DXP Enterprises, Inc.

Welcome to the BXP Enterprises Inc. 2021 First Quarter Earnings Call. At this time, all participants are in a listen-holding mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touch-tone telephone. I would now like to turn the conference over to your host, Mr. Kent Kueh, Chief Financial Officer.

Thank you, Christian. This is Kent Yee, and welcome to DXP's Q1 2021 conference call to discuss our results for the first quarter ending March 31st, 2021. 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 first quarter performance and financial results. Good morning, and thank you, Kent. And thanks to everyone for joining us today on our fiscal 2021 first quarter conference call. I will begin today with some perspective on our first quarter and our relative position today and thoughts on the remainder of 2021. Kent will then take you through the key financial details after my remarks. After his prepared comments, we will open for Q&A. Overall, we had a good first quarter that highlights good execution and a number of positive trends developing across DXP, including the continued execution of our acquisition strategy to accelerate our in-market diversification efforts, continued strength in COVID resistance in in-markets, and a strong free cash flow generation. Putting aside challenging week in February with a weather perspective, we are seeing good progress and moving towards our pre pandemic broke and we are confident that we are in the early beginnings of returning to our creep and pandemic levels and that remains and that remains our focus. Let me thank all of our DXP stakeholders, in particular all of our DX people, for their continued hard work and grit as we turn the corner from the global pandemic and momentum gradually begins to build in our business. We are encouraged by the improvement in market conditions and remain focused on growing our business in fiscal year 2021. DXP's industrial end markets, which is 67% of our business today, which, by the way, coming out of the last cycle was 51%, appears to have found some legs and shown signs of positive upward movements. The ISM PMI Manufacturing Index, which gives us an indication of how DXP's broad industrial markets will perform, continued to expand from January, a 58.7% reading, through March, a 64%. percentage reading. This is above the average for the last 12 months of 56.9% and looks to be a positive indicator for the year should the trend continue and the impact from COVID continue to lessen. We are excited to see momentum on this side of our business and look for this to improve throughout the year. These end markets, including food and beverage, chemicals, water and wastewater, manufacturing and general industry, should serve us well, along with the continued execution of our acquisition strategy. is the remaining 33% of DXP, which was 49% coming out of the last cycle, and is showing mixed signs of recovery with strength in the international markets. The majority of our business, that is oil and gas, tends to lag increases in the rig count and is tied closer to actual production or increased CapEx budgets. DXP will wait and see, but early signs point to flat to modest upticks in domestic budgets and the latest movement occurring in international capex spending in 2021. With regard to the broader demand covered, underlying trends improve across the business as the quarter progressed and trends were the strongest in March. Our first quarter results reflect sequential growth and improvements in our end markets and industry indicators, as discussed. Total DXP sales for Q1 increased 5.6% sequentially or were $245.6 million or $3.9 million per business day. Thank you to the 2,508 DX people for your hard work and dedication. This includes our recent year-end acquisitions, as this is their first quarter reporting with DXB. We are excited to have APO, corporate equipment, pumping solutions, and total equipment with us. They each had a great first quarter and performed in line with our expectations. Keep up the great work, and we are excited to have you as a part of our DXP family, and it is share your performance and financial results on your behalf. In terms of cash flow and liquidity, we generated $11.2 million of free cash flow in Q1. DX People have continued to find ways to deliver financial results and position us well for all of our stakeholders in the face of extraordinary challenges. This is evidenced by our sequential growth, closing acquisitions, and the overall teamwork of the DX People. We continue to build our capabilities to provide a technical set of products and services in all of our markets, which makes DXP very unique in our industry and gives us more ways to help our customers win. As we discussed during the third quarter, DXP's goal is to grow all of our markets and have a balanced in-market exposure. Our bigger opportunities and targets are food and beverage, sanitary, water and wastewater, chemicals, alternative energy, refineries, and military. Our recent acquisitions of Carter and Burbank is another example of making strides in these directions. In terms of financial results, Service centers led the way, followed by supply chain services, and then innovative pumping solutions. The diversity of in-markets and MRO nature within service centers allows us to continue to remain resilient and is experiencing the first signs of recovery. Supply chain continues to see improvements and expects activity to increase as we move through the year. We continue to experience the largest decline within our innovative pumping solutions business segment. IPS is tied to capital budgets and the oil