Q1 2021 DXP Enterprises Inc Earnings Call
[music].
Morning, David Martin the regimen.
DXP Enterprises, Inc.
On first quarter earnings call at this time, all participants are in the sense of holding up.
Later, we will conduct a question and answer session and the.
Instructions will follow at that time, okay for.
For anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone line.
I would now like to turn the conference over to your host Mr. Ken <unk> Chief Financial Officer.
Thank you Christian this is kidney and welcome to the Dxp's Q1, 2021 conference call to discuss our results for the first quarter ended March 31 2021, joining.
Joining me today as of our chairman and CEO David Little.
Before we get started I want to remind you that today's call is being webcast on 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 the 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 the <unk>.
Yes relief in the accompanying Investor presentation are now available on our website at IR Dot DXP Dot com.
I will now turn the call over to David to provide his thoughts and a summary of our first quarter performance and financial results.
Good morning, and thank you, Dan and thanks to everyone for joining us today on our fiscal 2021 first quarter conference call.
I'll begin today with some perspective on our first quarter and our relative position today and thoughts on the remainder of 2021.
Kipp will then take you through the key financial details. After my remarks. After his prepared comments, we will open for Q&A.
Overall, we had a good first quarter that highlights good execution on a number of positive trends developing across DXP, including the continued execution of our acquisition strategy to accelerate our market diversification efforts.
Continued strength in COVID-19 resistance.
In the end markets and the strong free cash flow generation.
The sides challenging week in February with a weather perspective, we're seeing good progress on moving towards our pre pandemic growth and we are confident that we are in the early beginnings of returning to our pre <unk>.
<unk> levels and that remains and that remains our focus.
Let me thank all of our DXP stakeholders in particular all of our DXP people for their continued hard work and grit as we turn the corner from the global pandemic and momentum gradually begins to build on our business.
We are encouraged by the improvement in market conditions and remain focused on growing our business in the physical year 2021.
The USPS industrial end markets, which is 67% of our business today, which by the way.
Going out of the last cycle was 51% appears to a balance some legs and showed signs of positive upward movement.
The Ism's PMI manufacturing index, which gives us an indication of how DXP broad industrial markets will perform.
<unk> to expand from January a 58, 7% reading through March 864% for us.
He is reading this for the current this is above the average for the last 12 months of 56, 9% and looks to be a positive indicator for the year should the trend continue and the impact from COVID-19 continue to lessen.
We are excited to see momentum on this side of our business and look for this to improve throughout the year.
The end markets, including food and beverage chemicals water and wastewater manufacturing in general industry should serve us well along with the continued execution of our acquisition strategy.
Oil and gas is the remaining 33% of DXP, which was 49% coming out of the last cycle and it's showing mixed signs of recovery with strengthen in the international markets.
The majority of our business that is oil and gas tends to lag increases in the rig count and is tied closer to actual production or increase capex budgets.
DXP will wait and see the early signs point to flat to modest upticks in domestic budgets and the latest movement occurring in the international Capex spending in 2021.
Sure.
With regard to the broader demand of the covered underlying trends improve across the business both for the quarter progressed and trends were the strongest in March.
Our first quarter results reflect sequential growth and improvements in our end markets and industry indicators as discussed.
Total DXP sales for Q1 increased five 6% sequentially or were $245 6 million or $3 9 million per business day.
Thank you to the 2500 DXP people for your hard work and dedication.
Includes our recent year in acquisitions.
This is that of first quarter reporting with DXP. We are excited to have ACO corporate equipment pumping solutions and total equipment with us.
<unk> had a great first quarter and performed in line with our expectations.
Keep up the great work and we are excited that revenue as part of our DXP family family and it is always my pleasure to see our share.
Share your performance and financial results on your behalf.
In terms of cash flow and liquidity, we generated $11 $2 billion of free cash flow in Q1.
Which continues to support our acquisition efforts the <unk>.
The people has continued to find ways to deliver financial results and position us well for all of our stakeholders in the face of extraordinary challenges.
