Greetings, and welcome to the Distribution Solutions Group's First Quarter 2023 Earnings C onference Call. At this time, all participants are in a listen-only mode. A question- and- answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Steven Hooser, Investor Relations. You may begin.
Good morning. Welcome to the Distribution Solutions Group First Quarter 2023 Earnings Call. In conjunction with today's call, we have provided a Q1 earnings presentation that has been posted on the company's IR website at investor.distributionsolutionsgroup.com. Please note that statements made on the call and in the 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 the current report on Form 8-K filed with the SEC. This call is being audio webcast on the Internet via the Distribution Solutions Group Investor Relations page. A replay of the teleconference will be available through May 18th, 2023. I will now turn the call over to Bryan King, DSG's Chairman and Executive Officer. Bryan?
Thanks, Steven, and thank you all for joining to review our first quarter results. Joining me for today's call is Ron Knutson, DSG's Executive Vice President and Chief Financial Officer. Distribution Solutions Group delivered another record quarter of outstanding financial performance with expansion in both revenue and profitability. Steven mentioned the slide deck that we are using in conjunction with our prepared remarks. Starting on slide four, we delivered strong sales of 28% on a comparable basis, which included almost 14% of organic growth. We generated first quarter Adjusted EBITDA of $39 million, representing our fourth consecutive quarter of expanded EBITDA margins into the double digits. We believe that our scale and breadth of products and services continue to provide competitive advantages in the specialty industrial distribution industry.
Our DSG operational teams are working well together. We are seeing good evidence of wallet share growth, volume increases, and encouraging and validating cross-selling wins, as well as continued identification of initiatives to capture cost synergies across each of our verticals. The first quarter's results further confirm the financial and commercial logic of the combination that took place only a year ago and the improved business model we now enjoy. The strength, depth, and strong collegiality across the combined expertise of our leadership team is enhancing our performance and accelerating building a best-in-class specialty distribution company with strong market leadership across several distinct but increasingly coordinated value-added verticals. As shareholders, together, we will continue to benefit as our team identifies and executes on myriad value creation opportunities. As we highlighted during our fourth quarter call, we continued strong sales momentum in the first quarter.
Our businesses successfully captured market share, delivered incremental margin expansion, and generated additional cash flow in our first fiscal period of this new year and culminated a strong first full year, four seasons, so to speak, working increasingly well together. We are actively engaging customers with the goal of providing a simple and efficient and even more value-added and customized customer experience as we remain hyper-attentive to reinforcing our value proposition to our existing end markets. We continue to monitor the overall demand environment for our products and solutions. We believe that further leveraging our strong historic customer relationships adds to organic growth increasingly through cross-selling our expanding value-added customer-centric capabilities in each of our channels. Moving to slide five, I'm pleased to comment on the previously announced plan to acquire Hisco, expected to close during the second quarter of this year.
Hisco is a leading distributor of specialty products, serving high growth industrial technology applications with 38 locations across North America and over $400 million in annual sales. This business most closely aligns with TestEquity. Although anecdotally and curiously to me, each of several distribution investment banking friends that called to enthusiastically congratulate on the surprise announcement that we were able to get Hisco to join our vision of building out a scaled-up, best-in-class specialty distribution platform. Each thought Hisco's capabilities fit more closely with different of our verticals, understanding how well it fits overall and how it more tightly binds TestEquity's capabilities to the Gexpro Services and Lawson verticals. We are excited that they so strongly saw how it strengthens our DSGValue proposition through four table stakes.
First, similar to our existing verticals opportunities to expand engagement with historic customers and the inaugural successes we've enjoyed in this area, we see Hisco and its expansion of TestEquity's OEM and MRO efforts around electronic production supplies, and expansion and extension of cross-selling and wallet share opportunities to further expand how customers are more broadly engaging in and deeply embracing our breadth of value-added and leadership around solutions. Second, Hisco brings new distinct value-added capabilities across the platform. For example, the business adds specialty materials and products that are not currently included in our DSG offerings. In addition, Hisco offers vendor-managed inventory and RFID programs with specialized warehousing for chemical management, logistics services, and cold storage.
Next, we're projecting, with the addition of Hisco's leadership, mark-market knowledge, footprint, and close collaborative customer relationships, a meaningful geographic pull-through that spans deeper into Mexico and South America, that we believe will create further operating leverage for their resource investment and our platform's distinctive capabilities, leading to the sustained revenue and profitability growth and accelerated returns. Finally, we expect Hisco to accelerate our timeline to a higher structural margin profile at the TestEquity Hisco vertical. Not to mention the incremental returns generated from associated cross-selling revenue growth accruing to our other verticals, which collectively has a meaningful effect on the future state of overall DSG profitability, return on investment on working capital, and critically, DSG's accelerating ability to generate and grow free cash flow.
Hisco is an exciting addition, bringing DSG closer to the total scale and connectivity we identified two years ago that we desired, where the flywheel should accelerate value creation and durability of this leading specialty distribution platform we created. Remixing TestEquity's total revenue to be tilted more significantly towards electronic production supplies, focused on OEM and MRO solutions, provides a stronger, more consistent ballast for that vertical, while offering us more embedded value-added engagements to daily reinforce our total value to the customer, including more opportunities to collaborate with them on their test and measurement needs. While we are enthusiastic about what the future will look like, the closing is still subject to certain regulatory approvals, although we are progressing as planned toward a closing in the second half of this quarter.
Before Ron covers the consolidated and operating company financial results, I would like to talk about operational progress and value drivers for each of our business units. First, Lawson Products is a leader in the MRO distribution of C-parts, offering vendor-managed inventory services. During the first quarter of 2023, Lawson exceeded our initial 2023 plans, realizing significant margin expansion that many of us who have been investors in Lawson for the last decade have been expectantly waiting. I was pleased with how well the team managed pricing, expense control, and growth within its customer base. Ron will dig in a bit deeper, but a large portion of Lawson's growth is coming from long, well-established relationships within their larger or strategic accounts and Kent Automotive lines, along with attracting new customers, some which are coordinated introductions from the other verticals.
