Q4 2020 DXP Enterprises Inc Earnings Call
And then.
[music].
Ladies and gentlemen, and thank you for standing by and welcome to DXP Enterprises, Inc. Fourth quarter 2020 earnings call at this try and participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Ask the question during this time simply press star and the number one on your telephone keypad. If you require any further assistance. Please press star zero and I would now like to hand, the conference over to Mr. Kent and Chief Financial Officer. Please go ahead.
Thank you Michelle.
Could you and welcome to DXP used Q4, 2020 conference call to discuss our results for the fourth quarter and fiscal year ending December 31 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 of.
A detailed discussion of the many factors that we believe may have a material effect on our business on the ongoing basis are contained in our SEC filings.
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 and non-GAAP measures is included in our earnings press release, the press release and an accompanying investor presentation are now available on our website at IR that DXP E Dot com.
I will now turn the call over to David to provide his thoughts and a summary of our fiscal 2020 and fourth quarter results.
Good morning.
And thank you Kent and thanks to everyone joining us today on our 2024th quarter and year end conference call.
We'll begin the day with some perspective on the fourth quarter and year end results current industry conditions, and our position going forward.
Ken will then take you through the key financial details after my remarks.
And for his prepared comments, we will open for Q&A.
As we all know everyone navigated through the many challenges of 2020 and I am proud of and.
And the courage and encouraged by the compassion and commitment demonstrated by our Dx people throughout the year.
As I outlined and the third quarter, there are some areas, where the impact and progress is not where we would like it to be but given the unprecedented nature of COVID-19, and the continued effects of managing the virus pandemic I am proud of how we collectively found ways to move forward and.
And how we finished the year.
DXP started physical 'twenty 'twenty, one, believing we were going to have a reasonable organic growth improvements consistency and gross margins contemplated by complemented by a robust pipeline of the acquisitions we.
We delivered on the majority of these goals in 2020, despite the global pandemic and associated upheaval.
While we saw signs of slowing and our project business going into physical year, 2020, we felt optimistic and encouraged by the projects we saw coming on.
Unfortunately, as we all know we then began to take on the new language and understanding around the global pandemic called COVID-19, and the essential nature of our business. This designation provided a renewed.
Perspective for many of us and here of DXP. It really underscored. The fact, the DXP, we are the feats legs and and arms that keep the wheels of the industry and society and motion the.
XP and submission products and services and what we do is the central sourcing products and services that you need and that are on the central.
Our people and focus.
Focusing their efforts on what they could control by creating a safe and healthy environment for all our stakeholders are outstanding and experiences from our customers and improving our culture and belonging and driving profitable growth and our key products and services.
Our strategy has always been to combined financial strength 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 customers.
And our suppliers, while providing better growth opportunities for our Dx people.
And we found that during COVID-19 that there has been no better time than now to emphasize the qualities, while being fast flexible and convenient and.
And providing technical solutions for the different end markets we serve.
From a sales per day.
[noise] standpoint, DXP remained resilient and did not see sales bottom until July.
At 3.2 million sales per day.
This was after many of the stay at home orders had been and effect and lessons, but points of the fact that DXP had a strong Q1 reasonable Q2.
And it really began to see the impact and the third quarter.
From July and we continue to climb upwards and sales per day continue to expand through October, but it did soften a little bit towards the end of the year.
Our fourth quarter results reflect sequential growth and improvements and our end markets and the industry indicators, such as PMI and metalworking business index.
Showed improvement oil and gas also started to see signs of firming and move moves toward the eventual recovery.
Today DXP sales for Q4 increased five 7% sequentially, our work $232 7 million or three nine and $7 million per business day.
Our profit for the quarter were impacted by some onetime or unique items and the quarter, which Ken will review during his comments, but adjusting for these items earnings also showed continued improvement and resilience as we grew both sequentially and year over year during the quarter.
Thank you to the 2000.
281, DXP people for your hard work and dedication and finishing the year as strong as possible and as always my pleasure to share our fourth quarter and year end financial results on your behalf.
In terms of cash flow and liquidity, we generated 101 million of free cash flow and 2020.
