Q1 2018 Earnings Call
Operator today at this time I would like to welcome everyone to the DXP Enterprises 2018 first quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then.
The number one on your telephone keypad, if you would like to withdraw your question press. The pound key. Thank you Kent E Senior Vice President and Chief Financial Officer, You May begin your call.
Thank you Kim.
This is to you and welcome to Dxp's Q1, 2018 conference call to discuss the results of our first quarter ending March 31 2018.
Joining me today is our chairman and CEO David Levin.
Before we get started I want to remind you that today's call is being webcast and recorded and includes forward looking statements.
Results may differ materially materially from those contemplated by these forward looking statements a detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis are contained in our SEC filings. However, DXP assumes no obligation to update that information as a result, 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 press release and an accompanying investor presentation are available now on our website at IR Dot DXP E Dot com.
I will now turn the call over to David to provide his thoughts and a summary of our first quarter financial results.
Thanks, Kent.
Thanks to everyone on our first quarter conference call with us.
We are off to a great start in 2018, and I will start off with a summary of my thoughts and Kent will take you through the key financial details and we will aim to get all your questions answered through our prepared remarks, and our Q&A session.
After returning to significant sales growth in the second half of last year, our top priority is to sustain topline momentum and drive operating profits. In 2018. This is our fifth consecutive quarter of sequential increases and we're going to aim at.
Keeping this trend up.
Let me thank all our DXP stakeholders in particular, all our Dx people for their hard work.
Momentum is building in our business and we are focusing on having a smart recovery.
We are focused on growing the topline and bottom line as well as providing speed quality and convenience for our customers and all stakeholders.
Turning to our results total DXP revenues of $285 9 million for the first quarter of 2018 was a seven 6% sequential increase and a 19, 9% increase year over year.
This reflects continued improvement and stability in our end markets as well as the addition of application specialties, Inc. A leading metal working and cutting tool distributor located in Auburn, Washington.
This is the first quarter that application specialties is reported as part of DXP and we are excited to have them as a part of the DXP family.
As ASI has great people, who are customer driven experts in the metalworking solutions.
For the first quarter ASI contributed $10 6 million in sales adjusting for the acquisition of ASI DXP sales increased 15, 4% year over year and three 7% sequentially.
In terms of sales increase by business segment I was pleased with the contribution of all three segments. As we are seeing strength in our capital projects MRO and OEM businesses innovative.
Innovative pumping solutions sales increased 37, 9% year over year to $69 6 million, while service center sales increased 17, 9% year over year to $175 4 million and supply chain services sales increased five three.
<unk> year over year to $42 9 million overall I am pleased with the growth, but it is great to see both sales growth and continued increases in our backlogs, especially within the Ips business segment.
Innovative pumping solutions increase was primarily driven by modular packaging equipment for midstream onshore markets as the offshore markets are still soft.
Yes.
Okay.
Sequentially Ips experienced a 13, 7% increase from <unk>.
Q4 of 17 to Q1 of 18 or an $8 2 million sales uptick.
We continue to remain encouraged by the improvements in the Ips backlog, which has continued to grow into the first quarter of physical 2018.
<unk> in the Ips quarterly average backlog increased 80 plus percent from 2017 to 2018 and eight plus percent from Q4 of 2017 to Q1 of 18.
The service center sales growth was driven by increases in our rotating equipment metalworking and bearing and power transmission product divisions within service centers, we particular.
We saw particular strength and Dxp's southwest Southeast and South Center Central regions Dxp's overall gross profit margins for the first quarter were 26, 7% a 32.
Basis point decline from Q1 of 2017, however, adjusting for the acquisition of ASI gross margins were 27% or essentially flat to the same period in 2017.
I am pleased that we continue to work off the trough in our gross margins. We experienced in Q3 of 2017 in terms of <unk> gross profit margins. They are below dxp's average, but they produce operating income margins of 12 plus percent.
The other factors that have impacted our gross profit margin.
Fees engineered to order business and DXP safety service business in Canada.
