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spk03: be a question and answer session. If you'd like to ask a question during that time, please press star followed by the number one on your telephone keypad. Thank you. I will now turn the conference over to Kent Yee, Chief Financial Officer. Kent, you may begin.
spk04: Thank you, Krista. This is Kent Yee, and welcome to DXP's Q3 2023 conference call to discuss our results for the third quarter ending September 30th, 2023. 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 it 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, DXB 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?
spk01: Thanks, Kent. Thanks to everyone on our 2023 third quarter conference call. Kent, we will take you through the key financial details after my remarks, and after our prepared comments, we will open for Q&A. It is my privilege to share DXP's third quarter results with you on behalf of over 2,799 DX people. Congratulations to all our stakeholders and a special thank you to our DX people you can trust. We are pleased to see in-market demand and DXP's performance continue through Q3 and remain at record levels as we move through the second half of 2023. This allows us to achieve another quarter of both solid sales growth and 10% plus EBITDA margins. We are pleased to announce strong third quarter results with sales, operating income, and earnings per share all up over the prior year. This is a great way to start the second half of fiscal 2023. We continue to deal with the macro uncertainty and the impacts of inflation and elevated interest rates. but we remain focused on serving our customers, providing products and services that help them save money, consolidate their MRO spend, manage inventory, provide solutions to solve their evolving needs. Being customer-driven and growing sales profitably is our goal. We continue to focus on driving organic and acquisition growth, increasing gross profit margins, and increasing productivity. Our execution has resulted in the fiscal 2022 and 23 top line growth and bottom line organic and acquisition growth. That said, our growth has not been as large as we would like, so we expect to add some acquisitions to our results as we close out fiscal year 2023 and going into fiscal year 2024. We continue to be excited about the future and delivering differentiated customer experiences, creating an engaging, winning culture for DX people, and investing in our business to strengthen our core capabilities and drive long-term growth. Year-to-date through September 30th, total sales are up 18.3%, and operating income is up 46.9%. Last 12-month sales adjusted EBITDA were $1.68 billion and $164 million respectively in EBITDA margins for a margin of 9.8%. Moving to our third quarter results, total DXP revenue of $419.2 million for the third quarter of 2023 was an 8.3% increase year-over-year with adjusted EBITDA of $44 million for the third quarter. In terms of Q3 financial results, service centers led the way, growing sales 13.2% year-over-year, followed by innovative pumping solutions essentially performing flat at $59 million in sales, and supply chain services declined 3.5% or $2.4 million to $65.8 million year-over-year. In terms of service centers, the diversity of our end markets and our MRO nature within service centers allows us to continue to remain resilient and continue to experience consistent top-line year-over-year growth. From a regional perspective, a majority of our regions continue to experience year-over-year growth, including the North Rockies, Northern Central, Alaska, and Texas Gulf Coast. Additionally, we continue to see strength in our air compressor product division. We continue to expect that our end markets will remain constructive over the near future. As it pertains to energy, we believe that we could be in the early stages of an upcycle supported by the energy transition, which has been consistent with our commentary over the last three quarters. In terms of IPS, Innovative Pumping Solutions, our Q3 average IPS backlog continues to stay ahead of the physical 2022 average. Additionally, our year-to-date average continues to exceed our long-term average of IPS going all the way back to 2015, which we highlighted and occurred for the first time in the second quarter and continues to move into fiscal year 2024. What this indicates is that we are continuing to give bookings and we are, as we mentioned earlier, we are likely in the front end of a good cycle on the energy-related project work that we look forward to as we move through 23 and into 24. As we maintain growth, our main focus within IPS will be managing the demand levels we have finding opportunities in all markets such as energy, biofuels, food and beverage, water and wastewater, and pricing appropriately given the supply chain dynamics and ebbs and flows of inflation. Supply chain services experienced a decline year over year, primarily due to some facility foreclosures with our customers, as well as streamlining and the efficiencies we brought to our new diversified chemical customer that we added last year. This happens as part of our value proposition, but we do not anticipate any further material saving impact on DXP. As we move into Q4, we will look for new customer additions as well as continuing to manage procuring products and managing inflation both year-over-year and sequential growth will flatten out until we start ramping new customers. That said, demand for SES services is increasing because of the proven technology and efficiency they perform for all their industrial customers. But the sales cycle can be protracted, and we will look to our SES leaders to add new customers as we move into 2024. DXP's overall gross profit margins for the third quarter were 29.9%. a 113 basis point improvement over 22, and down 85 basis points sequentially. Overall, I'm pleased with our gross margins and our steady improvement over the last seven quarters. SG&A for the third quarter increased 4.6 million versus Q3 of 22, but SG&A as a percent of sales declined going from 22% in Q3 of 22 to 21.4% in Q3 of 23. SG&A continues to reflect our investment in our people and organization, and as always, it is my privilege to share DXP's financial results on behalf of these DXP people. DXP's overall operating income was 8.6%, or $35.9 million, which included corporate expense and amortization. This reflects 170 basis point improvement in margins over Q3 of 22. That being said, we still feel there is opportunity in operations to be more efficient. Service centers operating income margins were 14.1%, and IPS operating income margins were 18.9%, and supply chain services operating income margin was 8.5%. Overall, DXP produced adjusted EBITDA of $44 million versus $34.3 million in 2022. This turned into a year-over-year increase of $9.7 million, or 28.3%. Adjusted EBITDA as a percent of sales was 10.5%, up 164 basis points versus Q3 of 2022, and essentially flat with Q2 of 23. I am pleased by our performance in the third quarter. We still have substantial work to do to achieve our goals, but I am confident the team will continue to execute. We are growing sales in excess of market and expect that in the near future. We expect to drive strong SG&A leverage, manage working capital, and generate free cash flow. If organic growth slows, then free cash flow will grow, and we will take advantage of the economy to grow profitably through acquisitions. We have grown sales on a compounded annual growth rate of over 23% since COVID, and we have achieved new highs in both sales and profitability. And I would like to thank our stakeholders and especially our DXP people. With that, I will now turn it back over to Kent to review the financials in more detail. Thank you, David.
