Yet Another Value Podcast - Far View Capital Management's Brad Hathaway talks the compelling setup at $DSGR

Episode Date: December 15, 2023

Brad Hathaway, Managing Partner of Far View Capital Management, joins the podcast today to discuss what he thinks is a compelling setup at Distribution Solutions Group, Inc. (NASDAQ: DSGR), a premier multi-platform specialty distribution company providing high touch, value-added distribution solutions to the maintenance, repair & operations (MRO), the original equipment manufacturer (OEM) and the industrial technologies markets. For more information about Far View Capital Management, please visit: https://www.farviewcapitalmgmt.com/ Chapters: [0:00] Introduction + Episode sponsor: Alphasense [3:11] Quick overview of Distribution Solutions Group $DSGR and why it's interesting to Brad [4:40] Overall $DSGR setup, starting with rights offering [7:07] $DSGR business overview (all three businesses), direct comps, competitive sales advantage, customer retention [19:51] $DSGR transaction (LKCM involvement) and why do all three businesses belong together? [29:23] $DSGR thesis and LKCM's history with specialty distributors [36:20] $DSGR valuation, what type of organic growth would $DSGR show without future acquisition, how much of the industry is still in-house, roll-up strategy multiple [46:00] Scaling $DSGR business, capital allocation and tail risks [57:22] Scaled specialty distributor that has not worked [1:01:11] Path to liquidity, management and LKCM alignment Today's episode is sponsored by: Alphasense This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the #1 rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities, like Smart Synonyms and Sentiment Analysis, provide even deeper industry and company analysis. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As a Yet Another Value Podcast listener, visit alpha-sense.com/fs today to beat FOMO and move faster than the market.

This episode is brought to you by AlphaSense, the AI platform behind the world's biggest investment decisions. The right financial intelligence platform can make or break your quarter. AlphaSense is the number one rated financial research solution by G2. With AI search technology and a library of premium content, you can stay ahead of key macroeconomic trends and accelerate your investment research efforts. AI capabilities like smart synonyms and sentiment analysis provide even deeper industry and company analysis. Alphasense gives you the tools you need, to provide better analysis for you and your clients. As yet another value podcast listener,

visit alpha-sense.com slash FS today to beat FOMO and move faster than the market. That's alpha-dash-sense.com slash FS. All right, hello, and welcome to yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, it would mean a lot if you could rate, subscribe, review, follow it wherever you're watching or listening to it.

With me today, I'm happy to have on my friend, Brad Hathaway. Brad, how's it going? Great to be here, Andrew. looking forward to chat. Brad is, what's the type, what's the title I give you? CIO, CIO of Farview? What is it? I mean, I guess I consider myself the managing partner.

That's not refer to myself, but yeah. I never know. Well, here, I'll tell you, before I do the disclaimer, I'll just tell you, you know, about, so I launched the podcast three years ago and you and I, we exchanged a few notes, but I think we met over the summer 2021. And then when I was like getting, when I was like, okay, I really like the podcast. I want to keep doing it. I want to like start getting them editing stuff.

I put together a list of people. I wanted to have on. And I think your name was number two or three. So it's taken two years, but finally got you on here. Very kind of you, Andrew. We've got a really fascinating one to talk about today. Before we get there, I'll just give the same disclaimer I do to every podcast. Nothing on this podcast investing advice. Neither of us are financial advisors. Please consult a lawyer, consult a financial advisor, anything you want to do, but not financial advice. That's particularly true today because we're going to be talking about a company that's pretty big, but the stock is quite illiquid because insiders own so damn much of it. So, you know, people should keep in mind that e-liquidity

cares an extra degree of risk. But this isn't financial advice. So that doesn't really matter any. Can I add to the disclaimer quickly? I mean, I think, you know, it's important to remember that like every investor, I'm wrong frequently. Yeah. And there's plenty of evidence of that. And also, you know, I've at least not through my career that if I just buy something on someone else's advice and I don't do the work, then I'm actually not going to hold it through the volatility. So my ability to get those returns is almost zero. So it's kind of like if you do if you buy something based on what someone says in a podcast you deserve what you get. I've talked about this frequently. Like if you listen to a podcast, I mean, look, I run a podcast. I hope it gives a lot of value. I get a ton of value out of it. But if you win and bought something off a podcast, and again, we're not saying you should. But they report a week quarter and the stock's down 10%. You are probably going to sell or you might buy more. Whereas if somebody who's done the work, they're going to know, oh, down 10% just a blip, buy more. Or they're going to know, oh, this was a thesis. Rooner. I need to sell.

You'll make all the wrong mistakes because you haven't done the work. You have no conviction. But having had, knowing you, knowing that you are one of three people who are asking questions on the Q3 earnings calls, company, I know you followed for a long time. The company is distribution solutions. The ticker is DSGR. They used to be loss in products. So I might accidentally call them Lawson once or twice.

But this fascinating company, I've got so many notes. But why don't I just flip it over you to give a quick overview about distribution solutions and what's so interesting about them? No, absolutely. And as you mentioned, so I've followed this company for almost a decade now back when they used to be called Lawson Products. And in 2022, they basically went through an interesting three-way merger where their major private equity shareholder, Luther King Capital Management, combined Lawson with two other distribution businesses that own, JexPro services and test equity. And in short, the reason why I think distribution solutions is really interesting. Again, disclosure, I own this is it's basically three good businesses with, that are basically niche specialty distribution businesses that have a really interesting runway for both organic cash flow growth through revenue growth and margin expansion, very accretive M&A leading to long-term cash flow compounding. And on top of this,

they're run by a heavily incented, well-aligned majority shareholder who has a tremendous amount of experience in the distribution space. So both you have the alignment and the expertise to help with the organic initiatives and the M&A, which I think is a really compelling setup. Yeah, I agree. And, you know, I guess the other thing we should talk about is let's start with maybe just the overall setup with the owner and stuff. So there are a few things I want to hit on. First, there was a rights offering over the summer. And, you know, anybody who's read, you can be a stock market genius, which I maintain is the best book for investors who are looking for like kind of modern value investing,

event-driven investing, those rights offerings should cause you to perk up. Talk about just the rights offering over the summer just to give a little bit of background on that before we dive into everything. So they did this combination in the spring of 2022. And, you know, initially the stock kind of reacted well to it. But then for some reason, I think just kind of a small cap malaise.

In Q3 of 2022, the stock really got hammered, like 30 or 40%. And so Brian Kigg, who's the head of Luther in capital management. You know, the goal of this has always been to, you know, basically he's got three verticals and he wants to acquire companies in each vertical to continue these kind of roll-ups because of the massive increase you want to see with well-done Eminai here. The problem was is he's also committed to a three-to-four-x leverage target because he wants us to be reasonably levered because it's, you know, a huge position for his family, a huge position for his fund. And so they found a great deal that they've been searching for years, a company called

Hisco, finally was ready to transact in the spring of 2023, and they didn't want to go past their kind of 4x leverage target. So they wanted to raise some incremental equity, but the problem is Brian didn't want to give equity out at the multiple they were trading at. So the theory was, okay, what's the best way to do this is let's explain to everyone the opportunity we see and give them a chance through the rights offering to keep their proportional ownership. of the business so that no one gets deluded, no one, you know, no one's effectively selling stock in a low multiple. And LKCM, Luther King Capital Management, I'll probably refer to them as LKCM a fair amount. They were going to back-sought the rights offering because they were like, listen, we think

this is incredibly compelling. We're going to make sure this rights offering is successful, but we want to give everyone else the opportunity to come along if they want. Well, so I just mentioned, I'd probably like put the cart before the horse bear I mentioned it, but you know, everyone who does have interest investing knows when there's a rights offering, you've got to look. And one of the most interesting things here is, as you said, LKCM does the rights offering. There are huge shareholders. They oversubscribe to the rights offering. If I remember correctly, and let me just see if I can find the one quote I really liked about this.