Which combined with a flexible capital structure put us in a position where we could keep our eyes forward and be opportunistic during this pandemic cycle during the fourth quarter, we successfully refinanced our term loan with a new term loan b and enhanced our financial liquidity.
And flexibility we use this position to pivot towards acquisitions at the end of the year to further enhance our end market exposure and position us better for a rebounding economy when it comes.
And we started the year of strong completing two acquisitions in January and February and then took a proactive pause for March until we could fully understand the impacts of COVID-19 on our business and the end markets.
We then pick things back up and the second half of the year by closing four transactions. We were excited to have six new companies full of Dx people that have been resilient and great additions to the DXP family. These include pumping systems, Inc.
The <unk> machinery repair.
<unk> pumps, and compressors and corporate equipment company pumping systems, Inc. And total equipment company to all of you and welcome to DXP and we are excited to have you and we look forward to your future, where we can visit and we look forward to the two of the future.
Where we can visit and spend more time and person and face to face.
The next people have continued to find ways to deliver financial results and position us well for all our stakeholders and the face of extraordinary challenges. This was evidenced by our sequential growth closing year and acquisitions and the overall teamwork of Dx people.
We continue to build our capabilities to provide complementary sets of products and services and all our markets, which makes DXP very unique and our industry and gives us more ways to help our customers. When we all sort of constantly looking at reviewing opportunities, where we can grow market.
Share with complement our strategy with a relentless drive for progress that includes business and operational and the initiatives, which we believe will allow us to steadily improve our performance from all for all our stakeholders.
As we go into 2021, we are excited about the opportunities ahead and the potential DXP has to continue to scale and grow within existing and new markets and.
As we discussed during the third quarter DXP goal is to grow all our markets and have a balanced end market exposure.
And our bigger opportunities and targets, our food and beverage sanitary water and wastewater municipal chemicals alternative alternate energies refineries and military.
Today, DXP sales and physical 2021 per 1 billion <unk>.
Service sales and service centers led the way followed by the supply chain services, and then innovative pumping solutions and the point here is the diversity of end markets and MRO nature within our service centers allowed us to remain resilient supply chain was impacted by oil and gas.
Gas and transportation related end markets and was subject to the COVID-19 requirements of their customers.
They were supportive of all safety protocol and demands.
As discussed during Q1 through Q3, we experienced the largest sales decline with our within our innovative pumping solutions business segment.
<unk> is tied to capital projects and the oil and gas industry and has yet to work through what ultimately is the demand problem that has been actuated during the Covid crisis accentuated during the Covid crisis, we have been cutting expenses to make money on.
Lower sales demand, including shuttering one of our Fabs.
Fabrication facilities. However, we do see the start of a slow demand recovery and improvements and industry indicators.
In terms of the strength and the Ips backlog. We are now at eight 6% below 2017 average backlog numbers and continue to see declines are consistent with our customers cutting capital budgets.
But that said we are focused on seeing the bookings for February and March which will be a strong indicator for the year. Our main focus within Ips is managing to the demand levels, we have today and finding opportunities and other markets such as Biofuels food and beverage and.
And water and wastewater.
And the Dxp's overall gross profit margins for the year were 27, 8%, a 40 basis point improvement over 2019 and highlights our ability to achieve one of our goals coming into the year and.
And particularly we wanted to show improvement within the Ips gross margins given the commentary last year around unique items and Ips jobs that said Ips and improved gross margins of 79 basis point year over year and the midst of a significant decline.
And the demand.
Overall, DXP produced EBITDA of $59 5 million and EBITDA as a percent of sales at five 9%, which is consistent with our goals and a declining market environment.
In summary, we are pleased with our overall performance in 2020, obviously, an extraordinary year the presented societal changes, but also highlighted and or accentuated certain business trends that provided us with areas to enhance and focus upon as we go into 2020.
And we look to continue to drive improvements and our organic sales and marketing strategies graph other sales growth through acquisitions, and and anticipate physical 2021, b and another year of volatility, but one where we cannot take anything for granted and need to proactively take market share.