spk04: And thank you to everyone for joining us for our review of our third quarter 2023 financial results. Q3 was a great quarter for DXP, and our results are in line with our expectations and reflect the positioning we were anticipating as we prepare to go into fiscal 2024. This quarter reflects our third quarter of 10% plus adjusted EBITDA margins, strong free cash flow generation, and meaningful diluted EPS growth. We are excited to report these results and we look forward to successfully closing out 2023 and starting fiscal 2024. Specifically, Q3 financial performance reflects our ability to continue to successfully navigate through the market and create value for all our stakeholders. As it pertains to our third quarter, Q3 highlights are as follows. Strong year-over-year organic sales growth, lessening impacts from inflation and price increases compared to a year ago, continued gross margin strength and stability, continued year-over-year and sequential growth in the IPS energy-related backlog, consistent operating leverage leading to sustained adjusted EBITDA margins, more notably our third quarter of 10% plus adjusted EBITDA margins, and significant capital return to our shareholders through our share repurchase program. Total sales for the third quarter increased 8.3% year-over-year to 419.2 million. Acquisitions that have been with DXP for less than a year contributed 3.9 million sales during the quarter. Average daily sales for the third quarter were 6.7 million per day or essentially flat to Q2 and were up 10% versus Q3 2022. Adjusting for acquisitions, average daily sales were 6.6 million per day for the third quarter. That said, average daily sales trends during the quarter went from 6.58 million per day in July to $7.1 million per day in September, reflecting a typical quarter-end push as we close out the third quarter and an uptick from the Q2 23 month of June versus September, or $6.9 million per day versus $7.1 million per day. In terms of our business segments, service centers grew 13.2% year-over-year. This was followed by innovative pumping solutions declining 0.1% or essentially flat year-over-year, and supply chain services declining 3.5% year-over-year. In terms of our service centers, regions within our service center business segment which experienced notable sales growth year-over-year include the North Rockies, North Central, Alaska, and Texas Gulf Coast. Key products and end markets continuing to drive sales performance include air compressors, rotating equipment, and chemical, general industrial, food and beverage, transportation, and energy. Supply chain services performance continues to reflect the impact of the addition of a large diversified chemical customer that we added in Q2 of last year and is fully ramped as of Q2 of this year. That said, supply chain services experienced a decline year over year primarily due to some facility closures with existing customers as well as the streamlining and efficiencies we brought to our new diversified chemical customer that we added last year. As David mentioned, this happens as a part of our value proposition meaning we anticipate reducing a customer's absolute spending volume by improving their purchase behaviors and inefficiencies. This customer contributed 16.1 million in sales during the quarter versus 16.5 million a year ago. As we move into Q4, we will look for new customer additions as well as continue to manage recurring products and managing inflation, but both year-over-year and sequential growth will flatten out until we start ramping new customers. In terms of innovative pumping solutions, We continue to experience increases in the energy-related backlog. Our Q3 energy-related average backlog grew 7.9% over our Q2 average backlog, which continues to be a notable uptick compared to Q1 of this year and continues to be ahead of our 2015, 2016, and 2017 average backlog. The conclusion continues to remain that we are trending meaningfully above 2016 and 2017 sales levels, and we're moving towards 2015 levels based upon where our backlog stands today. We have been experiencing strong organic sales growth within IPS, as we mentioned in the first half of 2023. We expect that to continue throughout 2023 and into 2024. Additionally, we are also continuing to find opportunities in other markets. In terms of our DXP water backlog, we experienced a sequential increase of 28.2%. Turning to our gross margins, DXP's total gross margins were 29.95%. 