DXP Enterprises, Inc.

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the DXP Enterprises 2022 Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Kent Yee, Chief Financial Officer. You may begin.

Thank you, Chris. This is Kent Yee, and welcome to DXP's Q3 2022 conference call to discuss our results for the third quarter ending September 30th, 2022. 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 Little, our chairman and CEO, to provide his thoughts and a summary of our third quarter performance and financial results.

David? Good morning, and thank you, Kent. Thanks to everyone for joining us today on our physical 2022 third quarter conference call. I will begin today with some perspectives on our third quarter and thoughts about the full year and our future. Congratulations DX people. Our third quarter sales of $387.3 million is a sales record for DXP during the quarter. Thanks to each of you for your efforts to be customer driven and your part in diversifying into new markets like food and beverage, water and wastewater, plus growing our existing markets. We as a company have a more stable industrial base that will serve us well into the future. We have also added technical products and service technologies to our outstanding product and service mix that will also serve us well into the future of digital automation, compressed air, filtration, biofuels, carbon capture, hydrogen that will help us make our lives better. Every day, DX people serve essential customers and help the environment by being more efficient, safe, and environmentally friendly. Our goal is to help our customers with their sustainability goals and for us to lead by example. To be customer-driven in a changing world is exciting and fun. It is also hard work. And I thank all the DX people for their efforts and enthusiasm for making DXP meaningful by helping our customers succeed. So how are we doing? Nine acquisitions over the last two years in water and wastewater industry. This is not only a stable industry, but very important to our lives and the environment. Three, compressed air acquisitions. Compressed air saves energy and is environmentally friendly. In 2014, energy was 66% of our business, and today, 27%. Note that this could be a good market for 2023, and we would be glad to see the 20% grow, but long-term, our focus is helping make energy environmentally friendly, efficient, and safe. New markets, hydrogen, biofuels, carbon capture, storage of carbon waste. We have the expertise and products to help our customers succeed in reducing carbon emissions. National accounts. This is growing, especially in rotating equipment. Service and repair initiatives in compressed air and pumps. Automation and controls. All mechanical equipment needs controls, and automation creates efficiencies, safety, and reliability. As a distributor, we have very little environmental impact and consume very little energy, but we will do better, and the REAL Fund is helping others with our technical expertise to reduce their energy consumption, carbon capture, renewable energy, and safety. These growth strategies, which include both organic and inorganic plans, are what we are doing to grow DXP and help the environment by helping our customers with their sustainability goals. Our Q3 results were great, and everyone did a good job of passing on supplier price increases. Our gross margins are still being affected by payroll costs and inflation, which is to be expected. And overall, inflation is good for DXP. We sold DXP's 49% ownership in pump work castings to the 51% ownerships at a $1.3 million loss, which is a one-time event. We will still have access to this foundry for supply chain help and quick deliveries. It is worth noting that all of the acquisitions over the last few years have helped us improve EBITDA margins. Our adjusted EBITDA dollars increase sequentially, which is always our goal. In terms of DXP's industrial, energy, and utility markets, we seem to be well positioned headed into next year as our end users, such as aerospace, water and wastewater, air compression, food and beverage, renewable energy, hydrogen, environmental products seem to look like growth markets, even in a slow overall economy. DXP's industrial market, which is our largest market, continues to have legs and show signs of positive upward movement. The ISM PMI Manufacturing Index, which gives us an indication of how DXP's broad industrial markets will perform, have an average reading of 53% through June and a September reading of still 50.9%. These end markets, including food and beverage, chemical, aerospace, compressed air, manufacturing, general industries should serve us well. That said, inflation is good for DXP and a slower economy or even a declining economy is manageable, but we have not yet seen any decline in activity in the markets DXP is serving. In terms of our energy market, we continue to see growth in oil, gas, biofuels, carbon capture, hydrogen, sequestration. We experienced a significant pickup in organic sales activity in Q3, which reflects the increase in backlog we began to see during Q3 of last year. consistent with commentary around U.S. majors and small exploration and production companies increasing cap budgets in 2023. That said, we are seeing delivery impacts related to supply chain issues that is slowing deliveries. Our oil and gas activity is not back to 2018 levels, albeit growing in that direction. DXP's technical expertise within energy has positioned us on the forefront of engineering, design, fabrication, and many environmental solutions and projects. Specific to renewable, DXP has designed and fabricated many biofuel and hydrogen projects. As to the environment, DXP's efforts to help our customers with carbon capture and sequestration projects continue to gain momentum. DXP is excited to be participating in engineering on many projects with our legacy customer base. Hydrogen is also an emerging technology, and DXP is leveraging packaging capabilities to participate in projects around green, blue, gray, and other hydrogen solutions. DXP is excited and well positioned to capitalize on energy transition efforts for years to come. We are seeing increase in energy cap budgets, which