I'll find it and go with it later. So let's talk about the business. So there are three different verticals here, but this is basically specialty distribution. Do you just want to talk about the overall business? And I think people might get really jazzed if you start talking about some of the comps that might not be in the exact same verticals, but some of the comps and the compounding returns that you've seen with these types of things. No, absolutely. I think so we'll start up with the idea that special distribution as opposed to more kind of broadband distribution is something where it's either scarce parts, you know, complex supply chains or complex sets of parts or very much kind of niche products. So it's not something you're going to be buying on Amazon.

it's not something you're going to be, you know, really easy to get. And so what that means is you have a fair amount of expertise, you have a very knowledgeable sales force, and there's a fair amount of additional services that kind of come along with the actual distribution of the product. And in this case, it's actually even more service-oriented than that, because I think the core underlying part of the business here is something called vendor-managed inventory or VMI. And so what that means is effectively, you are outsourcing.

supply chain for this particular set of products to the vendor. Lawson has been the classic example of this. So the way to think about Lawson is they do vendor-manage inventory for maintenance and repair organizations. So what that means is let's say you are an auto mechanic. You would have a wall of bins with various SKUs and we're thinking FAST centers, we're thinking students, we're thinking chemicals, we're thinking abrasive tools. And that wall would have the inventory. And if Lawson is doing their job properly, have lost salesperson doing their job properly, you never have to pick up the phone and order something because the salesperson is visiting you on a certain number, like, you know, every couple days or weekly, and they are in, they know your business well enough

that they are anticipating your needs. They're saying, Andrew only has 30 fasteners left. I know he uses 35 over the course of the week. We need to up that so he never runs out of a fastener. But Brad only, Brad has 30 fastener for Brad will use 15 in the week so I can wait till next week to fill him. So what that means is. is it's incredibly service intensive and what it saves you is from having your $100,000 a year mechanic spending time, unpacking boxes, spending time running inventory because you have outsourced that to your loss in salesperson. I think you're, go ahead, go ahead. As a result, you know, we start with loss and I can kind of move with the other ones. As a result, you know,

loss of historically is on 55 to 60% gross margins on parts that have an average selling price about 90 cents. It shows, you know, these are the service intensive nature is really what gives that. And then so just continue on the BMI. Let's just, let's speak with Lawson, real quick, just because you were talking about, I think there's true, correct me from wrong, but it's not just, hey, you don't want your mechanic who, you know, their time is best spent spending three hours repairing a car or truck or whatever. It's not just that. It's also, hey, if you ran out of a fastener, right? If it takes three hours to repair a car, you run out of the fastener, you have to call, get a new one delivered. That car instead of sitting there for three hours and

kind of churning is now sitting there for two days and like you're losing all sorts of revenue. is that that's one piece out of it's right a better way to even freeze that is united rentals is he one of the biggest customers of lawson and you don't want to have a you know multi-billion dollar excavator sitting idle because you're missing a dollar part and so yeah and then so let's just talk about the salesperson as well so if you were the salesperson right like literally what it is is the you would come to my garage or whatever you would literally go in the bin and say, oh, Andrew only has 10, he needs 35, you would actually just, without insulting me, you would toss 25 into the bin and then you would charge me for 25 facetors, right?

So there's also like a real degree of trust that you're charging me for 25 fassers. And I was thinking about the other day, because as you said, like some of these things are a dollar apart, right? It would be so easy for you to charge me for 30 instead of 25. I don't even know how I'd audit you or catch you. Like, there's something about the degree of trust that I think is really interesting. I don't know if you want to add anything there or anything. Well, no, and I think a lot of things, these are, you know, a lot of loss in sales reps are very long tenured. So, and these are root-based businesses. So, yeah, if I'm your sales rep, I'm seeing you, Andrew, every week, you know, and I'm on. And so there is that element of trust is built over the years. And if you're a good salesperson, you know, making an extra, you know, making an extra 30 cents on adding one extra screw to your order, is that really worth potentially ruining a relationship we might have over a decade where I'm going to sell you 50,000, 75,000 screws. How would you get close?

adding the extra screw because I even thought about like eventually if this if the if you're the mechanic newer bins are overflowing with stuff you're never using I think that least the question because again you know they're going to see how many products are there and how many are be whether or not they're being properly used I'm more meant like if you charge me for 26 but only put 25 in my bin right like how would you ever catch somebody when that would be caught that would be caught on the lawson side because in theory you know you know in theory those number of 25 should come out of their inventory, and if there's 26 other points, there would be an inconsistency there. Okay.

Yeah, and obviously, they lost in as an organization, it's very aware that the trust of their customers is one of the most important things they have. The reason I ask is, because I'd love for you to dive into this comp. Obviously, they've provided a set of peers and the multiples and stuff, but every investor has seen, like, there's the HBS or Barron's cover story that's facet. What's the best performing stock over the past 30 years? Like, I think it was in 2018. It was like, it's not Apple.

It's not Amazon. It's not any of the company. It's Fassonel, and it's like, what do they do? They're in the exciting business of they distribute screws, right? And so, hey, I mean, that's a direct cop, very similar model. I think slightly different end markets, but very similar model to Lawson. Correct me if I'm wrong. Yeah, a little more branch-based where they do, yeah, they have their retail,

I'm about retail location. They have their branches that they're distributing at it, whereas Lawson is more root-based. But, yeah, effectively, they are a lot of similar parts. Lawson is a little more of a mom-and-pop customer base than Vassanel. So, yeah, they are, there's a fair amount of overlap in the band diagram there. Yeah, but obviously, like, look, when you say, hey, we've got a similar business, the trust-based business, the dollar, you know, the dollar or less parts to the best performing stock over the past 30 years.

And now a quick break to remind you that this episode is brought to you exclusively by Alpha Sense, the AI platform behind the world's biggest investment decisions. Alpha Sense gives you the tools you need to provide better analysis for you and your clients. As a yet another value podcast listener, visit Alpha-Sense.com slash FS today to beat FOMO and move faster than the market. That's alpha-dash-sense.com slash FS. So let me ask, just with Lawson and with this DSGR, obviously there's a lot of trust with the relationships, but what is kind of the secret sauce that we'll talk about the returns on capital and stuff? Part of it is the trust, but Salesforce can be poached, right?

