Q4 2021 DXP Enterprises Inc Earnings Call
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.
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.
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 press release.
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 fiscal 2021 and fourth quarter results.
Covid.
Good morning, and thank you Kent and thanks to everyone for joining us today on our 2020 will in fourth quarter and year end conference call.
I will begin today with some perspectives on our fourth quarter and year end results.
Current industry.
<unk> conditions, and our position going forward.
Till then.
Take you through the key financial details after my remarks.
After his prepared comments, we will open for Q&A.
As we all know everyone continues to navigate through Covid and Covid related challenges for 2021, and I am proud of the courage compassion and commitment demonstrated by our DXP people throughout the year.
There is no question 2021 was an extraordinary year.
Continue to remain challenging for us our customers, our Dx people, our suppliers and our communities.
But even in an incredible dynamic market environment Dx people came together, we stay true to our strategy remain customer driven and though we still have a lot of work to do I am proud of the fact that we delivered strong results for our shareholders.
DXP started physical 2021, believing financial results, we're not going to become easy and we were going to have to take market share where we could.
Pace and magnitude of recovery.
It would vary greatly from geography customer type and end markets.
This largely proved to be true as the economy continues to recover from the short, but deep recession that marks the pandemics early months and days.
Subsequent robust growth followed in certain markets began to put enormous pressure on the supply chain triggering levels of inflation not seen in decades by year end interest rate hikes were widely expected markets entered in to a new uncertainty.
While we don't expect physical 2022 to look like 2021, Dxp's confidence is as strong as it ever has been our strategy is working we continue to be customer driven experts sourcing providing servicing our customers as they navigate.
Whatever the outcome.
Year holds.
In physical 2021, we certainly executed on diversifying our end markets with a focus on water and wastewater and other industrial markets continuing to do acquisitions, adding three great companies during the year, including Carter and per Planck process machinery.
<unk> and Premier water execute we executed on share repurchase program and growing organically in the second half of 2021, delivering second half organic sales growth of 13%.
Sure.
Our strategy has always been to combined financial strength talent resources technology and capabilities of a large company with a 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 DXP people.
We continue to believe in this approach and look to renew our commitment to people processes and resources and technology as we scale DXP and remain focused on doubling the size of our business over the next three to five years.
From a sales business day per standpoint, DXP experienced continue improvement throughout the year with Q1, averaging $3 9 million sales per day, and ending Q4, averaging $4 8 million sales per business day or.
<unk> an improvement of 23, 1% from Q1 to Q4.
While we did experience some softness during the summer months from August through the end of December we consistently performed above our 2021 sales per day average of $4 5 million.
<unk> per day.
Our fourth quarter results reflect sequential sales growth and improvements in our end markets and industry indicators, including.
Our PMI and our metalworking indexes.
Oil and gas also started to see signs of firming and DXP experienced sequential increases and our related backlog.
And Ips expected.
<unk> excuse me experienced two sequential quarters of organic growth through Q4.
Total DXP sales for Q4.
$293 1 million or $4 8 million per business day, our profits for the quarter were impacted by a sequential decline.
And gross margins as well as an increase in SG&A associated expenses associated with auditor transition and related items, which Ken will review during his comments.
However, in the midst of continued change and growth our year over year earnings showed improvement and resilience as we grew diluted earnings per share 13, 9% to <unk> 83 per share on a year over year basis.
Thank you to our 2840 <unk> Dx people for your hard work and dedicated dedication and finishing the year as strongly as possible. It is always my pleasure to share our fourth quarter and year end results on your behalf.
In terms of cash flow and liquidity, we generated $32 $7 million of.
Free cash flow versus a record of $101 million of free cash flow in 2020.
Which reflects the turning of the business and investing in related working capital as the business begins to turn positive during the second half of the year.
This combined with flexible capital structure.
Plus us in a position, where we could keep executing on our acquisition strategy as well as return capital to our shareholders.
Opportunistic share repurchases.
As we discussed at the backend of 2020 acquisitions have continued to diversify our end market exposure and position us well for a rebounding economy. As we are excited about 2022 and the growth we expect to see both organically and through acquisitions.