and gas industry. We see a stronger improvement in international cap budgets versus domestic. We continue to monitor expenses and make money on lower sales demand. In terms of the strength in the IPF backlog, we are now 20% below 2017 average backlog numbers and continue to see slower declines that are consistent with our customers cutting capital budgets. Our main focus within IPS is managing to these demand levels we have today and find opportunities in other markets, such as biofuels, food and beverage, and water and wastewater. DXP's overall gross profit margins per quarter were 29.2%, a 152 basis point improvement over Q4. This reflects continued improvement within IPS despite sales decline and strong gross profit margins from our recent acquisitions. Overall, DXP produced EBITDA of $13.9 million, and EBITDA has a percent of sales of 5.7%, which is consistent with a declining market environment. That said, if growth begins to pick up, we should begin to experience operating leverage as we transition from market declines to growth. In summary, DXP's financial performance is not where we would like for it to be today, but our objective is to continue to improve at providing customer-driven solutions by being fast, convenient, and technical experts. We look to continue to drive improvement in our organic sales and marketing strategies and our inorganic growth through acquisitions in certain geographies and industries. we continue to reiterate that the pace and magnitude of recovery going forward will vary by geography, customer type, and end market. Let me conclude my remarks by saying that I am encouraged with our continued sequential improvement in sales and profitability and firmly believe that we are well positioned to continue this growth pattern into 2021. We have managed the business through uncertain times, successfully making acquisitions and producing strong free cash flow, and continuing to invest in the business that will benefit our future growth. We have a tremendous team, and it is an honor to overcome the collective adversity we are all experiencing and deliver value for all of our stakeholders. With that, I will now turn it back to Kent to review the financials in more detail. Thank you, David, and thank you to everyone for joining us for our review of our first quarter 2021 financial results. Q1 financial performance reflects our second quarter of sequential sales increase as we move past the trough impacts of COVID-19 in the third quarter of 2020. Since 2020 was such an unusual year due to the pandemic, we are primarily measuring our performance based on sequential monthly and quarterly growth. Monthly results are likely to experience normal variation and move in either a positive or negative direction based upon unforeseen events like the winter storm that hit in February. However, our overall expectation is that we will see growth versus the previous month throughout the year, which should result in a significant increase in earnings as compared to last year. Overall, DXP's first quarter results were good to see. Service centers and supply chain services led the way, growing sequentially, which we will review shortly. That said, Q1 reflects the following summary takeaways. Strong first quarter sales and margin performance from recent acquisitions, gross margin improvement sequentially and year over year, and strong quarterly free cash flow generation. Total sales for the first quarter increased sequentially 5.6% to $245.6 million. We experienced a 15.6% and 0.5% sequential sales growth in service centers and supply chain services, respectively. Acquisitions contributed $28.4 million in sales during the quarter. As David mentioned, we are excited to have APO, CDC, Total Equipment, and Pumping Solutions as part of the DXP family. Average daily sales for the first quarter were $3.9 million per day versus $3.8 million per day in Q4. Adjusting for acquisitions, average daily sales were $3.4 million per day for the first quarter. That said, average daily sales trends during the quarter ramped from $3.8 million per day in January to $4.2 million per day in March, including the normalization of project work. Regions within our service center business segment which experience sequential sales growth include California, Texas Gulf Coast, and the Southwest. Key end markets driving the sales performance include general industrial, food and beverage, mining, municipal, and specialty chemicals. Supply chain services performance reflects a one-time $937,000 revenue adjustment associated with one of our customers' contract pricing. Adjusting for this, sales would have grown 3.1% sequentially, which is in line with our commentary during Q3 and Q4. Unadjusted sales grew 0.5% sequentially. SES expects activity to continue to improve as more customers open facilities along with vaccinations accelerate. Customers are also beginning to inquire if employees are vaccinated, which we see as a positive indicator. In terms of innovative pumping solutions, we are monitoring the backlog as we continue to experience declines. As we discussed in Q4, we do see the start of a slow demand recovery and improvements in industry indicators, but the rebound in CapEx dollars is mainly tied to international projects at this point. Domestically, we see CapEx budgets essentially flat to slightly down from 2020. Our Q1 average backlog was down 20.4% from the 2017 average backlog and down 35% from the 2015 average backlog, but it's up 10.9% compared to the 2016 monthly average backlog. We are continuing to trend slightly above 2016 levels based upon where our backlog stands at the end of the first quarter. Again, as we always comment, we are monitoring the backlog monthly and looking for new bookings always. Turning to our gross margins, DXP's total gross margins were 29.2%. 