Q1 2022 DXP Enterprises Inc Earnings Call
Both GAAP and non-GAAP financial measures a reconciliation of GAAP to non-GAAP measures is included in our earnings press release.
Press release, and an accompanying investor presentation are now available on our website at IR Dot DXP Dot com.
I will now turn the call over to David Little our CEO and chairman to provide his thoughts and a summary of our first quarter performance and financial results.
Good morning, and thank you can't thanks to everyone for joining us today on our fiscal 2022 first quarter conference call.
First let me say that following a partial recovery in 2021, we're off to a great start in 2022.
I personally want to thank all our DXP stakeholders in particular, all our Dx people for their determination hard work and grit as we turn the corner and momentum momentum appears to be building in our business with 25% organic sales growth adjusting for the four.
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At the end of 2020, and 30% overall year over year sales growth in Q1, we are off to a great start. This year. This is dxp's first quarter of meaningful organic growth in total sales and EBITDA, which is great to see that said <unk>.
As we get to the tail end of the Covid crisis, we're all facing new challenges that DXP is prepared to navigate.
We are encouraged by the improvement in our results and remain focused on growing our business organically and inorganically in the physical year 2022.
Although much remains uncertain, including inflationary pressures supply chain disruptions and constraints and the geopolitical impact of Russian invasion of Ukraine, I am proud that the DXP people effectively support their customers and this type of business.
Environment. This is a testament to the relentless drive we have made to center our strategy around customers and to remain customer driven experts.
I will begin today with some perspective on our first quarter and thoughts on the remainder of 2022, Kent will then take you through the key financial details. After my remarks and after his prepared comments, we will open up to Q&A.
Overall, we had a great first quarter that highlights good execution in a number of positive trends developing across DXP, including organic growth in most of our industrial markets plus growth in new markets, such as Biofuels carbon capture.
Air and water and wastewater.
We also experienced inorganic growth by continued execution of our acquisition strategy to accelerate our end market diversification efforts and compressed air and water and wastewater we are seeing increases in oil and gas capex budgets that said.
We are building a more resilient diversified business that can generate solid performance and more uncertain markets and we believe you are starting to see evidence of these efforts in Q1.
Again, let me thank all our DXP stakeholders in particular, all our DXP people for their continued efforts and adaptability as we grow and evolve DXP into a more diversified and less cyclical business.
<unk> broad base industrial end markets, which is 73% of our business today appears to be showing some deceleration in growth, but remains above economic contraction and shows signs of consistent demand and activity.
I assume and PMI manufacturing indexes, which give us an indication on how dxp's broad industrial markets will perform move from.
57, six reading in January to a 57 one rating in March this trend is slightly below average over the last 12 months of 59, 3% and it looks to be positive to be a positive indicator for the year should the trend continue.
Albeit we are at a lower level. This year than we are last year. We are also excited to see momentum on this side of our business and look for this to maintain strength throughout the year. These end markets, including food and beverage chemicals Biofuels transportation municipal.
Manufacturing General industries should serve us well.
Oil and gas, which is the remaining 27% of DXP is showing signs of recovery given the geopolitical circumstances and the overall relative strength in prices.
Majority of our business that is oil and gas tends to lag and the rig count and is tied closer to actual production or increases in capex budgets.
We experienced a significant pickup in organic sales activity in Q1, which reflects the increase in backlog, which began last year in Q3. The pickup is consistent with comp complementary around U S majors and smaller exploration and production.
Companies, increasing capex budgets from 2021 by low double digits.
We regard the broader demand recovery underlying trends improving across the business as the quarter progressed and trends.
Are the strongest in March which our sales per day going from $4 1 million per day in January to $5 8 million per day in March. We believe this also reflects impact from price increases from our suppliers.
Please note this inflation is.
Please note that inflation is normally good for distribution companies, assuming we can pass along supplier increases.
Total DXP sales for Q1 increased 9% sequentially.
30% year over year.
$319 4 million or an average of $5 million per business day for the first quarter.
Thank you to the 2533 Dx people for your hard work and dedication were excited to have Berlin games engineers and driving equipment join our DXP family. They each had a great first month with DXP and they both increase our presence.
