Q3 2020 DXP Enterprises Inc Earnings Call
And our final question.
[music], ladies and gentlemen, thank you for standing by and welcome to the T X P enterprise.
2023rd quarter earnings call at this time, all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question during the session you'll need to press star one on the telephone if you acquire any further assistance. Please press star zero I would now like to hand.
Conference over to your Speaker today, Correct Me Chief Executive Officer. Please go ahead.
Christine I was chief financial officer, but thank you.
Thank you. This is currently and welcome to Dxps Q3, 2020 conference call to discuss our results for the third quarter ended September Thirtyth 2020 joint.
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 an ongoing basis are contained in our SEC filings. However, DXP assumes no obligation to update that information as a result of new information or future events.
During this call we may present, both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our earnings press release.
Press release, and an accompanying investor presentation are now available on our website at IR Dot D. Expedia Dot com.
I will now turn the call over to David to provide his thoughts and a summary of third quarter.
Good morning, and thank you Ken Thanks to everyone for joining us today on our 2023rd quarter Conference call.
We are pleased with our results for the third quarter and year to date, obviously, there are some areas where the impact in progress is not where we would like it to be but given the unprecedented nature of COVID-19, and the continued effects of managing a bars and Nick I am proud of all our DXP.
People and how we collectively find ways to move forward.
People have continued to find ways to deliver financial results for all our stakeholders in the face of extraordinary challenges My heart goes out to those that have additional challenges, the California, wildfires and multiple hurricanes, along Louisiana coast.
We remain focused on driving sales growth and achieving our vision of excellence for our dxpeople customer suppliers shareholders and communities.
We will start this call, but updating you on developments since our second quarter call and discussing some of the actions. We are taking to successfully navigate the rest of the year and beyond.
Ken will then take you through the key financial details after my remarks.
After his prepared comments, we will be open for QNX.
As we continue to navigate through this sales and operating challenges associated with cold at night team, we feel very fortunate to be here at DXP and a part of the essential industry are.
Our strategy has always been to combine the financial screen talent resources technology and capabilities of a large company with the fast flexible and entrepreneurial capabilities of our local businesses to deliver superior value to our customer.
And to our suppliers, while providing better growth opportunities for our Dx people.
There has been no better time than now to emphasize these qualities, while being fast flexible convenient providing technical solutions for the different end markets we serve.
We continue to build our capabilities to provide complementary set of products and services in all our markets, which makes DXP very unique in our industry gives us more ways to help our customer win.
We also are constantly looking at reviewing opportunities, where we can grow market share.
We complement our strategy with a relentless drive for progress that includes business and operational initiatives, which we believe will allow us to steadily improve our performance for all our stakeholders.
As we finish out the year, we are excited about the opportunities ahead and the potential DXP has to continue to scale and grow within existing and new markets. We are financially strong industrial leader and we are finding ways to work through and remain successful today, while putting.
Yes in the position to be successful or tomorrow.
As we also believe that we must be opportunistic and find.
Ways to move forward with safety in mind and drive strategic growth side.
Finally, given the fragmented nature of our industry, we continue to build DXP by adding the best local and regional companies to our team through acquisitions, enhancing and filling in our product lines, expanding our reach and adding terrific talent along the way.
Right.
Our third quarter results reflect us being beginning to deliver on these priorities, while finding ways to work in our new normal.
As we discussed during the second quarter call the recovery or a rebound that we somewhat expected in may and part of June was short lived as co. The cases picked up after stay at home orders relaxed and businesses begin to return to work DXP crawl crawl.
In July while the economy rules fighting to get back to work, but began to rebound in August and September.
July sales per day, Troughed at $3.2 million and subsequently increased in August and September for the third quarter, we averaged 3.4 million sales per day versus our year to date average of 4.1 billion sales per day.
We anticipate closing the year closer to our average sales per day, assuming there is no setbacks in the fourth quarter, including future Lockdowns, our services related to Covance.
I would like to share with you some of the diversity of our end markets we.
We do water and wastewater slash municipal 2%.
Food and beverage slash sanitary 6%.
