DXP Enterprises, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the DXP Enterprise, Inc. 2020 Third 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 zero. I would now like to hand the conference over to your speaker today, Kent Knee, Chief Executive Officer. Please go ahead.

Kent Knee Christine, that was Chief Financial Officer, but thank you. Thank you. This is Kent Knee, and welcome to DXP's Q3 2020 conference call to discuss our results for the third quarter ending September 30th, 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 the third quarter.

Good morning and thank you Kent. Thanks to everyone for joining us today on our 2020 third quarter conference call. We are pleased with our results for the third quarter and year to date. Obviously, there are some areas where the impact and progress is not where we would like it to be, but given the unprecedented nature of COVID-19 and the continued effects of managing a virus pandemic, I am proud of all our DX people and how we collectively find ways to move forward. DX people have continued to find ways to deliver financial results for all our stakeholders in the face of extraordinary challenges. My heart goes out to those that have additional challenges of the California wildfires and multiple hurricanes along the Louisiana coast. We remain focused on driving sales growth and achieving our vision of excellence for our DX people, customer, suppliers, shareholders, and communities. I will start this call by updating you on developments since our second quarter call. and discussing 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 be open for Q&A. As we continue to navigate through the sales and operating challenges associated with COVID-19, We feel very fortunate to be here at DXP and a part of the essential industry. Our strategy has always been to combine the financial strength, talent, resources, technology, and capabilities of a large company with the fast, flexible, and entrepreneurial capabilities of our local businesses to deliver superior value to our customers and to our suppliers while providing better growth opportunities for our DX people. There has been no better time than now to emphasize these qualities while being fast, flexible, convenient, providing technical solutions for the different end markets we serve. We continue to build our capabilities to provide complimentary set of products and services in all our markets, which makes DXP very unique in our industry. It gives us more ways to help our customer win. We also are constantly looking at reviewing opportunities where we can grow market share. We complement our strategy with a relentless drive for progress that includes business and operational initiatives which we believe will allow us to steadily improve our performance for all our stakeholders. As we finish out the year, we are excited about the opportunities ahead and the potential DXP has to continue to scale and grow within existing and new markets. 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 for tomorrow. And we also believe that we must be opportunistic and find ways to move forward with safety in mind and drive strategic growth. Finally, given the fragmented nature of our industry, we continue to build DXP by adding the best local and regional companies to our team through acquisitions, enhancing and filling in our product lines, expanding our reach, and adding terrific talent along the way. Our third quarter results reflect us beginning to deliver on these priorities while finding ways to work in our new normal. As we discussed during the second quarter call, The recovery or rebound that we somewhat expected in May and part of June was short-lived as COVID cases picked up after stay-at-home orders relaxed and businesses began to return to work. DXPs cropped in July while the economy was fighting to get back to work, but began to rebound in August and September. July sales per day dropped at 3.2 million and subsequently increased in August and September. For the third quarter, we averaged 3.4 million sales per day versus our year-to-date average of 4.1 million sales per day. We anticipate closing the year closer to our average sales per day, assuming there is no setback, in the fourth quarter, including future lockdowns or surges related to COVID. I would like to share with you some of the diversity of our end markets. We do water and wastewater slash municipal, 2%. Food and beverage slash sanitary, 6%. Aggregates and agriculture, 2%. General industry, 15%. manufacturing 6%, chemical 7%, fabrication and construction 9%, military 1%, mining 2%, power 1%, pulp and paper 1%, refining 4%, steel 2%, transportation slash aerospace 3%, upstream oil and gas 8%, midstream oil and gas 15%, alternative energy a half a percent, and resellers 5%. ESP's goal is to grow all our markets and have a balanced in-market exposure. Our biggest opportunities and targets are food and beverage, sanitary, water and wastewater, municipal, chemicals, alternative energy, refineries, and military. We continue to believe the pace and magnitude of recovering going forward will vary greatly by geography and customer type. Despite these challenges, we continue to execute on our value proposition for our customers and our company. Our third quarter financial performance results reflects the results of these executions. Total company sales were $220 million, down 12% from the second quarter, an adjusted operating income of $7.1 million, an improvement