This is evidenced by our sequential growth closing acquisitions and the overall teamwork of the DXP people.
We continue to build our capabilities to provide a technical set of products and services in all of our markets, which makes of DXP very unique in our industry and gives us more ways to help our customers win.
As we discussed during the third quarter Dxp's goal is to grow on all of our markets and have a balanced end market exposure.
Our bigger opportunities and targets, our food and beverage sanitary water and wastewater chemicals alternative energy refineries of military.
Our recent acquisitions of quarter end per claim is another example of us making strides on these directions.
In terms of financial results service centers led the way followed by supply chain services, and then antibody pumping solutions.
The diversity of end markets and the MRO nature within service centers allows us to continue to remain resilient and is experiencing the first signs of recovery.
Supply chain continue.
<unk> continues to see improvements and we expect activity to increase as we move through the year.
We continue to experience the largest decline within our innovative pumping solutions business segment.
Ibs is tied to capital budgets and the oil and gas industry.
We see a stronger improvement in the international capped budgets versus domestic we continue to monitor expenses and make money on lower sales demand.
In terms of the strength in the Ips backlog, we are now of 20% below 2017 average backlog of numbers and continue to see slower declines that are consistent with our customers cutting capital budgets, our main focus within Ips.
As managing to two.
Two of these demand levels, we have today and by the opportunities in other markets, such as Biofuels, food and beverage and water and wastewater.
Dxp's overall gross profit margins for the quarter for 29, 2% 100 of 52 basis point improvement over Q4. This reflects continued improvement within Ips Despite sales decline and strong gross profit margins from our.
Our recent acquisitions.
Overall, DXP produced EBITDA of $13 9 million and EBITDA as of.
The percentage of sales of 5.7.
7%, which is consistent with a declining market environment.
That said the growth begins to pick up we should begin to experience operating leverage as we transition from market the clients to growth.
In summary of Dxp's financial performance is not where we would like for it to be today.
And our objective is to continue to improve and providing customer driven solutions being fast convenient and technical experts, we look to continue to drive improvement in our organic sales and marketing strategies and our annual organic growth through acquisitions and certain <unk>.
Charter fees and interest rates, we continue to reiterate that the pace and magnitude of recovery going forward will vary by geography customer type and end market.
Let me conclude my remarks by saying that I am encouraged with our continued.
<unk> improvement in sales and profitability and firmly believe that we are well positioned to continue this growth pattern into 2020. One we have managed the business through uncertain times successfully making the acquisitions and producing strong free cash flow.
And continuing to invest in the business that will benefit our future growth.
We have a tremendous team and it is an honor to overcome the collected the collective adversity, we are all experiencing and deliver value for all of our stakeholders.
I will now turn it back to the camp to review the financials in more detail.
Thank you David and thank you for everyone for joining us for our review of our first quarter 2021 financial results.
Q1 financial performance reflects our second quarter of sequential sales increase as we move past the trough the impacts of COVID-19 in the third quarter of 2020.
Since 2020 was such an unusual year due to the pandemic. We are primarily measuring our performance based on sequential monthly and quarterly growth monthly results are likely to experience normal variation in moving either positive or negative direction based upon the unforeseen events like the winter storm that hit in February however are on.
The overall expectation is that we will see growth versus the previous months throughout the year, which should result in a significant increase in.
And the earnings as compared to last year.
Overall Dxp's first quarter of results were good to see service centers of supply chain services led the way growing sequentially, which we will review shortly that said Q1 reflects the following summary, takeaways strong first quarter sales and margin performance from recent acquisitions gross margin improvement sequentially and year over year.
And strong quarterly free cash flow generation.
Total sales for the first quarter increased sequentially five 6% for $245 6 million.
We experienced a 15, 6% of 0.5% sequential sales growth in service centers and supply chain services, respectively acquisitions contributed $28 4 million in sales during the corner during the quarter excuse me as David mentioned, we are excited to have Ato CTC total equipment and pumping.
Solutions as part of the DXP family average.