Aggregates in agriculture, 2% general industry, 15% manufacturing, 6% chemical 7% fabrication and construction, 9% military 1% mining 2%.
Our 1%.
Open paper, 1% refining, 4% steel, 2% transportation Slash aerospace 3%.
Upstream oil and gas, 8% midstream oil and gas, 15% alternative energy a half a percent and resellers 5%.
DXP goal is to grow all our markets and have a balanced end market exposure our biggest opportunities.
And targets, our food and beverage sanitary water and wastewater municipal chemicals alternative energy refineries and military.
We continue to believe the pace and magnitude of recovering going.
Going forward, we will vary greatly by geography and customer type.
Despite these challenges we continue to execute on our value proposition for our customers and our company.
Our third quarter financial performers results.
Reflects the results of these executions total company sales were $220 million down 12% from the second quarter.
And adjusted operating income of $7.1 million, an improvement of 12% compared to the second quarter dirt.
During the third quarter as expected, we also experienced the largest sales decline.
With our innovative pumping solution business segment.
EPS is tied to capital budgets and the oil and gas industry has yet to work through but ultimately as a demand problem that is been accentuated during the cobot crisis, we have been cutting expenses to make money on lower sales demand, including shuddering.
One of our fabrication facilities. However, as my previous comments suggest that we do see this the start of a slow demand recovery.
And it's the sales professionals continue to use a variety of virtual tools to contact customers as well as they have started going back to traditional medicine methods of battery customer facilities.
Customers are focused on those partners that they have an existing relationship with prior to COVID-19.
We will continue to use what ever medium the customer prefers and tailor our approach that are in Leeds DXP is always customer focus, especially in the environment. We have today, we're listening to our customer matters.
But like the XP and Dx people, great is not just our technical expertise, but also being fast and convenient for the customer being fast and easy to do business with is not easy we tailor each solution to how the customer.
He wants to do business with DXP.
Our omnichannel approach is not new but does improve every year with new technology enhancements are smart solution suite of services driven by digital systems include programs that are flexible to adapt to each customers unique supply chain challenges.
DXP customers can pick the suite of programs they want or need the XP has a variety of solutions that the customer can choose including DXP smart solution suite of products that includes the following.
Smart agreements and MRO commodity purchase agreements smart by outsourcing MRO procurement with order management functionality and reporting smart served warranty and repair management that manages the lifecycle of the equipment Smart source store room management.
Smart store web based ordering and customized E catalog solutions smart van.
Industrial vending, including software set up training service and support Smart VM on vendor managed inventory solutions with a technology suite and EDI requirements Smart reliability, which is a suite of products to provide proactive health monitoring of capital equipment.
Smart virtual store, an unmanned store room.
Today, 35% of our transactions, our digital 68% of bulk purchase orders or electronic 87% of all our ATP processing is touchless the.
The question is not DXP and most of our suppliers are ready for digital transformation, but the question is is the industrial customer ready to become digital in.
In terms of our service centers and regions that experienced growth year over year. This included Alaska, California, North Rocky regions sequentially. The service centers grew sales 7%.
Supply chain service experience a slow decline in Q3 going from $37 million in Q2 to $33 million in sales in Q3 supply chain service business believes that it has turned the quarter and from customer demand perspective is anticipated.
In sequential growth in Q4.
In terms of the strength in the IP EPS backlog, we are now approaching that 2017 average backlog numbers and continue to see declines that are consistent with our customers cutting capital budgets. Our main focus within IP is maintaining the demand.
Dan level, where we have today and find opportunities in other markets, such as bio fuels food and beverage and water and wastewater for.
Regarding cost we are tightly managing our business to a performance standard that results in overall company profitability from an EBITDA perspective, we increase EBITDA margin 68 basis points from the second quarter as we were able to improve gross margins by segment by 12 basis points.
And drive efficiencies on lower sales demand.
This led us to continue to produce positive free cash flow, we produced 29 million of free cash flow during the quarter and we are on our way to have a $100 million free cash flow generation year.
But the strong cash flow generation in the third quarter, we were able to manage our capital structure appropriately our strong cash flow resulted in meaningful improvement and our liquidity and a reduction in for a little bit maintaining a strong balance sheet is critical to our strategy to invest in our case.