It's not like it's hard. You and I could go tomorrow and buy, I mean, I'll chip in $4,000, you chip in $4,000. And we could buy a bunch of screws and maybe hire a salesperson or we're both pretty outgoing. Maybe we could be the salesperson. What's the secret sauce that kind of gives them advantages as they scale and lets this business compound? Well, one of the next things here is it really is a many to many distribution. So we're talking about, you know, 170,000 customers, 500,000 skews and 7,000 suppliers. So you have you have a little. lot of areas, you know, it's not just you and I can go buy $4,000,000. We have to be able to distribute a huge number of parts from a huge number of suppliers. And at Lawson, you know,

their biggest customer is only 3% of revenues. So it's not like we can post one big customer and say, oh, we have, we have, we've done it. And so it's not, it's this idea of this many to many where the distributor really adds a lot of value because you are, you have the challenges of doing a, of kind of corraling the many players in the supply. side between the number of suppliers than a rescue use and managing that. And then also managing the number of players on the demand side. And that's where really this person in the middle could add value. I was wondering. So here you on all that. I was wondering how much of it was like a you mentioned route based density, how much of it was like a logistical advantage as

you scaled up. Because like if you and I started and we managed to poach a customer, two customers, one on each end of town. We'd spend a lot of time driving. And then if it was only two customers and we had to service them, you know, once each customer once a week, we'd have so much downtime, whereas if Lawson has, you know, 100 customers on each part of town, then the salesperson could be like, hey, Mondays you go to the West Side, Tuesdays you go to Midtown. Like, how much is the density in advantage for them? No, it's absolutely a huge advantage. It's actually one of the interesting things they've been doing with the new CEO, Cesar, the news, he's come in and basically kind of moved a bunch of their smallest customers that

were basically un-economic to their inside Salesforce and the digital channels with the idea being that, you know, even with the existing route-based business where Lossett has this advantage, there are still customers who are relatively inefficient for them to, for them to service because, you know, they're only ordering $500 with the parts, but it's a 45-minute drive and, you know, whatnot. And so this idea of basically gross profit dollars per unit of salesperson time is absolutely critical. And so if you don't have that density, then the gross profit dollars you can be able to get are not going to offset the time your salesperson has to do to basically managed business. And it's actually been one of the historic challenges for Lawson has been

the getting new sales reps up to speed. They used to have a chart in their old decks. Basically, the productivity of a seasoned sales rep, which is effective the year three plus, was kind of three X, I believe, in memory serves, the productivity of a year one, of a completely new green field sales rep. And so those first sales reps were effectively uneconomic, but Lawson would make the investment in them to try to hope that a certain portion of them would become season sales reps. So starting up with it, starting a business with a bunch of unseason sales reps, you'd be, you'd have to be willing to burn money for a fair amount of time. Perfect. I've got a few more questions. Why don't we go to the other two businesses and then I'll come back.

Yeah. And I guess yeah, just continue on. I mean, I think again, the core concept throughout this is this concept of vendor manage inventory. So whereas Lawson does vendor manager inventory for the maintenance and paramechanic, uh, Jexpro services does basically, uh, vendor managed inventory for OEMs. So. And these are all still small dollar figure inventory. These are bigger, these are bigger dollar figures. I think it's like, you know, because again, you're talking about like building a big gas plant somewhere or working with a big renewables company. But what's really interesting is I believe it's 70% of their products are specifically engineered for the customer. So it's a very collaborative relationship.

It's not like you're buying a screw off the shelf. You're basically working with the customer and saying, what do you need for this factory? Okay, we will go source and create that for you. and that's become a very sticky business. So Jacksboro has 98% customer retention because they're really a collaborative partner that is finding the parts for this. And they made a comment to the investor has something like it's, I think it's 25% to 30% determent savings that OEM gets from going to with Jackspro. You mentioned 98% customer retention ratio.

I mean, would I be right to say the only reason somebody's going to leave this once you kind of get inside there is basically the business goes belly up or maybe. get taken over by someone? Yeah, I think that's generally the case. And so Jexpro is 98. Lawson's in the low 90s, like 92. And Lawson has the incremental thing of occasionally like a sales rep goes to a competitor. And so giving the relationship nature of the business. But yes, generally the benefits of this are unless, and there's also a small chance wherein the service levels are poor or something like that. But that's very rare. I mean, these are very, very sticky businesses, which is one of the main benefits here. Want to hit that third business for a quick? Yeah. And so then the third business

is test equity. And so part of their business is vendor-managed inventory for electronic production supplies like solder and things like that. And that's actually becoming an increasing portion of their business with the acquisition of HISCO,

which was a pure VMI business. And so again, it's, you know, for, you know, for aerospace and defense, for electronics, things like that. They are basically providing, you know, a lot of these kind of low dollar price parts. But actually, in this case, even have more expertise like solder

is a very complex product that you need a real, You need some real knowledgeable sales force to distribute. They also have another business, which has been a little bit of the source of problems. They distribute testing measurement equipment. So you think you have key side of equipment, Rodian Schwartz, Tectonic equipment. And that is the one part of the business that's a little more kind of capital cycle tied because obviously these are a couple hundred thousand dollar pieces of equipment.

And so that is probably, that's the only kind of part of this. It's not really vendor management inventory, but it is now a relatively small part of the overall because of the, you know, post-the-a-scale acquisition. So I think you first mentioned law since me probably 18 months ago, and this was right when the three businesses got combined. And I guess, you know, the first thing was I kind of looked at and I was like, oh, I get what Brad saying, but, you know, I'm always a little skeptical of, and we'll talk why the inorganic growth makes sense and a second,

but I'm always a little skeptical of inorganic growth stories. And then I was kind of like, LKCM took a public business that they controlled and combined it with two private businesses they controlled. And I was just kind of like, you know, Brad's probably right, but life's too short. And then I will say, as people will hear, I got super excited when I read the analyst day in prep for this. But I was kind of just like, life's too short. So I want to ask two questions on that front. A, you know, what gives, we've probably mentioned a few of it already. But when I just lay out, hey, publicly controlled company merging with two privately controlled companies, I mean, that's not a red flag.

That's like a red sky scrape, right? So what gives you confidence there? And then on top of that, I want to ask you that once we get past that, the main question is actually, hey, why do these three businesses, which are all VMI, but which are certainly completely different customer bases, why do these three businesses belong together? Because the company is definitely pushing there are synergies, there are reasons to belong. You kind of have to think that first. So I'll turn to you.

No, absolutely. And I'll start maybe on the kind of wide piece because I do agree like, yeah, there's obviously been a lot of examples. of like a private equity shareholder taking advantage of minority public markets investors and whatnot. What was interesting to me here is, you know, a couple things. One is LKCM did not take any cash out of this transaction in any way. In fact, they took entirely stock. So they went from, you know, controlling 40% of Lawson to basically 65% of this business and really kind of tied tied themselves to the mass in terms of this is roughly 35% of their funds. It is a massive

position for them that they need to make work. And what we've seen is also their behavior since owning has been incredibly shareholder friendly. So Brian King is now the CEO of DSGR and he takes zero cash compensation. His, you know, he's not taking, as opposed to, you know, I'm involved in a couple of other rollups where all of a sudden the manager's making a few billion a year and they're getting bonuses and, hey, you know, if the stock goes up, we make a lot of money. And then you have to be like, yeah, but if the stock goes down, you still make a lot of money. I have, I have a different one where they literally, the founders stepped back and hired a new CEO and they took, you know, multi-million dollar pay days as their quote to step back. And, you know,

I was like, okay, guys, you own a large percentage of this company. Did you really need that extra multi-million dollar payday? Um, and so Brian has taken absolutely no cash compensation. In fact, LKCM is taking no management fees for any of this. And they are controlled. contributing significant expertise in terms of both their M&A teams and their operations team. They have an operations improvement team. And they're basically not getting paid for any of this. So not only are they not taking advantage of shareholders, but they're actually contributing significant expertise for basically no compensation on behalf of shareholders.