And water and wastewater industry.
It is always my pleasure to share our performance and financial results on behalf of everyone's efforts.
Dx people have continued to find ways to deliver financial results and position us well for our stakeholders in the face of extraordinary challenges. This is evident by our sequential growth closing acquisitions and the overall teamwork of DXP.
We continue to build our capabilities to provide a technical set of products and services in all our markets, which gives DXP very unique which makes DXP very unique in our industry and gives us more ways to help our customers win.
In terms of Q1 financial results inventory pumping solutions led the way.
Followed by supply chain services, and then service centers in terms of sales growth.
In terms of the strength of the Ips backlog, our Q1 average Ips backlog compares to our 2017 average backlog numbers and we are continuing to grow month over month as.
As we transition to growth our main focus within Ips is maintaining.
Man is managing the demand level, we have today finding opportunities in other markets, such as Biofuels, food and beverage and water and wastewater and pricing appropriately given the supply chain dynamics and inflation.
Supply chain services.
SCS is having a great year with increased organic growth.
Due to increased activity with existing contracts and plus several new contracts procured.
Bring products and inflation will be Ses's challenge this year and so far they have done an excellent job of managing these two headwinds demand for SCS services is increasing because of the proven technology and efficiencies they perform for their industrial customers.
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S. C would service centers performed the best during the last few years through Covid as Ses seats, the central customers running with MRO P, which stands for maintenance repair operating and production products and services necessary for the customer to stay in business.
Bookings backlog and revenues continue to grow at a steady pace.
DXP overall gross profit margins for the quarter were 29, 7% and 83 basis point improvement over Q4. This reflects strengths within the Ips and service centers and strong gross margin performance from our recent acquisitions.
A special thanks to our Dx people, who have stayed on top of supplier product increases and labor costs.
Overall, DXP produced EBITDA of $29 3 million and EBITDA as a percent of sales was eight 9%, which reflects the operating leverage we expect with significant.
<unk> organic sales growth.
Let me conclude my remarks by saying that I am encouraged with our continued sequential improvement in sales and profitability and firmly believe that we are well positioned to continue this growth pattern. In 2022, we have managed the business through uncertain times successfully.
Making acquisitions, producing strong free cash flow and continued to invest in the business that will benefit our future growth.
Unemployment levels are low wages are increasing inflation is the highest it's been in decades and decades, we're seeing new stress on supply chains, and commodity pricings and U S households are facing rising gas prices as well as higher prices for food.
And housing.
In general moderate inflation is good for DXP and rising interest rates have.
Very little financial impact and we do not see or feel a recession coming in 2022 that said stag inflation and recessions can be bad and being in business. Since <unk>. We have lived through some really tough times and we all hope that.
Our federal reserve gets this right and balancing a soft landing.
Ongoing complexity and the economic outlook is certainly something we will keep our eyes on but whatever the future holds I believe DXP is well positioned we continue to make progress on our growth strategy and our commitment to customers is stronger than ever.
<unk> growth and improvements at DXP, and we look forward to a successful 2022.
With that I will now turn it back over to Kent to review the financials in more detail.
Thank you David and thank you to everyone for joining us for our review of our first quarter 2022 financial results Q1 financial performance reflects our fourth quarter of sequential sales increases during this COVID-19 cycle and the subsequent interrelated challenges, including inflation supply chain constraints.
<unk> and a war with global ramifications. Despite these challenges DXP continues to successfully navigate through the market and has been able to execute and create value for all our stakeholders.
Dxp's first quarter financial results were great to see and reflect a combination of business actions. We have undertaken more specifically Q1 takeaways are as follows strong organic sales growth and contribution from acquisitions meaningful organic sales increase within Ips along with another quarter increase in the IP.
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Significant operating leverage leading to improved adjusted EBITDA margins and continued share repurchases.
Total sales for the first quarter increased 9% sequentially to 300.
Absolutely.
<unk> for less than a year contributed $13 1 million in sales during the quarter. We are excited to have our two most recent acquisitions as David mentioned driving equipment in Berlin Gateway Engineers, who contributed in Q1 as a part of the DXP family.
