Q2 2020 DXP Enterprises Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the de X P enterprises, Inc. 2022nd quarter earnings call.
It's time, all participants are in a listen only mode. After the speakers presentation. There will be a question answer session.
Ask a question during the session you want me to press Star one on your telephone if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to your Speaker today can <unk> Chief Financial Officer. Thank you. Please go ahead.
Thank you Mary AMR.
This is KCI and welcome to Dx piece Q2, 2020 conference call to discuss our results for the second quarter ending June Thirtyth 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.
Detailed discussion of the many factors that we believe may have a material effect on our business on ongoing basis or contained in our SEC filings. However, DXP assumes no obligation to update that information as a result of new information or feature 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.
Press release, and an accompanying investor presentation are now available on our web site at IR that B.S.P.E. Dot com.
I will now turn the call over to David to provide his thoughts and a summary of our second quarter.
Good morning and vote.
Good morning, and thank you again and thanks, everyone for joining us today on our 2022nd quarter Conference call.
Given these unprecedented times, we were pleased with our results for the second quarter a year to date as we get the halfway point.
I am proud of our tremendous DXP people as they have continued to find ways to deliver financial results for all our stakeholders and that they still but extra award.
There are challenges related to cope with Nike.
Accordingly, we remain well positioned to deliver strong long term financial promotion, we will position ourselves to drive sales growth.
Oh Gee, the our vision of excellence for our Dxpeople customers suppliers sure stakeholders.
Communities.
I will start this call by updating you owned developments since our first quarter call and discuss some of the actions we're taking to the.
Successfully navigate the rest of the year and beyond.
Good will then take you through the key financial details after my remarks after his.
Prepared comments, we will open for acuity.
Before I update you on developments since the first quarter similar to our last call I want to reiterate that our thoughts and prayers go out to all those affected by cobot 19.
With the recent surge and positive cases, which we have experience first hand here in Texas, We're all aware.
At this pandemic is far from over and it is still resulting in tragic loss of life, social socialize isolation significant economic hardship.
As did the way of not escaped these many challenges and yet we feel very fortunate to be here in a part of the XP.
We are a financially strong industrial leader and we are finding ways to work through and remain successful today, well, putting us in a position to be successful tomorrow.
We also believe that we must be opportunistic and find ways to move forward with safety and mine and drive strategic growth.
As I mentioned during our last call in mid March and into April Weve quickly rally the our team around three fundamental priorities, which were to maintain health and safety of or Dxpeople.
Provide excellent service and support to our customers and manage our balance sheet on unexpected lowered near term the man.
We remain strong and poised for an eventual recovery.
Hi, I'm very proud of how are the X P team has managed and balanced these priorities in what continues to be an unprecedented and unique environment.
Our second quarter results reflect us being beginning to deliver on these priorities, while finding ways to work in our new normal.
The recovery and rebounded somewhat experienced in may and part of June appears to be short lived this cases picked up after stay at home waters relaxed and the good businesses began returning to work.
In addition to implementing the CDC guidelines, we added cover face covering requirements enhance social dismissing and our locations the design to present the spread over bars world continuing to work.
That said the eggs he did experience a surge and internal cases, similar to what Texas experience.
Finally, we continue to limit travel.
Meetings, a bench supplier visits and we continue to have those people do more productive and able to work from home.
In summary, we were adapting to operating safely and they covert 19 environment. While also adopting new managers. They can help to prevent the spread of this fars.
In terms of business the man and coated our sales were impacted starting in mid March we experienced the additional declines in orders in the months of April May and June.
The pace of decline appears to slowed during the quarter as sales per business day in April were down 12% from our Q1 average well June was down 1% for me.
In terms of our key end markets.
Upstream oil and gas continues to contract.
The U.S. and Canada average quarterly rig count is down 57% from Q1. The Q2. This primarily affects the man within our safety services Division and a subset of supply chain services and other service center locations.
However, DXP safety services also.