For example, within both the Lawson and Kent strategic businesses, unique ship-to locations this quarter grew approximately 9% over a year ago quarter. While experiencing good expansion in the quarter, as a leadership team and sales force, we see many more opportunities with the network effect and current internal initiatives expanding and accelerating the vertical. We are focused on a balanced but more aggressive approach to driving growth and engagement with customers. We're making strategic investments in additional sales channels to support our customers, including inside sales, strategic account managers, web enhancements, as well as better positioning our field sales team to drive higher conversion with our high-touch customers that create greater long-term value.
Lawson is also investing in lead generation capabilities and CRM tools, all of which will be rolled out in the second half of the year, with the goal of helping our sales representatives across all sales channels become more productive, better equipped for cross-sale opportunities, and to better serve our customers, and to help make them more money. Gexpro Services is a leader in the supply chain solutions of largely C-parts, specializing in VMI programs for high-spec OEM customers. We delivered strong first quarter operating results driven by growth in many of our diversified end markets, such as industrial power, aerospace and defense, Europe, and in our recent acquisitions. We're starting to see strong year-over-year improvements for renewables in both the U.S. and Europe.
Customers are interested in our renewables value proposition to combine expanded electrical, mechanical, and hardware product offerings with kitting supply chain services and domestic manufacturing capabilities. We have won some recent mandates that should accelerate our leadership as a value-added channel partner for the leading OEMs in that marketplace, helping them with solutions not only on the OEM side, but across accelerating demand around the retrofit and upgrade cycle for the installed base. Specifically, regarding what we are currently seeing in our end markets, aerospace and defense has sustained double-digit growth, and we expect this to continue. In industrial power, demand remains strong, primarily due to changing dynamics in oil and gas. Gexpro Services value creation initiatives this year are leveraging the synergies of our acquisitions, securing cross-sell wins with both Lawson and TestEquity, expanding kitting and project services, as well as launching the e-commerce platform.
Additionally, the five acquisitions we closed over the last two years have cross-selling opportunities within the Gexpro Services vertical, like the increased capabilities I alluded to that secure the expansive retrofit opportunity in the renewable space. We are also working through an expanded pipeline of opportunities where our customers are engaging us as partners to offer solutions around additional product and service capabilities in a thoughtful and customer-centric way. Winning initial OEM programs where you're embedded with a customer can be a tediously long lead time affair. With our expanded and expanding number of customers we now work with, we have found a surprising number of them have celebrated embracing our collaborative approach and the benefits gained through the last year's verticals, combinations, and strategic tuck-in acquisitions that have increased our set of resources, geographies, and collective expertise.
Third, moving to TestEquity, January started strong with pent-up demand that landed in early 2023. We also saw growth in the VMI sector, somewhat offset by meaningful declines in tech sector capital spend. First quarter chamber production hit new record highs and continues to grow as supply chains begin to stabilize. We expect profitability to significantly improve after a period of working off backlog priced in a different market. Overall, digital sales were up 10% in the first quarter, with growth primarily from the new TestEquity and TEquipment e-commerce sites. We continue to capture cost synergies and production efficiencies by moving our products into distribution centers that are closer to our customers, resulting in what will be improved delivery times and lower shipping costs.
Higher costs of capital are impacting some of our customers' behavior, as we have seen a delay or reduction in their 2023 capital spend on new test and measurement equipment, not helped by some of the lead time and supply chain challenges with continued overhang in some of our key channel partners. We are seeing this influence more of our customers in the current cloudy economic environment, and with some lead time challenges around new product, renewing their focus on refurbished and rental equipment, which we expect to be a growth area for us and where it offers us the opportunity for higher margins.
Finally, as we discussed earlier in the Hisco transaction, we expect to accelerate our timeline to a higher structural margin profile at TestEquity and expanded engagement around cross-selling initiatives with the other verticals, which will have a meaningful effect on overall profitability and cash flow generation for DSG. As you can likely tell, our team is very encouraged by our prospects and internal initiatives to improve and expand all three operating verticals for 2023 and beyond. Now I'd like to turn the call over to Ron to walk through the financials. Ron?
Thank you, Bryan, and good morning, everyone. Turning to slide seven, we're excited this morning to share with you the first quarter results of Distribution Solutions Group. Let me remind you that given the reverse merger accounting treatment, Lawson Products was not in the prior year first quarter results in 2022. All three of the businesses are included for the first quarter of the 2023 GAAP results. For ease of comparing the results, the slides that we're utilizing this morning adjust and include first quarter Lawson's financial results for 2022. Let me summarize the first quarter results. On a combined basis, we reported strong top line and bottom line results. As Bryan mentioned, we reported total sales growth of 28%, with organic sales growing 13.7% through both price and volume expansion.
The first quarter results reflect four quarters of sequential margin improvement, with Q1 finishing above 11% of revenue. I'll now walk through some of the specific numbers on a combined basis. Most of this is on page seven of our presentation. First, consolidated revenue for Q1 was $348.3 million. With the inclusion of Lawson on a comparative basis, revenue increased 28% or $76.3 million over the first quarter of 2022, driven by organic growth plus approximately $39 million coming from acquisitions. Second, reported GAAP operating income was $16.7 million, compared to $3 million a year ago quarter. On an adjusted basis, excluding merger-related costs, acquisition costs, stock-based compensation, severance, and other non-recurring items, Adjusted EBITDA improved by $16.7 million- $39.4 million or 11.3% of revenue.
Third, we reported GAAP diluted earnings per share of $0.28 for the first quarter, compared to a loss of $0.25 a year-ago quarter. On an adjusted basis, diluted EPS was $0.52 for the quarter versus $0.00 a year-ago quarter. Moving on to slide eight. Slide eight includes the full run rate of all closed acquisitions as of March 31st, 2023, as if they were owned for each quarter presented. For clarity, since we have not yet closed on Hisco, it is not reflected on this page. As you can see from these charts, our full run rate, inclusive of acquisitions, has seen nice sequential margin expansion from quarter- to- quarter, reflecting strong performance of each of the three operating companies. You'll notice Q4 is historically our slowest quarter, given fewer selling days than the other quarters.
