Q3 2019 Earnings Call
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Would now like the hand your comments over to your speaker today can you. Please go ahead Sir.
Thank you Marcello.
Thank you this is K.E.M. welcome to D.S.P.'s cues.
Many 19 conference call. This discuss our results for the third quarter ended September 30th 2019, joining me today is our chairman and C.E.O. David Little.
Before we get started I want to remind you that today's calls being webcasting 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 R.S.C.C. filings.
The X.P. assumes no obligation to update that information as a result of new information or future events.
During this call we may present, both gap and non-GAAP financial measures of reconciliation of gap to non-GAAP measures is included in our earnings press release. The press release at an accompanying investor presentation are now available on our website at I.R. Dot D.X.P.E. Dot com.
I will now sort of the call over to David to provide his thoughts and a summary of the third quarter financial results.
<unk> yeah it.
You keep today or yeah.
[laughter] for our budget anyway, thanks, everyone on or 2019 third quarter conference call him will take you through the coupon into details that promote mark.
After our prepared comma, we will open up for Q. on it.
It is my privilege to share D.S.P.'s third quarter results with you on behalf of over 2700. The people congratulations dollar stakeholders and especial planes to U.R.D.X. people you can dress.
We are pleased to announce wrong third quarter results will sales operating income and earnings per share all up over the prior you're.
This is a great way to start the second half of 2000 in 19.
Continue to deal with the ups and downs of our economic environment as well as our key in the market indicators are showing salons signs up slowly.
We remain focused on serving our customers and providing products and services that help them say money.
Consolidate their M.R.O. spin manage their inventory provide solutions to solve the revolving needs.
Customer driven and growing sales profitably is our goal and in physical 2000 in 19, we have executed on this goal by one expanding our product offering within pumpworks, starting at Greenfield start up in Pittsburgh.
Expanding our aftermarket service and repair business.
Implementing software upgrades for one of our largest logistics customers investigating and machine machinery and equipment to increase production of rotating equipment consolidating and expanding various service center facilities enlarging our vendor manage inventory programs and.
In implementing new sites within supply chain services.
Versus the pod industries outside of oil and gas.
Additionally, we have invested in our D.X. people were training upgraded computer tools and a consolidated corporate facility to bring everyone together.
Our focus over the last 12 months has been on organic growth increase gross and increasing gross profit margins increased productivity.
Are execution has resulted in both top line and bottom line organic growth.
That said our growth has not been as large as we would like so we expect to add some acquisitions to our results going forward.
[noise], we are excited about the future and delivering differentiated customer experience, creating an engaging winning culture per R.D.X. people.
Investing in our business to strengthen our core capabilities and gripe long term bro.
[noise] Your day through September 30th total sales were up 7.4%.
Raining income is up 23.7%.
Total sales for the third quarter grew 6.2% to 327.2 million and we were able to deliver 54% diluted earnings per share growth over the prior your water.
[noise] sales growth year today to has been driven by supply chain services up 18.5% compared to the same nine month period in 2018, we continue to roll out new sites and add in market diversification to D.X.P.
<unk> pumping solutions segment continues to perform and his up 8.9% on a nine month comparable basis. This continues to provide us considerable go given the strong sales performance across I.P.S. last year.
Moving to our third quarter results total D.X.P. revenue 327.2 million for the third quarter of 2019 was a 6.2% increase your over here.
Terms of sales increases by business segment I am pleased with the contribution from all three segments with the greatest increase your over your coming from supply chain services, which grew 17.6% 251.3 million.
Innovative pumping solution sales increase 7.2 per same year over year to 82.2 million, while service center sales increase 3.2% year over year to 193.7 million.
Overall this is similar to what we experienced in the second quarter and continued growth is great to see.
Bloodstains growth reflects the addition of new customer side, they have implemented teen plus news sites since Q3 over here, including customers and medical device aerospace and food and beverage.
Innovative solutions sales increase continues to be driven by our modular package equipment or both.
The T.O.N.E.T.O. jobs in the upstream mid screen refinery chemical petrochemical and power customers.