Average daily sales for the first quarter were $3 9 million per day versus $3 8 million per day in Q4 adjusted for acquisitions average daily sales were $3 4 million per day for the first quarter that said the average daily sales trends during the quarter ramp from $3 8 million per day in January to $4 2 million per day in March including the.
The normalization of project work regions.
Regions within our service Center business segment, which experienced sequential sales growth include California, Texas Gulf Coast and the southwest key end markets driving the sales performance include general industrial food and beverage mining municipal and specialty chemicals.
Supply chain services performance reflects a one time 937000 revenue adjustment associated with one of our customers contract pricing adjusting for the sales would have grown three 1% sequentially, which is in line with our commentary during Q3 and Q4 on adjusted sales grew zero of <unk>, 5% sequentially.
Ses the expect activity to continue to improve as more customers opened facilities along with vaccinations accelerating.
Customers are also beginning to inquire for employees are vaccinated, which we see as a positive indicator in terms of innovate innovative pumping solutions. We are monitoring of the backlog as we continue to the experienced declines as we discussed in Q4, we do see the start of a slow demand recovery and improvements in the industry indicators, but the rebounding.
Capex dollars is mainly tied to international international projects at this point domestically, we see capex budgets essentially flat to slightly down from 2020 out of.
Our Q1 average backlog was down 24% from the 2017 average backlog and down 35% from the 2015 average backlog, but its up 10, 9% compared to the 2016 monthly average backlog.
We are continuing to trend slightly above 2016 levels based upon where our backlog stands at the end of the first quarter again as we always comment we are monitoring the backlog of monthly and looking for new bookings always.
Turning to our gross margins Dxp's total gross margins were 29, 2% of 152 basis point improvement over Q4 gross margins improved 48% for Q4 to Q1 within innovative pumping solutions as we experienced the mix shift associated with more international projects as well as working.
Through several municipal water and our wastewater jobs and continuing to deliver on our efforts to move past lower margin jobs and the cost improvements despite the decline in the business.
Service centers also experienced the 50 basis point improvement sequentially from Q4, the Q1, while supply chain services experienced a decline in gross margins that is unique and more associated with the onetime revenue adjustment I mentioned in my previous comments.
In terms of operating income combined all three business segments improved 25 basis points in sequential business segment operating income margins versus Q4 <unk>.
Total DXP operating income adjusting for the Q for impairment expense decreased 82 basis points versus Q4 to $6 2 million.
Service centers operating income margins increased 92 basis points from Q4 resulted in $22 1 million of operating income excluding acquisitions operating income margins increased 63 basis points sequentially.
Innovative pumping solutions operating income margins declined 332 basis points sequentially, which primarily reflects higher SG&A costs as we continue to rightsize, our cost structure to demand as well as some fixed cost absorption.
Supply chain services experience of 251 basis points decline in operating income margins, primarily associated with the aforementioned one time revenue adjustment associated with the contract pricing.
Our SG&A for the first quarter increased 65 4 million for Q4 this was.
The increased excuse me $2 $65 4 million for Q4. This was primarily driven by the payout of commissions and bonuses associated with 2020 normal seasonal payroll taxes and first of the year items. Additionally, this also reflects transaction costs and other legal items similar to our comments on Q4, we are mindful that the contraction of.
Associated with the Corona virus is passing and with the accelerated distribution of vaccines. We are positioning DXP to respond to increased customer needs. As we believe those who are in a position to respond today and tomorrow will gain the most market share.
Turning to EBITDA Q1, adjusted EBITDA was 13, $13 9 million adjusted EBITDA margins were five 7% as we move through the COVID-19 rebound, we should experience of operating leverage as David mentioned as long as we drive organic growth and maintain gross margins in <unk>.
Terms of tax our effective tax rate continues to have a lot of noise. This quarter similar to what happened in Q4, and Q1 DXP booked a significant reserve associated with the Texas R&D tax credits based upon the increased risk of challenged by the state.
Going forward if the.
The XP continues to rebound, we expect the normalized effective tax rate between 23 of 25%.