Turning to slide nine, let me now comment briefly on each of the businesses. Starting with Lawson. Recall that since Lawson is the accounting acquiree, it is not in the GAAP reported numbers for Q1 2022. However, for purposes of these slides, we've included the pre-merger results. Sales were $125.3 million for the quarter. Please note that this does not include Bolt Supply as they are now included in the all other reporting segment. The Lawson segment average daily sales, or ADS, grew 19.4% organically over the first quarter of 2022 on an adjusted basis, and ADS grew 8.7% sequentially over the fourth quarter of 2022.
The increase over a year ago was driven by strong performance within the strategic business, up nearly 25%, Kent Automotive up 28%, the core business up nearly 14%, and government up 40%. During the quarter, unit volume was essentially flat versus a year ago, however, increased approximately 3% sequentially over Q4 2022. Lawson's growth during the quarter was achieved through an increased share of wallet with existing customers and new customer relationships, in particular within strategic or large accounts in our Kent Automotive businesses. In both of those pieces of our business, we shipped to approximately 9% more unique locations this quarter than a year ago. Lawson continues to realize steady improvement in its gross margin percentage.
While growth within our larger strategic customers is putting pressure on the overall gross margin percentage, we continue to see margin expansion given price realization, lower net freight costs, and leveraging our costs over a higher sales base. Lawson Products' Adjusted EBITDA improved to $18.5 million compared to Adjusted EBITDA of $8 million a year ago quarter, primarily driven by the sales and gross margin improvements, partially offset by increased compensation on higher sales. Lawson Products' Adjusted EBITDA as a % of sales was 14.7% in the quarter versus 7.7% a year ago quarter. Turning to Gexpro Services on slide 10.
Total sales for Gexpro Services were $101 million for the first quarter of 2023, an increase of $19.3 million over Q1 2022, of which $4 million was driven by acquisitions and $15.3 million from organic growth. In 2022, Gexpro Services acquired Resolux early in the year and Frontier at the end of Q1 2022. Excluding the impact of these acquisitions on the first quarter, organic sales grew by 18.7%, of which approximately 4% came from price. The increase in aggregate sales was primarily driven by new customers and the expansion of existing customer relationships. Gexpro Services Adjusted EBITDA expanded to $11.7 million or 11.6% of sales as compared to $8 million or 9.8% for the year-ago quarter.
Lastly, I'll turn to TestEquity on slide 11. Sales for the quarter grew $35 million or over 48% to $107.4 million, primarily driven by recent acquisitions. During 2022, TestEquity closed on three acquisitions, TEquipment and National Test Equipment in Q2 and Instrumex in Q4. Of the $35 million sales increase for the quarter, approximately $34.9 million was generated from the 2022 acquisitions. Organic sales were essentially flat versus a year ago with a decrease in test and measurement sales offset by an increase in the electronic production supply sales. As previously communicated, sales in the test and measurement business were lumpy throughout 2022 and as expected slowed in the first quarter of 2023 as customers have delayed expansion projects and we continue to face supply chain challenges.
On an Adjusted EBITDA basis, the first quarter ended at 7.1% of sales or $7.7 million, representing an increase of $2.2 million over a year-ago quarter, of which approximately $2.4 million came from the 2022 acquisitions previously mentioned. Moving on to slide 12. From an access to capital, we have approximately $31.1 million of available cash and $70 million available under our existing credit facility. As part of our credit facility, we have also an additional $200 million accordion feature. We ended the quarter at a net debt leverage ratio of 2.7x, primarily on increased earnings. Our deleveraging that started in 2022 continued into the first quarter of 2023.
For reference, at the time of the April 1st, 2022 merger of the three businesses, our net debt leverage was 3.6 x. This progress is consistent with our intention to prudently manage our debt levels and our leverage in the 3x-4 x range. Net capital expenditures, inclusive of rental equipment, was $5.1 million for the quarter. Before I turn the call back to Bryan for some closing remarks, I wanted to reiterate how pleased we are with the company's financial performance. We said that we are going to exit 2022 with margins exceeding 10%, which we did. We have maintained double-digit Adjusted EBITDA margins into 2023. We have substantially delevered the company within the first 12 months. As Bryan mentioned, we continue to be pleased with our long-term outlook.
We are up against tougher sales comps going into the second half of 2023. All of the businesses continue to execute on their planned initiatives for 2023, which will make us a stronger company going forward. We will continue to prudently manage our balance sheet and financial position. Thank you to the operating teams at Lawson Products, Gexpro Services and TestEquity for their commitment and drive to deliver these great results in the first quarter. I'll now turn the call back over to Bryan.
Thank you, Ron. Let's turn to slide 13 for a few additional comments before we get into the Q&A. Our approach to capital deployment and working capital investments are not unique. Our underlying philosophy is anchored in a discipline to allocate capital to the highest return projects while building the best positioned long-term specialty distributor with the deepest and widest moat possible around our value-added focus areas of leadership for our customers. Since we are an asset-light business, our organic growth primarily comes in the form of investment in trade working capital and great people, as well as inorganic investments through M&A. We've invested significantly in all three over the last year. The returns on our incremental investments in working capital made to support organic growth are, without a doubt, the highest returns on a pre-tax basis.
They often approximate 80% -1 00% or significantly higher, consistent with what we have observed over a long cycle have been and continue to be the returns of our peers of best-in-class specialty distributors. Our second-best return on investment at this point is identifying and buying the most strategically enhancing but accretive acquisitions that make our specialty verticals, both individually and holistically, more competitive. These acquisitions should enhance our ability to organically grow at a faster, more profitable rate, in turn sustaining and driving higher returns on working capital, all of which will significantly cheapen back the purchase price. We certainly believe that Hisco, like others we have done over the last years and others we are currently dialoguing with, will do that. While we are committed to this approach, we are not in any hurry to buy something that is only accretive.
Along those lines, our debt leverage is an important focus, especially given the rising rate environment. Currently, our leverage remains below 3x ahead of the closing of the Hisco acquisition, which we expect to take us to somewhere between 3x and 3.5 x. After the close, we will have approximately $450 million of net working capital pro forma alongside our accelerating cash flow to comfortably support and pay down that debt. We also have a board-approved share repurchase program to take advantage of opportunistic buybacks should our stock weaken unexpectedly, inconsistent with our current trajectory to unlock earnings and accelerate shareholder value creation.