133 basis point improvement over Q3 2022. This improvement was driven by strength in our IPS business segment, showing the greatest improvement with margins improving 430 basis points on a year-over-year comparative basis. This was followed by a 49 basis point improvement from service centers. That said, from a segment mixed sales contribution, service centers contributed 70.2%, supply chain services 15.7%, and innovative pumping solutions was 14.1%. Compared to last year, SES's mixed contribution was higher at 17.6 percent, which impacted margins in Q3 of 2022. In terms of operating income combined, all three business segments increased 139 basis points in year-over-year business segment operating income margins, or 9.8 million versus Q3 2022. This was driven by improvements in operating income margins across all three business segments. IPS operated income margins improved 651 basis points driven by the addition of water and wastewater acquisitions and overall improvement within the energy-related IPS business. Service center operating income margins improved 34 basis points on a Q3 comparative basis in year-over-year operating income margins. Supply chain services operating income margins approved 67 points, six basis points on year-over-year comparative basis. The improvement in service centers reflects the impact of acquisitions at a higher relative operating income margin. Total DXP operating income increased 170 basis points versus Q3 2022 to 35.9 million. Our SG&A for the quarter increased 4.6 million from Q3 2022 to 89.7 million. The increase reflects the growth in the business and associated incentive compensation, as well as DXP investing in its people through merit and pay raises that we continue to experience. SG&A as a percentage of sales decreased 57 basis points year-over-year to 21.4% of sales. We still anticipate that DXP will benefit from the leverage inherent in the business despite increased operating dollars supporting our growth, cost inflation, and the impacts of acquisitions. Turning to EBITDA, Q3 2023 adjusted EBITDA was $44 million. Adjusted EBITDA margins were 10.5%. This is our third quarter of sequential adjusted EBITDA margins in excess of 10%. and we will look for this to continue. Year over year adjusted EBITDA margins increased 164 basis points or $9.7 million. This reflects the fixed cost SG&A leverage we experienced as we grow sales. This translated into 3.4 times operating leverage during the quarter. In terms of EPS, our net income for Q3 was 16.2 million. Our earnings per diluted share for Q3 23 was 93 cents per share versus 71 cents per share last year. Of note, we returned $22.6 million to shareholders through our share repurchases during Q3. Turning to the balance sheet and cash flow, in terms of working capital, our working capital increased $10.4 million from December and decreased $11.9 million from June to $287.5 million. As a percentage of sales, this amounted to 17.1% of last 12-month sales. At this point, we have moved in line with our historical averages or range in terms of investing in working capital, and we have moved off our Q3 2022 high of 19.9% of last 12-month sales as we have onboarded some of our recent acquisitions for a full 12 months. We do anticipate further acquisitions, so as we move into fiscal 2024, this could move upwards, albeit we are focused on managing working capital as efficiently as possible as we scale and grow. In terms of cash, we had 27.2 million in cash on the balance sheet as of September 30th. This is a decrease of 18.9 million compared to the end of Q4 2022, and an increase of 11.6 million since June. This reflects the strong cash flow generation we experienced during the quarter, which we will touch upon later on in my comments. In terms of CapEx, CapEx in the third quarter was 1.5 million, or a decrease of 327,000 compared to Q2 23. We still are ahead of our fiscal year 2022 levels. We continue to reinvest in some of our facilities and equipment on behalf of our employees. As we move forward, we will continue to invest in the business as we focus on growth. Turning to free cash flow, free cash flow through Q3 was a positive 56.7 million, which reflects free cash flow produced a 38.3 million for the third quarter. This was driven by an 11.9 million reduction in working capital along with our sustained earnings through the quarter. Specifically, we lessen the impact from investments and project work, along with a small increase in payable days. That said, while we continue to make improvements in our free cash flow, when we are growing, DXP makes significant investments in inventory and project work throughout the year, and we have experienced significant step-ups since Q4 of last year. Return on invested capital, or ROIC, at the end of the third quarter was 34% and continues to be above our cost of capital as reflecting our improved profitability levels. As of September 30th, our fixed charge coverage ratio was 2.67 to 1, and our secured leverage ratio was 2.36.
spk03: Ladies and gentlemen, this is the operator. Please stand by. We are experiencing technical difficulties. One moment, please.
spk02: Ladies and gentlemen, this is the operator. You have gotten, we are experiencing technical difficulties. Please stand by. Ladies and gentlemen, we are experiencing technical difficulties. Please stand by. Hi, okay, you may now begin.
spk04: I understand we got temporarily disconnected, so I'll turn back a few paces to when we started discussing our balance sheet. So turning to the balance sheet and cash flow in terms of working capital,
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