DXP Enterprises, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the DXP Enterprises, Inc. 2020 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Kent Yee, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Mariama. This is Kent Yee, and welcome to DXP's Q2 2020 conference call to discuss our results for the second quarter ending June 30, 2020. Joining me today is our Chairman and CEO, David Little. Before we get started, I want to remind you that today's call is being webcast and recorded and includes forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis are contained in our SEC filings. However, DXP assumes no obligation to update that information as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release. The press release and an accompanying investor presentation are now available on our website at ir.dxpe.com. I will now turn the call over to David to provide his thoughts and a summary of our second quarter.

Good morning and thank you. Good morning and thank you, Kent. And thanks to everyone for joining us today on our 2020 second quarter conference call. Given these unprecedented times, we are pleased with our results for the second quarter and year to date as we hit the halfway point. I am proud of our tremendous DX people as they have continued to find ways to deliver financial results for all our stakeholders in the face of extraordinary challenges related to COVID-19. Accordingly, we remain well positioned to deliver strong long-term financial performance We will position ourselves to drive sales growth and achieve our vision of excellence for our DX people, customers, suppliers, stakeholders, and communities. I will start this call by updating you on developments since our first quarter call and discuss some of the actions we are taking to successfully navigate the rest of the year and beyond. Kent will then take you through the key financial details after my remarks. After his prepared comments, we will open for Q&A. Before I update you on developments since the first quarter, similar to our last call, I want to reiterate that our thoughts and prayers go out to all those affected by COVID-19. With the recent surge in positive cases, which we have experienced firsthand here in Texas, We are all aware that this pandemic is far from over and it is still resulting in tragic loss of life, social isolation, significant economic hardship. As DXP, we have not escaped these many challenges and yet we feel very fortunate to be here and a part of DXP. We are a financially strong industrial leader and we are finding ways to work through and remain successful today while putting us in a position to be successful tomorrow. We also believe that we must be opportunistic and find ways to move forward with safety in mind and drive strategic growth. As I mentioned during our last call in mid-March and into April, we've quickly rallied our team around three fundamental priorities which were to maintain health and safety of our DX people, provide excellent service and support to our customers, and manage our balance sheet on an expected lower near-term demand to remain strong and poised for an eventual recovery. I am very proud of how our DXP team has managed and balanced these priorities in what continues to be an unprecedented and unique environment. Our second quarter results reflect us beginning to deliver on these priorities while finding ways to work in our new normal. The recovery and rebound that's somewhat experienced in May and part of June appears to be short-lived as cases picked up after stay-at-home orders relaxed and businesses began returning to work. In addition to implementing the CDC guidelines, We added face covering requirements, enhanced social distancing in our locations, designed to prevent the spread of the virus while continuing to work. That said, DEXP did experience a surge in internal cases similar to what Texas experienced. Finally, we continued to limit travel, meetings, events, supplier visits, and we continued to have those people who are productive and able to work from home. In summary, we are adapting to operating safely in a COVID-19 environment while also adopting new measures that can help to prevent the spread of this virus. In terms of business demand and COVID, our sales were impacted starting in mid-March. We experienced additional declines in orders in the months of April, May, and June, The pace of decline appears to slow during the quarter as sales per business day in April were down 12% from our Q1 average, while June was down 1% from May. In terms of our key end markets, upstream oil and gas continues to contract. The U.S. and Canada average quarterly root count is down 57% from Q1 to Q2. This primarily affects demand within our safety services division and a subset of supply chain services and other service center locations. However, DXP's safety services also perform plant turnarounds, which have been delayed but not canceled and should be a positive over time. Midstream only gas as it relates to pipeline activity continues to execute small projects and has not canceled any large orders, but we are now getting pressure to push some projects back into physical year 2021. Additionally, the bookings or projects we are winning tend to have a smaller average order size and less gross margin. Downstream