We are constantly informed about the private value of our business and that a scarcity exists for exceptional specialty distributors with our size and line of sight around growth of revenue and earnings by strategic suitors as well as large private equity firms. It is not surprising the interest in DSG by those with the benefit of time, as leading specialty distributors continue to be tremendous long-term compounding engines, which is why I have loved the space as much as I have for the last 30 years. So much so that I don't wanna sell this business prematurely, that we have such tremendous line of sight on how to compound.
If the marketplace offers an unnatural price with us generating strong cash earnings, the board and I believe we should have the flexibility to buy back stock and think about ways to improve the value for the shareholders that want to continue to be partners with us on this journey. As I just alluded to, at the end of the first quarter, we had $352 million invested in our working capital, with another $100 million or so coming with Hisco. Our investment in working capital over the last year reflected our expectation around many ways to continue to drive organic growth and how that drives accelerating profitability for our shareholders. We invested more aggressively last year, especially with the business combination and with the opportunities to add working capital that some of the follow-on acquisitions provided. With supply chain and inflationary pressures, it made sense.
This year, we indicated that we expect to optimize our investment more dramatically, more than dramatically increase it. Our operating team understands my intense belief that prudently managing working capital is one of the best ways to drive meaningful return on invested capital, and should the economic headwinds get testy, it is also the best way to free up the most liquidity, along with timely but prudent cost leveraging opportunities to protect flexibility for growth in calmer environments. As I mentioned last quarter, our operating teams have a heavy focus on managing our working capital intensity for 2023. I wanna continue to maintain a strong balance sheet and prudent financial position by providing ample liquidity to execute on our long-term growth strategies that maximize value for all shareholders.
Our principal goal at DSG is to improve our overall return profile and continue to build profitable scale as a specialty distribution business with significant free cash generation. We have now cycled our merger transaction completed in April 2022 and are seeing the benefit of our working capital investments, our acquisitions, and our collaboration across the three business units. We are finding more ways to leverage spend and to drive cross-selling through our embedded alignment with many of our closest customers. Hisco will significantly enhance both primary objectives. Aside from our work on Hisco, we continue to evaluate an active acquisition pipeline, analyzing opportunities that fit our strategic lens, acquisition criteria, and hurdle rates. In summary, we are pleased with our first quarter results and appreciate the collaborative efforts across our leadership teams to deliver four sequential quarters of sales growth and margin improvements.
Although we are excited to report Adjusted EBITDA margins of 11.3% and commit to our partners that we have action plans over the coming years to take each of our verticals' profitability and internal return metrics significantly higher from current levels, we also wanna manage expectations that while the very discreet operating initiatives we are working on will yield meaningful financial improvements to performance metrics that we are all focused on, the results will not be linear, and we absolutely are not planning for the slope to track the last four quarters. We all can appreciate what some of the leadership teams are now facing with having delivered exceptionally the last few quarters and me trying to move the goalposts forward on them at a faster clip.
I want to temper all our expectations, mine included, that it will likely not be as linear or as steep as we just enjoyed. We will be comping tougher quarters later this year. DSG is a specialty distribution solutions company supporting a leadership position in several key vertical channels, where customers rely on us to provide high touch, value-added distribution solutions for their MRO, OEM, and industrial technology needs with a combined addressable market of $57 billion. Our vertical channels to the marketplace offer customers replenishable industrial parts and products, as well as specialized products. In addition, we offer managed solutions for companies that rely on outsourced expertise, labor, specialty capabilities, and supplies with secure supply chain management.
It is daily reaffirmed that our unique competitive advantages are compelling to customers and are important to manufacturers, OEMs, and businesses that use specialized products in their industrial and commercial industries. Expanding our distinct products and solutions makes this Hisco acquisition a compelling investment for us. Thank you for your time today. Now we would like to open up the line for investor questions. Operator?
Thank you. At this time, we will be conducting a question- and- answer session. If you would like to ask a question, please press star one on your telephone keypads. The confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one on your phone if you wish to ask a question. One moment while we pull for questions. First question today is coming from Kevin Steinke from Barrington Research. Kevin, your line is live.
Morning, Kevin.
Thanks, and yeah, thanks, and good morning to you as well.
Morning, Kevin.
Morning, Ron. I appreciate your comments there about, you know, the fact that maybe the margin improvement won't be as linear going forward as it has been. You know, obviously you've hit that and now exceeded that, you know, near term 10% goal that you had discussed. When you get Hisco layered in, you expect that to accelerate, you know, improvement in your structural margin profile. Have you given any thought about what kind of the next target could be that we should think about in terms of Adjusted EBITDA margin, or is it, you know, kinda too early to commit to a particular number?
Yeah. Kevin, this is Ron. I'll take that and then maybe Bryan will make a couple of comments as well. We've not publicly put out any specific percentages. But as we indicated in both Bryan's prepared remarks as well as mine, we did exceed our plan that we had initially set up for the first quarter. You know, seeing a nice improvement, you know, 300 basis points over Q1 a year ago and also 100 basis points over Q4. We ended Q4 at 10.3%, and we got to the 11.3%.
What I would say is that, I mean, there were really no, I would say, you know, kind of one-time items that gave us a big benefit in the first quarter. To Bryan's point, you know, structurally, you know, I think all three of the businesses are getting the benefit of a lot of the actions that we took in 2022. Again, probably premature to commit to a percentage. You know, we're seeing that spillover effect of those actions that we made in 2022 into 2023. You know, I did in my prepared remarks, I did indicate that we're up against, you know, some tougher comps as we enter into the latter half of the year.
I think, you know, to Bryan's point, you know, certainly, you know, won't be as linear. We're making investments within all three of the companies as well. We feel really, really good about the first quarter and not only the net margin expansion, but also the gross margin expansion as well. I'll pause there and maybe if Bryan wants to add some comments as well.
I think you said it well, Ron. What I would add to it is just to what Kevin's question about or alluding the structural margin. You know, we demonstrated to ourselves, and I think the marketplace, hopefully that the business is able to generate now over 11% structural margins, and it's on a continuum that we see continuing to go up over time. There's gonna be elements of, you know, when we pull TestEquity and Hisco together, you know, we've said in our comments that, you know, together it accelerates getting both of them up to, you know, similar margins to what the total company did this year. Coming from a much, you know, from a lower level.