Have experienced slight improvements, but we're not where we want to be and frankly other areas of DXP compensated this quarter to the upside in terms of gross profit margins.
Typically we saw strength in DXP fabrication business at our 529 facility and increased margins in our private label pump business Dxp's engineered to order business within Ips is still working through a reduced level of the complex large high margin order.
<unk>.
And their overall of course.
Cost absorption as they attempt to focus on more configured to order projects in terms of Dxp's, Canada safety business. We are continuing to work through implementing price increases and adjusting our employee cost structure in order to make the gross margins, we expect going forward.
As we have discussed this is the seasonal soft season in Canada, and we expect to see progress on our efforts during the second half of 2018.
SG&A for the first quarter increased $9 million versus Q1 of 2017 as a percent of sales Dxp's SG&A declined 75 basis points going from 23, 6% in Q1, a physical 2017 to 22, 8% in Q.
One of <unk>.
That said similar to our Q4 commentary SG&A reflects the growth and investment in our business and people at the end of the first quarter DXP had approximately 2563 full time employees as always it is my privilege to share Dxp's financial.
<unk> on behalf of these Dx people, who work hard everyday as one team driving customer success and value creation.
SG&A will increase as expected and reflect our investment in our people and our organization as we.
Grow going forward.
But as a percent of sales SG&A will decline.
<unk> overall operating income margin was three 9% or $11 1 million, which includes corporate expense and amortization. This reflects a 45 basis point improvement in margins over Q1 of 2017 that being said, we still have a ways to go for full recovery.
Service centers operating income was 9%, while Ips and supply chain services operating margins were nine.
4% respectively.
Ips operating income margins experienced the greatest inquiries growing but 228 basis points year over year, driven primarily by improved gross margins service centers increased operating income margins by six basis point basis points.
Benefiting from the addition of ASI, which had a 12, 3% operating income margin in the first quarter.
<unk> chain Services' operating income margins decreased by 52 basis points, driven by an increase in SG&A.
Overall, DXP produced EBITDA of $17 9 million versus $15 5 million in 2017, a year over year increase of $2 4 million or 15, 5% EBITDA as a percent of sales was six 3%.
Versus six 5% in Q1 of 2017.
Earnings per diluted share for the first quarter were <unk> 24, compared to <unk> 17.
<unk> per share in the first quarter of 2017, a year over year increase of 41, 9% or <unk> <unk> per diluted share.
In summary.
<unk> delivered 19, 9% sales growth.
Teen, 5% EBITDA growth and 41, 5% earnings per share.
DXP and all our stakeholders remain excited about our future and a smart recovery as we move through physical 2018.
As DXP believes our goal is to grow the topline and the bottom line at the same time as well as providing speed quality and convenience for our customers and stakeholders.
Before I turn it back over to Kent, I want to reiterate my excitement about the future and our capabilities to bring value to our customers suppliers Dx people and shareholders. The first quarter was a great start of the year DXP remains well positioned to benefit from.
The return to growth DXP and all our stakeholders are fired up and excited about winning and growing as we continue to be customer driven partner with great suppliers and take market share by being fast.
With that I will now turn it back to Kent to review the financials in more detail.
Yeah.
Thank you David now turning to the first quarter financial results, starting with our income statement.
Q1 was a strong quarter for DXP and is a great start to the year.
Q1, 2018 financial results reflect continued sales growth and marks our fifth consecutive quarter of sequential sales increases since Q4 of 2016 or quarterly compounded growth rate of five 2%. The first quarter performance was broadly in line with all of our key financial metrics and expectations total sales for the first quarter.
Increased 19, 9% year over year to $285 $9 million.
This does include the acquisition of an application specialties, which we closed on January one 2018, adjusting for the $10 6 million contribution in sales from ASI organic sales increased 15, 4%.
Average daily sales for the first quarter were up 21, 8% over Q1, 2017 or were $4 5 million per day in Q1, 2018 versus $3 7 million per day in Q1 2017.
Adjusting average daily sales, where ASI average daily sales for Q1 increased 17, 3% average daily sales increased four 2% sequentially from Q4, two two <unk>.