The service center year over year sales growth was primarily driven by increases in our rotating of equipment metalworking and industrial applies product divisions.
Then service centres, we saw particular year over year sales strengthen the Ohio River Valley work taxes, and the worst sent all regions.
The X.P. overall gross profit margins for the third quarter or 28.3%.
And four bases born improvement over 2018, and I used to potential increase of 73 basis points.
S. G.N.A. for the second quarter increase 3.7 million versus <unk>, three year 2018, S.G.N.A. as a percentage of sales decline going from 221.8% and Q3 of 18% to 21.7% you three of 19.
S. G.N.A. continues to reflect our investment in our customers people in our organization as always it is my privilege to share D.S.P.'s financial results on behalf of these D.X. people.
The expertise overall operating income margin was 6.6% or 21.7 million, which included corporate expenses in amortization.
This reflects 118 bases point improvement margins over Q3 of 2018 that being said, we still feel there there's opportunity in our operations to be more efficient.
Service centres operating income margins were 12.9% I.P.S. operating income margins were 12.3%.
Supply chain services operating income margin was 6.1%.
Given though that supply chain services investment and new site implementations operating income margins will improve going forward.
Overall, the X.P. produce <unk> 28.2 million versus 23.2 million in 2018, this turned into a year over year increase to 5 million or 21.4% increase.
Yeah, but as a per cent of sales was 8.6% up 108 basis point versus Q3 of 18 and essentially flat with two two of 2000 in 19.
I am pleased by our performance and the third quarter, we still have substantial work to do to achieve our goals, but I am confident that the team will continue to execute.
We are growing sales and excessive market and expect that into the near future. We expect driving strong S.G.N.A. leverage managing working capital and generating 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.
Well that I will now turn it back over to can't to review the financials in more detail.
Thank you David and thank you to everyone for joining us for our review of Arthur corner financial results.
Two three it was a great quarter for D. XP and our results reflect our ability to gross sales and improve margins in varying market environments. We continue to grow sales improve gross margins and our balance she continues to be points to be acquisitive. The key themes for fiscal 2019 remain the same strong sales growth within some.
Chain services gross margin expansion and improvement within an innovative pumping solutions. Additionally, we've had strategic investments to drive organic rose kind of improvement in our operations.
The nine month period ended September 30th 2019, total sales grew 7.4% to 971.7 million and operating income is up 23.7% to 59.4 million.
Alluded earnings per share is up 38.4% to $1.84 per share for the nine month period.
D.S.P. continues to perform as we have moved into the second half of the year and look to close out fiscal year 2019 with the same momentum.
Total sales for the third quarter increase 6.2% year over year to 327.2 million third quarter sales growth. What's on your bike D.S.P.'s three business segments third quarter sales growth was led by supply chain services growing 17.6% year over year to 51.3 million.
Followed by innovative pumping solution is growing 7.2% you over here to 82.2 million and service centres growing 3.2% 193.7.
Average daily sales for the third quarter were 5.1 name per day first 4.9 million per day and Q3 2018.
Sales growth in supply chain services is the result of adding 14, new customer sites within the food and beverage aerospace medical device and all the gas industries, which has been occurring since Q3 of 2018.
You start to see sales fully ramping at these sites as we close out fiscal 2019 and move into fiscal year 2020, as David mentioned the roll out of new sites does impact operating income margins over the short term due to implementation costs, including inventory burn off and they initial hiring of onsite personnel without the corresponding revenue.
Additionally, during the third quarter supply chain services, what's impacted by costs associated with implementing a new warehouse management package on behalf of one of their customers going for we expect their operating income marches to improve.
Innovative pumping solution sales growth continues to include both configured to order and engineer to or related projects, serving customers in the upstream midstream refinery chemical and power markets.
<unk> within our service center segment, which experience meaningful sales growth and the third quarter include the Ohio River Valley, North, Texas, and North Central regions.