And so you start to see the behavior, which gives you real comfort that they're actually working on your side. And then when you also have things like the rights offering, you know, LKCM could have done, you know, could have basically contributed the capital themselves. They could have, in fact, Ryan waited till after the Q1 results, which are really, really good, specifically because he did not want to be taking advantage of other investors because he knew Q1 was going to be good. So he waited to price the price dollar until after that, you know, that information of the market. So we're starting to see enough behavioral things wherein, you know, he's doing

the right thing enough times. He had his team. It's not just him. But he is here. He is. He are doing the right thing enough times where you really start to kind of build up that reservoir of trust. Again, you know, like the flip, they easily could have also taken Lawson private and done this in the private markets. They have plenty of capital and Lawson was not richly valued previously as a public market security. So there was definitely a scenario where they could have not brought people along for the ride. Instead, they chose to, you know, put out a proxy with pretty aggressive projections to show people the opportunity they saw and then do things like hold this investor day where, you know, as a public market CEO, you are taking on some

liability by putting aggressive targets out there. And Brian got it in front of the investing public and said, $5 of EPS in five years. And, you know, that is for someone who's not getting paid a dime for spending that time, you know, he's taking on risk. So what gives me comfort effectively has been the behavior of them throughout. Now, obviously, it is something to keep an eye on, but at this point, as opposed to it, and again, I own, unfortunately, on a couple other roll-ups where the behavior has not been as good. I have not, I have not seen anything that's given me any discomfort. Yeah, no, I'm completely easy. I get, I would encourage anyone. I read the analyst say, and I was like, blown away. It was one of the best in those days I've ever seen.

And I'll come back to the LKCM history in a second, but let's just talk about, why do these three businesses belong to it? Right. So there is VMI's. If you're acquiring, you know, as we mentioned, there's route-based density, you get a little bit bigger, you get a little bit of pricing power with your supplier. there are certainly economies of scale within something, but why do three different VMIs belong together? So the easiest argument is effectively that, you know, Jexpro and Lawson are very similar businesses just serving different customer bases. And those businesses and also the kind of BMI part of test is also some very similar serving different bestral bases. And so if you

are serving a big multinational, for example, if you're serving General Electric, you know, both they have, which is Jexpro's biggest customer, because actually Jexpro stands for GE experience professionals, because it used to be incubated inside GE. Yep. GE is the biggest business. If you are servicing GE for their OEM piece, they're using a different supplier for their MRO piece. And, you know, Jexpro has talked multiple guys about how they didn't have an MRO offering because it is a different end market for them. And Lawson has talked in the past about how they didn't have an OEM or an OEM offering.

And so there is significant ability to basically bring your kind of sibling company into a big customer and say, yes, you love us for OEM here. This is someone very similar to us for MRO. And so you're seeing a lot of those kind of cross-send synergies. And you see that as well with the BMI, the BMI part of test equity. The hardest part is the test and measurement business. That's probably got the least synergies you get as a different business bottle. what they would argue is that that's kind of the tip of the sphere in terms of kind of early age investment and it helps kind of create leads for them. That's probably the one where

there's this is the least compelling argument. But what we've seen is, you know, the investor they talked about, they have, I think it's 250 opportunities for cross-selling. They think have lined aside to over 50 million of revenue. So there's significant value add in kind of having these businesses introduce each other. For example, Hisco has a very big business in Mexico and obviously near shore it means Mexican and there's going to be a lot of investment into Mexico. Lawson has no business in Mexico and Hisco is about bringing Lawson into Mexico as a kind of if you're doing, you know, they're doing the electronic production supplies, Lawson can help with the more industrial side of it. And so there's that. And the other part

of bringing them together is the, while these are fragmented industries, you know, they're not enough of them so that, you know, each of the verticals on its own can be consistently buying and acquiring every year. And so having three verticals allows for the cross-allocation of capital. So, for example, when, you know, right now, test equity is just on a big Hisco deal. And I think they talked about the investor day, you know, test equity probably is not ready for another deal at any time. Another big deal in your future, but Lawson and Jexpro both have plenty of capacity for a new deal. So given that they're under levered right now, instead of having to wait till the test equity business is ready for the new deal.

They're like, oh, we can reallocate that capital if it needs to other verticals that have more kind of capacity for M&A. So those are the two reasons. They mentioned, and I wasn't sure if this was, you know, sometimes they'll get out there and try to, companies will get out there and like throw a small thing out there and it's kind of meaningless. But they mentioned, I think it was from memory, it was either printing or labeling. And they said test equity had like a ton of excess printing or labeling capacity.

And by merging, like, we could do that in house. And look, these are businesses where their target is low double-digit EBIT margins, right? Like if you're bringing something in the house and saving a little bit of money or leverage fixed costs, like every little bit actually matters when you're talking about margins that low. But it did just strike me as I wasn't sure. Like, was that just one example of the many they were using or was that a real thing that they were kind of showing that they could scale up?

Yeah, and there's some of that. There's some cost of me. But I think the real big thing is more the revenue opportunity. Like, yeah, for example, also like Jex Pro is now manufacturing something for test equity that they used to have a manufacturer somewhere else that's much more efficient. And they, you know, they haven't started doing it yet, but there will be some kind of vendor consolidation and some ability to get some cost savings on the side. But in reality, what they really see is the ability to introduce each other business, the other businesses into kind of a similar customer

base and provide for revenue synergy. So I think that's what they, you know, I think, yeah, and the 50 million is kind of the, I think, the first step that they say. We have talked a lot about it. But I think, tell me if I'm wrong, the two pieces of this thesis would be, hey, you've got a specialty distributor trading for 10 times EBDA and peers, you and I can disagree, mid double digits EBDA is the number. This is specialty distributor. They've got a lot of room to grow through inorganic acquisitions, which tend to be great for specialty distributors. That would be point one. And then point two would be, and this is the point, again, when I kind of dismissed it 18 months ago, I think I was missing and I didn't realize until the investor day.

I think point two would be LKCM is a killer at this, right? They are an absolute killer. Their track record is unbelievable. Would those be the two, like, if I had to blow it down. I think it's basically, it's a, yeah, it's a good business and a space that's proven to be attractive for a creative M&A that because of its complexity is trading kind of below where it should. And then you have an incredibly capable steward who so far has proven itself to be trustworthy.

So I just want to go. And again, I would encourage anyone read. The analyst day is so, it is so long that I. I always block off, I've told people this for a podcast, I walk off half a day to prep. I blocked up yesterday and then I got a quarter of the way through it because it is a long end of it. I got through like another quarter to thirds of it. So I'm probably two thirds away through. So I couldn't even get through all of it.

But it was so exciting. I'm obviously going to go finish it after this. It was so excited. I encourage anyone to go read it. But I just wanted to ask you like, can you give a little bit more about LKCM's history with the special distributor? Because again, when you read it in the analyst day and when you see them talking about it, you're going to see what Brad sees and be like, oh, my. God, this is, this is really, maybe it's not the best opportunity in history. Maybe it is, but you at least see this is worth doing work on. This is really interesting. No, it is one of

things that you say, like, the investor is very long because one of my favorite things about Brian King is you start talking to him about distributors. And I've had hour long phone call schedule with him that have gone for two hours and a half because once he starts talking about the distribution businesses, he gets really excited. And that's because, you know, he both has a tremendous amount of history, you know, so LKCM, I'll back up for a second. LKCM is basically the private equity arm of Luther King Capital, or this is LKCCM headwater is technically the entity in control of this, and that is the private equity arm of Luser King Capital management, which is a Dallas-based money manager, multi-billion dollar, long track record.