Subsequent to Q1, we also added Cisco Air systems, and we look forward to their contribution in Q2, and further margin enhancement in product and market diversification that they bring.
Average daily sales for the first quarter were 5 million per day versus $4 8 million per day in Q4 2021.
Adjusting for acquisitions average daily sales were $4 8 million per day for the first quarter that said average daily sales trending during the quarter ramp meaningfully from $4 1 million per day in January to $5 8 million per day in March in terms of our business segments innovative pumping solutions grew 128, 3% year over year.
Excluding acquisitions Ips grew 89, 1% of our sales increased $27 million. This was followed by supply chain services growing 32, 2% year over year, and then service centers growing 17, 4% year over year, excluding the acquisition sales within service Center sales grew 36%.
In terms of our service centers regions within our service Center business segment, which experienced sales growth year over year. This includes Ohio River Valley, South Atlantic Southwest in the South Rockies.
The end markets driving the sales performance include food and beverage mining municipal air transportation and specialty chemicals.
Fly chain services performance reflects an increase in existing contracts and an uptick in activity with COVID-19 closer to fully subsiding. Additionally, SCS is onboarding some new contracts that should continue to impact the top line as we move through 2022.
In terms of innovative pumping solutions, we continue to experience increases in the backlog, which matches the market commentary that capex budgets will have increases in 2022 versus 2021 as David mentioned, our Q1 average backlog at this point is flat to the 2017 average backlog and down 19% from the 2000.
<unk> 15 average backlog, but it is up 39% compared to the 2016 monthly average backlog. The conclusion here is that we are now trading meaningfully above 2016 levels and were flat to 2017 sales levels based upon where our backlog stands today, we are transitioning into a strong organic growth within Ips and look to find opportunity.
These and other markets versus our traditional oil and gas, but fully expect oil and gas to continue to contribute meaningfully.
Turning to our gross margins Dxp's total gross margins were 29, 7% to 54 basis point improvement over 2021 drivers of the improvement include organic increases driven by inflation and acquisitions, which were at an average gross margin of 35%.
Organic gross margins improved 53 basis points year over year.
In terms of operating income combined all three business segments increased 168 basis points of year over year business segment operating income margins are $13 million versus 2021.
This was driven by an improvement in organic operating income margins across all three segments given the pickup in sales total DXP operating income increased 421 basis points versus 2021% to $21 5 million.
Service centers improved operating income margins 62 basis points to $27 4 million supply chain services operating income margins increased 199 basis points to 4 million innovative pumping solutions operating income margins increased 924 basis points or $6 1 million compared to 2021, which is notable once again given the organic.
Improvement of 802 basis points and operating income margins.
Our SG&A for the quarter increased $7 9 million from 2021, the increase reflects the payout of year end bonuses associated with 2021 normal seasonal payroll taxes in first of the year items as well as continued audit and legal related expenses.
That said during a period of normally high seasonal SG&A costs, DXP was able to manage more efficiently and increase margins turning to EBITDA Q1, 2022, adjusted EBITDA was $28 3 million adjusted EBITDA margins were eight 9%.
Year over year, EBITDA margins increased 317 basis points of $14 $3 million. This reflects the fixed costs SG&A leverage we experienced as we grow sales. This translated into three four times operating leverage.
In terms of EPS, our net income for Q1 was $12 6 million or earnings per diluted share for Q1, 2022 was <unk> 65 per share versus <unk> <unk> per share last year.
Turning now to the balance sheet and cash flow in terms of working capital our working capital increased $32 2 million from December 31 to $218 4 million as a percentage of last 12 months' sales this amounted to 18, 4%.
Primarily reflects an $11 million increase in inventory as we continue to manage supply chain shortages and lead times and $10 million increase in accounts receivable were $4 2 million of the increase associated with our recent acquisitions. We are still at a point, where we are in line with our historical averages in terms of working capital as a percentage of sales or in the range in terms of that.
And working capital, but we expect this to increase as the business grows.