As we continue to have a strong backlog.
Pipeline of opportunities.
We were excited to have three new companies joined us during the year 2021.
On top of before we completed at the end of 2020.
Or essentially the beginning of 2021 Carter.
Carter Verplank process machinery premier water have been great additions to the DXP family.
That is.
That is seven acquisitions over the last 12 months, including API pumps, and compressors corporate equipment company pumping systems, Inc, and total equipment company. So.
All of you welcome to DXP and we are excited.
Have you be a part of our DXP family and we look forward to our successes together.
DXP has continued to find ways to deliver financial results and position us well for all our stakeholders in the face of extraordinary challenges. This is evidenced by our sales growth improved gross margins and acquisitions in the overall teamwork.
DXP people.
Yeah.
We continue to build our capabilities to provide complementary set of products and services to all of our markets, which makes DXP very unique in our industry and gives us.
More ways to help our customer win we also are constantly looking at reviewing opportunities, where we can grow market share we complement our strategy with a relentless drive for progress that includes business and operational initiatives, which we believe will allow us to steadily improve our performance for all.
Of our stakeholders as we go into 2022, we are excited about the opportunities ahead and the potential DXP has to continue to scale and grow within existing and new markets.
Total DXP sales and physical 2021 were up 10, 8% to $1 1 billion.
<unk>.
Service centers led the way.
816 billion, followed by supply chain services of $158 million, and then antibody public solutions 48.
The point here is acquisitions.
The diversity of end markets.
MRO nature of service centers allowed us to obtain.
William.
Supply chain services.
Named.
Remain impacted by oil and gas and transportation related end markets. During the first half of the year and as we move into the second half some of it is related to Covid impacts the game began to subside.
Additionally, we started more proactive sales development.
Related to further growth in supply chain services and.
In 2022.
<unk>.
As we discussed during the Q1 through Q3, we experienced the largest organic sales decline.
Our innovative pumping solution business segment.
<unk> is tied to capital budgets and predominantly in the oil and gas industry.
Added through acquisitions water and wastewater treatment project work this year, which has positively impacted the results of Ips along with improvements in cost management.
Traditional business.
In terms of the strength in the Ips backlog, we have now had two consecutive quarters of sequential double digit increases and the trend looks to continue in Q1.
DXP overall gross profit margins for the year were 29.
Five per share a 192 basis point improvement over 2020.
Display consistent gross margin performance within Ips through the year and added accretive gross margin acquisitions that said Ips improved gross margins 463 basis points year over year in the midst of a significant decline in demand.
Overall, DXP produced EBITDA of $70 2 million or an increase of 19, 1% year over year.
EBITDA as a percent of sales was six 3% or an increase of 43 basis points compared to 2020.
In summary, we were pleased with our overall performance in 2021, obviously, another extraordinary year that Brazil with vital changes, but also highlighted are accentuated certain business trends that provide us with areas to enhance and focus on as we go into 2022.
We look to continue to drive improvement in our organic sales and marketing strategies.
Future sales growth through acquisitions, and anticipate physical 2022 to be a strong recovery here.
Our acquisitions performed very well during 2021.
Contributing significantly to both in sales and adjusted EBITDA, We continue to expect a busy acquisition year in 2022.
In 2021, we made great progress with an investment in a customer relations management system.
Or CRM tool for our sales force, which will help our <unk>.
Over 400 outside sales leaders.
Increased value to our customers and drive growth through new customers and increase share of wallet.
We are very optimistic.
And digital tools and marketing can create significant competitive advantage for DXP.
Overall through our strategic investments and initiatives, we will remain focused on providing world class tools processes training and technology to deliver value to our customers and suppliers and to help our DXP people be more productive so they can better help our customers win.
We will continue to use whatever median the customer prefers and tailor our approach that her needs.
XP is always customer focused especially in an environment, we have today or listening to the customer matters.
I am very proud of how our team continues to perform in this extraordinary times as a leading distributor of highly engineered products and services. We believe DXP remains well positioned to support our customers and navigate these challenging period for the benefit of all our stakeholders.