17.
Both our industrial and oil and gas end market indicators continue to show strength notable businesses within our Ips segment, which experienced year over year sales growth include our configured to order engineered to order and re manufacturing businesses.
Within our within our service Center segment, which experienced meaningful sales growth include the south central southwest and southeast regions. The overall growth reflects what we're seeing in some of our key in the market key end market indicators in the first quarter, including the rig count.
Oil and gas production, the metalworking business index and the PMI. These.
These indicators continue to show strength and support for our customers and DXP.
In terms of our business segments, all three experienced sales growth year over year with Ips showing the greatest improvement increasing 37, 9%. This was followed by our service centers, which experienced 17, 9% growth in supply chain services were five 3% growth.
Hosting the service centers for ASI sales were up 10, 8% year over year on an organic growth basis.
Turning to our gross margins gross margins were essentially flat at 27% adjusting for the acquisition of ASI.
Gross margins for Q1 were 18, 9%.
Total gross margins reflect the slow progress, we're making but also the continued impact of our engineered to order and our Canadian safety services businesses as.
We have discussed these two businesses have put pressure on our gross margins that said both businesses continued to show improvement in Q1, but remain below our historical averages and in Q1. They were supported by other businesses within their respective segments. Thus compensating for the margin softness we expect to see further improvement as we move throughout.
2018.
Sequentially, our Ips segment gross margins experienced a 238 basis point improvement from Q4 sequentially service centers gross margins.
<unk> declined five basis points were essentially flat to Q4 adjusting for the acquisition of ASI supply chain services gross margins declined 49 basis points from Q4 in terms of operating income combined all three business segments improved 42 basis points in year over year business segment operating income margins versus Q1 2017.
Total DXP operating income increased 35, 4% from Q1 2017 to $11 1 million.
<unk> had the greatest uptick improving operating income margins 228 basis points to $6 4 million operating income followed by service centers, which had a six basis point improvement to $15 8 million and supply chain services declined 52 basis points, primarily driven by increases in segment SG&A.
Turning to EBITDA first quarter, 2000, and 2018 EBITDA was $17 9 million, which was up 15, 5% from Q1 2017, our EBITDA margin expanded 31 basis points from the fourth quarter year over year year over year EBITDA margin declined 23 basis points, primarily reflecting the decline.
And gross margins that we have discussed since Q3 of last year. The increase in EBITDA dollars, primarily reflects the 40 the increase excuse me an EBITDA primarily reflects the $47 4 million or 19, 9% increase in year over year sales growth as we move through the cycle. We should experience continued operating leverage as long as we continue to drive organic growth.
And steady improvement in our gross margins.
In terms of EPS. Our Q1 net income was $4 6 million. This is up $1 $4 million or 45, 3% over Q1 of last year, our earnings per diluted share for the first quarter was 24.
Turning to the balance sheet in terms of working capital we were comfortable with where the numbers came out working capital as a percentage of last 12 months' sales for the first quarter was 17, 4%.
This is above our historical average of 15, 4%, but remains within our targeted ranges and reflects investments in our business. The main driver of the increase in working capital as a percentage of sales with inventory inventory increased $11 8 million for the fourth quarter. This was primarily due to a $3 3 million addition from ASI.
And a $2 million increase in finished goods and another $6 2 million increase in win.
In terms of cash we have $13 million in cash on the balance sheet at March 31, net of the outstanding checks.
In terms of Capex capex in the first quarter was 791000 or 0.3% of first quarter sales compared to the same period in 2017 Capex dollars are up 190.
The increase reflects the minimal investments needed within our core distribution business and our ability to manage cash that said DXP is making investments in software to enhance our sales efforts facilities and improvements to future Super centers and our corporate operations.
Return on invested capital or ROIC remained stable.
At a strong 17% and continues to be above our cost of capital, but it does reflect our dampen profitability levels.
In terms of our capital structure, we have two main covenants under the ABL and term loan b, including the fixed charge coverage ratio and secured leverage ratio at March 31, our fixed charge coverage ratio was three 401, and our secured leverage ratio was $3 41 and.