of 12% compared to the second quarter. During the third quarter, as expected, we also experienced the largest sales decline with our innovative pumping solution business segments. IPS is tied to capital budgets, and the oil and gas industry has yet to work through what ultimately is a demand problem that has been accentuated during the COVID crisis. We have been cutting expenses to make money on lower sales demand, including shuttering one of our fabrication facilities. However, as my previous comments suggested, we do see the the start of a slow demand recovery. BXP 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 customer facilities. Customers are focused on those 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 listening to our customer matters. What makes DXP and DX people great is not just our technical expertise, but also being fast and convenient for the customer. Being fast and easy to do business with is not easy when we tailor each solution to how the customer wants to do business with BXP. Our omnichannel approach is not new, but does improve every year with new technology enhancements. Our smart solution suite of services driven by digital systems include programs that are flexible to adapt to each customer's unique supply chain challenges. VXP's customers can pick the suite of programs they want or need. VXP has a variety of solutions that the customer can choose, including VXP Smart Solutions suite of products that includes the following. Smart agreements, MRO commodity purchase agreements. Smart buy, outsourcing MRO procurement with order management functionality and reporting. Smart serve, warranty and repair management that manages the life cycle of the equipment. Smart source, storeroom management. Smart store, web-based ordering and customized e-catalog solutions. Smart bin, Industrial vending, including software, setup, training, service, and support. Smart VMI, vendor-managed inventory solutions with a technology suite and EDI requirements. Smart reliability, which is a suite of products to provide proactive health monitoring of capital equipment. Smart virtual store and unmanned storerooms. Today, 35% of our transactions are digital. 68% of all purchase orders are electronic. 87% of all our AP processing is touchless. The question is not the DXP and most of our suppliers are ready for digital transformation. But the question is, is the industrial customer ready to become digital? In terms of our service centers and regions that experience growth year over year, This included Alaska, California, North Rocky regions. Sequentially, the service centers grew sales 7%. Supply chain service experienced a slow decline in Q3, going from 37 million in Q2 to 33 million in sales in Q3. Supply chain service business believes that it has turned the corner and from customer demand perspective is anticipating sequential growth in Q4. In terms of the strength in the IPS backlog, we are now approaching the 2017 average backlog numbers and continue to see declines that are consistent with our customers cutting capital budgets. Our main focus within IPS is maintaining the demand level where we have today and find opportunities in other markets such as biofuels, food and beverage, and water and wastewater. Regarding cost, we are tightly managing our business to a performance standard that results in overall company profitability. From an EBITDA perspective, we increased EBITDA margins 68 basis points from the second quarter as we were able to improve gross margins by 12 basis points and drive efficiencies on lower sales demands. This led us to continue to produce positive free cash flow. We produced $29 million in free cash flow during the quarter, and we are on our way to have a $100 million free cash flow generation year. With the strong cash flow generation in the third quarter, we were able to manage our capital structure appropriately. Our strong cash flow resulted in 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 organic growth and acquisitions. I am very pleased that we were able to quickly reunite our acquisition discussions during the second part of the second quarter. And at the start of the third quarter, As we mentioned during our last call, we made the decision to resume our acquisition discussions, and we are already moving forward. We have two letters of intent in place, and we are actively conducting due diligence and anticipate closing one or two deals at the end of the year. We are adding companies that have a focus on non-oil and gas markets specifically, water and wastewater, food and beverage, and other general industrial end markets. To summarize, I am very proud of how our team has performed in this extraordinary environment to keep everyone healthy and safe, serve and support our customers, manage our business to the lower near-term demand, take care of each other along the way. As a leading distributor of highly engineered products and services, we believe DXP remains well-positioned to support our customers and to navigate these changing periods for the benefit of all stakeholders. I would like to sincerely thank all of our DX people who continue to show up to work or whom are working remotely every day with their passion, commitment, and teamwork. We have a tremendous team and it is an honor to overcome the collective adversities we are all experiencing and deliver value for all our stakeholders. With that, I will now turn it back over to Kent to review the financials in more detail.