In terms of cash we had $36 6 million in cash on the balance sheet at March 31.
This is a decrease of $12 4 million compared to December 31, 2021. The reduction was a result of our acquisition activity share repurchases and working capital usage was primarily driven by the $11 million increase in inventory as I mentioned, just a second ago between December and March.
In terms of Capex capex in the first quarter was 740000 or a decrease of $2 3 million compared to Q4 of 2021 as a reminder, capex reflects our ability to control capital investment and the minimal maintenance needs of our business. While we do expect capex to pick up in 2022, our Q1 levels were very.
Moving into 2022, we will continue to invest in the business as we move toward growth.
Turning to free cash flow free cash flow for the quarter was $1 $9 million. As a reminder, we typically have negative cash flow from operations in the first quarter and positive cash flow from operations in the second through the fourth quarter. However, the last two years, including Q1, we have created free cash flow as we have moved through the cycles that said as we increased project activities in our <unk>.
Base business, we historically have experienced high uses of cash during the first half of the year versus the second half, which we are starting to see.
Return on invested capital or ROIC at the end of the first quarter was 24% and should continue to improve as we drive margins and operating leverage and improve our run rate EBITDA.
At March 31, our fixed charge coverage ratio was two five to one and our secured leverage ratio was three two to one total.
Total debt outstanding at March 31 was $325 9 million.
In terms of liquidity as of the quarter, we remained undrawn on our ABL and subsequent to the quarter. We did draw on our ABL by $11 million to complete the acquisition of Cisco Air systems that said, we are turning to the point in the year, where we typically increased free cash flow anticipated paying down current borrowings funding future acquisitions.
In terms of acquisitions subsequent to the quarter, we closed on the acquisition of Cisco Air systems. We're excited to have the Cisco team with DXP and we look forward to them reporting with us starting in Q2 <unk>.
Cisco provides DXP with a leading platform within compressed air while continuing to diversify.
<unk> excuse me Dxp's end markets with a primary focus on food and beverage and transportation related end markets Dxp's pipeline continues to grow and we anticipate closing more acquisitions as we move through 2022.
Alright acquisition strategy continues to create significant value for DXP enhancing end markets margins dxp's cash flow profile.
More importantly, the talent at the company is joining DXP is very high and brings expertise and valuable experience to our growing company.
The last item I want to briefly update everyone on as is on our auditor transition. This is the first quarter with price Waterhouse Coopers as our auditor and the transition is going well and we were able to quickly get ourselves in a position to release earnings and we appreciate all the hard work that said, we will anticipate that we will file past the normal deadline as we.
Closeout, some additional procedures and follow up items with pwc related to our first quarter with them.
We look forward to working together through the remainder of the year.
And I will now turn the call over for questions.
If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
First question comes from Cor <unk> from Stephens. Please go ahead. Your line is open.
Hey, guys. Thanks for taking my questions.
Hey, Nicole Thank you this morning.
First question on sales now that where most of the way through the second quarter here, just what kind of commentary could you offer on daily on how daily sales have progressed, whether that's month by month or quarter to date year to date.
Any context would be helpful.
Yes, Paul I'll take that one and just once again give the.
Sales per business day trends going from January and I'll pull it through kind of April if you will.
As we mentioned January $4 1 million per day February four nine March five eight and then aprils at five four.
So once again meaningful ramp kind of as we move through the quarter and then.
A strong kind of April if you will.
At this point.
So.
We look forward to kind of seeing how Q2 shapes up.
Got it Thats helpful.
Second gross margin was strong in the quarter and assuming inflation continues what is the potential for gross margins throughout 2022, and as we move into the back half are there any factors that you'd point to that would drive opex higher or lower as we move throughout the year.
So your first question coal there around gross margins.
Couple of comments.
A lot of our recent acquisitions.
We have strong gross margins, meaning north of 30% So that's kind of.
What's contributed there.
Yes.
Inflation and.
Okay.
A benefit on the base business.
A lot of the margin enhancement, we're seeing on a more sustainable go forward basis as a result of the acquisitions and so we feel good about kind of their contribution if you will.