Turning to our gross margins D.S.P.'s total gross margins were 28.3% 104 bases point improvement over Q3 2018, they improvement in D.S.P.'s total gross margins reflects a 77 basis point improvement in service centres and I've 304 bases plant improvement within R.I.P.S. business segment on a year over year basis.
In terms of operating income combine all three businesses segments improved by 91 basis points a year over year business segment operating income marches versus Q3 2018.
Oh, the X.P. operating income increased 118 basis points versus Q3, 2018 to 21.7 million.
Innovative pumping solutions improved operating income margins 85 basis points to 10.1 million, while service centres improved operating income barge into 197 basis points to 25.1 million.
Supply chain services decrease 285 basis points year over year again, this was driven by the implementation of new I.C.S. sites as we mentioned during our chewed wanting you to conference calls as well as absorbing some costs associated with implementing new warehouse package during the quarter.
Turning to either die, even die was 28.2 million and Q3 up 21.4% for Q3 2018.
Year over year, even <unk> margins are up 108 basis points for the nine months, it's translated into 1.7 times operating leverage and for the quarter 3.5 times operating library.
In terms of tax are effective tax rate was lower this quarter, primarily due to the impact of future statutory rape change from 12% to eight per cent in Alberta, Canada and increase benefit from Oriente tax credits that D.X.P. has previously received in the past.
Terms of R.E.P.S.R. net income for Q3 2019 was 13.1 man.
This is at 4.7 million or 56.1% versus Q3 2018, our earnings per diluted share for Q3, 2019 was 71 sense versus 46 cents in Q3 2018.
[noise] turning to the balance sheet.
In terms of working capital are working capital was 250.5 million at the end of the quarter. This amounted to 19.5% of our last 12 months sales. This is above our <unk> above our store will average, but below target it ranges, albeit at the higher end. The main drivers of the increase in working capital. During two three included a 3.9.
And increasing inventory accompanied by three they decrease in our D.O. days or 6.1 million reduction and accounts payable. We recently invested in a new peculiar to pay platform Cooper and we have seen the impact of this investment in managing our financial relationship with our vendors.
Helped us get more in line with painter vendors over the short term, we will be in a better position two strategically manage accounts payable as we move forward and take advantage of purchasing data and trends in the future.
Inventories up 15.4 million from Q4 an inventory days on hat on hand, excuse me have gone from 47 to 52 days as we adjust for current market dynamics, we expect inventory to come down and thoughts contributing to improvements at working capital. That's sad part of the increase reflected he has to be carrying higher levels to support.
Revenue growth and investment we expect with an I.P.S., we achieved inventory true seven times during two three.
In terms of cash we had 28.6 million and cash on the balance sheet of September 30th.
In terms of <unk> and the third quarter with 5.7, then or 1.7% on third quarter sales compared to the third quarter of 2018 cap x. dollars or up $3.5 million.
<unk> during the quarter reflects investments made within our facilities, including our corporate office, which is largely completed and the corporate support team is in one facility together fabrication facilities in Houston and other service Center locations also had investments. We also are continuing to make investments in software to enhance our corporate support operations and provide or people with.
Needs to be more efficient.
Fiscal 2019 has been a year, where we have focused on growth cap acts first ingest versus Jess maintenance cap X. Other 14.2 main year today cap x., 75% or $11 million has been growth related.
But turned on if that's the capitals are are Oh I see at the end of the third quarter was 25%.
During two three.
Oh I see what's impacted by then I may an increase in working capital from Q.T. Q3 in terms of our capital structure at September 30th are fixed charters coverage ratio unsecured leverage ratio was 3.6 to one and 2.0 to one respectively total debt outstanding that September if somebody's it was 250 million.
In conclusion, we look forward to finish in the year strong executing on our strategy growing sales <unk>, both organically on through acquisitions and driving gross and even dot margins momentum has it been good and we look forward to finish in the year strong I will now turn the call over for questions.
[laughter] I'd like to remind everyone.
Ask a question.
Crestar and the number one on your telephone keypad.
Yeah first question comes from line.
<unk>.
Your line is helping.
Oh, that's close enough good morning gosh.
You do more and more blood I congratulate right corner here.