Ryan King is the head of LKCM, and they've been doing basically distribution M&A, they've been doing distribution acquisitions for over 20 years now. Direct quote, we've spent the last 20 years focused on specialty distribution and building scare there and knowledge, and we've been able to attract a really resilient ecosystem of operators and coaches who are investors in DSG. That was the quote that I thought was that was like the most interesting quotes to me from the NLSA. No, I mean, so I think it's 16 or 17 companies. I think the ones they still own, I think they margin with 5x and the ones they've actually generally got to TEDx. Yep. So really strong IRAs in this in this distribution space

with so a ton of historical institutional knowledge. And as you said, I think the comment during the investor is like, they've got like a hundred specialty CEO, specialty distribution executives in their kind of advisory slash limited partner pool. So there's a tremendous amount of knowledge. I mean, I think they talked about, um, Hisco was something where one of their guys was the executive coach to the number two at Hisco. And so they had incredible insight on the business. You know, and so they have this expertise about these specific area and they have a ton of history of doing it and a ton history of doing success. But it's also not just that. You know, I've spoken to employees who say, you know, when you talk to Brian about distribution, it's for the same experience I've had.

He is, A, incredibly knowledgeable, and B, really loves distribution businesses. So his breadth of knowledge and his excitement about the space, you know, he means that his excitement means he's excited to continue learning about the space, but he's a guy who understands both, has a lot of history with all the companies in space, understands what great looks like for a really good specialty distributor and has the network to both source really good M&A deals. I think they don't get Hisco without his network. They don't get Parts Master, which is a deal lost in a couple of years ago without his network. They actually heard about Jexpro when it was part of Rexell, which was a French conglomerate,

and basically figured out a way to carve it out of Rexell, which became, you know, Jexpro, which is this incredibly attractive business. So his knowledge of the space means he knows how to run the company as well. And his knowledge of the industry means he has access to opportunities that you and I are never going to see because we're not going to know, oh, my goodness, there's a great little distribution business with 3% of revenue at this French conglomerate. you know, can we convince them to sell it to us? And so having someone with that kind of expertise run your, you know, but run an M&A thing, I think is critical because obviously one of the

risk of M&A is generally the sellers no more than the buyers. In this case, there's still a lot of obviously seller knowledge, but Brian's dealt with most of these competition for 20 years. And so that gives him a really strong base of knowledge to start with. Also, and if you believe the scale, there's scale benefits in this industry, like that is the one reason where, hey, you're buying a seller, yeah, they probably know more than you. Yeah, they've probably tried to like front load earnings to get the best price for their business. But if scale is a benefit and you go and buy a company for 10 times and they're even on margins are six and you can get them to 10 by throwing them onto your platform by getting more density. Like that's how you overcome

everything. And as you said, these guys have a history of it. Other specialty distributors have a history of it. Let's go ahead. Sorry. I just on the synergies there for a second. It's actually one of the, it's not just also cost energy. It's revenue incentives as well. So if you look at what But they highlighted two deals in the investor day. They highlighted T equipment, which was a test equity acquisition. And the comment was basically T equipment was mainly selling small and medium customers, which test equity selling larger customers. And T equipment didn't have a relationship with KeySight, which is the largest player in the test measurement space.

So by introducing KeySight into the T equipment business, they were able to massively grow that business and brought down the EBITDA multiple by a full two turns within the first. you have 12 months of owning it. Same with Resilux, which is the Juxborough acquisition. Basically, it had a relatively, it had a very good European footprint, but in a relatively limited product portfolio. So by introducing Jexpros' product portfolio into Resilux, they were able to massively increase the revenue.

So it's actually not even just the cost series of bolting it on. It's really, there's all, generally what they've said is they only want to buy something with commercial logic, wherein there's going to be significant revenue synergies by, as you say, adding this to part of the platform. And they've got great experience of doing that. You know, there are 22 acquisitions they bought at 7.7x. And within, I think it's 15 months, they brought down the multiple down to 6.3X, mainly

through revenue growth. And they expect to get at least two turns. They're not done yet. After a couple of years, they expect to get two turns. And they've got a track record of doing it. So, yeah, you can, the great thing is you can buy something at eight. But if you can then bring it to six through, you know, through the accretion that your platform is uniquely able to provide, that is high.

highly, a creative method gives you a big advantage. Those discussions of multiples actually go nicely into my next point. Let's talk fair value. So I guess the first thing to do is, you know, we've said 10 times EBDA several times here. When you start thinking parse and everything, you know, you start thinking, oh, my God, like those are actual physical things. They need to be stored in warehouse and stuff. But, you know, I think people might be surprised by the D and the DNA here.

So let's just talk, you know, 10 times EBDA. What are you kind of talking about free cash flow and ignore future growth, all that sort of, just like, let's start free capital characteristics. I think one thing to think about here is actually that especially, especially distribution is generally a good business. The reason why FASL has been such an incredible compound is because they have a great return on capital. And this business, I think, is turning in that direction. So right now, the return on invested capital is about 16%. But obviously, right now they're both under earning on the Ebiton margins to what they believe they can be.

And also, they made a large investment in working capital in 2022 to the supply chain disruptions that they're now working through. So, and they've talked to both of these things extensively in the investor day. So there's actually a really pretty clear line of sight for me to get return investing capital here above that magical 20% number that kind of signifies a really good business for people. And so that is, I think, one of the things that were, you know, one of the reasons why these businesses get great multiples is because they have this sustainably really good return on invested capital. And DSGR has that as well. You mentioned kind of CAPEX. One of the interesting things here is they're not really manufacturing. You know, they are working with suppliers

to manufacturers. So CAPX is only about 1% of sales here. And DNA is right now a little over about 2% of sales. So there is a KAPX, a DNA gap. But, you know, these are, this is not hugely capital intensive. You know, you're talking about 20 million of KAPX out of, you know, just under $2 billion, you know, dollar revenue base. And, you know, it's, you know, basically maybe 10%, you know, it's about 10% of EBITDA. So EBIT actually flows through relatively well to free cash flow here because of that lack of KAPS. And just for people who are going to look, there have been acquisitions, but the EBDA is actually a pretty clean number. In Q3, there was a big, they just the high school merger, there was a big merger.

add back charge, but you look at the prior quarters, EBDA is actually a pretty clean number without like, you know, the valiant level. We just bought someone and add everything back and all that sort of stuff. So that's pretty nice. Just so valuation. So we've talked about 10 times EBDA. It's actually, no, it's not, it's not 10 times free cash flow, but it's pretty close to 12ish times on levered free cash flow, 10 times EBDA. How do you, again, I don't, I want to put aside like lots of inorganic growth here, but we mentioned peers are kind of in the mid double digit EBITL multiples? Like, how do you think about free value fair value here? Yeah, no. So, I mean, I think if I look out a couple of, you know, so when we talk about

also like mid-digit EBITDA for the peers, that generally ties to about a 4% free cash for yield. So when I kind of think about valuation here, you know, there's two ways thing that. One is kind of let's look out a couple years of the midterm. And so if I look at my 2025 numbers, you know, I have north of, you know, north of $200 million of EBITDA, which translates to about. Are you, are you assuming, I'm guessing, I'm guessing, I'm assuming a acquisition. I'm actually not assuming significant Mn A. I haven't. I know a lot of people want to build those multiples of, oh, you put in $200 billion at 8x as this, you know, as $25 million to $25 million. I haven't done that. So this is more of a organic number where I'd get to kind of