In conclusion, we are pleased with our ability to have five sequential quarters of sales increases as David mentioned EBITDA growth of room for improvement in terms of operating leverage and significant diluted EPS growth I would like to emphasize that we continue to take deliberate actions to position and support the evolution of our strategy, while continuing to thoughtfully allocate capital to capture it.
Support profitable growth in the short and long term this will be a smart recovery.
Now, we will turn the call over for questions.
At this time I would like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from Matt Duncan from Stephens incorporated your line is open.
Hey, guys. This is will on the call for Matt Congrats on the good quarter.
Thanks, well thanks, well.
Yes.
Wanted to start with the strong sales trends through the quarter end and through April on a monthly basis have you seen.
<unk> strengthen or can you kind of touch on that within the quarter.
Yes, no sure absolutely well this is Kent.
I can just walk you through the sales per business day, that'd be great through the through the quarter and then include April .
Sales per business day in January were $4 2 million.
$4 4 million.
5 million $5 $1 million in March and.
And then April was $4 6 million.
Okay, Great that's helpful.
And then just flipping over to Ips in particular, great to hear that backlogs are continuing to build do you think.
But that will translate to further sequential growth from this from this high <unk> watermark throughout the year.
How should we be thinking about the trend there as we move throughout 2018.
I'll answer that.
Activity in terms of.
Completing.
Ducks.
Drilling activity is.
A reasonable.
There are a lot of pipeline projects too.
<unk> product from these oil fields to.
The coast or wherever they need to go.
We really.
But all I don't see any slowdown in activity.
So we would we would expect.
Ips too.
Continued to grow we would.
It really be also.
If you could get our offshore industry is going.
And that would help.
And with our engineered to order stuff the stuff that's more complex and have higher profit some are still pursuing.
Some of that stuff and we and we do land.
Orders here and there where they're normally on the smaller side really need the offshore business to pick up.
The onshore business is strong and continuing.
To be strong.
And we don't we don't see any reason.
For that not to be the case.
Although I will make this the one.
Argument I always make and that that's the perfect price of oil.
And that's where the industrial market.
Okay and doesn't have to bake too much at the pump or pay too much for cars and all that kind of good stuff and yet it's enough money that the oil companies make money and so.
I think we are.
Were there frankly.
Frankly, I would hate to see price of oil.
Rich.
Higher.
Okay. That's helpful. David.
Long answer.
I always helpful.
And then you spoke to it a little bit but going back to the gross margin pressures in Canada in ISS.
Can you speak.
More about the wage negotiations up there and your customer has been pushing back on the wage increases more than you had expected.
And then and then looking forward.
When do you expect gross margin levels to start to improve on a year over year basis.
I do think they can.
Pushback has been stronger.
The Canadians.
They don't like us.
Much money on the oil sands as we make in.
In the states, but.
So they are they're very cautious.
Their expenses have not that everybody is not cautious level expenses, let me I mean, one of the reasons why we make.
Both companies make money at $60 a barrel because we've all cut our cost.
The question becomes Canada also has a very.
Social site too.
And and employment is.
Reasonable up there so it is.
Ben.
The heart of pushback on the employees also so.
Yes.
Back from our customers when there is a pushback from the employees has been there and yet.
Not a problem.
Profit organization here, so we have to figure all that out and we are.
But it's been a slower process at home.
Well the only other thing I would add to it is we did see on organic basis I'll just reemphasize it from our comments.
That gross margins were at 27 point on 4% adjusting for ASI and so we did see sequential improvement now we do have a huge comp if you will from a gross margin perspective, the year over year in Q2 last year gross margins were 27, 5%. So I think it's fair to kind of.
We've measured here in terms of expectations going forward, but.
We are seeing gradual improvement.
Not at the pace, we like but we are seeing some.
Okay.
It's helpful. Canada, then last thing from me are you continuing to pursue some more bolt on deals here.
We expect to see more acquisitions across the finish line throughout this year.
And we always have discussions ongoing.
And it's our goal to kind of.