In terms of of EPS. Our net income for Q1 was 411000 our earnings per share for the first quarter was <unk> <unk> per diluted share. Our recent acquisitions were accretive to gross margins operating income and ultimately to earnings.
Turning to the balance sheet and cash flow in terms of working capital our working capital increased $2 4 million for Q4 to $161 million as a percentage of sales of this amounted to 16, 9%. This primarily reflects an increase in accounts receivable and inventory in terms of cash we had 127 $127 5 million.
On cash on the balance sheet at March 31.
This is an increase of $10 million compared to Q4.
Regarding the Capex capex in the first quarter was 680000 or an increase of 538000 for Q4 run rate levels, reflecting our ability to control capital investment and the minimal maintenance needs of our business.
Turning to free cash flow, we generated solid operating cash flow during the first quarter, producing $10 $6 million of cash from operating activities and $11 2 million in free cash flow. This includes a $1 3 million cash inflow from the sale of assets return on invested capital on ROIC for the first quarter was.
17%.
At March 31 of our fixed charge coverage ratio was three seven to one and our secured leverage ratio was two 8% to one total debt outstanding at March 31 was $329 2 million, which reflects the refinancing of our term loan b and our first quarter of amortization of the refinancing and reset our covenants and provides additional.
The flexibility as we move forward as of as a reminder, excuse me of the new term loan B matures in 2027.
In terms of liquidity, we remain undrawn on our ABL in the have over $258 $6 million on liquidity, consisting of cash and Undrawn ABL.
In terms of acquisitions earlier this week subsequent to the quarter end, we closed on our acquisition of Carter on for platelets, and we anticipate closing another acquisition by the end of Q2 or early in Q3 Carter on for plant provides us with the platform to continue to expand our water and wastewater capabilities headquartered in Tampa Bay in the Q1 was for two.
Net sales of our acquisition strategy continues to create value for DXP as evidenced by the strong quarter, we had from year on acquisitions and we look forward to CDI contribution in Q2 of our pipeline remains strong and is expanding the different end markets more importantly, the talent of the companies joining DXP is very high and brings efforts ex.
Thirties, and valuable experience to our growing company with that we'll now turn the call over for questions.
Ladies and gentlemen, if you have the question at this time. Please press Star then the number one on your telephone keypad again that as part of one.
And your first question is from Tommy Moll Your line is open.
Good morning, and thanks for taking my questions.
Hey, good morning, Tommy how are you.
Doing great doing great how are you all.
Good.
Well you gave some helpful commentary just to unpack the varying trends across the segments for the first quarter on some of the onetime kind of items that you highlighted.
I think we're good on in terms of the first quarter I'm curious.
If there is anything you could point to for maybe how April looked.
Or.
Or how you think about the progression as we go forward you called out I think of pretty strong from looking back on the pretty strong exit rate for March but.
Really on a segment by segment level Youre seeing.
Widely varying trends.
You can do to help us understand how the move.
On a differently would be very helpful. Thank you.
Yes, no worries the Tommy maybe what I'll do is I'll go through the sales per business day, and then maybe.
David can comment on kind of service centers versus the Ips versus supply chain, but.
Just in terms of the cadence just for everyone on the call during the quarter.
We did some normalization this year just because we have of heavy accounting entry we deal at the end of the quarter that we felt you should normalize to get a view of the trends and so sales per business day for January were 3836 in February for two in March and then early estimate.
For April of shelf for 0.6.
And so the.
The cadence.
Is good and strong.
But to your point.
There is we're seeing.
A little bit of of difference this rebound between service centers.
Yes.
And supply chain.
And so.
David if you want to share some thoughts just on kind of.
Sure.
Yes, so on the I think.
The supply chain services.
As.
We got to point out the fact that they had on the adjustments of sales for the significant 900 per month.
And so if you look the supply chain and add that back then there's the actually add sequential growth.
Which is encouraging.
If you take them through last year they had.