Thanks, I do start I guess, that's they get the service centres the margins there were.
Good I think they were the highest had been in like five or six years can you talk a little bit more about what.
Kind of driving that if there was anything I don't know any kind of like at one time gain in the corridor and.
Sustainability, if it was margins.
Yeah.
[noise] sure as you know our goal was to get get margins up.
Gross margins.
And at the same time.
<unk> Oh.
Are under pressure to give people raises that haven't Adam in the past them. So so expenses are up just a little bit but not not to the extent that that sales are and and then growth will actually expenses are now I'm sorry.
<unk> I was looking at wrong column.
The yeah 34 million to 33 million and and then margins were up there wasn't nothing unusual about that there's nothing unusual about our service center business. It's just it's it's localized business taking care of the customers need on a a very quick.
Fast inconvenient way and so that business is is held up nicely. It's it's not going off the chart, but it's it's holding up really really nice and so we're really proud of those guys and they've done a good job of managing expenses and and inching gross profit margins up so.
We don't we don't expect.
That.
<unk>.
No have they push the envelope I guess, maybe they have its its things started getting a little more competitive out there in terms of sales then you know more of.
Buyer's market than a seller's market so to speak so we're not sure about that but that happens in that would that would cause some margin pressure, but in general there's nothing unusual there and we would hope to sustain that yep, yeah, Blake the only thing I'd add on there there there wasn't anything necessarily unusual now.
Or outside of you know the strengthen our business. These this year from a product division backed up has been around rotating equipment as well as we've had some improvement in margins in the Canada and so I think those are are contributing this quarter to kind of the the up side, but the the the large.
<unk> benefited service centres this quarter came from an improvement in gross margins. You know, we don't we don't disclose a segment gross margins, but that's not a larger benefit came from an improvement in gross margins within the service center. So.
Got it that's encouraging here and then.
And over to I.P.S.
<unk>, but did you touch on trends and backlog air.
And then a follow up to that you know if you could talk about the margin figure C.N.N. backlogged versus Canada.
12, 12, five that we saw in the corner.
Yeah, No just in terms of I.P.S., we did see a d. celebration in the trends in the backlog Blake is the way I put it <unk> you know for the first time, probably I'm on a year over year basis. We we saw deceleration I think when we talk about it we typically talk about 2% growth.
So what I would say as we once again, we saw in deceleration there that's sad when we talk to the segment segment leaders in I.P.S. You know, we feel like will continue to finish up the air strong in their focus on I'm getting bookings if she well going into 2020, you know <unk>, we'll have a better.
That obviously by the end if two for you know once again, the average age of that backs backlog and very anywhere between you know six to months' as long as 12 to 15 months and so but <unk>. We did see for the first time of day celebration in that trend that said we're off a strong years you know the stock is pretty high.
We grew sales 40, plus per cent last year, and Robert and others, Hi single digits seven 8%. This year. So deceleration is not necessary cause for concern at this point, it's more about kind of what we have going into 2020.
Yeah.
Your next question comes from a line of the Steve merger from Keybanc Capital. Your line is open.
Oh, Hey, good morning, guys. This is actually Ken Newman on for Steve. Thanks for taking my question.
Yes. Thanks.
I just wanted to hit back on the service Center margin. It's it was good to hear that you know the business is performing well and I understand the the strong nothing unusual in the in the gross margin performance, but maybe a little bit more color as to.
Maybe price caution in that business or any impacts from mix that you saw in the quarter relative to what you've seen in the past 12 months.
You know once again came out I would say you know our rotating equipment Division, which is you know we have key five product divisions tends to be one of our more profitable product divisions and so that continues to perform that's where DXP has gotten a good amount of its growth. This year then the second item.
Is Canada, Canada last year once again, if you remember the dialogue and they were having challenges both from a gross and operating income margin perspective, and so a lot of that's.
Kind of for lack of better we're kinda.
We're working off that trough in so I think kind of if youre looking at it from last 12 month basis, that's what you're seeing an improvement there is kind of benefit of the mix of rotating equipment being one of our larger higher margin product divisions, and then candidate improvement in Canada.