Reform plant turnarounds, which have been delayed but not cancelled and should be a positive overtime.
Midstream only gas as it relates to the pipeline activity continues to execute small projects.
And it has not canceled any large orders, but we are now getting pressure to push some projects back into physical year 2021.
Additionally, the bookings are projects, we are winning tend to have a smaller average order size and less gross margin.
Downstream and the refinery business has seen their utilization rates.
From Q1 average, 88% to an average of 72% thing Q2.
Well during this quarter, we experienced the largest sales declined within our supply chain service business segment, we were expecting I P. S business segment will suffer the largest sales impact as new capital projects are tied to capital budgets.
And the oil and gas Ingres screen is yet.
To work through ultimately demand problem.
We believe this will improve when the country as further along and getting back to work. This means that Dx piece I P. S segment, which is capex dependent is cutting expenses to make money at lower sales demand going into physical year 2021.
We continue to see strength and gold mining specialty polymers bottled water.
Certain recreational manufacturing, so food and beverage agricultural some chemical medical petrochemical municipal and asphalt markets.
Well they segment and location basis, we are right sizing to anticipate sales results with an anticipated bottoming in the third quarter. We're also supporting those markets that are experiencing growth.
Customers continue to utilize DXP b to b capabilities to increase their efficiencies.
Our approaches to tailor H.B. to be experience to that customer specific set of needs DXP b to b customers. Appreciate this approach and is a significant differentiator.
The expertise 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 that customers facilities.
Customers are focused on these partners that they have an existing relationship with prior to cope with my team. We will continue to use whatever medium the customer prefers and tailor our approach to their needs DXP is always customer focus, especially in the environment we have today.
Today, where we were listening to the customers matters.
In terms of our business segment.
As I mentioned earlier supply chain services experienced the biggest decline driven by oil and gas and transportation related customers.
Service center regions that experienced growth year over year include South Atlantic Alaska in South Central.
Additionally, we saw growth in our California market.
In terms of the strength and I P. S backlog, we are continuing to see declines that are consistent with our customers cutting capital budgets. This is consistent with our recent commentary and we continue to monitor and compare our quarterly average backlog to previous cycles.
Specifically, our Q2 average backlog.
6% B. Lowe physical year 2015.
Monthly average backlog.
Let me repeat that Q twos average backlog is 6% below 2000, fifteens monthly average backlog.
60% above fiscal year 2000, Sixteen's monthly average backlog, we continue to monitor the new bookings and the impact to our total backlog.
As we move into the second half a physical your 2020, new bookings will be key for the later part of 2020, and our physical year 2021, I P. S outlook.
Regarding cost we are tightly managing our business to a performance standard their results and overall company profitability. This will produce positive free cash flow.
We're pleased to see more stability and gross margins since Q4 as we have continued to focus on consistent profitability within IP is and renewed emphasis on supply chain and pricing.
We're avoiding discretionary travel and expenses we are they have benefited from the cobot 19 related trends such as lower health care costs.
We achieved record cash flow in the quarter, driven by improved collections and accounts receivable, our strong cash flow results in a meaningful improvement in our liquidity and a reduction in total debt.
Maintaining a strong balance sheet is critical to our strategy to investing in our capabilities through growth or acquisitions.
In terms of acquisitions, our two most recent acquisitions have been in the chemical municipal pulp and paper water and wastewater food and beverage markets and we look to fill in our capabilities in these markets across the United States in Canada.
These markets benefited from stable trends and offer a greater balance to Dx piece oil and gas end markets.
Which today.
Our oil and gas end markets or 42% of our total sales.
As we start physical your 2020, we had planned on a more robust fear of acquisitions, we quickly moved to understanding the impact of voted 19 and the direction of the economy and the resulting impact on different end markets and while there is still considerable amount of.
Uncertainty in the second half a 2020 and going into 2021, we believe that certain end markets and the associated risks is manageable in the near to mid term.
Accordingly, we have made the decision to resume our acquisition discussions.