Capabilities through organic growth and acquisitions.
I am very pleased that we were able to quickly.
Our acquisition discussions during the second quarter second quarter and at the start of the third quarter as we mentioned during our last call. We made the decision to resume our acquisition discussions and we are already moving forward.
We have two letters of intent in place and we are actively conducting due diligence and anticipate closing one or two deals at the end of the year.
We are adding companies that have a focused on non oil and gas markets, specifically water and wastewater food and beverage and other general industrial end markets.
To summarize I am very proud of how our team has performed in the sexual ordinary extra.
Extraordinary environment to keep everyone healthy insight serve and support our customers manage our business to lower lower near term demand.
Take care of each other along the way.
As a leading distributor of highly engineered products and services, we believe DXP remains well positioned to support our customers and to navigate these changing period for the benefit of all stakeholders I.
I would like to sincerely. Thank all of our Dx people, who continue to show up to work or who are working remotely everyday but their passion commitment and teamwork.
We have a tremendous team and it is an honor to overcome the collective adversities. We are all experiencing then vinnolit and deliver value for all our stakeholders.
With that I will now turn it back over to the kit to review the financials in more detail.
Thank you David and thank you to everyone for joining us for our view of our third quarter financial results.
Overall, DXP third quarter results for good to see and reflect the following sales demand likely bottoming from the pressures of COVID-19. This segment strength within service centers, followed by supply chain services, and then IP EPS, which was impacted the greatest given the ties to oil and gas capex budgets can.
Segment gross margin strength as DNA reductions and strong quarterly free cash flow generation.
During our second quarter conference call, we were still looking for the full impact of Covance to show in our financial results.
Third quarter reflects the full impact of the COVID-19 related sales demand pressures as we'd likely had a cobranded related sales bottom in July the sales per business day at 3.2 million.
As such during the third quarter, we took a 48.4 million pre tax charge related to an impairment of goodwill and related assets throughout the remainder of my comments I will adjust for these impacts as they are noncash and relate to following the appropriate accounting guidance.
Turning back to our operating results the demand deterioration associated with our customer spending reduction was most evident in our IP EPS business segment, which followed the decline in rig count and completions. However, our end market diversity proved to be a mitigating factor within our service Center business segment, and we look forward to strategically.
Adding other end markets over the next 12 to 24 months, which David alluded to as we press on with organic and acquisition initiatives.
For the nine month period, ending September Thirtyth 2020, total sales were 772.6 million and adjusted operating income was $25.2 million.
Adjusted diluted EPS diluted earnings per share was 16 cents per share as I mentioned earlier during the third quarter DXP incurred a pre tax noncash impairment and other onetime noncash charges of $48.4 million related to goodwill and certain assets.
In terms of the quarterly income statement highlights Tony.
Total sales for the third quarter were 220.2 million compare.
Compared to $327.2 million for the same period in fiscal 2019 so.
Sequentially. This is a 12.4% decline versus Q2, and a 32.7% decline compared to the third quarter of 2019.
Year to date. This reflects DXP sales hitting a trough in July the subsequent rebounds in August and September as well as October Act.
Acquisitions contributed 5.1 million in sales during the quarter, which was a sequential increase of 13.7% versus Q2.
Average daily sales for the third quarter were 3.4 million per day versus 5.1 million per day in Q3, 2019, and 4 million per day in the second quarter of 2020.
Adjusting for acquisitions average daily sales was essentially flat at 3.4 million per day.
Regions within our service center business segment, which experienced sales growth year over year include Alaska, California, and the North Rockies key end markets driving the sales performance include food and beverage mining municipal and specialty chemicals service centers sales excuse me were up 7.2% so.
Financially and declined 14.9% from Q3 of last year, the Cisco and the sequential growth reflects the diversity of end markets within service centers and the strength in markets previously mentioned.
In terms of innovative pumping solutions sales were down 63.8% sequentially and 73.4% compared to Q3 of last year.