And maybe you're also asking about tariffs and things like that that that's not affected us in any way.
Price increases were seeing we're glad to see them quite frankly in there and are in that 2% to 3% range and so we were able to pass that on everybody understands that we haven't had some increases in awhile. So I.
Idle literal seething negative there and we don't we certainly don't see any deflation.
That doesn't that's that's not in our that's not the kind of product we're buying so.
So we're we're in good shape.
That's helpful.
I wanted to touch on free cash flow.
The generation it looks like working cap was a little bit more of a headwind in the quarter relative to where you were on sales and where the margins were.
Oh, yes.
Any kind of commentary or.
Just how we should think about free cash generation as we think about the year wrapping up here in Fourq, you and how you're thinking about working capital improvements.
Going forward.
No absolutely in fair comment there hey.
<unk> cash flow from operations. This quarter is down on a year over year basis I'm part of that's just been purely been driven by during this time last year frankly, we started a new procure to pay platform Cooper.
Manage our relationship with our vendors on a more efficient basis, and we're starting to see the benefit of that meaning hey.
In some instances with key suppliers we weren't.
We were swear stretched numb unduly is the way I'll put it obviously, we're mindful of the impacts of working capital and manage that favorable to us as well as them.
And so what do you see there is a DPL depo days this quarter going down by three days. So that was a 6 million dollar impact there alone.
And then the other thing you see in our balance sheet. There is inventory continues to pick up what's really reflects the investments we made.
Well within some of the project side of our business as well as just trying to.
Meet customer demands there during the year, if you will and so we're going to look continue to look at that 19.5% is at the higher end.
You know, we prefer kind of I'll call it in the 16% to 18% range.
And we typically are peaking in Q2 in terms of working capital as a percent of LTM sales and then driving down as we go into Q3 in Q4 and this year, we're still kind of ticking up.
That said what I will say is today for example, we are creating free cash flow, we have $51 million cash on the balance sheet just from quarter end and so.
Q4 will be typically as it normally as is our heavy free cash flow generation quarter.
And so.
Not necessary concerns, but there's areas we're focused on and we expect to kind of drive if you will that free cash flow generation as we move forward.
The last comment and then I'll. Then then I'll then I'll be quiet is a fair amount of our Capex. This year has been growth related.
Versus maintenance related once again, 75% of what the 14 million we spent.
Year to date has.
In.
Growth related.
And so we have ability to control that and as we go into fiscal year 2020 with the backdrop. We have today. We're just we'll have those mindful thoughts on on top of us. So.
That's that's really helpful color I appreciate that.
Last question for me before I jump back into queue, you talked a little bit earlier on the call just about.
The M&A pipeline and priorities for capital deployment into the pipeline you just talking about where multiples are for targets right now how robust is that pipeline and any color and how larger deal you'd be willing to entertain.
The pipeline, we're always working and going in as David discussed Hey, we're we're working to close some transactions here.
Is the way I'll put it by year end in terms of your question around multiples Hey.
I think multiples are always and valuation is always a challenging discussion but.
You know their fair and we continue to be able to get them in the price, that's that's appropriate which for us.
As anywhere between you know I'll call it the five to seven times.
And so.
That's a fair value for the besides the businesses, we look at and were able to get those opportunities and so.
You know.
We we don't suffer for a lack of opportunities we spend our time being sure we have the right fit both culturally product in other lies and financially so.
Perfect. Thanks for calling.
Your next question comes from the line of Blake Hirschman from Stephens, Inc. Your line is open.
Hi, Yes, just a quick clarification on some of that backlog commentary I think you said deceleration I just wanted to make sure does that mean that growth is at a lower rate and it's still up or that the backlog is slightly down.
Well I think that.
Finally, downplay got it and I know you guys don't want to again.
20 guidance by any means but.
Could you kind of just look at what.
Years on both the you know industrial energy side I mean, it seems like just end market wise not specifically for you guys.
Got the industrial side is kind of shaping up for flat.