I would like to sincerely. Thank all of our DXP people, who continue to show up to work with their passion commitment teamwork and self service, we have a tremendous team. It is an honor to over.
Overcome the collective of adversity, we all experience they deliver and deliver value for all our stakeholders.
With that I will now turn it back to Ken to review our financials in more detail.
Thank you David and thank you to everyone.
Sure.
Fiscal 2021 financials.
2021 turned out to be another unique year estimates of the COVID-19, and experienced new and related challenges. Despite these challenges DXP successfully navigating through the year and was able to execute and create value for all our stakeholders overall dxp's fiscal 2021.
<unk> results were good to see and reflect the farmland.
Diversifying our end markets with strong acquisition activity completed three acquisitions in 2021 after completing the floor at the beginning of the year are on December 31 of last year.
Sales improving further from the ongoing pressures of COVID-19, with sales per business day, averaging $4 $5 million sales per business day in 2021.
Improved business segment strength with year over year growth in service centers and supply chain services. Despite the first half of 2021 presenting.
Okay.
Two quarters of sequential growth in the Ips backlog during the back end of the year.
Gross margin improvement year over year, and opportunistic share repurchases, returning $33 5 million in capital back to shareholders.
Essentially a great transition year, and one that will position us well for 2022 and beyond.
Total sales for the fourth quarter increased sequentially, one 3% to $293 1 million.
Collecting significant improvement in sales per business day going from.
$4 5 million per day in sales in Q3 with 64 business days to $4 8 million sales per business day with 61 days in Q4. Additionally, this reflects impacts from supply chain shortages and sales getting pushed into 2020 to act.
Acquisitions contributed $43 5 million in sales during the quarter total sales for DXP for fiscal 2021 were $1 1 billion, increasing 10, 8% compared to fiscal 2020.
For the full year acquisitions contributed $147 5 million in sales.
Average daily sales for the fourth for the fourth quarter as I mentioned were $4 8 million per day.
Versus three 8 million per day in Q4, 2020 average daily sales for fiscal 2021 were $4 5 million per day versus 4 million per day for fiscal 2020 adjusting for acquisitions for the full year average daily sales were $3 9 million per day.
In terms of our business segments service centers grew 23, 2% year over year, excluding acquisitions service centers grew six 9% year over year, followed by supply chain services growing two 1% and then in innovative pumping solutions excuse me declining 25, 8% excluding.
<unk> innovative pumping solutions declined 35, 5% year over year.
In terms of our service centers regions within our service Center business segment, which experienced sales growth year over year include California, Ohio River Valley, North, Texas, and our Canadian Safety services business key end markets driving the sales performance include food and beverage mining municipal water wastewater specialty chemicals.
As well as some COVID-19 related activity in Canada during the first half of the year.
Why chain services performance reflects the pullback in activity at oil and gas and transfer transportation related customer sites. This subsided as we move to the second half of the year and then the SCS team turned their focus to new customer wins, which we anticipate as David said, adding significant growth in 2022.
In terms of innovative pumping solutions, we have now experienced two consecutive quarters of increase in the backlog.
As I always say, we review monthly bookings and backlog and compare these data points to fiscal 2015, 2016 averages as well as fiscal 2017 averages. Our Q4 average backlog was down 12% from the 27 average backlog and down 28% from the 2015 average backlog, but it's up 22.
2% compared to the 2016 monthly average backlog. The conclusion here is that we are now trending slightly above 2016 sales levels based upon where our backlog stands today over the next 12 months.
Turning to our gross margins Dxp's total gross margins were 29, 5% 192 basis point improvement over 2020.
Drivers of the improvement include acquisitions, which we write.
Which excuse me were at an average gross margin of 32% and continued improvement in Ips on a year over year basis organic.
Gross margins improved 436 basis points year over year within Ips, followed by 154 basis points improvement within service centers supply chain services was essentially flat year over year.
In terms of operating income combined all three business segments increased 94 basis points and year over year business segment operating income margins versus 2020.