We have anticipated being able to close one or two additional deals Bobby here in while continuing to build a backlog of excellent companies, who wish to join DXP and 2021 and beyond.
To summarize I'm very proud of how our team has performed in the sexual ordinary environment to keep everyone healthy and safe.
Severe and support our customers and manage our business to a lower near term demand.
And taking care of each other along the way.
As a leading distributor of highly engineered products and services, we believe DXP relates well positioned to support our customers and navigate this challenging period for the benefit of all stakeholders, we're closely monitoring the trends and adjustments as necessary to perform in this.
Short term, while continuing to build and manage for the long term.
The second half the year, we're going to continue to push.
We're finding ways to be resilient and adaptive and find growth to support our business with that I will now turn it back they can't to review the financials in more detail.
Thank you David.
And thank you to everyone for joining us for our review of our second quarter financial results.
Overall, DXP second quarter results for good to see and they reflect the following sales demand pressures from coven 19, and the resulting impact of various end markets consistent growth gross margin performance and particularly within high P.S. and supply chain services, SGN average auctions and record quarterly free cash flow generation.
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Our second quarter financial results do reflect as I mentioned, the full impacts on the cover 19 related sales demand pressures as was the effect of an unfavorable year over year comparison last year at this time, we experienced our strongest sales quarter since Q1 of 2015, which coincidentally last time, we again.
Parents economic contraction for the six month period ended June Thirtyth 2020, total sales were 552.4 million and operating income was 17.7 million diluted earnings per share was 42 cents per share adjusting for onetime items, which I will review later on diluted earnings per share for.
The six month period was 49 cents per share.
Turning to our quarterly income statement highlights.
Total sales for the second quarter were 251.4 million compared to 333.3 million for the same period in fiscal 2019.
Sequentially. This is a 16.5% decline versus Q1, and a 24.6% decline compared to the second quarter of 2019.
This primarily reflects the full impact of Kevin 19, as I've mentioned and all three business segments segments excuse me being impacted by a minimum full month of shelter in place orders and the subsequent attempts at going back to work.
Acquisitions contributed 4.5 million in sales during the quarter, a sequential decline of 14.2% versus the first quarter.
Average daily sales for the second quarter were 4.94 point Onemillion per day versus 5.3 million per day in Q2, 2019, and 4.7 million per day in the first quarter of 2020.
Adjusting for acquisitions average daily sales were 3.9 million per day.
As I mentioned earlier in the second quarter of 2019 was our highest quarterly sales performance since the first quarter 2015.
As such the comparable performance was going to be a high hurdle mark on a year over year basis, regardless of code or any other circumstances.
Regions in our service center business segment, which experienced sales growth year over year include the South Atlantic, Alaska, and South Central regions key end markets driving the sales performance include food and beverage mining, Minnesota municipal and specialty chemicals.
Service Center sales were down 15.7% sequentially and declined 23.1% from Q2 of last year [noise].
In terms of innovative pumping solutions sales were down 13.6% sequentially and 25.4% compared to Q2 of last year.
As David mentioned in his comments, we are monitoring the backlog as we experienced declines as we review monthly bookings and backlog. We're comparing these data points to our fiscal year 2015 and fiscal year to have 2016 averages. The last time, we experienced contraction in our business. Our Q2 average backlog is below the fiscal year.
2015 monthly average backlog by 6%, but significantly above the fiscal 2016 monthly average backlog by 60%.
Supply chain services sales declined 23.3% sequentially and 29.1% compared to the second quarter of 2019.
Supply chain services second quarter sales performance reflects significant pullback in activity at oil and gas and transportation related customers.
Additionally, SCS has been dealing with customers temporary closing facilities for an extended period of time due to cover or rationalizing some facilities altogether.
Turning to our gross margins DXP is total gross margins were 27.7% a 12 basis point improvement over Q2 2019.
This is a result of consistent performance from Q1 to Q2 within IP S and 171 basis point improvement within supply chain services.