$225 million to kind of $2.25 million. What type of organic growth with this business show without future acquisitions? So the way I think about this is there is obviously some tie to GDP because while most of this is not capital equipment, there still is a, you know, if you're not using your excavator as much as United Rentals, you're wearing out fast, there's less salt, and you need fewer them. So there is a little bit of an economic tie, but it's not nearly as intense as most industrial companies. And so you have GDP, and then I think of this is kind of GDP plus plus. And the plus plus is one is there is a trend from kind of to people increasingly outsourcing the vendor management inventory for the cost savings they see. There's a trend to moving

from smaller players to larger players like your, like your Lawson's, your Jacks, your Kimball Midwest, your Fastenols. And there's also that, and then so you have the GDP growth, the growth of the industry, you have a significant market share growth from the industry. You have market share growth for these companies within their industry because they're all kind of, they're all, they're all, they're all very big players in their niches. How much of the industry still in-house? I don't, that's always been tough to quantify. I don't have great numbers on that, but I do think there's still a significant opportunity for, you know, for moving to a kind of more vendor bandage system. Because again, as you say, it's not the easiest thing to do if you've always

unpacked your own boxes and screws to, you know, trust someone else to come and do it for you. It takes a little bit of, I think, coaching in the beginning. And then the third plus is obviously this cross-seller they've talked about between the verticals. So like, you know, I think of, you know, I think of mid-single-digit plus organic growth to be on the revenue line, to be very possible. and that if you look at the margin accretion percentage as well, that they have credibility on. When they came for this business, the business was at, I believe, at a, was like 7.5% EBITDA margin when they first put them together and they committed to exiting at 10% by the end of 2022.

And they're now at 10.6. Now, that's in the most recent quarter, trailer 12 month is 9.5. But this 9.5 to 13.5 path, I think they have credibility where they show, they've got some clear initiatives that can get you there. So if you can buy that kind of big single digit top line growth with the margin expansion that comes, you know, it's possible to get to kind of high double digit EBITDA growth. And that's before you start adding in any M&A. And so, yeah, so I get to like when I get to that EBITDA number, when I work down to cash flow,

that gets me to roughly about $3 a share free cash flow. So if you do that, you know, we've said 4% for the peers. on 2025, let's just use 5% now because it makes the math easier for me. So $3 a share free cash flow times 20 is effectively roughly $60 a share. And that's a 2025 number. And then longer term, you have Brian's kind of $5 a share of EPS. And again, we're leaving aside working capital because of the DNA mismatch, free cash flow should not be too dissimilar from EPS.

So then let's say that's roughly $5 a share free cash. So X working capital moves. Again, if you want to put a 20x on that, then all of a sudden, over the longer term period, you have that path to 100. I always struggle with rollouts for a few reasons. One, a lot of times to accounting, I don't think that's an issue here. Number two, you know, you mentioned earlier. A lot of times you'll see people say, hey, you know, I assume they're going to do $200 million

of acquisitions every year at eight times EBITDA. And, you know, they should be valued at 10 times EBITDA. So that's going to create, what is that? That's two terms of multiple. That's $400 million of value or something there, right? I don't know if I did that math, right? But there's this multiple arbitrage. And I always struggle with that part for two reasons.

Number one, it's not like the sellers are giving you something at a discount out of the goodness of their hearts, right? Like, that's what they think their fair value is. So I never quite know. I do believe they're, especially here, there can be accretive growth, but it's always tough to model. You haven't modeled any of that, so we can put that aside. The number two reason would be, hey, the industry multiple is eight times EBDA, and we're over here paying 10 times. even out, right? So when I say that, I either say, hey, either the insiders are wrong or we're already paying a premium to account for kind of that accretive growth or, you know, I guess you

could say public markets because public markets have better liquidity, just pay our multiples. But I struggle with that a little bit. Does that make sense? Like, if everybody's selling an eight, I want to buy it seven. I don't want to buy a 10. No, and I completely agree that. That's the hardest part of like the roll up story is the symbol, oh, we buy it eight, we trade it's well, yay, value creation. There were people who did that in the 70s, right? They issued stocks. Exactly. And when it works, it works, but the minute it stumbles, it can unravel very quickly. And we've seen a lot of examples of that. What I think is actually more compelling here is they buy at eight, but they make eight, six or five. And so you have, you know, this significant growth in the underlying EBITDA of the businesses they acquire. And there's, you know, they have multiple examples of it. I would urge anyone to go back and look at the parts master. Because again, LKSA controlled Lawson boys. Look at the parts master deal that Lawson did before. Look at the parts master deal that Lawson did before. Look at the. Look at the parts master deal. bolt supply deal. Look at the history of losses acquisitions, and they'll look at the history of the Jets Pro and test equity acquisitions they provided. And they have a long history of basically saying

we roughly pay depending on the thing about six to eight times and we take out two X plus in terms of the multiple within a couple of years, basically through the revenue accruation I talked about. And so that also is, and so that's the one thing. It's one is, you know, it's eight to the seller, but it's six to DSGR because they can run it better. And the second thing is also is then, You do have these opportunities at scale. You know, Hisco, you know, let's use T equipment. T equipment was too small to get a Kisite relationship. KeySight is the most important player in testing measurement.

So as part of test equity, the T equipment business is worth more because it has the, it has the, it has that Kisite relationship that didn't have previously. Resilux didn't have enough products to become a significant business under their ownership. with part of Jexpro, all of a sudden they have access to SOUs, that they are a bigger and more valuable business. So there are kind of returns to scale that I think, you know, you should get multiple as a bigger player in these niches. But I do agree that the kind of pure financial engineering part of it is less interesting to me than the fact of the matter that they have opportunities to basically improve, to relatively quickly improve the job wherever they acquire. You mentioned scale. So this was going to be my kind of loose last question, but let me ask

that. And then I have one more, actually more important question, but let's stick with the skill. The company at their investor day said, hey, there's almost a smile curve, right? When you're too small, you don't have the scale advantages and everything, so your margins are low. Then as you grow and grow and grow, you get more scale, you get benefits. And then the smile curve would be when you start to get too big, you're, you get too complex and you lose some of those scale benefits. So I guess I would have two questions for you on that. One, why? Like, why can you get too big? And two, you know, this company has gotten a lot bigger recently. Right. They're still not at like Fastenel or some of these other guys levels, but they have hugely increased in size. They're rounds up to $2 billion. They're planning to get much bigger. But are you comfortable that they're not close to that the negative side of that curve? Well, so I think, you know, one of the things to think about here is that, you know, this is while it is one company in the public markets, it really is to be distinct verticals. And each vertical has its own sales, its own basically customer facing apparatus. So you have, you know, you have, you have

you know, each of the verticals is on CEO and CFO. And while there's a little bit of back office that's commingled, it's really not much at all yet. So it's actually three companies that are large for their, you know, are the leading players in their niches. But, you know, it's not like we're actually a, you know, a $1.8 billion revenue business. It's really we're more three separate businesses. So I think we're far away from the idea of being even there, though, like, we're talking about how each of the three verticals can bring the other ones synergies, right? You could probably do that at three. You could probably do that at five.

But like, if you and I were talking, we're like, they have 10 different verticals. It's going to be really hard to get like CEO one and 10 and two and nine. I don't think they intend to expand the number of verticals. You know, right now the idea is effectively there is a lot of room to consolidate each of these three verticals. So I think the three verticals will be, will remain as they are. What I would say is, you know, back to kind of financial engineering public markets, one of the funny things they always used to complain about when Lawson was kind of small on its own. You know, Lawson, you know, when it was a public market company, was like $30 or $40 million of EBITDA.