This was driven by improvement in organic operating income margins from service centers total DXP operating income increased 38 basis points versus 2020 to $39 9 million service centers improved operating income margins 128 basis points to $98 9 million supply chain services operating income margins declined 70.
Basis points to 12 million innovative innovative pumping solutions operating income margins declined 33 basis points compared to 2020, which is notable once again given the contracted market environment.
Our SG&A for the full year increased $43.
$7 million from 2020, this increase reflects higher than normal audit and legal related expenses associated with our auditor noise. This past year increased health care costs versus 2020 due to abnormally low costs incurred in 2020 when stay at home orders were in place and increased insurance cost. Additionally, DXP incurred growth.
Related increases in SGA SG&A, including over 775000 associated with investing in a new CRM package as David mentioned.
Turning to EBITDA fiscal 2021, adjusted EBITDA was $72 million.
Adjusted EBITDA margins were six 3% year over year EBITDA margins increased 43 basis points, we typically expect to receive greater fixed cost SG&A leverage as we grow but given our growth was driven from acquisitions and our business declined organically, 2% year over year, we did not experience the leverage.
That we will experience as we move through the cycle this points to the accretive nature of the margins with the acquisitions and the opportunity to significantly improve EBITDA margins as we move to organic growth in 2022.
In terms of our EPS or net income for 2021 was $16 4 million or earnings per diluted share for fiscal 'twenty one.
<unk> 83 per share versus an adjusted <unk> 73 per share last year.
Turning to the balance sheet and cash flow.
In terms of our working capital our working capital increased $27 1 million from the prior year to $186 2 million as a percentage of sales this amounted to 16, 7%.
This primarily reflects an 11 day increase in days sales outstanding or what they refer to as DSO days and investments in inventory. We are still at a point, where we are in line with our historical averages are ranges in terms of investing in working capital.
In terms of cash we had $49 $1 million in cash on the balance sheet at December 31.
This is a decrease of $73 million compared to December 31, 2020.
This reduction was the result of our acquisition activity and our share repurchase program that we announced in May of 2021.
In terms of Capex capex in the fourth quarter was $3 million Capex in the fiscal year was 6 million our general 5% of total sales.
Compared to fiscal 2020 were down 673000, as a reminder, capex reflects our ability to control capital investment and the minimal maintenance needs of our business. During fiscal 2020, we are focused on liquidity as we establish our bearings around COVID-19 and 2021, we maintain that discipline, but also began to opportunistically.
The best in the business with 75% of our Capex activity occurring in Q3 and Q4.
Moving into 2022, we will continue to invest in the business as we move towards growth.
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 2021, we had cash flow from operations of $14 3 million and $37 1 million respectively for fiscal 2021. This translated into $32 8 million in free cash flow return on.
Invested capital R. R. I see for 2021 was 21%.
At December 31, our fixed charge coverage ratio was $2 71, and our secured leverage ratio was three 7% while total debt outstanding at December 31 was $326 $7 million.
In terms of liquidity we have.
We remain undrawn on our ABL and have.
Over $180 7 million in liquidity, consisting of $49 million in cash and $131 seven under the ABL.
In terms of acquisitions, we anticipate closing another another acquisition by the end of Q2. This transaction, we will continue to diversify DXP from an end market perspective, as well as further strengthen our capabilities in key geographic regions and enhanced product capabilities our acquisition.
<unk> strategy continues to create value for DXP and our pipeline is strong and is expanding in different end markets more importantly, the talent at the company.
Very hot brings expertise and valuable experience to our growing company.
The last item I wanted to touch briefly upon is our auditor transition plan I am sure. Many saw the announcement. This morning that we have appointed price Waterhouse Coopers as our auditor for fiscal 2022.
I wanted to first start off by publicly thanking Mcconnell and Jones for working with us to get our third quarter and fiscal 2021 done in a timely manner given the unusual circumstances. The team from O'connell Jones handled everything with the utmost professionalism diligence and candor frankly, it was extremely refreshing.
As discussed back in November Dxp's Auditor transition our bridge plan has been about the future of DXP into line and to align with our vision and goals for the finance and accounting function.