Your next question just around kind of operating leverage in the business.
On the distribution.
You get that on the upswing.
You can grow kind of.
5% to 10% in two or three times or more you can get that operating leverage once again this quarter. We got three four times operating leverage meaning dividing your EBITDA growth and sales growth if you will and so.
We expect that as we kind of move through the cycle.
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I don't know if David has any thoughts, but that's that's what we expect to see as long as we've got some meaningful sales growth.
So cole I would add on the gross profit side of the equation that.
The challenge is to pass on supplier and labor cost going up.
They are going up theyre going up pretty significantly with.
Inflation and stuff. So the challenge is to pass those on and were normally pretty good at that and I don't see any reason why we wouldn't continue to be good at it we were good at it in the first quarter here.
And.
I would I would just say from a.
From a customer point of view, they're expecting it so it's not there's not a lot of pushback.
Awesome Great color there just one last quick one from me on M&A first.
First off congrats on the Cisco acquisition.
On that point outside of the attractive margins and end market diversification is there any other rationale that you'd point out that went into the decision and or any details related to price that you're able to go there would.
It would be helpful. Thanks, guys.
So I think.
That we have.
We earlier back in 2020 bought two companies ones total equipment and the other ones.
And both of those businesses.
Our compressed air components to it they were they were both in the rotating equipment business, but they were also and pumps and stuff but.
<unk> had a compressed air component and in the process of <unk>.
Adjusting those two companies we learned a lot about compress there.
And it can be a very.
Clean nice environmentally friendly type business that doesn't relate.
Relate to oil and gas or anything and so and very profitable. So.
We've targeted.
Impressed there and.
You should see us.
Purchasing more companies in the compressor business and we like that we equally like water and wastewater and so we're we're trying to buy those.
The.
And so those are kind of the two areas main areas that we're targeting for acquisitions is too.
Buildup pretty national presence on those two marketplaces.
Your other question was related I guess, you used the word pricing, so I'm going to take that as multiples out in the marketplace.
It's a pretty robust M&A market in general out there.
I guess from our capital allocation standpoint.
We're always balancing it in today's environment and kind of where we built our capital allocation model is saying.
We look at yes, where the multiples are in the market, but also we have a share repurchase program and we have some other things out there.
Kind of what I'll call. It the suppressed earnings that are starting to release with DXP.
Share repurchases are on the table a lot of things are on the table for DXP and so.
We're always balancing that but we won't we're pretty disciplined I guess is the point around kind of the price we're going to pay for acquisitions in today's market given the relative valuation of DXP as well so.
And really one more one more thought.
As both of these companies or most of that all of them that we've been buying a plate.
Have had.
Five year track records of growing their business.
Through three each year Covid, no COVID-19 oil and gas being ugly.
Et cetera, and so that was part of our diversification.
Our.
Strategy around having businesses that are less cyclical.
Perfect. That's helpful. Thanks, sure I'll turn it back.
Yeah.
As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
And call if you have other questions feel free.
Aspen.
Once again to ask a question. Please press star followed by the number one on your telephone keypad.
We have no further questions in queue I'd like to turn the call back over to David Little for any closing remarks.
Yes. Thank you.
Just.
Thanks, everybody for who are listening in today.
We have just one analyst and we think coal for your participation.
Just in closing I think it's an interesting story of DXP looking at.
ESG sustainability et cetera, and all of those things are important and so we're on top of that.
The main focus to me is that our pump and people are.
And looking at different ways of helping our customers be environmentally friendly from biofuels to two.
<unk>.
Carbon capture et cetera, and so that's pretty exciting but in addition to that as we just mentioned. These these last acquisitions are targeted around some markets that are less cyclical.
We.
We've been in the water and wastewater business, but we're now pushing it even more and so and trying to grow it into a bigger piece of what DXP does and then compressed there likewise, we've been in that business, but it hasnt been a real big focus of ours and so both of those things are.
We are making.
DXP different than it's been in the past and I think it's a neat story and I think everybody.
For their efforts all of our stakeholders for helping.
Helping us move in a real positive direction. So.
Thank you and you all have a great day.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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