrial Technologies Group, there are additional elements that we are working towards to drive volume, leveraging, profitability that we see in terms of being able to bring the Hisco capabilities to all of DSG.

An example that it lifts margins quite a bit for everybody was one that we will work through in the last day, as we had everybody together, would be the printing and labeling capabilities that are owned by Hisco, taking on volume that is needed from Gexpro for instance. And so you end up with a lift because we’re getting more throughput on a facility that was a very good facility, but not one that was operating at a level of kind of capacity utilization that would pull the gross margins and EBITDA margins of that alliance printing business to where it really drops a lot more dollar. So there’s a number of those things. There’s also things like, there’s other capabilities that are specific kind of value-added capabilities that Gexpro is leaning into Hisco or leaning into TestEquity that expands the structural margins of TestEquity and Hisco in certain categories.

And those are outside of the 400 basis points that I alluded to earlier.

Brad Hathaway: Got it.

Bryan King: There’s no does need to be, there is no doubt about it. To get to the 12%, we’ve got to get back to the normalized top line. So there’s a full 200 basis points. That is leveraging the spend dollars that we expect that we’ll get just from getting through this test and measurement overhang of product and delayed purchasing and then also getting the organic revenue baseline back to where it should be.

Brad Hathaway: Okay, so just to make sure I’m clear, in Q4 2023 is roughly 6%. So to bridge that 600 bps, it’s roughly 400 bps from kind of synergies and 200 bps from volume leverage, is that kind of correct?

Bryan King: That’s about right, yes.

Brad Hathaway: Okay, great. Excellent. That’s all I have right now. Thank you.

Bryan King: Okay, thank you.

Operator: Your next question is from John Krueger with JAG Capital.

John Krueger: Hey, Bryan. Thanks for taking the question. I just want to ask you how you’re thinking about buybacks and keeping that free float available to other investors.

Bryan King: Yes. Look, I think that’s you tell me where the stock price is and I’ll tell you what we’re doing on the buyback. Not really, but I mean we’re that specific in what we’re looking at exactly what the terminal value that we’re trying to build in the business is. And we’ve got a capital allocation model that’s quite specific. It’s taken us longer to get some of our M&A done candidly, during the last half of last year. The disruption in some of these pocketed end markets that we’ve talked about this morning, like renewables or semiconductors specifically, as well as some other noisiness in the channels, have impacted some of the people that we have direct dialogues with that are not in our process, that aren’t necessarily having to sell their business, but want to be a part of DSG.

And so it’s slowed down some of our kind of getting to the goal line on M&A that are specific capabilities or expansions of our reach that we want to have in some of our kind of long-term value proposition that we want to pull together with DSG. So as those things have slowed kind of, now we have good line of sight on some of those right now, but as those have kind of not happened as quickly and we’re generating cash, we want to make sure that we’re mindful of exactly what we’re doing with our shareholders cash while we’re sitting on that additional liquidity. And so if the stock price is where it’s too significant of a discount of what we think the terminal value of the business would be, if we wanted to sell the company, then we’re going to buy back shares.

But we don’t want to buy back shares, so but it’s part of a very disciplined capital allocation. I wanted to make sure that we continued to improve the float. That’s why we did the stock split. That’s why we’re making sure that we try and get out in the marketplace and see shareholders like yourself and go on the road. But that’s to make sure that our shareholders are confident in what we’re trying to execute on and that where we can, we want to improve liquidity for everybody. But we’re not sellers and I’m a net buyer, so and the business itself is doing what we want it to do. At its core, the team is performing really well against a lot of very discrete objectives to drive value longer term for all of us. And so if we think that the right thing to do for all the shareholders is to use liquidity to buy shares, then we’ll do it.

John Krueger: I appreciate it. Thanks.

Bryan King: Sure. Thank you for your support.

Operator: We have reached the end of the question-and-answer session and I will now turn the call over to Bryan for closing remarks.

Bryan King: Thank you. Well, we look forward to speaking with you everyone, again when we report our first quarter results in early May. Additionally, just I alluded to it just a minute ago, we are planning a multi city, non-deal roadshow starting on the east coast and covering parts of the Midwest during the last week of March. We also have an several investor conferences scheduled for this spring. We appreciate everybody’s time today and we absolutely thank the 3700 DSG associates for a great 2023. They put a lot into it and thank you. Have a great day.

Operator: Thank you. This concludes today’s conference and you may disconnect your lines at this time. Thank you for your participation.