And so spending $2 million on a new ERP really actually hit results and really was impactful. And they talked about, you know, they've talked about, you know, they just are kind of in the process of firing their 5% of their customer base that's uneconomic at Lawson. He was like, Brian, I talked about I did not, I could not do that as a, when Lawson was a standalone public company because it would have decimated our share price because people would have thought that we were losing all this business. So there are things where in like a, it costs the same to implement some new tech or do a do an investment at the company this size. But you can hide, you could hide one or two million of incremental expense a lot better off across 200 million of EBITDA

than you can across 30. You know, the first thing that I've heard Brian say that I don't agree with is, hey, we couldn't do it because people were, would decimate or sell price. Like he didn't have need to tap the equity market. See control 45% of the company. I would have said like, hey, do it. Have a share buyback plan in place and buy the shit out of your shares. If people don't get like,

hey, profits aren't going down. Profits are actually going up as we fire these on economic. All right. Two last questions. One is going to be capital. Let's quickly get capital allocation. Then I'll hit the big one. Capital allocation.

So obviously they want to do both on M&A, all this sort of stuff. But, you know, leverage is kind of already at their targets. And they've said that there's going to be a ton of cash flow flowing in. I'll let you take it from here. I'll make it a softball. But they've said they're going to be. very share all refundly going forward. Like, how do you expect cash to get allocated with

now that leverage is where it should be? No. And so, you know, I think they are very return focused. Yeah, if you listen to the investor, and again, I appreciate you're saying that people should do that because I agree the industry. It was pretty incredible. Yeah, they were constantly talking about returns on capital. So, you know, they're talking about, you know, investments in working capital to get returns on 50% return on networking capital. Exactly. We're like, we're at 35 return return on network and capital now. We like 50%. So they're talking about like investments they can make and whether it's organic and masculine in the business. Right now, I do believe the majority of the cash flow will go to M&A, which, you know, as long as they continue to do the deals

they've done, to me, to me, every deal, the stock has reacted very well to every deal they've done because every deal they've done is very good. Again, you can look at Hisco, you can look at parts faster. When they do a deal, it's generally pretty well received. But they also have bought back shares in the market. They bought back shares late in 2022 when the share price got below 20. Again, And this is, you know, these are, there's a, there's a split in there. So they bought back shares in the past. You know, I think that's something they would consider in the future if they can't find other deals.

I mean, they've talked about being very opportunistic in terms of capital allocation. Would they pay a dividend? And maybe at some point, but I think the share price has to be far higher than it is today to do that. So I think right now the priorities are, first priority is still M&A. Second priority would be share repurchases if they don't have the other options. And then dividend would depend on where the share price is. and you've seen it.

I mean, they have bought back shares in the past. And now a quick break to remind you that this episode is brought to you exclusively by AlphaSense, the AI platform behind the world's biggest investment decisions. AlphaSense gives you the tools you need to provide better analysis for you and your clients. As yet another value podcast listener, visit Alpha-dashcense.com slash FS today to beat FOMO and move faster than the market. That's alpha-dash-sense.com slash FS. actual last question and this is not an easy one but you know I've got I think a mutual friend of

ours who owns DSGR I emailed him and asked him for questions on DSGR and he didn't respond so he'll know who he is and he knows I'm calling him out here but he mentioned like I think he once I've said hey look with DSGR I've seen specialty specialty distributors before I've sold them too soon I'm not going to make that mistake here we've got a great management team we've got a long runway to go you know yeah if it trades for 100,000 times EBITA I'll sell up but I'm going to ride this as a compounder because I see really attractive long-term returns here, right? So my question is, he's not the only one, you know, you see it,

the management team sees it, people who've invested in Fastenel, people who've invested a pool. Like there is a very, everyone knows specialty distributors when run well, and if you buy them at a reasonable multiple, you can compound really well. My question is, what breaks a specialty distributor, right? Like what causes it to not work to fail? Because every time I've heard, hey, this model always works. And I'm not seeing like the SGR specific.

I'm just saying what would cause a specialty distributor to fail? Has there been one? What's the tail risk that these stop working? So I think, you know, let's take the longer term. Because obviously in the short term, you know, the share price might struggle due to economic cyclicality, things like that. You have as well, these are stickier businesses. They are still economically exposed. And obviously, if we have a big recession, you know, there will be.

The funny thing about this business is it will actually generate a tremendous amount of cash flow, I think, during that period is they draw down working capital. But the stock's probably going to go down. That's a near-term risk. The longer-term risks, I mean, you can look at what it's been in the past. So Lawson previously, they used to have their employees, were all 1099s, and they had a huge issue with employee kind of alignment and whatnot. They then moved them all over to be full-time employees, and that caused a tremendous amount of disruption.

So one area that can really mess it up is Salesforce disruption, you know, again. Is it kind of title insurance? Like, I remember with title insurance when you had agents and, like, it's a known thing in title insurance that some of your agents will steal from you eventually and you have to fire them, but they're always accruing for like, is it kind of, hey, your sales forces are such trusted intermediaries that a few of them will take advantage and you have to account for that and like the worry would be that gets out of hand? I was saying more than historically when the sales force wasn't as well aligned, it wasn't full-time employee. They didn't have as much

insight. And then you had these people with all these freedom I used to do whatever they wanted and when they tried to bring them under the corporate umbrella, some of the rebelled and whatnot. And so you have the, you have the risk of, you know, one of the things that I were about with Lawson is, you know, we talked about the value of the tenured sales reps. You know, these are, that's the asset here. Those sales reps are incredibly valuable. And so if you have something like whether, you know, some of them are eventually going to start AGI, you're going to have retirements. You're going to have to start backfilling those really experienced reps with newer reps. So you have to get up the, and so if you had a thing where

you lost a significant portion of your well-tidated sales reps, this is a relationship business. That is a huge, that is a huge potential problem. You know, also, obviously, one of the things you have to continue to do well as manage inventory. You know, it's very, if you get, you know, you have to be able to understand your customers need to be granted to a very short cycle business, but, you know, you don't want to get over inventory to the point where you are, you know, where you have a bunch of obsolete inventory sitting or shelves you have to start taking provisions for. Sales reps.

I'm just, you know, plumbers. Anyone could make a really nice living as a plumber, right? It's not exactly like, but you're literally managing poop, so people might look down their nose on it, but so there's a plumber shortage, right? And despite the fact you can make great living. sales reps here, where do they find their sales reps? When you talk about, hey, there's going to be a retirement club at some point, is that replaceable or is it the plumber issue where, hey, maybe because it's not the sexiest

industry, even though I believe the sales reps are all making over 100K a year once they get fully seasoned, is it kind of the issue, oh, you know, you're going to auto repair shops and dealing with nuts and bolts and oil, are they going to have trouble replacing that? Yeah, I mean, I think one of the one of the things Lawson had historically had an issue with was they really tried to aggressively grow their sales force and they didn't do a great job of onboarding new reps. what they are trying to do right now is basically help their reps make more money. So by taking off some of these got, you know, like till very recently, their CRM system was

effectively an Excel document. And so they're giving, you know, and they're giving the reps a lot more tools to kind of remove some of the nonprofit generating of their business so they can generate a little profit with the idea that you make reps more money, they'll be happier. It'll be easier to season reps if you can get them above that area where they're actually really making a living. So that they're trying to invest in that. historically they have not done a great job of the seasoning reps at Lawson.