The supply chain services improvement was the result of losses, some lower margin accounts along with the addition of new accounts at a higher margin with a better product mix.
In terms of operating income combined all three business segments declined 153 basis points a year over year business segment operating income margins versus Q2, 2019, and 16 basis points compared to Q1 total PXP operating income decreased 460.
<unk> basis points versus Q2, 2019 to 6.8 million.
Our SGN named for the quarter declined 10.1 million from Q1 with further reductions anticipated as we adjust to the current level of sales demand.
We have benefited from our ability to quickly reduce s. DNA levels and aggressively attack discretionary spending.
We will maintain our cost discipline to whether they're pandemic, but also strategically find ways to be more efficient for the long term.
We are in the process of integrating recent and legacy acquisitions were should continue to drive further benefits that said we are also mindful that the contraction associated with the Corona virus will pass and from a resource and capability perspective, we want to be in a position to respond to our customer needs as we believe those who aren't a position to respond.
Today, and tomorrow will gain the most market share.
Turning to EBITDA EBITDA was 12.6 million in Q2 versus 28.7 million in Q2, 2019, and 17.8 million in Q1, EBITDA margins were 5% versus 8.6% in Q2 2019.
Adjusting for other noncash unique and one time items EBITDA for the quarter was $15 million or 6% of sales [noise].
In terms of S., our net income for Q2, 2020 was 2.2 million our earnings.
Per diluted share for Q2, 2020 was 12 cents versus 31 cents in Q1 and 73 cents in Q2 2019.
Adjusting for onetime items, including legal integration and severance costs Dilutes Ernie earnings per share for Q2 would have been 17 cents per share.
Turning to the balance sheet and cash flow in terms of working capital our working capital was 192.3 million at the end of the quarter. This amounted to 16.4% of our last 12 months sales and a 51.2 main reduction from Q1. This reflects a 300 basis point improvement versus Q1 and prizes.
Closer to our historical averages.
The improvement in working capital primarily the result of improved collections within our with our average accounts receivable days experience and eight day reduction from Q1, Q2, or a 39.3 million impact.
I'd like to personally thank our accounts receivable team and their leadership for driving these improvements.
In terms of cash we had 78.7 million in cash on the balance sheet. At June 30. This is an increase of 45.9 million compared to Q1 and 24.4 million since Q4.
Cash provided by operations was a quarterly record 63.4 million.
While we would've preferred this milestone would have been reach due to sales growth versus decline. We will continue to reiterate the strong cash flow model, we have and the benefits when paired with the appropriate capital structure and working capital management.
At this resulted in another quarterly record 61.6 million and free cash flow for the quarter and we anticipate anticipate this to continue as we move to the second half of the year, which typically are stronger cash flow quarters as they say cash is king.
In terms of Capex capex in the second quarter was $1.9 million or 0.8% of second quarter sales compared to the second quarter of 2019, Capex dollars are down 4.4 million or 69.7% capex during the quarter reflects our ability to control capital investment and the minimal maintenance needs of our busy.
Yes.
Moving to the second half of the year capital expenditures will continue to decline on a year over year basis.
Return on invested capital our ROI see at the end in the second quarter was 18%.
At June 30 year fixed charge coverage ratio was 2.9 to one and our secured leverage ratio was 2.4 to one total debt outstanding at June 30 was 228.1 million, which reflects 15 million in optional prepayments made during the second quarter.
As I mentioned during our Q1 earnings car call. Our capital structure was built to match our strategy and ensure flexibility through different cycles. Additionally was parent acquisition capital, which are long term assets with a long term financial instrument a term loan b as a reminder, we have known to new.
No near term maturities as our ABL matures in August 2022, our term loan B matures in August 2023.
In terms of liquidity as of this call we remain undrawn on our ABL and have over 209.7 million in liquidity similar to after Q1, we have made an optional $10 million prepayment on our term loan b to further strengthen our balance sheet.