We continue to believe the pace and magnitude of recovery going forward. He will vary greatly by geography customer type and the end markets. Despite these challenges we continued to execute on our value proposition both for our customers and our company.
DXP sales professionals continue to use a variety of tools to contact customers as well as they have started going back to traditional methods of and ring customer facilities.
We will look to ways to enhance serving our customers and knowing more about the different types of customers. The DXP serves and ensure we are maximizing the number of opportunities for DXP. We will continue to use whatever medium the customer prefers and tailor our approach to their needs.
DXP is always customer focused especially in the environment. We have today, we're listening to the customer matters and.
In summary, I'm very proud of how our team has perform and this extraordinary environment to keep everyone healthy and safe serve and support our customers manage our business to the lower near term.
Demand and May 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 navigate this challenging period for the benefit of all stakeholders.
And it is important to note the visibility remains limited and uncertainty persist as customers continued to mangas managed through a challenging macro and pandemic outlook near term.
Like many we are hopeful of the business environment continues to recover as vaccines are deployed further in coming months, but we remain cognizant of the potential.
Pact of any resurgence in Covid cases.
<unk> of mass vaccine distribution and possible physical policy changes from the new administration.
I would like to sincerely, thank all of our Dx people.
Yeah.
Who continue to show up to work and who are working remotely every day with their passion commitment and teamwork and selfless service.
We have a tremendous team and it is on or to overcome the collective adversity, we of all experienced and and to deliver value for all our stakeholders.
So that and will now turn this to Ken to review the financials in more detail.
Thank you David and thank you to everyone for joining us for a review of our fourth quarter and fiscal 2020 financial results.
Q4 financial performance reflects the sequential sales increase as we move past the trough impacts of COVID-19, and the third quarter.
Innovative pumping solutions and supply chain services grew sequentially, which is positive given both segments have been impacted the most by the negative impacts from the pandemic.
Service centers had a slight sequential decline, but given the end market diversity within this segment, we feel fine as it pertains to the outlook that said DXP finished the year on a strong position closing four acquisitions successfully refinancing our term loan b and.
And continue to drive free cash flow generation with $15 3 million and Q4.
Overall Dxp's fiscal 2020 results were good to see and reflect the following strong acquisition activity completing six acquisitions and 2020 sales the demand bottoming and from the pressures of COVID-19. During Q3 as the segment strength within service centers, followed by supply chain services.
And then Ips gross margin improvement year over year, SG&A reductions, but the focus on sizing the business activity and strong quarterly and yearly free cash flow generate generation.
So much of the third quarter and the fourth quarter, we took $11 5 million pre tax charge related to a write down associated with assets impacted by COVID-19.
For the full year this amounts to $59 $9 million of pre tax charges related to the impairment of goodwill and related assets associated with the pandemic. Additionally, we incurred $5 $4 million of charges and the fourth quarter associated with the refinancing of the term loan b.
Throughout the random throughout the remainder of excuse me on my comments I will adjust for these items as they are noncash are unique and one time and relate to the two following the appropriate accounting guidance, but adjusting provides a more complete view of our performance and the fourth quarter and for the full year.
And as David mentioned in his comments fiscal 2020, presenting unique challenges and took a turn and that surprised all of US never before had many of us dealt with a global pandemic as well as for the societal and other challenges that surfaced during the past year the.
The circumstances, along with a rather unique and contentious election here, we'll make it one of the more notable fiscal years, whereby believe collectively maybe understood, but it did mean to have a clear vision and see things more transparent and honest that said DXP did a marvelous job of navigating these circumstances and executed our plans, while keeping health and.
Safety at the forefront.
Total sales for the fourth quarter increased sequentially, five 7% to $232 $7 million, reflecting improvements from trough levels in Q3.
We experienced a 62, 8% and 717.
Seven 1% sequential sales growth and Ips and supply chain services, respectively.
Acquisitions contributed $4 $7 million during the quarter.
Total sales for DXP for fiscal 2020, where one day and down 27% compared to fiscal 2019.
For the full year acquisitions contributed $19 $6 million, including turbo machinery and pumping systems.
Average daily sales for the fourth quarter were $3 8 million per day versus $4 8 million per day, and Q4 2019 and.