Hopefully get a few few other ones done, but it's always hard to call.
Time win.
Sellers will say, yes to our compelling offers.
Yes.
That's great David Kent I appreciate it.
Unlike those compelling offerings.
Thanks, guys.
Thank you will.
Your next question comes from the line of Joe Mondello from Sidoti and company. Your line is open.
Hi, guys good afternoon.
Okay.
If you ask.
About the service center margins.
I was wondering how they sort of stack up against your expectations.
They seemed a little bit light for me than they were a little lighter than the last few quarters. So I'm wondering your thoughts there and sort of how looking at that margin.
Put up in the first quarter, how would that sort of stacks up against your expectations for the rest of the year.
Joe are you, referring to the operating income margins or yes, I'm talking to say, yes.
Yes, yes.
Yes.
Yeah I think.
Yeah.
Some of that just reflects first part of the year, some usually sometimes some higher than usual expenses I know in Q1, we had a few extra payrolls and so I think.
That may have dampened their margins ever so slightly on that slightly on the SG&A side.
I think we feel good in terms of where they are at this.
This point, so I don't know if David has some comments well Joe I think.
Thank <unk>.
<unk> margins are too low I think service center margins are too low.
And Ah probably after John actually lower supply chain services margins, a little bit because I would like to see.
More topline growth, so I'd like to see and be more aggressive on new orders.
But yes, we are.
We're back into growing scale and we're back into.
I had to give people raises that haven't had raises in awhile.
We're saying that.
That are going on.
It was been a buyers market not a seller's market. So therefore, our mark our gross margins are too low et cetera. So we're working on all that.
Our gross margins need to come up.
Leverage will take SG&A as a percent of sales down.
And we.
We have to be north of 10%.
Operating income.
So the operating income at that segment I mean, it was sort of close to 10% and so I'm. Just wondering do you think you can sort of get to that sort of 10% plus level. This year or is it going to take.
Are we going to have to wait until sort of 2019 until we sort of surpass that 10% levels that we've seen in the past.
Yes.
I'm pretty convinced.
That we will.
No.
We should see service centers.
So really we'll have much of a reason not to hit CFO .
Share of operating income.
Whether or not.
We can get to.
I think it's.
Peak somewhere.
We were a little north of 11 or so.
So that might take a little longer, but we should we should be able to get to 10.
Okay and can you remind me of the seasonality of service center just on the margin perspective.
Once again part of that I was going to jump in there Joe is impacted buyers Canadian safety services business. So once again.
As we work through the gross margin pressures.
Our Canadian safety services business, which is in our service Center segment.
We should see some lift across the board, including.
Included on the operating income line.
Okay and there is there is seasonality there is seasonality.
To answer your question directly it's usually Q.
For some times early Q3, just depend upon when winter hits.
And it gets cold in Canada.
No.
The break the break up is when the activity level.
It goes down because people can't I can't get into the field, it's too wet.
So it's actually the reverse once once the Canada, Canada starts falling out.
Entities to dry out and then its good its good one it's frozen because of necessity.
Q3, as Q3 Q4 are up yes, that's what I'm, saying is okay. I'm sorry, I thought you were commenting that they were down okay I'm sorry.
Sure.
Alright, and then I wanted to actually I was wondering you gave the daily sales per month, and just wondering your thoughts about the sequential tick down from March to April .
What your thoughts are on that.
Yes.
Business.
Seems the billed as the month goes on and the and it also builds from the months through the end of the quarter.
Okay.
Joe If you look at our if you look at our Q1 2018 average that was $4 5 million or so.
To be a little bit directional April coming out of the shoe that four six.
We're comfortable with $4 six.
Okay, and then you spoke on the last call about the Ips backlog.
Just wondering is that continuing to sort of ramp up sequentially.
How strong is the order trends been there and then I also wanted to ask in terms of IP ISS.
Are we starting to see any of that large project backlog at all I know you were trying to diversify and trying to win some business on the smaller side, but just wondering how strong the environment is if youre starting to see any of that high margin large project type work.
So we're not.