Lawson, you know, has, we've been talking for years about the contribution margin that Lawson enjoys when revenue is growing. Pulling the businesses together is unlocking an opportunity for Lawson to access, you know, some new customers and to enjoy some growth that we had struggled with. There's some really exciting initiatives that Cesar and his team have been working on to continue that growth and to really free up more opportunities for our salespeople to go hunt new customers or to super serve the customers that they've got where they're continuing to grow wallet share.
That, we would expect that as that, those efforts that, you know, we're rolling out more this year and, we've been working on at the first part of this year are getting traction, that Lawson's structural margin, which was 14.7% this quarter and, you know, significantly higher than what we had been seeing the last few years. Part of the real strategy here that we had pulling DSG together are gonna continue to march forward. We think the whole is gonna get pulled up. I don't think it's gonna be linear. The slope was dramatic, obviously, between last quarter and this, over 100 basis points in a quarter. That's what I was trying to make sure that we have a more measured perspective.
Specialty distributors that are out there that are public, we've gone back and studied, you know, them through their continuums over the last 30 years. you know, to line up where we would like to and where we wanna be, you know, several hundred more basis points is our objective, but it's gonna take us, you know, three, five, seven years to get to where we think that we can get this business. hopefully that's helpful.
Yes, absolutely. Yeah, very helpful commentary. Where are we, in terms of the, you know, the journey with pricing? I don't know, Ron, did you mention the, overall contribution, to your 13.7% organic growth from price? If not, what was that? I guess that would kind of play into the tougher comps perhaps as you move forward this year in terms of, you know, starting to lap some of those price increases.
Yeah. Yeah. Kevin, yeah, I did, I did not indicate the consolidated number, but out of the 13.7, about 10 points of that was price related and the other, call it 4, 3.5 to 4, was volume on a consolidated basis. All three of the businesses, you know, were, you know, taking, continuing to take, you know, pricing actions and again, kind of the spillover effect from the actions taken in Q2. I'm sorry, in 2022 into 2023. Yeah, you're right. It does play a bit into the tougher comps later in the year. You know, I would say that
You know, we're still continuing to see some vendor cost increases come through, although they've moderated a bit from, you know, where we were in 2022. All three of the businesses are keenly, you know, managing and expanding their gross margin %, not only from, you know, from necessary pricing actions, but other initiatives around freight, rebates. You know, we put a portion of our costs up into gross profit as well. We're getting some basis points lift on just the increase in sales there on a higher sales base. You know, I think, you know, good progress on all fronts and certainly driving, you know, to expand that gross margin % over time as well. About 10.
You know, short answer is about 10 of the 13. 7% was price related for the quarter.
Got it. No, that's great. That's helpful. Just wanted to touch too on Lawson, and it seems like some really strong momentum there. And you mentioned the 9% growth and ship-to locations. Any more just commentary on what's contributing to that? You've discussed your expansion into new sales channels and what have you. Just trying to get a sense of the momentum that's building there and perhaps could continue to build as you start to roll out some of the CRM tools and build out those sales channels.
Sure. I can start and then maybe have Bryan jump in as well. You know, yes, you know, very, very pleased on the Lawson results for the quarter, the 14.7% that Bryan, you know, quoted. Really nice improvement. I would say that, you know, is primarily coming from sales growth as well as gross margin expansion and really leveraging our cost structure that we knew we could get. You know, we've talked, you know, publicly about getting 30%-40% flow through on the Lawson business, and I think you saw the power of three here in the first quarter of 2023.
You know, relative to the 9% increase in unique ship-to locations, that's a metric that we're measuring, you know, across the entire business on all the segments. You know, as I think about this for the investments that we've made in 2022, and not really just 2022, but even going back previous to that, you know, Lawson has made some pretty significant investments in the strategic account area where we develop, you know, long-term relationships with large customers servicing many of their locations, you know, with a pricing strategy and a rebate strategy. We have specifically invested in strategic account managers and customer support individuals to support that piece of the business, as well as the Kent Automotive business.
As we look at the trajectory of those two pieces of our business over the last five years, you know, they've really been the strongest. I think it's been not only developing, you know, those core relationships with the larger customers that are very sticky, you know, slightly less, you know, gross margins. We're up against that from a headwind perspective, but we're still seeing gross margin expansion on a consolidated basis. Yeah, it, you know, we're driving our business really, you know, from both existing customers as well as new customers, and certainly those unique ship-to locations is a big piece of the overall growth for us.
Okay, great. I just wanted to ask lastly here about what you've seen in April, in terms of a sales growth trend. You mentioned some moderation in a few markets, perhaps related to the economy. You know, it doesn't sound like that's a meaningful headwind at this point, I guess. Just, you know, any thoughts on April and the trend and, you know, the economy?
Ron, either one of us. Why don't you go, Ron, and I'll follow with you.
Sure. Okay, great. Yeah. Kevin, yeah, I would say, you know, for April, you know, we've continued to see, you know, pretty, you know, positive results. You know, I would say, you know, we've seen a little bit of moderation in some of the end markets. You know, we both Bryan and I commented on the, on the test and measurement side within the TestEquity business. You know, kind of putting that aside, you know, for the most part, we you know, our...
I would say our April sales are kind of running in line with where we exited the first quarter on a consolidated basis, you know, with, you know, a couple markets being up, and a couple of our verticals being up, you know, Lawson being up, you know, versus where we, where we exited the first quarter. You know, T&M being down a little bit. You know, I would say within Gexpro Services, you know, a little bit of a mix there, but we are seeing some growth now on the renewables side, which, you know, we were up against, you know, some weaker numbers a year ago. You know, overall, we feel pretty good about where April is finished from a sales perspective.
You know, don't see any, you know, major red flags that sit out there, here for the month.
Yeah. Kevin, I just would add that, you know, we spend a lot of time looking at all of our collective end markets that we're serving and trying to understand how to continue to add balance to them so that we, you know, between MRO and OEM, which Hisco does, some very deliberate things for us. You know, so we are encouraged, as we kinda look at what we're trying to build longer term in terms of kind of, some of the, you know, the, I'm about to fall into my CFA talk, but correlation coefficients of the different industries, and different economic, you know, backdrops.