Daily sales for our fiscal 2020, or 4 million per day versus 5 million per day and fiscal 2019 adjusting for acquisitions for the full year average daily sales were $3 9 million per day.
In terms of our business segments. All three were impacted by COVID-19 with service centers being impacted the least decline and 13, 1% year over year, followed by supply chain services with a decline of 23, 2% and innovative pumping solutions declined and 38, 1% range.
Within our service center business segment, which experienced sales growth year over year include Alaska, California, and the North Rockies.
The end markets driving the sales performance includes food and beverage mining municipal and specialty chemicals.
Supply chain services performance reflects the pullback in activity at oil and gas and transportation related customer sites. Additionally, SCS throughout the year debt with customers' temporary closing for periods of time due to kind of it of rationalizing some facilities altogether as mentioned during our Q3 call our supply chain services segment and was anticipating sales growth and the fourth quarter.
<unk> and grew seven 1% sequentially and we will look to carry that into 2021.
In terms of <unk> innovative pumping solutions as David reviewed we are monitoring and the backlog as we experienced declines as we all know Ips is tied to capital budgets and the oil and gas industry and it has yet to work through the supply and demand imbalances that had been accentuated during the Covid crisis. However, we do see the start of a slow demand Rick.
And we had improvements in our industry indicators as we reviewed monthly bookings and backlog as mentioned during Q3, we are comparing these data points to our fiscal 2015.
And 2016 average as well as the fiscal 2017, our Q4 average backlog was down eight 6% from the 2017 17 average backlog and down 25, 4% from the 2015 average backlog, but its up 27, 2% compared to the 2016 monthly average backlog.
The point here are the conclusion is that we are now trending slightly above 2016 sales levels based upon where our backlog stands today.
Turning to our gross margins Dxp's total gross margins were 27, 8% of 40 basis point improvement over 2019 and highlights of us achieve and one of our goals in 2020, which was to improve gross margins, especially within Ips.
And we were able to accomplish that goal despite the decline and demand for Ips work gross margins improved 160 basis points year over year within the supply chain services, followed by 79 basis point improvement within Ips and 39 basis point decline within service centers and.
In terms of operating income and combine all three business segments declined nine basis points of year over year business segment operating income margins versus 2019.
The total DXP adjusted operated income decrease of 194 basis points versus 2000 $19 million to $33 million.
Supply chain services improved operating income margins of 137 basis points, resulting in $13 2 million of operating income compared to 2019 of the proven and the FCS margins, primarily reflects the removal of implementation costs, which occurred in 2019 innovative.
Innovative pumping solutions improved operating income margins of 44 basis points compared to 2019, which is notable and once again, given the contracting market environment.
Service centers operating income margins increased 76 basis points year over year, resulting in $70 4 million and operating income.
Our SG&A for the full year declined $34 8 million from 2019. These reductions reflect the suggesting to the current level of sales demand. Since Q1, we have of reduced SG&A $16 6 million, which reflects our ability to quickly reduce SG&A levels and aggressively attack discretionary spending.
We remain mindful that the contraction associated with the Corona virus is passing and with the recent distribution of vaccines and we want to be and are positioned to respond to increased customer needs. As we believe those who are and are positioned 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 and take the.
Market share where appropriate.
Turning to EBITDA fiscal 2020, adjusted EBITDA was $59 5 million adjusted EBITDA margins were five 9%.
In terms of tax our effective tax rate has a lot of noise. This year due to the impairments and associated book losses, as well as significant increased benefit from R&D tax credits that DXP had previously received in the past, but not at the absolute levels will be received during 2019 and the associated admin and returns for 2016 from 2018.
As such we have attempted to normalize for these impacts and believe of 22, 5% rate can be used to calculate adjusted EPS performance for the full year.
In terms of our EPS, our adjusted net income for 2020 was $14 1 million or earnings per share for fiscal 2020 was a negative.
The $1 45 per <unk> per.
Per share adjusting for the impairments and unique on onetime items associated with the COVID-19, and the normalization of the tax rate that we just reviewed our adjusted earnings per diluted share for 2020, and was 76 cents per share versus the $1 96 and 2019.