Since 2017, we have been focused on ensuring we were building, our finance and accounting team capabilities and function that would support and propel DXP into becoming a multibillion dollar company <unk>.
Progress by no means is a straight line and we are improving year over year. We are also staying nimble as we continue to grow and work with a variety of market challenges that you face. We are at that inflection point and I am excited to work with Pwc and have another fresh view as we scale DXP and real time organically and through acquisitions.
<unk>.
In summary, our priorities this year were to drive shareholder value through diversifying our end markets continuing to execute on our acquisition program and opportunistic share repurchases. We were successful and look forward to a stronger 2022 and beyond.
I will now turn the call over for questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster. We will take our first question from Tommy Moll with Stephens. Your line is open.
Good morning, and thanks for taking my questions.
Hey, Tommy how are you.
Doing well thanks, I wanted to start for your oil and gas customers with crude here above $100.
What if any kind of change in appetite for spend are you seeing there.
Especially on the pricing side.
I would assume you're probably seeing some input inflation.
Obviously these customers are realizing much higher prices on their side. So do you have any kind of incremental pricing power in this environment that might be a tailwind to margins.
Okay.
Yes.
Yeah.
Yes.
Yes.
First of all let.
Let me say that.
That.
We're kind of moving ourselves away from from oil and gas and yet we still sell a lot of product into that marketplace.
And we will continue to do so.
One of the bigger opportunities for Ips, though is the sale a lot of alternative fuels type projects.
And also carbon capture stuff in.
And things to improves our environment, which is pretty exciting for us and pretty exciting for <unk>.
<unk> is kind of creating a whole new market.
And that's when we're kind of expanding there but back to your question.
Certainly.
People are.
Spending money to produce as much as they can.
Drilling is going back up but those budgets are.
Theyre nowhere nearly as big as they used to be but there is still.
Increasing so we're seeing activity.
At our Ips segment both for.
For alternative fuels, environmental and gathering systems and things that help.
Produce more so so all of that looks really really good for Ips.
Great.
Our our cost you say.
They're getting more at the wellhead further product and they certainly are I am a big fan that that's too high it will ultimately.
Somewhere along the line of low even out towards probably the right amount but.
Perfect price of oil, we always talk about that.
But it isn't it's not at $100 plus I'll just tell you that so so I'm worried about how it affects.
The rest of our business, but back to the oil and gas part.
People people costs are going up.
Our suppliers are raising their prices because there are people costs for steel has gone.
All of the commodities have gone up so.
And then we pass that on and I think the oil and gas company and expect us to pass that on whether or not we pass on a little bit for ourselves.
Kind of.
Up to the individual salesperson and the people doing the quoting and stuff, but what we tried to.
But we're just going to have a simply I was all stated to kind of point to the fact that really are our service centers did great.
Supply chain services.
I think it's going to have a good year.
They keep look keeps looking like it's going to have a good year, but the real improvement in the real detriment in 2021 was Ips and the capital projects and then but that's coming back and we're expecting them to have a good year.
Thank you David.
Moving up to the total company level and.
And just looking at your daily sales it sounds like <unk>.
Most of the second half of last year was quite strong.
I'm curious you know now where most of the way through the first quarter here, just what kind of commentary could you offer on.
I don't know if you want to go month by month or quarter to date year to date.
Any context, you could give us on how daily sales have progressed.
Hey, Tommy this is Kent, what I'll do is I'll jump in here and just give you the trends as I.
Normally do sometimes my caveat the sales per business day, if at all.
Pull it forward from the Q3 average and then kind of.
Last five months, if you will.
So for Q3, we averaged $4 5 million per day in October It was $4 7 million per day in November was $4 6 million per day in December was $5 1 million per day.
<unk> was $4 1 million per day January is usually always a soft month kind of coming out to shoot the beginning of the year.
In February we kicked up to $4 9 million per day.
So so turning in the right fashion and.
Increasing.
Month over month, so we like what we see now some of that does include acquisitions to be fair.
But.
Without getting into the detail, we're seeing the incremental increase in both sales per business day, and what I'll emphasize is our backlog as well we're seeing.