Right now, we're seeing things like renewables, where a year ago, you know, the one acquisition that we had made at Gexpro Services that was actually when we reported last quarter, how exceptionally well we'd brought down EBITDA multiples on acquisitions that we've made over the course of 12 months. The one that was the outlier to the negative, even though our average was very good, was the fact that renewables had given us some challenges. We knew that we had a tough backdrop there, and that backdrop is starting to really open up.
The strategy that Bob and his team put in place by pulling some renewable pieces together in order to have a much more robust offering for that market to firm up our leadership in that market is taking hold. While we aren't yet getting the benefit of that market being back at peak levels, the acceleration there is comping against much easier comps a year ago. We're enjoying, you know, aerospace and defense is a strong space for Gexpro Services right now. They have some verticals that are stronger. We went into the year anxious about their semiconductor end market, and it's softer than it was a year ago.
That impacted, you know, their first quarter, even though their first quarter's great, but it weighed on it a little bit. Yet it's firmed up a little bit from where we started the year and where we ended last year. There's, even as we look at kind of the cloudiness that's out there, our end markets seem to be performing well. The one area that we've tried to really emphasize on this call is that, you know, capital spending is where we're, you know, all of us across all of our portfolio companies, not just DSG and all of our investments in public companies. You know, capital spending is, people are cautious about it.
Test and measurement equipment, to the extent that somebody can delay making a capital decision, you know, that we're seeing and have felt some sluggishness in the first quarter there. We saw a little bit of it at the end of the year. We went into this year expecting that that could be the most sluggish part of our, or challenging part of our business. It has been so far this year. Some of that is with lead times and challenges with getting product to, from our vendors to our customers.
What I did emphasize in the call is that we are seeing at some level, those customers who are well capitalized, large customers are, you know, asking more about rental and used, which we have higher margins on, but it does impact top line. That's the one place. Hisco doesn't have that. You know, as we think about Hisco and how it lines up with what we're doing here, it doesn't have that test and measurement equipment exposure in their revenue. They do have some programs that we had identified that were rolling off.
When we get to talking about it next quarter, you know, they've picked up some new mandates and we're not seeing real weaknesses in their end markets. Just like with any other OEM relationships like we would have at Gexpro Services, you can have end of life programs like a COVID, you know, testing kit for instance. You're picking up new programs along the way as well that more than backfill that revenue.
All right. Great. Well, thanks for all the insight and commentary. I'll turn it over.
Thank you, Kevin. We appreciate your interest.
Thank you. Once again, ladies and gentlemen, please press star one if you have any questions. The next question is coming from Brad Hathaway from Far View. Brad, your line is live.
Morning, Brad.
Morning. Thank everyone.
Hey, Brad.
Thanks for incredible job in the quarter and really impressed with both the organic growth and the incremental margins. Obviously, I didn't think we'd see 11% this quickly, so well done on that. Wanted to ask you quickly, though, to double-click on the cross-selling, both between verticals, which I think you've talked about a bit before, and also I think you mentioned a little bit within verticals, like I know you mentioned in the Gexpro section something about with it. I'd just love to understand kind of, you know, maybe a little more detail on some of the opportunities you see there, both, you know, from, you know, between Gexpro and Lawson, but also within Gexpro and within TestEquity themselves.
Yeah. I'm gonna, Ron, I'll lead on this, and then I want you to help me get some tightness on what I'm saying. Brad, the example I used on renewables is probably one of the best examples that we've got to show how.
Sure
...how pulling some of these acquisitions together inside of a vertical has accelerated opportunity. In addition to that, it's pulling the what, you know, Bob coined early on, the power of three, which is the way that he's been really firing his sales force up at Gexpro Services to go out and engage with their embedded relationships. Sorry. The... There's the renewables piece, we needed to land the some of the... I'm hearing a little bit of feedback. We needed to land some of those major OEMs in the renewable space. We had some of them, we didn't have all of them.
The acquisitions themselves are bringing deep engagements with certain customers that we knew that we had a broader product offering that we could, and a set of solutions that if we could get tightly coupled with them, that we could broaden out our engagement with. On the renewable side, there was one of the major OEMs in the wind space that we did not have as much of an engagement with or relationship with. One of the acquisitions brought that relationship, but then several of our acquisitions that we made on Gexpro's solutions were deliberately mapped out to significantly expand our ability to provide solutions for not only the OEMs that we were working with, but the OEM that we landed through an acquisition.
That has given Bob and his team an ability to take a much more robust set of offerings to them. We've led with being able to help solve for all of the guts inside of the towers, connecting the base to the turbine and on their retrofits and their overhauls. That, you know, we would not have had all those elements, you know, brought together had we not pulled those acquisitions together. That's one way to think about it. What that also does is we're putting MRO elements or we're putting pieces of what Lawson does into that dialogue.
There's an engagement there that is pulling some of the products of TestEquity on the Electronic Production Supplies side and the MRO SKUs that Lawson had. Then to the extent that we are working inside of a facility, we're trying to pull some of that Lawson capability, and we're getting good traction with some really key OEMs to where we had, you know, Gexpro Services specifically had very deep relationships and were basically able to pull in and unseat on those MRO and VMI pieces folks that were there before. I think it's really how collaborative and, you know, the relationships already were, and then being able to, you know, take that collaboration lens.
You know, I think about it on a micro level, you know, we're trying to work with the customers very, in a very engaged way on a micro level on what their needs are. It's not as, you know, while we're working in our back office in our warehouse to try and improve automation, we're not taking a lot of that, you know, automation lens to the experience of some of these customers. That's been successful. We think it will continue to be successful. We're just scratching the surface on some of the cross-selling, candidly. The dialogues are expansive, the wins are more narrow, but the wins are still material to the you know, to the financial performance. It's just the funnel is a lot larger.
Yeah.
40,000 more customers that we're picking up with this scale.
Yeah.
Sorry, Brian. Yeah. I would add, Brad, just, you know, there's an excess of 300 active leads. I think we talked about this on the Q4 call, where we are incentivizing our sales teams across all of the companies to bring these leads that Brian referenced, into, you know, into the other organizations. We are, you know, we're actively working, you know, in excess of 300 leads and, you know, have seen realized sales, you know, multi-million already coming through. Now some of that, you know, happened in 2022, but, you know, I would say it's on a steeper scale as we enter into 2023.
