DSGR Q2 2024: Margins Expand as Test & Measurement Regains Share
- Test and Measurement Recovery: Management highlighted that sequential improvements in the test and measurement segment are evident, with the company regaining lost customers and taking share in a challenging market environment.
- Structural Enhancement in Lawson Business: Despite some organic softness, executives emphasized that cost controls, margin expansion, and a targeted plan to add 70 new sales reps will drive improved profitability and operational efficiency in Lawson.
- Accretive Source Atlantic Acquisition: The upcoming acquisition of Source Atlantic is expected to be margin-accretive, with margins improving from mid- to high single digits to a run rate double-digit EBITDA by the end of 2025, boosting overall operating leverage.
- Sluggish demand recovery in key segments: The test and measurement business is showing only modest sequential improvement amid continued macro uncertainty and cautious customer capital spending, which could pressure revenue growth and margins.
- Softness in short-cycle MRO business: Lawson's segment is experiencing organic revenue softness and volatility in orders—particularly in military and core street areas—raising concerns about sustaining growth in these short-cycle markets.
- Margin risk from lower-margin acquisitions: The recent Source Atlantic acquisition, initially operating at lower margins, may not contribute positively to consolidated EBITDA until later (post-2025), potentially diluting overall margins in the near term.
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Source Atlantic Impact
Q: Impact on consolidated margins?
A: Management expects that Source Atlantic will initially have margins in the low single-digit range, similar to past acquisitions, but improvement is targeted to push its contribution to a double-digit EBITDA margin by the end of 2025. The impact on 2024 results is modest, with a significant margin uplift anticipated later. -
Lawson Organic Softness
Q: Are Lawson’s sales softer than expected?
A: Management acknowledged that short-cycle segments in Lawson have experienced softer organic revenue growth, particularly in segments like military, although overall margins have expanded. They are addressing this by aggressively recruiting nearly 70 new sales reps to bolster performance over the coming quarters. -
Test Recovery
Q: How is test business recovery progressing?
A: Management noted a sequential improvement in the test and measurement segment, driven by regained customer relationships and enhanced supplier engagements, even as interest rate pressures remain a headwind. This indicates that the business is taking share amid a cautious capital spending environment.
Research analysts covering Distribution Solutions Group.