As David reviewed we are monitoring the backlog as we experienced declines within innovative pumping solutions as we review monthly bookings and backlog. We are comparing these data points to our fiscal year 2015, and 2016 averages. The last time, we experienced a contraction in this business as well as the fiscal year 2017, our key.
Q3 average backlog is below the fiscal year 2015 monthly average by 15%.
What remains above the fiscal year 2016 monthly average by 44% and ahead of our 2017 17 average by 4%.
Conclusion here is that we're trending toward 2017 12 month sales based upon where our backlog stands today.
However, each quarter, we've decline, we reset based upon the new level bookings and corresponding ending backlog.
Our IP EPS customers have cut capex budgets and a majority are waiting to the us election settles and they can reset budgets based upon political direction clarity around opex producer cuts and the timing around a vaccine for covance as we always say volatility uncertain and uncertainty is not good for our capex related customers they become.
It is difficult for them to make capital allocation decisions and we find ourselves in that environment today.
Supply chain services sales declined 9.9% sequentially and 34.8% compared to the third quarter of 2019 supply chain services third quarter sales performance reflects significant pullback in activity at oil and gas and transportation related customer sites.
Additionally, supply chain services has been dealing with customers temporary closing facilities for an extended period due to covance are rationalizing some facilities altogether during July a subset of our supply chain customers close for the holidays going into Q4, our supply chain services segment is anticipating sales growth.
Yeah.
Turning to our gross margins DXP total gross margins were 27.8% a 49 basis point decline from Q3 of 2019, and a 12 basis point improvement sequentially.
This is a result of 185 basis point improvement in gross margins within service centers from Q2 to Q3, and an 18 basis point improvement within supply chain services. The service Center improvement was the result of an improvement in gross margins in Canada within our safety services business with a better product mix improvement within supply chain services.
As a result of more sales from higher margin customers.
In terms of operating incomes combined all three business segments declined 165 basis points and year over year business segment operating income margins versus Q3 of 2019, and 13 basis points compared to Q2.
Total DXP adjusted operating income increased 74 basis points versus Q2 of 2000 $20 million to $7.6 million.
Our SGN NAV for the quarter declined 9.2 million from Q2 with further reductions anticipated as we adjust to the current level of sales demand in our various business segments.
Since Q1, we have reduced SGN, a 19.3 million, which reflects our ability to quickly reduce SGN a levels and aggressively attack discretionary spending.
We remain mindful that the contraction associated with the kind of 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 are in a position to respond today and tomorrow will gain the most market share. We are starting to see this within our service Center segment, and we are selectively positioning ourselves to grow into.
And take market share where appropriate and reinvest in the business.
Turning to EBITDA adjusted EBITDA was $12.5 million in Q3 versus 28.2 million in Q3 of 2019 and $12.6 million in Q2, adjusted EBITDA EBITDA margins excuse me were 5.7% versus 8.6% in Q3 of 2019 sequentially. We.
Improved adjusted EBITDA margin 68 basis points.
In terms of our EPS, our adjusted net income of Q3 2020 was $2.9 million. Our adjusted earnings per diluted share for Q3, 2020 was 16 cents per share versus 12 cents per share in Q2, and 71 cents per share in Q3 of 2019.
Turning to the balance sheet and cash flow in terms of working capital. Our working capital was 161.7 that we ended the quarter. This amounted to 15.1% of our last 12 months sales and a 30.6 million reduction from Q2, and an 81.8 million reduction since Q1.
This reflects the med decline within our project related business, which is a double edged sword. When it comes to working capital uses but this quarter does drive us to the point, where we are in line with our historical averages.
Improvements in working capital have been driven by improved collections, which we've mentioned during the second quarter with our average accounts receivable days experienced an eight day reduction from Q1 to Q2 and moving slightly up by four days, but still down almost six days from recent averages.
In terms of cash we had 97.3 million in cash on the balance sheet at September Thirtyth. This is an increase of 18.6 million compared to Q2 and $43.1 million since Q4 and reflects.
The payments on our term loan b.
Cash provided by operations was $30.5 million, we will continue to highlight the strong cash flow model, we have and the benefits when paired with the appropriate capital structure and working capital management for the quarter, we produced $29.1 million in free cash flow.