I mean, I think we got a couple of million dollars of order of the other day that was required engineering.
That went with it we say engineered to order.
We engineered the process the whole the equipment everything, but the more that we engineer.
And changed.
The molecule some stuff in terms of what we are.
We're dealing with but.
That business is.
Not particularly coming back.
It was it was mostly offshore and overseas and we're not.
We're not seeing a lot of that.
We get a little bit of it I'll just mention that.
So we've had to go to onshore stuff, which is not.
Not as complex the customer doesn't need us to engineer the project.
30 for the year and it came in below twenty-seven for this quarter. So just wondering what your updated thoughts are on the effective tax rate for the year.
Yeah.
You know we were thinking that based upon the limitation on the top stability of interest expense that maybe we would've ended up a little bit higher but obviously.
We made some income to the upside so that that impacted the assumption a little bit and then there was a one time right change in Canada.
That we adjusted for that kind of brought us down low in the way of getting that.
The only revise thinking I'd, probably get there is probably we're probably closer to that 28% range.
Then call at 28% to 30.
Okay.
Our thanks, a lot I appreciate it.
Alright, Joe.
Again, if you'd like to ask a question. Please press star one on your telephone Keypad. Your next question comes from Steve Burger from Qui think capital markets to your line is open.
When I'm questioning for Steve.
Hey, Steve how are you.
Good good this is Ryan actually.
Yeah, just want to go back to the operating margins that Ips real nice performance, there and I'd like to think that they exceeded your expectations or at least came in at the high end, but I believe on the last call you hinted towards more significant improvement in the back half of 18.
Does that belief still hold.
Given the performance you had an <unk>.
I believe dot com has to do with.
More with the service centers.
Yeah, because that's where our safety businesses at and our safety business globally has pretty gross profit margins.
Dribbles down into operating income margins, so Canada's stronger in the second half of the year then it then it will be.
German or.
The first half when the editor.
Looking for local meltdowns until Brian would've.
So again it goes through.
Oh.
An important but anyway.
So so that has more to do with service centers.
Yes is.
A little bit of a.
Oh.
That's not a little bit it's been against.
Three people for people that are hungry, they're shop as empty as a ninja absorb overhead and so therefore, it's a buyer's market versus today.
Both of those times, we just went through and so now today the customers more concern will can you can you deliver this in 10 weeks.
And somebody goes well pretty busy right now so.
Can but I'm going to charge you more soft and so it's just a different market in those big capital projects are going to be sensitive.
Two delivery points and so deliveries are going out and the people that can get the equipment out or going to are going to make more money. So margins will will creep up.
Okay. All right. Thank you for that and then going back to Ips you guys been having.
Real nice growth for about three quarters now.
Just curious do you think you're you're gaining share with your private label pump and.
To piggyback on that.
When when should we expect to see.
The benefits from the aftermarket business start to come through with that offering.
Oh, how did you know I wasn't getting that already but anyway.
[laughter].
Yeah, that's one of them I just wanted to talk more subjects fall away, but.
[laughter].
We're putting a lot of equipment out there and so we make more money and the pump industry people make more money on aftermarket so.
So we're pushing for that.
And that is growing is about 10% of.
Of new pumps about 10% of our pump business is kind of aftermarket so.
If we can get that up to you don't want it to be more than pulp sales. Because then that means you're going to die, but if you get it up to 40% we would in fact make more money.
So such a really good point when will that.
Get better it's already getting better but it's.
Passion up I guess.
A good point.
And you asked another question I forgot what it was Kent.
Yeah, just asking about the customer tracks and you're getting with your private label pump do you think.
Yeah, Yeah, yeah. So so we're extremely pleased with that.
Again.
I don't I don't know that.
Made in America means a whole lot, but what does mean a whole lot is that we're fast we control our supply channel we have our own.
Testing facility, we we don't have to wait for something to get ship for 30 days from China to America, all of that means speed and and speed is.
Important today.
So speed open times means way more than the cost of that pump. So.
We're happy about that and.
And we have gotten tremendous.
Tremendous success in traction.
And we're.
We're doing really good.