Remarkable increases our backlog now some of that's driven by the fact that there are the supply chain issues and some sales are getting pushed out but the net trends.
Our favorable 2022 once again.
Yes.
Moving to.
Expenses here on operating expense.
Thank you called out in the prepared remarks, some of the drivers in fourth quarter, moving higher one of which was auditor related but as we move into.
This year 2022.
Are there any factors you would point us to just if we think about where we're at.
<unk> expense line was in Q4.
Any factors that would drive that higher or lower as we move through this year.
Yes, let me Tommy in terms of the answer to that question, let me just retrace a little bit.
Some of those buckets and put some put some numbers around it and then kind of.
Specifically answering your question, if you will kind of going into 2022.
In terms of our auditor noise once against nothing.
Yes.
Wanted to have happen publicly but.
Once again I'll just couch it with it was refreshing to kind of be able to move forward and find a firm that we could come alongside for our growth and development.
But that created an excess of $10 million in half.
$1 in 2021.
We wouldn't have normally experienced.
Increased health care costs that was in another additional $2 2 million.
And then in terms of increased insurance cost another $1 1 million and a lot of that once again to your point was backend weighted towards the back end of the year.
Just give us given a lot of things.
In terms of pulling forward as we go into 2022.
We are still in the midst of the transition once again, it feels a lot better but.
As we transition from Mcdonald Jones, because we had to have them pick up in Q3 and for the full year audit.
There'll still be some expenses as we close out the 10-K and then we will onboard.
Well with price Waterhouse, and so 2022, we're probably still be elevated probably more than likely not the same levels as 2021, but we will also have some elevated costs there.
And then just in terms of SG&A going forward.
I guess I would couch it in terms of big picture.
I think every company in today's environment is receiving pressures around people.
Sometimes it gets tagline with a great resignation or just people moving from company to company I don't think dxp's any different and so sort of valued team members. We're trying to do all the right things and retaining those and looking at compensation and then.
In general.
You have inflationary pressures to in general to kind of meet those demands. So I think youll see some of that as we kind of move through 2022.
Thanks, Ken last one for me just on M&A.
It sounds like.
There may be another deal you do you expect to close sometime in Q2.
I suppose you have given us all the context, you can their dividend if not over the line yet, but whatever you could share just about the pipeline in general number of opportunities youre looking at versus trend.
Any guess formative opportunities in the pipeline are more along the tuck in route that we've seen lately.
Yes, yes no.
Big picture.
Some of those themes that are very relevant to DXP got lost in one of those obviously with all of the auditor noise was acquisitions right.
We remain acquisitive seven over the last 12 months.
The pipeline continues to grow was growing in the midst of all that.
We obviously just recently closed two here already at the beginning of 2022, so Dryden in Burlingame.
Not a lot of sales roughly around $9 million of sales added to DXP and then in terms of kind of one upcoming.
I'll call it closer to our average acquisition size, which average acquisition size is typically 25% to $35 million plus in revenue.
And so we're excited with where our pipeline stands.
Some of the dynamics in the pipeline what you see.
The market is very competitive still.
So you do see.
Multiple pressure, but we're still able to find those that are accretive to DXP and are a good fit and they have the themes of focusing on water wastewater.
Diversity of end markets and so.
We're excited to be in 2022, and we're excited to kind of have that pipeline still grow.
See where we end up by the end of 2022 in terms of the number of deals but.
Full pipeline.
I'd add one just one thought.
Yes.
Is that we're also in pursuit.
<unk>.
Okay.
Companies that are in the service business.
We're trying to.
Stay away from.
We always think of ourselves as an engineering customer expert type business and so.
We see that.
We want to compete with Amazon when will it compete with.
The graders.
So.
Companies that are in the service business and and then specifically.
May seem enticing to kind of jump back on the oil and gas, but we are really we have enough exposure in that market.
And so we're we're looking at other industries.
That have a high service content.
I appreciate it David that's all from me I'll turn it back.
Those are all the questions today, we thank you for your participation. This concludes today's conference you may now disconnect.
If you have anything else you want to add color.
Are you done.
Yes.