Davids comments covered the fact that we will opportunity opportunistically look to close one or two acquisitions before year end.
Coming into the year, we had a very robust pipeline and we are on track to achieve our goal of 10% growth through acquisitions, while we did not close any transactions in Q2, our pipeline remains deep and our commitment as steadfast to execute our M&A strategy and build upon the strong growth. We have historically demonstrated via acquisitions, we're looking forward to eventually be.
Ringing.
On new DXP people, who will make the DXP 18 stronger expand our end market mix and support further performance and growth.
In summary, our priority from a balance sheet perspective is to emphasize and maximize our financial strength and flexibility. During these uncertain times without sacrificing long term growth our market opportunities and position us to be opportunistic.
When any growth opportunities arise collectively we have to find a way to move forward safely and position DXP to win today and Tomorrow I will now turn the call over for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound Arhaus key please standby, while we compile the Q and a roster.
Your first question comes from Joseph Mondillo with somebody and call. Your line is open.
I can david or because of doing well.
Hey, Joe how are you.
Doing well.
Was wondering Kent, Kent can we start with a monthly sales per day, just to get a sense of how this weird quarter has progressed.
Yes, sure absolutely you know what I'll do Joe is I'll, just really go back to March and then kind of pull it forward and give you a oh flash even before July.
Sales per business day, I'm, starting to March were 5.152 million.
April was 4 million in 128000 May was 3.942 million June was 3 million 900, and 903000 and then July flashes three may in 234000.
5.24, 0.1 I'm sorry.
3.244 million 3.2 million.
And so I'm just trying to do the math really quickly.
Hi down 17% from June.
Yeah.
Yeah, so it looks like your.
I have if I'm correct historical data it looks like you're down 25% to 35% in June and July.
From a year over year perspective year on year over year feedback of yeah.
Yeah.
And so maybe we can dive into the alone deeper away where is the weakness coming from relative to I guess the main two segments with our service center and <unk> and IP.
It looks like the year over year declines are are the worst thus far in July could you talk about our you're seeing things.
Regarding those trends.
Sure Joe I'd like to answer that question.
[noise] room.
The there's there's really three data points that are important and then.
And we've got them, all grafted out and and et cetera, and oftentimes the backlog the other ones water, what our shipments and invoicing and then the other one open no I looked at much is bookings.
So.
So our.
We can't just gave you was the shipments in invoicing in the sales for each of those periods and that's that's still declining.
The bookings story, it's a little different it.
For the service Center segment.
Bookings hit.
Well it appears hopefully be a bottom in June.
And July actually wind up.
Even though invoicing.
Down.
And.
And therefore and in backlog.
It was kind of kind of levels. So.
On service centers were looking at service centers and and really everything is.
For the year.
This year not not compared to last year last year was obviously, a much better year in with.
All hope that this year would in a better year, but.
For this year just looking at it things things that are are trending down a little a little but whether they're not they're not big numbers.
And so in my opinion.
Sales will continue to trend down just.
Slightly as we go through the third quarter, but our but hopefully are booked and continue to trend up.
We will mean that are their backlog will will start to.
Level loud and clear I'm, a little bit so.
So what.
Service centers lips.
Well, it's good and of course that.
Is just the MRO piece us in the maintenance repair and operating and OEM piece of our business and and by far the largest.
You mentioned supply.
Yes, I P. S is the capital projects out of the business.
Backlog is trending down invoicing is creating down and.
And.
Bookings is seems to have found the bottom, but its found the bottom at a at a very low point. So that's.
To give you an idea you know our backlog is around 84 million and and our bookings actually an uptick also in July but that went from $4 million bookings in June to $6 million booking in July.
Of course, both of those numbers.
Uh huh.
Are way down.
Okay. Good color I really appreciate that gives us a good point into the back half of the year I guess relative to the backlog comments and maybe you know we can sort of focus on <unk> yeah.
You mentioned in your prepared remarks that backlog.
And.
Comparable he said a 6% below 2015 in about 60% above 2016.