Some oil and gas accounts that were hit pretty hard and then they also had some airline accounts that they actually closed down some facilities et cetera. So so that was the two big negatives, the positive where food and beverage and other accounts, but those other was brought them down and so.
We're seeing recovery.
And the small way in the oil and gas accounts, they're starting to.
To build things again, and so that's good and then.
And then the airline accounts that we have or are doing doing fine on the ones. We lost we lost them last year. So we will build off of that but.
But sequentially from fourth quarter of the first quarter is not reflected very clearly, but it's.
It's ever so slightly up.
The service centers.
And of the maintenance repair and the operating side.
As people have gone back to work that that part is bounced back really nicely and.
And looks to continue so that's very encouraging for us.
And so the real the problem areas as Ips on Ips.
As.
And where we put we kind of break out.
Just a refresher our branches may sales capital projects, but we take that and put it in Ips.
And so we really get a pure picture, which is unusual versus most companies of.
All of our Capex business looks like versus our maintenance and repair and operating business looks like so when we look at IPF types of strictly capex.
And of course, our oil and gas brands.
Cut their budgets last year and it looks like the.
On a kind of go with the same budget this year.
I guess the general attitude there is for.
They like the price of oil it's awesome.
But theyre not.
They are concerned with what the long term future looks like et cetera. So they are being reluctant to the increase those capital budgets at this point.
And I'll say that about the United States in which because we see a little more positive activity international.
The Ips business is not.
I'm not going to go to zero on launches.
For those that.
But it is less than we can adjust to labs and still make some money there, but not like we have of the past.
The Bill is the thing I would add to that Tom is what we're also seeing.
And particularly on our California or less range. It is there is some project.
And that are in that Ips segment that our water wastewater that are that are at the time that we're excited about it so.
And so there is.
It's predominantly oil and gas, but there are some other end markets in that Ips bucket.
Okay, Yes.
Yes. Thank you both that's extremely helpful.
Let's talk about maybe your own supply chain, there's a lot of commentary around cost inflation.
This is probably more on the MRO side of your business to what extent.
Are you seeing that in your own supplier base and what are some of the price cost kind of dynamics that you.
You've managed your plan to the.
For the rest of this year.
Brian.
So.
We don't sell lumber so.
Yes.
All of that.
Got it.
Okay.
We won't deal of that one but thank.
Thank goodness, but we are seeing.
Some of some price increases we're seeing more than we've seen in the past and we're seeing numbers that can be pretty high on a high number would be somebody raising price was 10% and then something more normal would be 4% to 5%.
And we are seeing.
Delivery problems and shortages so all of those things.
To me.
Is reflecting the fact that I just can't help but think the inflation's coming.
<unk>.
We're also getting.
Pay rage pressures.
People come back to work.
And the pulling that goes back now.
So the paper and so.
And then just let me say the some level of inflation.
For the 5% would kill me is good for US distribution. So as long as you know that we can pass that onto the customer, which which we normally can with proper documentation.
Of how the cost of gone up then.
And we can raise the prices up.
The point out the supply chain services, our own supply chain services company.
It takes a little longer so they do get some margin pressure gross profit margin pressure.
Because they.
They have the right to raise those prices, but the but it takes a while to get that done sort of slow a little bit of of lag, whereas somebody just break something in calls and stuff. The wants something we can give them a new price immediate yes.
That's helpful.
I think I think we are dealing with all of that fine.
You saw our inventory levels go back up some.
We're trying to we're trying to adjust to.
Two what we hope is much better volumes.
And the shortages the only one we had on meta will fix is the one same on that the auto industry as the Mets.
The.
Of these computer shift from China, we actually use those on our.
And the pulp pulp side, the sensors that we use for.
Understanding of the operation of temperatures and stuff like that so those boats have been impossible to get.
Let's see.
Let's move down the P&L here to SG.
SG&A so.
For the last 12 months.
<unk> taken some out of the model.
In response to the.
The events, we've all lived through.
But now Youre at a point, where potentially the rest of this year looks pretty good or at least.
Better than recent quarters, you may be in a position where some of that cost comes back.