Slightly down and maybe a little bit worse on the energy side I mean, just as a general kind of lay of the land is that consistent with what you guys see and think about 2020 as we sit now.
I've been Blake, Hey, I think I think yeah, thats somewhat consistent I'll be at I., I would say hey, what you're correct, we don't give guidance, but when we look at all the indicators that we study.
The way I'd I'd put it is kind of we feel good from on the service Center perspective, we feel good from the supply chain services respect we feel good about IP, yes, we're just focused on that project business, because it's tied to those capex budgets and we don't have a view right now right.
A lot of those guys are going into their budgeting and planning season, and we don't have a view versus we can look at some of our other indicators and what kind of JJ has been doing in terms of winning new site implementations on or on our supply chain services business and and we can we can feel comfortable going into 2020, I think IP, yes, we just have to wait a little.
A bit longer to kind of get a little more clarity.
Got it.
As a housekeeping one can we get a monthly sales per day.
Throughout the quarter, absolutely absolutely I was waiting for that Blake.
Yeah.
So I'll just walk through the Q3 numbers and kind of where every kind of preliminarily at this point kind of.
Looks like Brad for October .
On July was 5 million August was 4.9 million September was 5.4 million for Q3 average of 5.1, and then October was at 4.7 million.
Keep in mind, if you look at that on a year over year basis.
That would suggest you know 2018 were little bit at 4.6 million. So I think the trend is very similar in terms of what you're doing and so that that would just be my only additional point of color.
So im a point would be that.
The first month after four quarters, typically a little lighter and Anna grows even though October had a lot of days in it you would like it would.
Please stellar but it.
Okay.
But it wasn't so will we but we're.
We're not they're concerned about that.
Got it.
Lastly, there now.
I'll stop.
You guys announced a new pump the PW a FL.
I think I got that right back in.
August or September I believe.
Can you kind of talking about you know anything you can share on the addressable market opportunity over time penetration and kind of what sets that product apart from the others that are out there thanks and good luck.
Okay Blake thanks.
Sure I'll answer that.
We.
We.
We created a pump that that's in the Yancey field.
But it has it doesn't have a seal and so that's why it's called our Pwc its pump works and see seamless SLC lists and so with the seamless pump does is eliminates the need for metallic or a metallic pump haven't eminent seals.
So therefore.
It's very likely I'm not going to say.
People will say, 100%, but on the play 99%, so I don't get suit.
From bleak link so it's really an environmental friendly.
Up in it and it competes with the cost wise, a pump that hasn't steel so we're pretty.
Excited about that.
It's really a dynamic.
Product and it's a you know something very new and mobile market.
And we feel good about that that's that said like any new product going into.
Industrial and oil and gas field.
Pages is some work so so I'd call. It we've quoted about 300 of these things we've gotten close to 100 orders Forum.
It's the license growing and.
It's it's not move and DXP is needle to be quite honest from that point of view from a revenue generation deal, but it is a really needed product in it it creates.
Differentiation with the Pumpworks brand and so we're excited about that well ports also has.
Had some success with us significant account a pretty hard when the crack in terms of Chevron up in Alaska was a significant when they're they're using that pump and and a lot of our midstream customers or.
Our pretty interested in it.
There's also some.
Other things no our custom pump deal because we have a.
You know with what's interesting about pump works to describe it in a way that I think is meaningful that.
The.
So our competition has a world lean supply channel.
Designed to make everything she.
And we have a United States supply channel.
Designed to make everything past.
So you can imagine if you're getting your peller from Korea, and your castings from China, and et cetera, and you're trying to put all that together United States that those are just the challenge of speed and being a pull all that together versus our our castings and manufacturing centers all done in United States. So we're not the cheapest.
But were the fastest and that's worked well for us.
And and we're pretty proud of that.
Again, if you like to ask a question. Please press star and the number one is on your telephone keypad.
Your next question comes from the line of Joe Mondillo from Sanofi Company Your line.
Hi, guys good morning.
Hey, Good morning, Joe Joe just wanted to understand the or how much of a contribution the perform better performance that you saw in Canada. The service Center.