So it looks like you're on your sales, especially.
Yeah.
Our.
Looking more like 20, you know as far as the outlook for the back of the year anyway are looking more like 2016.
So could you maybe sort of.
Help us understand how bag I could get maybe in the back half of the year.
However, you want to compare you know relative to 2016 or you know however, you want to talk about it.
Yeah.
So.
So that's why did and just to refresh or idling, thereby knows the 15, what's the what's the start of the down cycle in 16 got worse, and then 17 will absorb biddable recovery and 18 was a much bigger recovery and 19 was.
Ups more so and now we're back on the down cycle. So when we look at I.P.S. so impaired.
To.
16, as you pointed out I <unk> I.
Somewhat.
I agree that that it's going to be like the 16 when if.
Correct and I think I am.
If we if it wasn't.
If we took impairments and other things out of there that are not cash transactions.
Yes, and stay profitable all through the cycle it would have to downsize than it when it does produce.
Plus capex projects, but they havent they haven't gone away.
We still have a healthy backlog and so.
Yes, we'll have declining sales for some period of time and cool things turned around and but but it will be able to manage to stay profitable.
Okay, great. So I guess last question I'll, let someone else ever shot at it regarding sort of just your cost management just broadly speaking.
How much how first off how much temporary cost that you take out in the second quarter or maybe I don't know government benefits or anything like that that you saw in the second quarter better knock on our re occur in the third quarter and then I guess secondly.
Just broadly can you talk about where you're doing with cost management should we expect more in a broad level in the in the second half are you taking out anything permanent or maybe you can just address all those topics on costs.
Sure Yeah first of all first of all I would like to say that I didn't know the government was given money away do a public companies. So if I missed the boat there.
Please I'd like for you to point Meehan right direction [laughter] because [laughter].
I heard a couple of company Uh Huh.
[laughter] benefits I didn't know if their tax benefits or walk, but [laughter] well, we have over 500 employees them were public. So we anyway, we haven't gotten any.
[music].
Yeah Congress hadn't seen fit to give us any money but.
We would like to take some.
The only thing we're really struggling with that's.
That's a loss and is our supply chain and there is no I'm sorry is safety services.
Thank you services tied the drilling.
And turnarounds and so the turnarounds have been put all but all and so they have many turnarounds and the drilling activity is is way down.
So.
That business is just had declines in revenues that are beyond its ability to cut expenses or not.
So that.
That said the rest of the business is performing pretty good considering.
The losses, but that's generally.
That's.
So I guess I'm you know we don't.
Cannot only if you want to address this specific side you know I don't know if you have those kinds of numbers I don't I don't think in terms of those constant numbers, what I, what I think though is that I have a location.
It's in Midland, Texas, but hard to.
Permian Basin.
And.
I used to do.
Some number I'm good I'm not going to get my competitors numbers exactly but some number and now they're doing half as much.
And but that happens much there there's still make a month.
And now so we manage the business to a performance standards that says.
Hey, your contributed margin.
It will we get that you used to make.
X and now.
The best you can do like 8% of sales of a much smaller number but that's what you're expected to do.
And so our people.
You know they they know how to do this and so they're going through the process of making.
Making that happen.
And and when they do that and then our.
Corporate DNA is.
5% will then you know we might we make money.
So that's that's what we we do we do it by every location and then that the location just can't.
They profitable within the consideration is to close that close it down.
Our or we think it's just temporary and and things are going to.
Back for them specific to them and their market.
Then the then we'll we'll let them.
He kick in for Awhile.
You want to add anything to that.
Yeah, no the only thing I'd add to that Joe is that I think you were getting that you know are there any kind of onetime kinda cost reductions in Q2, because that reflects the full brunt of of Cove Ed.
In all I would say is we did Dave. It's early comments you know, we don't really necessarily a approaching that way. Yes. There is the employer potion of social security, which were deferring from a cash perspective, but that's more so cash management.
It's in in so and that doesn't really.