The EPS in Q4 was <unk> 19 per share.
Okay.
Turning to the balance sheet and cash flow.
Please keep in mind based upon the timing and closing of the four year and transactions on December 30, 31, excuse me from a GAAP standpoint, we are including the balance sheets of total equipment, APL pumps, and compressors corporate equipment and pumping solutions and in terms of working capital our working capital decreased $66 8 million from the prior year to 158.
$6 million as a percentage of sales this amount of 15, 8%. This primarily reflects the decline within our project related business and drives us to the point, where we are in line with our historical averages and in terms of cash we had $117 4 million and cash on the balance sheet at December 31.
This is an increase of $63 1 million compared to December 31, 2019.
In terms of Capex Capex and the fourth quarter was 142000 and Capex in fiscal 2020 was $6 7 million or 0.7 percentage of total sales compared to fiscal 2019 were down $15 4 million.
As a reminder, capex reflects our ability to control capital investment and the minimal maintenance needs of our business growth.
Fiscal 2019, we're focused on investing and the business and as its 2020 began to unfold, we curtailed the growth of investment and really focused on liquidity and flexibility.
Turning to free cash flow, we generated solid operating cash flow during the fourth quarter as we did during the second and third quarter.
During Q4 and for fiscal 2020, and we had cash flow from operations of $15 $4 million and $107 7 million respectively.
For fiscal 2020, this translated into a $101 million and free cash flow.
Return on invested capital of <unk> for 2020 was 16%.
At December 31st our fixed charge coverage ratio of three five to one and our secured leverage ratio was three two to one total debt outstanding at December 31 was $330 million, which reflects the refinancing of our term loan b.
The refinancing and reset our covenant and provided additional flexibility as we move forward the new term loan b matures in 2020 seven.
And in terms of liquidity, we still remain undrawn on our ABL and have over $249 2 million and liquidity and.
In terms of acquisitions, we anticipate closing one to two acquisitions by the end of Q2 of these transactions will continue the diversified DXP from the end market perspective, as well as further strengthen our capabilities in key geographic regions and our acquisition strategy continues to create value for DXP and our pipeline is strong and is expanding the different end markets.
More importantly, the talent of the companies joining DXP is very high and brings ex expertise of valuable experience to our growing company.
In summary, our priority from a balance sheet perspective remains focused on maximizing our financial strength and flexibility without sacrificing long term growth of our market opportunities and position us to be opportunistic when any growth opportunities arise. This is what we did and fiscal 2020 collectively we are moving forward safely and positioning DXP the wind today.
And tomorrow.
Now I will turn the call over to questions.
At this time if anybody has the question. Please press star one on your telephone keypad.
Your first question comes from Tommy Moll from Stephens. Your line is open and good morning, and thanks for taking my questions.
Thank you how does it go on Tommy going good gone good hope things true for you all.
Good good.
I wanted to start on your oil and gas and market.
Clearly last year, there were some headwinds there.
And now we look up and early 2021 and.
And <unk> sitting in the mid sixties.
What kind of anecdotes can you share with us about.
The potential pace of of Reacceleration, there if any.
This might be one of those points and Tom one of the commodity and the level of activity or dislocated, but to the extent you can help us peer peer forward.
That'd be helpful. Thank you.
So the Tommy I think the answered your own question, but.
And I think they are a little disconnected.
Thanks.
Yeah.
There's no question the oil and gas has kind of bottomed out and.
And then there's the.
And the budgets the capital budgets of the oil and gas companies put forward this year our cutback.
So.
We're not.
We're not seeing a.
A big.
V shaped recovery I guess is what I would say.
That said, we're encouraged by the fact that things are progressing.
And moving forward.
Just not out of control forward.
And are getting better and and so that that market will start.
Improving and and.
And hopefully for sure we will gain more minimum more momentum as the COVID-19 vaccines take effect and.
And we get into the second half of the year, but.
We are.
I think you said it best actually is that it's.
The oil and gas the price of oil has shot up pretty nicely and it sort of a very attractive price.
And yet the activity has been slower to recover.