152 basis point improvement over Q4. Gross margins improved 48% from Q4 to Q1 within innovative pumping solutions as we experienced a mixed shift associated with more international projects as well as working through several municipal water and or wastewater jobs and continuing to deliver on our efforts to move past lower margin jobs and make cost improvements despite the decline in the business. Service centers also experienced a 50 basis point improvement sequentially from Q4 to Q1, while supply chain services experienced a decline in gross margins that is unique and more associated with the one-time revenue adjustment mentioned in my previous comments. In terms of operating income combined, all three business segments improved 25 basis points in sequential business segment operating income margins versus Q4. Total VHP operating income adjusting for the Q4 impairment expense decreased 82 basis points versus Q4 to 6.2 million. Service centers operating income margins increased 92 basis points from Q4 resulting in 22.1 million operating income. Excluding acquisitions, operating income margins increased 63 basis points sequentially. Innovative pumping solutions operating income margins declined 332 basis points sequentially, which primarily reflects higher SG&A costs as we continue to right-size our cost structure to demand, as well as some fixed cost absorption. Supply chain services experienced a 251 basis points decline in operating income margins, primarily associated with the aforementioned one-time revenue adjustment associated with contract pricing. Our SG&A for the first quarter increased $65.4 million from Q4. This was primarily driven by the payout of commissions and bonuses associated with 2020, normal seasonal payroll taxes, and first-of-the-year items. Additionally, this also reflects transaction costs and other legal items. Similar to our comments in Q4, we are mindful that the contraction associated with the coronavirus is passing, and with accelerated distribution of vaccines, we are positioning DXP to respond to increased customer needs as we believe those who are in a position to respond today and tomorrow will gain the most market share. Turning to EBITDA, Q1 adjusted EBITDA was $13.9 million. Adjusted EBITDA margins were 5.7%. As we move through the COVID rebound, we should experience operating leverage, as David mentioned, as long as we drive organic growth and maintain gross margins. In terms of tax, our effective tax rate continues to have a lot of noise this quarter, similar to what happened in Q4. In Q1, DXP booked a significant reserve associated with the Texas R&D tax credits based upon the increased risk of challenge by the state. Going forward, if DXP continues to rebound, we expect a normalized effective tax rate between 23% to 25%. In terms of EPS, our net income for Q1 was $411,000. Our earnings per share for the first quarter was $0.02 per diluted share. Our recent acquisitions were accretive to gross margins, operating and incomes, and ultimately to earnings. Turning to the balance sheet and cash flow, in terms of working capital, our working capital increased $2.4 million from Q4 to $161 million. As a percentage of sales, this amounted to 16.9%. This primarily reflects an increase in accounts receivable and inventory. In terms of cash, we had $127.5 million in cash on the balance sheet at March 31st. This is an increase of $10 million compared to Q4. Regarding CapEx, CapEx in the first quarter was $680,000 or an increase of $538,000 from Q4 run rate levels, reflecting our ability to control capital investment and the minimal maintenance needs of our business. Turning to free cash flow, we generated solid operating cash flow during the first quarter, producing $10.6 million in cash from operating activities and $11.2 million in free cash flow. This includes a $1.3 million cash inflow from the sale of assets. Return on invested capital, or ROIC, for the first quarter was 17%. At March 31st, our fixed charge coverage ratio was 3.7 to 1, and our secured leverage ratio was 2.8 to 1. Total debt outstanding at March 31st was $329.2 million, which reflects the refinancing of our term loan B in our first quarter of amortization. The refinancing reset our covenants and provides additional flexibility as we move forward. As a reminder, excuse me, the new term loan B matures in 2027. In terms of liquidity, we remain undrawn on our ABL and have over $258.6 million in liquidity consisting of cash and the undrawn ABL. In terms of acquisitions, earlier this week, subsequent to the quarter end, we closed on our acquisition of Carter and Verplank, and we anticipate closing another acquisition by the end of Q2 or early in Q3. Carter and Verplank provides us with a platform to continue to expand our water and wastewater capabilities. Headquartered in Tampa, they ended Q1 with $4.2 million in sales. Our acquisition strategy continues to create value for DXB, as evidenced by the strong quarter we had from year-end acquisitions, and we look forward to CVI's contribution in Q2. Our pipeline remains strong and is expanding in different end markets. More importantly, the talent of the companies joining DXB is very high and brings expertise and valuable experience to our growing company. With that, we'll now turn the call over for questions.

Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your telephone keypad. Again, that is star one. Your first question is from Tommy Moll. Your line is open.