I mean, it's not an eight-figure number yet from a sales perspective, but it's a few million dollars that we've been able to realize on top line growth.
Awesome. Thank you guys so much for the color, thank you for the incredible performance. Look forward to seeing how this continues to develop. Thanks a lot.
Thank you, Brad.
Thanks, Brad.
Thank you. The next question is coming from Katie Fleischer from KeyBanc Capital Markets. Katie, your line is live.
Hi, good morning.
Good morning, Katie.
I'm on for Ken today.
Yeah.
Morning.
I wanted to follow up on your pricing or on the pricing question from earlier. Can you clarify if price cost was positive to margin, and what's the expectation for the rest of the year?
Yeah. Katie, yeah, so the, you're referencing back to the 10% pricing that I commented on?
Yep.
Yeah. you know, we've seen more of that, I would say, here in the first quarter, given that we are lapping some of the price increases we put through during 2022. We wouldn't expect as we enter into the latter half of the year for that pricing to stay at, you know, 10% of our combined increase on a, you know, on a quarterly basis for every quarter, you know, on a go-forward basis. I'd say, you know, as we think about timing in terms of some of those actions we did in 2022, they were probably later in the year versus even in Q2.
I think, you know, we're probably up against less headwinds from a pricing standpoint here in the second quarter, but probably more so in the latter half of the year. I don't know if that answered your question or not. I mean, we've not come out with any kind of formal guidance relative to what we think pricing will be from an overall perspective. What I will say is, you know, we're still taking pricing actions in 2023 across the businesses, as we're, you know, we're still, as I mentioned earlier, seeing, you know, some vendor increase, cost increases coming through, and so we're certainly not sitting on those and absorbing those internally. We are passing, continue to pass those, that effect along.
Generally speaking, you know, the customers have been understanding and willing to take those increases, certainly in 2022, and so far here in 2023. Certainly, you know, some conversations with some customers about tightening up a bit on that. Generally speaking, I would say that the customers are supportive in understanding those actions.
Okay. Just to-
Katie, I'm gonna just touch, Katie, just on that. I mean, your question I think was, you know, pretty straightforward in that are we, you know, are our price actions more than eclipsing the inflationary pressures that we're feeling from our cost of goods sold to our vendors? The short answer is absolutely. The longer answer is yes, we are more than been able to capture margin, and we're continuing to.
The difference between, you know, especially distribution and broad line distributors or commodity distributors is that in periods like this, even our other services and capabilities are giving us flexibility with our customers to not only make sure that we're protecting margin on the product side, but also on the value that we're bringing by, you know, with the other capabilities and the people that are supporting it. We're absolutely continuing to look at and make sure that we are more than being rewarded for the total capabilities besides just the cost of the actual product that we're selling through. It has been margin enhancing at both the gross margin level and the EBITDA margin level.
Okay. Okay, great. That's helpful. Ron, just to clarify one point that you made, there. You mentioned before that those vendor cost increases, those are starting to moderate, correct?
Yes.
Okay, great.
Yes.
Okay, another question here. You, you talked about easing lead times in some of the individual businesses. I was wondering if that's impacting inventory decisions at all, and if you think that could lead to faster backlog monetization at the customer level.
We definitely have seen the our supply chains get easier or easing. We did take actions a year ago and even before to make sure that we had product on-hand for our customers, and that did increase our working capital investment and our inventory position. The this year we think that we're gonna see some real tightening up on our working capital investment. That's one of the things that we went into the year as a, as a focal focus point, and we're the different verticals are working on that. The incremental returns have been really good just because we've had the updraft of EBITDA to go along with the, you know, the increase in working capital investment. We think they can be even better.
There's the anxiety I think on our part of making sure that we had product on-hand for customers. Maybe buying more aggressively or leaning into inflationary pressures from our vendors by stocking deeper is some of that's abating. That allows us to operate with more confidence with a leaner inventory position. Ron, I don't know whether or not we're seeing. I think part of your question may be, Katie, are our customers changing their purchasing behavior because they are also not as anxious. To the extent that they're buying from us, and we're stocking more around, this is Ron, you can correct me on this.
The way that we think about it and talk about it as a team is that our customers, you know, are giving us forecasts around what their needs are gonna be, and we're really holding that inventory oftentimes until we're loading it into their bins, putting it on their sites or managing it at the production line, as it would be for Gexpro Services. That has influenced or informed us more about what we need to have on our balance sheet and less about what we might have might be placing at their... Is allowing us to, you know, we certainly, I think, have reflected on the fact that our customers have padded those numbers some for us.
Their end market production, you know, on their, you know, schedules may, over the last 12 months, have looked different than what they asked us to hold in inventory. That was partially driven by their anxiety in making sure that we had key products, you know, on hand, so as they needed it, based on whatever their production output was gonna be, they were not caught short, or we were not caught short being able to support them. But I don't think that that necessarily created pull-through, where they were stocking inventory or they were safety stocking up much greater amounts of inventory on hand. The only place where we really had longer lead times were on test and measurement equipment.
That's a place where, you know, we've already talked about, there's been some customer behavior changes, there over the last four or five months. We don't think that, you know, that hasn't necessarily... You know, sometimes we end up with a little bit. That's 1 area where we have a backlog. A lot of our other places we don't, and we aren't sitting on backlogs. We're sitting on, you know, kind of visibility around what we're gonna be pushing through. We wouldn't say that there's a backlog where they're waiting on inventory. The chambers business is a place where we've had a backlog, where we've, you know, not been able to manufacture at the pace that our customers were asking for chambers.
That's where we did get caught with some margin compression over the last several quarters because we had quoted and priced product a year ago, and then we had inflation on our costs, or I mean, on our component prices. Our so our cost of goods sold went up on us, but our top line stayed the same. We're working through that overhang and ought to get margin lift in that area as well as an acceleration actually in revenue as we get further into this year. Ron, what else you got to help maybe on that?