Thank you. Thank you both there.
And David maybe sticking with the the end market theme.
Going forward.
It sounds like diversification through M&A as it continues to be a priority.
I am curious do you have a view on.
Say 123 pick your timeframe, some some time and the future after you've.
Digested a few more deals on what type of oil and gas versus industrial and.
Market split the.
Comfortable Zip code and up in or is it more just take.
Take the deals that are in front of you and we will think about the rest of later.
No no.
We're trying really hard to.
Sell as many pumps as we can end of the oil and gas industry, but it saved us.
The exposure to to get down to about 20% I don't think it ever gets really lower than that we're not like.
Uh huh.
<unk>, which which they mentioned, 5% or something but it but we are.
We're in and that business and we're in that business from a technical point pump point of view rotating equipment point of view of both.
Mostly in the midstream area, we're not again, we're not in the upstream or not and the drilling aspect of it and et cetera, So drilling rig count doesn't really matter to us a whole lot but.
And it ultimately does because if they're not drilling new wells of replacing oil and gas will then they don't need the equipment, but we're in the midstream part and.
That that part is.
Like I said, I guess is improving and so I don't.
The thing is longer than we were founded as a pump company, we were founded and Houston, Texas.
And.
If we ever got that we're going to be an awful big company, when we get oil and gas down to 20%.
And we'll look forward to follow on the progress there.
Yes.
I do think I do think it's smart and and it will create some less volatility of our company, which I think is important.
And as as we move into the water and wastewater which is.
The.
That's just going to be their food and beverage that's going to be there those are much much more stable markets.
And im not as concerned by the way.
People and I don't.
Don't think we have to turn Green Tomorrow, I don't think we're going to live with that oil and gas for a long long time so.
And welcome the opportunity to work on the wind turbines and.
I'm not quite sure of how we play with solar panels, but wind turbines and the gearboxes and all of the stuff the turbines and stuff that are and there. We certainly can play in that area.
The field, we can play in that area.
So.
And I think we're being responsible but.
And if we're being realistic too so.
Last question for me and then ill.
Step back.
Just focusing on let's say year to date or maybe first quarter trends, we've got a couple of months and the book.
What are some top line.
Items, you could highlight for us maybe just the trajectory in terms of.
Average daily sales.
No it or any context, you can give there and then on the cost or margin side anything you want to make sure. We're aware of just from the fourth quarter to first quarter progression there.
Yeah Tammi this is Kent.
I'll just walk through the sales per business day trends and.
We have early indication of February but take the things could still be slightly moving but just in terms of sales per business day on op.
Tober was $3 9 million and November three eight and 9 million and December 3.4 of $5 million and then in January of 382 million and then and February 381 million.
And so.
And those are the sales per business day trends and so.
Keep in mind, Mark just typically.
A big a big month for us So that's what we're looking towards as we kind of.
Go into ending out Q1 is that this month hopefully as the.
Significant uptick as we normally see in March.
In terms of the other question regarding kind of.
Cost if you will Q1 is always a disproportionately higher.
SG&A.
Quarter on just because you have higher than the insurance payroll taxes, you have some things and so from an SG&A standpoint, while we have been kind of for lack of better word sizing to the level of business activity.
Throughout the business.
You typically have a higher SG&A quarter, and Q1, and so we would we and we continue to expect to see that here at the beginning of the thing here and.
And so.
No.
Hopefully that answers your question and that said, we're obviously encouraged by the way from our gross margin trends throughout 2020, and if those continue to hold and move through 2021.
Well, we will still see still see success of improvements on the bottom line and addition, and necessarily and my last comment as well.
Obviously, we will start to see the Q1 performance of all of the acquisitions, we closed at year end and all of those acquisitions were great performing businesses, even in a pandemic year and so their profitability will start to contribute and Q1 and so we look forward to that as well.
Great. That's all helpful. Thank you, both and I'll turn it back.
And if anybody else would like ask the question. Please press star one on your telephone keypad.
It will bring us to the end of our Q&A session. Today. Thank you everyone for joining us.
And of the conference call for today.
May now disconnect.
Alright.
Thank you.