Feed through the financials. The way you would think it would everything else is in our speakers for the most part hard to cost savings are flat to kind of the demand that we're seeing the outlook that we're seeing in so yes bonuses are down yes, we've put in some plus some actions that we normally.
Do a and a depressed economic environment, but those aren't necessarily quote unquote onetime in nature.
There there is all of US just kind of how we manage philosophically and thinking about that business until we returned to growth and so you know I'm you know we've run rate taking out over you know $28 million, where the cost out of 28 man of 2019 costs out of the business and so.
No.
That's happening in real time and so.
You know, we'll we'll continue to make money as we move through the cycle that's always our goal.
But as David ended his comments with is.
Those markets, where we see.
Growth, which there are some.
You know will will allow those people to invest in growth grow the business. So.
Okay perfect well, thanks for taking my question.
You bet.
There are no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect Hey, Hey, one one second once again.
Joe you might have some more questions on the other parties not going to ask any questions. That's fine, but Joe if you have some more go ahead.
Right to that up we don't want to country short.
And my.
Can you hear me.
Yes, we can't yet okay, all right I wasn't sure if I was still alive or not yeah. It's only I did have a couple other questions. Yeah I wanted to ask about the supply chain segment anyway.
Lower than I was looking for but not a total soc to me because I'm I'm guessing you know some financing customer there just trying to shed some costs in a in a what was you know have been a very challenging quarter for certainly some types of companies could you just talk about.
Oh.
And what you saw in the quarter and sort of what your outlook there at that segment is.
Joe I. Thank you for asking that question, because it's kind of unique.
What would happen to supply chain services more normally they're going to have a dip this kind of.
Just based on what the customer's going to buy a little less and so they normally don't go down very much Ah historically, that's always been the case in this particular case.
We actually had customers that they close to or shuttered.
Facilities and so.
All the volume that we would get from that particular facility.
Just totally went away 100%.
That said all the expenses for servicing that the still they went away 100%.
So consequently, the sales.
There's not a real big leverage point here that the sales went down.
Whatever they went down 20% then.
You know our profitability dollar went down 40%, but as a percent of existing sales they are able to maintain mad because.
Because of what I've said, both both sales and expenses all went away because they close that so.
Also on top of that.
The facilities, they typically get closed and the reason for it is but are not great performing facilities and if they're not great performing for the customer then they're probably not performing that well for us either so a lot of what the sales went away, but but they weren't making that much money for us anyway, and so it wasn't a big.
<unk>.
Big or debt to our bottom line. So I really want to make that point because I think when you look at the numbers. The topline did it did go down significantly and the bottom line didn't go down as much.
Okay.
I must have been a pretty big customer as far as soon as far as the top line, but I guess it yeah, yeah, yeah. It was.
It was Ah yes, it was.
It was an aerospace.
The company.
Got it manufactured airplanes, you know so I mean it [laughter].
Well, so they will need airplanes right now so.
So it looks like in the quarter is the second quarter that is that a good run rate then I suppose.
So when I look at my other chart that I talked about that has the three three points on it.
It looks like on bookings that the June was that are low point.
No no I'm, sorry May may was their low point and June went up.
And in July was was flat so.
So we're kind of.
Well, we're we're thinking that they they've seen the bottom.
And that the third quarter will be a little better.
Not a lot, but it will.
Joe This is Ken the only thing I'd add to the only thing I'd add to David's comments that we are subject to in this segment, which is pretty unique is you know when you're in when you're in the service centers and IP asked we control our own facilities, meaning opening and as long as weren't getting orders were working to it to service our customers.
When you're on the supply chain services side, we are a little bit subject to the whims of our customers cut a lot of times, where in their facilities and I only point that out because if there's one thing. The pandemic has taught us about supply chain services is is that you know if they want to take a.
Certain approach as it turns to safety closing their facilities.