You know, one of the things, I actually think this is the more enjoyable business than you give a credit for it because unlike a plumber where you're going to different houses and you're never kind of talking. It's an emergency, the toilet's broken. Exactly. Everyone's all stressed out. No one's happy to see you. You know, if you're going to see Bob, your buddy at the local repair shop and you see him

every week, you're talking football, you're talking whatever. And they actually said that they heard of the problem of getting some of the reps to get rid of some of these kind of not economic accounts is they're friends yeah that's my friend bob and i wasn't trying to fully appointed to pull me if it's difficult to i think there's a little more lifestyle enjoyment but i do think yeah we're talking about things that need to continue to do well they do need to continue to acquire new reps and they do a very good job of maturing them up so that because eventually some of these older reps will retire so i do think continuing on the loss inside and the and actually all these sides because the test equity, you know, you know, their sales force is

incredibly technical. People selling, you know, a key site machine. I mean, these are high-end engineers. These are PhDs. These are really technical people. And so that is, that is so much of the asset here that when you think about the way this can get broken is I always think about, okay, what's the key competitive advantage of the business? And to me, it is kind of these rep, that they have in the relations they have. So the way I see it getting broken is, if you do something to in some way that basically hurts that asset, hurts your, hurts your rep. Has there been a scaled specialty distributor that you're aware of that has not worked? I mean, I'm sure, again, if you and I went and started a mom and pop with five customers,

there's a chance that fails. But, you know, has there been a scaled one that you're aware of that kind of has a worker that's unraveled? So the ones that have generally done worse, the ones have been more kind of broadline commodity guys. Those are the ones who are starting to really feel pressure of Amazon, deal pricing pressure. In terms of the specialty space, just to find, quickly to find broadline, versus specialty? I mean, so Broadline is kind of a lot more of your kind of basic products. Like, you know, if you're buying a basic mop or something like that. Or, you know, it's really generic. It's the stuff that's Amazon. It's something that's more of a commodity product. Whereas

if you're buying a private label loss and fastener, you're not going to find that on Amazon. It's not Amazonable because one, again, these fasteners, 30 of them might cost 30 bucks. So the shipping costs, if you're going to start ordering from Amazon, and then it's more not just the shipping cost. It's the time cost of, you know, a mechanic goes in. Amazon, could Amazon launch a specialty distribution in some of these things? I think Amazon is historically not loved having a here. Yeah. It's a people and sense of business. Yeah. So, so Amazon likes having a replaceable cards, not. The fact that we're, we just had a labor shortage, right? And we probably do

still have one. So in a labor shortage, your time is very valuable. And these guys manage their mechanic's time. If we ever went into a labor on shortage, right? Would especially distributors be at risk because there we're saying, hey, mechanics, like, okay, whatever, take an extra two hours to go and sort inventory and then go order them off Amazon because, you know, we've got plenty of extra mechanics. Wages are coming down. Is that a risk? I think that actually definitely is. I think it's a really interesting question because I think they talk about the tailwind of kind of labor shortage and the shortage, especially kind of skilled industrial labor. So if there was ever a surplus of skilled industrial labor, perhaps then, as you say, the mechanics time is worth a lot less. I think you'd also have to see mechanic wages come down significantly to upset that. So I think there is a, if there was a massive surplus that basically made your mechanics time, and I'm just using mechanic interchange with, there's obviously a lot of time. But then you probably just fired the mechanic because why do you want somebody on staff

me that versus the, yeah. Yeah, but I think, I think your point being is, yeah, I think what there is on Detra is to basically save you money in time for your skilled worker. If the skilled worker is no longer as valuable, you know, then maybe. maybe their value adds a little bit less, but you still have the kind of many-to-many issue where it might, you know, do you really, you know, if you're XYZ, if you're United Rentals, do you want to manage 7,000 suppliers and, you know, a couple hundred thousand skews that you need or would you rather if someone do it for you?

No, I only ask because, you know, again, so many of these worked. And as my friend said, like, I've seen these work before when you, when you buy them at 10 and then you sell them because they get to 11 or something, like that's the mistake, right? You want to ride these for multi-year compounding. They're going to trade for a big multiple day. Every time you think they've run out, if you found a really good one, they're going to do another good deal. It's going to look great.

And, A, that's a really attractive proposition to me. But B, when somebody says, they all work, my first thing is, how does this break? I've been broke before. How do I get hurt? I completely agree with you. And I do think that that is a really important question. And I think, you know, specifically, one of the other kind of unique to DSGR challenges is, as you say, it is illiquid.

It's relatively complex because you give you. you know, while there's a kind of core DNA of these three businesses, you still do have to learn three different businesses. There's, I would call it two and a half saleside analysts. One of them has effectively punted out of this forever by saying it's, quote, too complex. And so there is the idea of, you know, for this, for us to really benefit for the common matter thing in the public markets, eventually you do have to get a public market multiple. And the path to that for this one, the path to price discovery here because of the nature of it might be longer than it would be for like a matter.

Yeah, you know, especially because LKCM owns so much of it, it's tough because to get more, there's two ways to get more liquidity. One would be them selling, which is everybody's going to freak out if they start selling on the open market. So, you know, you do wonder endgame here just because of their huge position there. But there is one other path to liquidity. I mean, the company could do a secondary without LKCM selling. Or, you know, you could talk the next deal. If the company starts getting a multiple, the next deal is a stock deal. And then that person starts bleeding out over time.

So there's pass. I do wonder like, hey, if we're sitting here three years from now, like, is this LKCM takes the whole thing in? Do they try to sell it to a bigger company? Would Fas and L or someone like, hey, you know, this is special distribution. But I do hear. I just, I think it's funny because people email are like, oh, that's an Eliquid stock. It's like, hey, as you and I are talking, it's 3 o'clock Eastern. This stock has traded 40,000 shares at let's just round it to 30 to make the math really easy, right?

So that's $1.2 million with value. I'm sure there are listeners who $1.2 million would be a small position for them. But, you know, we're talking about something that if Brad is right, if the management seems right, could multi-year 20%, nothing's invested by, but, you know, you can paint a path to multi-year 20% plus IRAs. Like, you could buy a couple thousand shares every day and they get into it for like, you know, spend a little time for 10 trading days to get that type of IRA. And again, not investing by it, but just saying it's funny. People tell me, oh, we look, it's like, I think you could probably park several million dollars into this if you

took a little bit of time. No, and I think, and you'd mean, again, yeah, it's not investing. But I do think one of the things you kind of brought up is, you know, LKCM, this is not just like a, oh, they own 70% of this, but this is a rounding error for them. This is 35% of, yeah, I think somewhere in there, percent of their fund. This is a fund maker for them. They can't get, you know, they can't really afford to get this wrong. So it's something they deeply, deeply care about the outcome.

And I think the CEOs got interesting strike prices on these options, everything. we probably don't have full time, but everybody is very aligned with getting with me. I mean, just very quickly, say, we only know this because of the structure of the deal, the only, the only division CEO's compensation we know is Seizor, the CEO of Lawson. And his strikes are 27 and a half, 40, 55, and 70. And again, we're talking about a $27 shape. When did those options expire? Do you know?

It's years out. I actually don't remember that. It's on my head. But he got them last year, so I would guess several years from now. Yeah. Yeah. But we're still talking about, you know, 70 is. 70 is a pretty big number when you're sitting at 27.

And this is all split adjusted, by the way, just sure. There was a two-for-one split for people when you go back and love a history. Cool. Well, Red, I've wanted to have you on for two years now. Finally got you on. I think people can tell why I wanted to have you on. This is great. And it's going to have to not be two years before we get you out again.

I want to have you. I'm going to enjoy it. It looks forward to chatting again and so much. Excellent. All right. Thank you so much. A quick disclaimer. Nothing on this podcast should be considered an investment advice.

Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.