have been gradual and should accelerate as we move into 2023. Our utility market of water and wastewater is gaining traction with nine acquisitions plus organic growth within existing DXP service centers. The outlook is great for 2023. several projects in 2022 have exceeded their budgets because of inflation so we should see increased demand in 2023 and beyond with three market categories and many markets we are building a more resilient diversified business that can generate solid performance in more uncertain markets and we believe we are seeing the evidence of these efforts regarding acquisitions during the quarter we closed the sullivan Environmental Technologies, Inc., as we mentioned earlier. We are excited to have them as part of our DXP water division. We are continuing to see inflation across our product groups, but as we have discussed over the years, inflation is good for our business. Price increases are passed through to our customers. We have received multiple price increase notices from our vendors and expect this to continue throughout the year. The increases have moderated down to more normal amounts for the beginning of next year. With global supply chain problems, our backlog at all-time high, it does appear that supply chains are not getting worse. As we head into the holiday season, bookings are starting to flatten in some areas as we close out 2022. All of our segments are doing very well. and have positive outlooks for next year. Service centers is hiring sales professionals. National rotating equipment contracts have reached activity levels that require us to hire two additional sales professionals. Plus SES can help with supply chain problems, which puts their services in demand. And IPS is busy with environmental projects, renewables, remanufacturing, and energy companies are increasing new capital budgets for 2023. During our financial results, our third quarter reflects sequential growth and improvements in our end markets. Total DXP sales for Q3 increased 5.3% sequentially and 38.7 million or 33.8% year over year. As always, thank you to our DXP family for your hard work and dedication. We are excited to add Sullivan in Q3 and look forward to continued growth in our DXP water division. All of our acquisitions continue to perform during Q3, and we look forward to having everyone's results for a full year in 2023. Again, keep up the good work, and we are excited to have everyone as part of our DXP family. It is always my pleasure to share our performance and financial results on everyone's behalf. We continue to build our capabilities to provide technical set of products and services in all our markets, which makes DXP unique in our industry and gives us more ways to help our customers win. In terms of our segment financial results, service center sales of 260.1 million, followed by supply chain service sales of 68.2 million, and innovative pumping solution sales of 59 million. The diversity of the end markets and MRO nature within service centers allows us to continue to remain resilient and grow sales. Supply chain services experienced significant sales improvement in the quarter driven by the addition of the diversified chemical customer as well as overall growth in existing customer base and expect activity to increase as we move through the year. With disruptions in global supply chain, DXP's SES is uniquely qualified to help customers with their maintenance, repair, operating, and production supplies. We are excited about the supply chain business moving forward because our customers are looking for companies that can digitize the supply chain, resulting in a reliable supply of MROP goods and services. The customers are needing demand planning and forecasting and someone to monitor transportation, logistics, and inventory levels, detecting issues and taking action well in advance of a problem. DXP Supply Chain Services is well qualified to manage the complete supply chain by increasing efficiencies, eliminating downtime, all while keeping the customer's facility up and running. Results in increased production, ultimately saving the customer's money while improving their bottom line. Our IPS segment is growing backlog and continues to increase bookings as our energy business continues to grow, but it is slowed by supply chain constraints. Our utility markets through water and wastewater included in IPS because of the capital nature of this business is growing and should have a positive runway for several years looking forward. DXP's overall gross profit margins for the quarter improved to 28%. This reflects positive contributions from our acquisitions and continued improvement, albeit a decrease from a year ago because of increased labor costs, inflation, and a mixed shift in increased supply chain services growth, which, as you know, has lower gross profit margins. Overall, DXPs produced EBITDA of $34.3 million. And M&I is a percent of sales of 8.9%, which is a 240 basis point improvement over Q3 of 2021. This is a continued sign of DXP gaining, getting operating leverage, which we saw in Q1 and Q2 as well, and which we would expect as we grow organic sales. In summary, DXP's financial performance was great to see, with continuous sequential increases. We look to continue to drive improvement in our organic sales and marketing strategies and inorganic growth through acquisitions in certain geographies and industries. While we are encouraged by our performance in the third quarter, we are continuing to plan thoughtfully for next year given supplier price increases, labor shortages, supply chain constraints, and concerns of when a slower economy is coming. We continue to see the industry and consumers we serve continue to grow as our backlog and bookings continue to perform. DX people are working hard to give our customers the service they deserve and expect, which is not easy given the headwinds we all face. I am pleased with our performance in Q3 as we continue to move forward to achieve our goals Our strategies and digital tools are helping us grow sales, and we expect to drive productivity, manage working capital, and create free cash flow. With that, I will now turn it back to Kent to review the financials in more detail.