We were totally subject to that and so that's a little bit also with what JJ, who runs that segment is dealing with on a day to day kinda in a real time basis. So when you have these flare ups and in cities and municipalities, where we have locations you don't know how.
These different companies are going to respond so.
Got it.
I also wanted to ask about its or your inventory management through through the downturn here.
Your inventory at the end of the quarter was still up year over year.
What are your thoughts on ER and how are you thinking about man inventory management through the back half.
Yeah now that that's our stepped up.
Yeah I'd have to that I asked that same question [laughter] I asked that same question out there where are you all doing over there, but anyway Oh.
The answers it's common is it.
It hasn't trended down yet it's only been.
You know we really weren't.
Until we know we were into April before we made adjustments the inventory in April we made adjustments. So they just haven't.
Really shown up yet.
But.
But the second half of the year inventory levels should come down.
Okay and I guess last question then they have just regarding M&A.
You mentioned, the 10% target and I know this is just sort of a general sort of goal that you have on an annual basis.
But 10% is pretty sizable so I'm, just wondering sort of what you're.
First is or.
Hi, guys of acquisitions, you mentioned, one or two by the end of the years I'm just curious on what you're thinking regarding capacity related to the balance sheet.
Yeah. Joe This is Ken you know I I think you know we're in discussions with one or two believe it or not companies, where they have actually experienced growth in this market and so you know the quick answer is is you know with the amount of cash we have on our balance sheet from.
Credit agreement perspective, we only get credit for the first 30 million and so every dollar over 30 million, we have to ask ourselves from a capital allocation perspective is it more appropriate used to pay down debt or in this instance, can we buy growth if it makes sense medium pro forma for the transaction.
Leverages incompliance and from a diligence and business perspective, we think their business isn't as gonna grow if all those things are true then Joe effectively we have really more than likely depend by a structure that transaction, we probably have de levered the business slightly from a credit agreement.
Perspective, and so you know those are some broad comments I give I'd say in terms the average transaction size that.
The <unk> I think the comment more so in our scripts were indicating that coming into the year. We had a pipeline that look like we were going to achieve our our 10% growth through acquisitions in so it's we're not signaling necessarily that hey, we've got you know 10% growth in the pipeline today I think what were.
More so signaling is that we want to.
We're returning to those discussions because we were where we're starting to understand the impacts of covered better and there are some exceptions to the rule in areas, where we're finding pockets of growth in so if we can acquire those businesses, they're falling in our average transaction size I'll call them, which is call. It typically.
Only 25 million, our last and so.
But you know there's a lot of things that have to be Matt for us to do those transactions, but I think it's we're returning to discussions we had a robust pipeline.
We are seeing some businesses that are holding in this environment and if we have opportunity to pick them up we're going to try our best so.
And what what is the general leverage.
Threshold leverage today from a.
Well leverage today from a credit agreement prospective for total DXP is 2.4 times I'm historically to answer your latter question.
You know, we've we've typically kind of peaked out at around three and a half times now are outside covenant is that four and a half times from a credit agreement perspective in so once again, we're monitoring this real time ensue.
You know some of its math and real time dependent upon where DXP is base total DXP businesses from a trailing EBITDA perspective on where we think it's gonna go going forward and then also subsequently with the acquisitions, but once again not to get in the weeks here in the details, but if it we don't get credit for any dollars over.
$30 million worth a cash on the balance sheet from a credit agreement perspective, so there's multiple things we can do it that it today you know as of today. For example, we have $96 million worth a cash on the balance sheet and so that's a significant amount of cash obviously in Q2, we optionally prepaid 15 million here more recently.
Weren't going to pay down 10 million paying down 10 million in real time, and so but that's still leaves us with call. It north of 80 plus million dollars worth a cash. So once again, if we're finding businesses that are growing or stable with EBITDA and were stable. The the math does work.
In certain scenarios so.
Okay, great well Ah I appreciate you taking my questions today, and good luck with a back half of the year.
[laughter]. Thank you do appreciate it.
[noise] [noise] there are no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Thank you.
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