and the refinery business has seen their utilization rates from Q1 average 88% to an average of 72% in Q2. While during this quarter we experienced the largest sales decline within our supply chain service business segment, we were expecting IPS business segment will suffer the largest sales impact as new capital projects are tied to capital budgets and the oil and gas industry has yet to work through and, ultimately, a demand problem. We believe this will improve when the country is further along in getting back to work. This means that DXP's IPS segment, which is CapEx dependent, is cutting expenses to make money at lower sales demand going into fiscal year 2021. We continue to see strength in gold mining, specialty polymers, bottled water, Certain recreational manufacturing, soap, food and beverage, agricultural, some chemical, medical, petrochemical, municipal, and asphalt markets. On a segment and location basis, we are right-sizing to anticipate sales results with an anticipated bottoming in the third quarter. We are also supporting those markets that are experiencing growth. Customers continue to utilize BXP's B2B capabilities to increase their efficiencies. Our approach is to tailor each B2B experience to that customer-specific set of needs. BXP's B2B customers appreciate this approach and it is a significant differentiator. BXP's sales professionals continue to use a variety of virtual tools to contact customers, as well as they have started going back to traditional methods of entering the customer's facilities. Customers are focused on these partners that they have an existing relationship with prior to COVID-19. We will continue to use whatever medium the customer prefers and tailor our approach to their needs. DXP is always customer focused, especially in the environment we have today. where we are listening to the customers' matters. In terms of our business segment, as I mentioned earlier, supply chain services experienced the biggest decline driven by oil and gas and transportation-related customers. Service center regions that experienced growth year over year include South Atlantic, Alaska, and South Central. Additionally, we saw growth in our California markets. In terms of the strength and IPS backlog, we are continuing to see declines that are consistent with our customers cutting capital budgets. This is consistent with our recent commentary, and we continue to monitor and compare our quarterly average backlog to previous cycles. Specifically, our Q2 average backlog is 6% below physical year 2015. Monthly average backlog, let me repeat that. Q2's average backlog is 6% below 2015's monthly average backlog. But 60% above physical year 2016's monthly average backlog. We continue to monitor the new bookings and the impact to our total backlog. As we move into the second half of fiscal year 2020, new bookings will be key for the later part of 2020 and our fiscal year 2021 IPS outlook. Regarding cost, we are tightly managing our business to a performance standard that results in overall company profitability. This will produce positive free cash flow. We are pleased to see more stability in gross margins since Q4 as we have continued to focus on consistent profitability within IPS and renewed emphasis on supply chain and pricing. We are avoiding discretionary travel and expenses. We have benefited from the COVID-19 related trends such as lower healthcare costs. We achieved record cash flow in the quarter driven by improved collections and accounts receivable. Our strong cash flow results in a meaningful improvement in our liquidity and a reduction in total debt. Maintaining a strong balance sheet is critical to our strategy to invest in our capabilities through growth or acquisitions. In terms of acquisitions, our two most recent acquisitions have been in the chemical municipal Pulp and Paper, Water and Wastewater, Food and Beverage Markets, and we look to fill in our capabilities in these markets across the United States and Canada. These markets benefited from stable trends and offer a greater balance to DXP's oil and gas in markets, which today, our oil and gas in markets are 42% of our total sales. As we start fiscal year 2020, we had planned on A more robust year of acquisitions. We quickly moved to understanding the impact of COVID-19 and the direction of the economy and the resulting impact on different end markets. And while there is still considerable amount of uncertainty in the second half of 2020 and going into 2021, we believe that certain end markets and the associated risk is manageable in the near to mid-term. Accordingly, we have made the decision to resume our acquisition discussions. We have anticipated being able to close one or two additional deals by the year end while continuing to build a backlog of excellent companies who wish to join DXP in 2021 and beyond. To summarize, I'm very proud of how our team has performed in this extraordinary environment to keep everyone healthy and safe. Thank you for joining us today. in the short term while continuing to build and manage for the long term. The second half of the year, we are going to continue to push for finding ways to be resilient and adaptive and find growth to support our business. With that, I will now turn it back to Kent to review the financials in more detail.