Part of the business was could you.
Frame it like you know in terms of a year over year comp or how much how much better to that part of the business perform at the service centers.
Compared to last year.
Yeah, Joe I'd have to get that for you I'm on I don't have it directly in front of me, but I can follow with you, but I know.
What I know is you know from a revenue perspective, you know they were you glass year. Once again, if you remember the dialogue there. They were they were down almost near double digits. This year that only down 2.6%, 3% on a year over year basis. So that so that the they're working off that trough and kind of kind of bouncing back at the.
They also.
And have had some improvement in their margins as they've worked through 2019 once again.
So I'll give you a little more color first of all that pros are rotating equipment company antenna.
They've [noise].
They really turned the corner reasons ago.
Recently isolated.
Right.
We have good margins above those center at night.
Net income more than sort of.
10 or so.
The and they they've been doing.
It was our who is our safety services company.
That.
At a poor management.
We are the management.
There is that new people live.
It's already making great strides.
Gross profit margins the younger bond sales like if so would help Joe but.
Gross profit margins have gone from 20% to 40% and and there and are making.
Some nice.
10% operating income margins and so that's been a really great nice turnaround.
Well they still have a segment IP is which is medical services.
Paramedics.
And again, we had.
Soon.
Some management the that wasn't doing things very ethically and so we're still in the process a turn that around so they still have some upside potential.
And so we're excited about that and or the same team is working on that but it's not were needs to be.
And.
But it will get there's that said, Canada has a lot of headwinds.
All everything I've talked about will happen that pro as.
Well, it's not quite half to half of its on the East Coast, Canada. So that's more of the water because more of them and this will business and that's pretty solid and and doing really really well than the others, Alberta too.
That's cashew on in those areas certainly that is oil and gas in the have Vancouver on the West coast, which is a food and beverage.
Fisheries and things like that so.
They got to mix deal, but but they've been pretty strong headwinds in terms of oil and gas because the customers.
The customers there are not only in the United States customers are saying, we're going to live within our cash flow and and not borrow a bunch of money Canadian people are saying, hey, we're going to buyback our stock and pay down debt.
So the their budgets are tight, but we have a dominant position up there and so we do we get way more nurture and and so they're doing a really really nice job of of doing pretty well in a pretty tough oil and gas club.
Yeah, Joe just to give you give me a sense of the improvement other operating income margins, it's a little over 300 basis points and the Canadians safety services business and so.
Hopefully that gives you a little bit better color just in terms of their improvement from operating income and that's on a year over year basis, comparing Q3 2018 versus Q3 2090.
Okay, great. Thanks.
And then on a it's certainly sounds like mix was up a pretty good positive for certain service center you called out rotating equipment has been quite strong <unk> could you just talked about the markets that are driving the rotating equipment demand and how that sort of trending into the fourth quarter.
Once again I'd like to think of it in terms of our regions and so once again, the Ohio River Valley, North, Texas, North Central regions and those literally are.
Regions within the United States, but you know you, Ohio River Valley, you know that's kind of the rust belt. So there's some chemical there steel steel.
Those type of markets North, Texas, you know that that's that's some midstream oil and gas.
And then north central <unk> as well as finished strong region, which is more kind of food and beverage kind of and more industrial side of things but.
So.
Okay and then.
So if we do see a slowing as it seems like into the fourth quarter.
Just trying to think of the I mean, the 12.9% margin that you saw in the third quarter I.
I think it was second highest in company history behind a quarter back in 2013. When we were seeing you know you know the huge oil and gas shale boom.
Has anything structurally changed since then and.
How I'm just still trying to figure out how sustainable you know, 13% Op margin got service center are.
I think Joe Hey effects are correct, though I'm not I'm not going to argue with your facts I think.
No.
Yes, typically what we said you know.
Let me tell folks is a target our goal for our service centers is that color call, let that 12 the.
13% operating income and they're kind of the there on the top of that right.
You know you know mix definitely always impacts us of what's going on out there.