So what what's the philosophy there I mean, you guys are.
For discipline on cost of generally.
So as your revenue potentially heads back higher is there a rough maybe relationship on how much of fixed cost for every unit sales you add back or how do you manage that.
Hopefully you're headed the right direction for a while.
So I'm kind of glad you asked that question.
I don't think we managed that process like we normally would because we felt like the.
The COVID-19.
They make us was wasn't of event and it would.
Have a start and stop I don't know the necessarily there'll really be of stop but we felt like there was so we didn't we didn't rationalize.
Productivity to the sales volume that we were getting we kind of in my opinion, we kind of held on to our talent and our DXP people are not easily the combined are not easy to train up and so so we didnt really make employee.
<unk> stuff priority.
And so therefore, I think as you see us.
Expand and grow the top line you should see leverage on the bottom line. So.
Our.
I'd like to thank the EBITDA could pretty easily get back the 8%. Our goal is 10% and we've been at 10, but that's when times are really good so I'm not I'm not targeting 10 anytime real soon but.
Something.
More on the line of eight.
As the appropriate and so.
Since we're already doing a pretty good job on gross profit margins of 29 point something percent of is pretty good for us.
<unk> would be perfect, but I will take the 29 something.
SG&A as a percentage of sales is really too high for for we're at but.
That said we.
We took that on because we wanted to be in a position to recover.
The fast and so.
We hope you got that right.
Last question for me more from a strategic standpoint.
Good to see continued progress on the tuck in acquisition side. It sounds like at least one more you've got good visibility on.
Im curious in terms of the pipeline.
What are the context, you could give us how you think the rest of the year may progress Theres the potential tax law change in the works.
And the impact there.
But what's the appetite for pipeline look like.
Yes, yes, Tommy now.
Youre spot on just on your earlier comments on the sense that yes, we've got one where we've got high visibility of that hopefully will get done before the end of the quarter early Q3.
And then just in terms of the overall broader market dynamics I think what you see out there is.
There's a lot of opportunities in the marketplace.
On that we are chasing and that we're looking at.
And then your last point I think it's spot on I've had those conversations here recently with others, but.
Is.
As this tax law change begins to grab momentum.
We are the way we saw some of that at the end of 2020, and I think we're going to see of repeat here.
Because now it's it's.
Publicly become in the thought process.
Politically and so.
It always does tax potential tax changes always do create some transaction activity some level and we could see that towards the back end of this year frankly.
For those entrepreneurs that feel they need to get in front of it and so.
I think.
We already got a robust pipeline, but it could accelerate towards the backend of the year.
So capital of Gainesville, Yes capital gains going on.
Those items and so.
Tommy just for the clear though.
<unk> made in my comments.
Looking at the firm geographies and certain industries for so we're being pretty selective.
What the direction of DXP is headed in.
We like water and wastewater and we like food and beverage and slower than we like.
Geographies that debt or not.
Not oil and gas geographies or the industrial geographies on municipalities geographies are on geographies, where we're not.
In the room.
And the appropriate business in those areas, but.
So that's that's kind of what we're thinking for being very selective.
From a multiple of respect the Tommy I think also maybe what you have been getting that.
The polls there is some pressure on the upside.
You've got more private equity guys in the sandbox.
And you've got sellers expectations.
Debt don't match the profile of their business on what I mean by that is.
Of these business as we look at.
Or closer to the lifestyle business, if they don't necessarily have on aggressive growth plans, yet they want of growth multiple.
And so some of it is also of matching up with what David said, the the markets and geographies with obviously at the right valuation we try to be disciplined.
And so.
That way, we're creating the value.
Wed like to create out there so.
That's all very helpful. Thank you both.
Thanks for the time today I'll turn it back.
Okay.
And I'm showing no further question at this time. This does conclude our Q&A session. Thank you for participating in todays earnings conference call and have a great day.
Thank you.
Yes.
Yes.
Okay.
Yes.
Okay.
Yes.
Yes.
Non.
Okay.