In terms of Capex capex in the third quarter was $1.4 million or 0.6% third quarter sales compared to the third quarter of 2019, Capex dollars are down $4.3 million or 75.3% as a reminder, capex during the quarter reflects our ability to control capital investment and the minimal maintenance needs of our business.
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Return on invested capital our ROI CFT in the third quarter was 17%.
At September 30, our fixed charge coverage ratio was 2.6 to one and our secured leverage ratio was 2.8 to one total debt. Our total debt outstanding at September Thirtyth was 217.5.
Which reflects again, the 10 million and optional pre payments made during the third quarter.
In terms of liquidity as of this call. We minute, we remain undrawn on our ABL and have over 228.6 million in liquidity, consisting of 97.3 million in cash and 114.3 million in ABL availability. So much. So after Q2, we anticipated we anticipate excuse me make an optional $5 million.
The 10 million prepayment on our term loan b to further strengthen our balance sheet.
Davids comments covered the fact that we anticipate closing a one to one or two acquisitions at year end. These transactions will continue to diversify diversified DXP from an end market perspective, as well as further strengthen our capabilities in key geographic regions and product offerings.
We are looking forward to eventually bringing on new DXP people, who will make the DXP teams stronger expand our end market mix and support further performance and growth and.
In summary, our priority from a balance sheet per Frac perspective remains focused on maximizing our financial strength and flexibility without sacrificing long term growth our market opportunities and positions us to be opportunistic when any growth opportunities arise collectively we are moving forward safely and positioning DXP to win today and some.
Okay.
I will now turn the call over for questions.
As a reminder to ask a question on the firewall and your comments on to the side of your question press. The pound ASCII. Please standby, we can pilot queue and ask.
And there are no questions at this time I turn.
On the call back over to Kathy.
Thank you Christine.
To our listeners today, we understood that there could be a possibility of not having equity analysts on the call to ask questions.
Recently, one of our equity analysts took another job opportunity and his firm had to haul coverage in response, Joe Congratulations on your new job and we wish you. The best of luck and we appreciate all the support over the years.
Another from decided to discontinue coverage on DXP for a variety of reasons and why we think this has miscalculated, we look forward to telling our evolving story from an end market growth perspective.
We are excited to have Tommy mall from Stephens pick us up but unfortunately, he cannot be on this call today and notified us in advance of the call.
As we reset and move forward from here, we think Theres no better opportunity than now to cover DXP as we continue to execute on our organic and acquisition driven growth that we mentioned during this call. Additionally door to our employees and shareholders changes never an event, but a process and we are equally as committed to the process of growing the different end markets. We.
I have discussed both internally and externally while continuing to serve the oil and gas markets with that said I'll turn the call over to David for some closing thoughts.
Thanks, Ken.
Yes, well.
Well it surges that would.
I would like to really think our Dx people.
Which is really a tough environment nobody wants to catch the coated and.
So with that we all need to go to work and try to take care of the customers best we can and so I really appreciate everybody in their efforts.
To do so.
No I'm traveling a bit I know salesmen are out doing what they need to be doing it said roads. So I think thats, the great and fantastic at same time as well.
We're fortunate to have all the like Tronics devices in the in capabilities to to work at home for those that can.
And we're trying to be safe, which I.
Thank you.
Paramount in the probably are number not probably is our number one.
Concern is to keep everybody sites.
And so I, thank everybody for that.
I think our.
Selling holders for supporting us.
And you know, we're we're trying to do the best we can here.
It's it's not.
We've kind of been fortunate in a lot of ways. The that were in the central business and what we're.
Moving forward and doing a lot of really really good things and making some pretty neat progress.
As as everybody knows that we can see the biggest culprit is IP is and thats.
Probably the first thing that somebody's going to cut is going to be their capital budget and so.
We're having.
We are having some wins there.
And they're just normally not a.
The same size there are small wins soon so.
And there are still profitable wins, so we're we're.
We're okay. There it's just.
It is what it is and who were down.
We're down in that area pretty pretty significantly.
I think with that.
Again, thank everybody for our call today.
And we appreciate that.
Everybody's effort so.
Every day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
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Okay.
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