And so that could move on us or we could have one strong quarter, well, where metal working as a little bit higher which tends to be from operating income a little bit lower margin business.
Theres a lot of factors that can feed into it I think if you look at year to date, there at 11.6% versus just kind of the 12.9 in the quarter.
Once again, we don't give guidance, but I think EA as long as are performing in that 11% to 13% range, that's where we drive those guys towards driving towards improving their gross profit margins and so we're going to continue to do that so.
I don't know if that answers your question, but.
That gives you feel how we think about.
Okay no yeah. Those that was good. Thanks last question just on the M&A side of things.
So you are levered out I think around two times.
That's correct EBITDA.
That's correct.
I've been where we are in the cycle.
Slowing industrial production, you know environment I'm, just curious what you're sort of what sort of your threshold or how high levered up would you want to be.
Given the environment.
Once again, we've got cash on the balance sheet Joe So.
We ended the quarter, we had 28.6 million today I've got you know $50 million, where the cash on the balance sheet and so.
Once again, we're not going to buy a broken business, we're not going to buy off by a falling knife, we're going to buy businesses in the perform but we can probably find businesses in markets that are for lack of afterwards, a little bit counter cyclical are performing in this environment and as long as we can get them at the multiples that we think our fair we're going to we're going to pick those guys up.
And so and if that's not going to necessarily increase our leverage once again, you know, we're going to get earnings with that and with the cash on the balance sheet. It provides us at this point in the cycle an opportunity to be up you know I'm proactive rather than reactive so so I'd like to comment on that.
Since I'm responsible for the equity section.
Well first of all our our debt structure is so entirely different you know them. When we had the bank days and and the XP never made.
Never missed the principal payment on interest payment, but we were in technical default, so weve pretty much eliminated all those technical bowl probabilities and in doing so we pay a little higher interest rate than if we were at a bank. So that that's a givens, but we sleep at night no one that.
I don't have a dumb bank looking over our shoulder.
You can tell I like them, but anyway, so that our debt structure is what it is and it's really much more flexible.
Then you take the fact that you know things slow down then then working capital comes down and therefore, we generate cash flow and then certainly that's what our.
Our competition or what's perceived as our competition I hate to.
We're going to admit there are companies.
They are in part of our business.
We are doing so so we'll generate cash flow. Then then the question then becomes we what we have lined up all the way is is acquisitions that have nothing to do with oil and gas.
There are municipal and or in other industries that that are diversifying us away from oil and gas in fact, we looked at oil and gas and it's now under 50% of our business.
And so we want to continue to play in oil and gas because as we know it's it's it's a good market of eventually it does cycle when it gets a little lumpy at times, but.
So so if we take our cash and we don't have.
Dumb covenants, we're really in a position to deploy our cash to grow the company. We're we're really a small company and we need to we need to be a.
Two 5 billion dollar company and so that's what we're back on that program and a that's that's what we're going to the.
Okay, and then I actually just had one last question.
I think the new facility that you're building I believe it's related to the Btwenty seven business I think what what did the status of that and do we still have the old building, where we're still seeing some costs related to that.
Yeah, just a little correction there Joe as it pertains to our legacy 529 facility and their their call. It 90% moved into the new facility they have a little bit of there.
They're HP plus test stand at some things kind of still in transition, but we we expect by the end of the year they'll be a fully into the new facility and so.
That's that's really the update there and that's our fabrication just to be clear that's our fabrication facility here in Houston are one of them.
Okay. Thanks for that clarification, just a follow up though.
Are we seeing I'm still some cost overruns and yeah, yeah, yeah, Yeah, I'm, sorry, yeah, a smaller amount, though once again not to get into the Nitty gritty.
Because it involves a third party landlord, but.
We are carrying some additional costs temporarily until they get into the facility, but nothing I would say, a notable but but but a small amount.
And what about inefficiencies like production wise because of the truth is there any.
No nothing there number.
Alright, Thanks, a lot I appreciate it thanks for taking my questions.
No.
There are no further questions at this time.
This concludes today's conference call you may now disconnect.
Right.
Yes.