Okay. Yeah, I would. I, Bryan, I think well said. I, you know, I think we're seeing, you know, certainly some easing taking place on some of the. On getting product. What we don't believe we've seen is that the pull-through from our customers is decreasing because they had inventory stocked up, you know, at an excessive level. You know, we still saw, you know, in the EPS business, at Test and certainly with the Gexpro Services and in Lawson, we saw nice volume, you know, volume increases as well, not just price. You know, we're not seeing, you know, significant pullback from our customers, you know, as they try and normalize their inventory levels.
And to Bryan's point, I mean, Gexpro Services is so well connected into the production process with the customers that they've got a great read on what the future need is for their customers, and they're able to go out and source that product on a timely basis to help their overall production cycle. And within the Lawson business, you know, there's, you know, certain items that are on backorder with our customers. We track that. It's pretty isolated in terms of specific SKUs. But for the most part, we've seen a decrease in backorders as well, which is an indicator that the supply chain is easing for us to be able to get that product.
Okay. Thanks. That's helpful. Just one last question, from me. I wanted to clarify on the margin cadence commentary from earlier. Should we expect an outsized move to margin sequentially versus the normal seasonality? Is that what you were trying to get at?
Yeah.
Ron?
Let me make sure I understand your definition of an outside movement beyond seasonality.
Yeah. Yeah. I guess just in terms of the sequential moves versus the normal seasonality.
Yeah.
When you're saying it's gonna be less linear than it was in the past.
Yeah. Yeah.
In terms of sequentially, is that you're expecting an outsized difference versus prior years is really the question?
Yeah. Yeah. Let me try and address that from a seasonality perspective. I would say generally speaking, you know, Q2 and Q3 across the platform are the strongest quarters. We did see, again, you know, we saw the nice lift here in the first quarter. Generally speaking, we would see, you know, Q3 and Q4... I'm sorry, Q2 and Q3 being the strongest, probably Q4 being the weakest, just because of fewer selling days and then Q1, you know, falling after Q2 and Q3.
You know, I think our commentary around the linear piece of that really gets to the 300 basis points improvement that we saw over a year ago quarter, in that when you think about the second quarter of 2022, you know, versus where we end up, you know, here in Q2 of 2023, it may not be that linear. You know, as we think about where we exited the first quarter, certainly, you know, we believe that we can still create, you know, margin expansion and operating leverage on the top line sales growth. Again, I think what we're saying is, you know, don't expect a 300 basis points improvement every single quarter as we move throughout 2023.
You know, exceeding 11% sets a really nice baseline to start, you know, sequential growth on, you know, as we develop the rest of 2023.
Yeah. Katie, I've kinda hit on that at the end of the on my prepared remarks. You know, I just wanted to make sure that, you know, we knew when we pulled these businesses together, and we know from where we are today what our longer term objectives are. We've had conversations that we aren't gonna try and give, you know, like near-term milestone guidance on where EBITDA margins should be. What we did say a year ago was that we expected At this time a year ago, we made the strong comment that we were You know, and at that time, we were at 8.3% EBITDA margins or 8.6% EBITDA margins.
We said pulling the businesses together, we expected to, you know, to end the year at over 10% on a run rate basis. We actually, you know, ended the year at slightly above that. I think it was 10.4%, something like that. Now we've moved up to where we're operating, you know, where we had a strong quarter at 11.3%. We know we've got a long march to a much different structural EBITDA margin objective for this specialty distributor. We don't expect that we're gonna be picking up a couple hundred basis points a year or over a 12-month period again.
It could happen, but really what we think is gonna happen is that we're gonna be continuing to have significant milestone objectives at each of the verticals. As those verticals move up from where they have historically operated, it's gonna create a blended margin for the DSG's kind of from a specialty distributor perspective, it's gonna move DSG up more consistent with what I would expect we should have out of this type of a scaled up specialty distributor. It's just not gonna be linear. It's not gonna be linear. We're rolling in Hisco. We've got some opportunities there to significantly leverage the TestEquity Hisco vertical.
There's gonna be good movement there, forward over the next 12 months on their EBITDA margin. That's gonna contribute to the new blended rate. You've got Lawson, is gonna continue to have the benefit of, we think, you know, cost leveraging across the platform as well as margin opportunity, at the contribution margin level. It should operate better.
Gexpro Services has done a great job of, you know, their relationships and their with their OEMs are tight, and it's not always easy to just, you know, raise prices the way we can on, you know, kind of transactional MRO activities like you can at Lawson or like you could on the MRO side of Hisco or could going forward on that, on the Hisco side. On the OEM side, it's more sticky. They've done a great job of passing through and having constructive conversations because they are such partners with their OEM customers that it's been very collaborative.
That should continue to work in our margin favor on Gexpro Services as well, just 'cause we're getting more scale there, and we're able to have some of that pricing action continue to kind of flow through versus having it flow through more specifically on a date like it does on Lawson.
Katie, I just wanted to point you to on slide eight of the deck, we reflect what the margins are inclusive of all the acquisitions. In Q2, I think this gets to our points. Q2, inclusive of all the acquisitions that we were made even the pre-acquisition period, our Adjusted EBITDA percentage was 9.6%. The GAAP reported numbers was 8.3% Q2 a year ago, but inclusive of all the acquisitions that have been made, which certainly will be there in Q2 of 2023 as well. If you were to look at that from a year ago, it's the 9.6%.
I think that, you know, that's the, you know, I think that's exactly to our point is that, you know, kinda don't expect, you know, a 300 bips, you know, movement in over a year ago. That margin percentage, you know, was 9% inclusive of the acquisitions, 9.6% in Q2, 9.9% in Q3, 10.3% in Q4. Kinda comes back to the commentary around, you know, a lot of the actions that we took in 2022 helped, you know, drive the performance later in the year, and accordingly, you know, some tougher comps here in the second half of the year.
Yep. Okay, great. That was very helpful. That's it for me. Thanks.
Thanks, Katie.
Thank you. There were no other questions in queue at this time. I would now like to turn the call back to Bryan King for closing remarks.
Thank you, Operator. Thank you for those that joined us today for the call. Absolutely thank you to all those folks that work for DSG for allowing us to have a great quarter and continuing to operate so well together as we look prospectively at what we're building. Thank you for your interest in DSG. We're excited about being your partner, we are optimistic about the business that we will continue to be together with you on. Thank you. We'll look forward to talking to you next quarter. Have a great day.
This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.