Q3 2022 DXP Enterprises Inc Earnings Call
[music].
Good morning, My name is Chris and I'll be your conference operator today at this time I would like to welcome everyone to the DXP Enterprises 2022 third quarter earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Kent E Chief Financial Officer, you may begin.
Thank you Chris.
This is Kent Yee and welcome to Dxp's Q3, 2022 conference call to discuss our results for the third quarter ending September 32022.
Joining me today is our chairman and CEO David Little.
Before we get started I want to remind you that today's call is being webcast and recorded and includes forward looking statements.
Actual results may differ materially from those contemplated by these forward looking statements.
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.
All of our DXP assumes no obligation to update that information as a result of new information or future events.
Yeah.
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 now available on our website at IR Dot DXP Dot com.
I will now turn the call over to David Little our chairman and CEO to provide his thoughts and a summary of our third quarter performance and financial results.
David.
Good morning, and thank you Kent, Thanks to everyone for joining us today on our physical 2022 third quarter conference call I will begin today with some perspectives on our third quarter and thoughts about the full year and our future.
Congratulations Dx people, our third quarter sales of 387 3 million as a sales record for DXP during the quarter.
Thanks to each of you for your efforts to be customer driven and your part and diversifying into new markets like food and beverage water and wastewater plus growing our existing markets.
As a company to have a more stable industrial base that will serve us well into the future.
<unk> also added technical products and service technologies to our outstanding product and service mix that will also serve us well into the future of digital automation compressed their filtration biofuels and capture.
Hydrogen that will help us make our lives better.
Every day Dx people serve essential.
Customers and help the environment by being more efficient safe and environmentally friendly our goal is to help our customers with versus high inability goals and for us to lead by example.
To me.
To be customer driven and a changing world is exciting and fun. It is also hard work and I think all the Dx people for their efforts and enthusiasm for making DXP meaningful by helping our customers succeed.
Yes.
So how are we doing.
Non acquisitions over the last two years in water and wastewater.
Industry. This is not only a stable industry, but very important to our lives and the environment three.
<unk> three compressed air acquisitions compressed there saves energy and is environmentally friendly.
In 2014 energy was 66% of our business and today, 27% note that this could be a good market for 2023, and we would be glad to see the 20% grow but long term our focus is helping make energy environmentally friendly efficient and.
Safe.
New markets hydrogen biofuels carbon capture storage of carbon waste, we have the expertise and products to help our customers succeed and reducing carbon emissions Nash.
National accounts this is growing especially in rotating equipment service and repair initiatives and compressed there and pumps automation and controls all mechanical equipment needs controls and automation creates efficiencies safety and reliability.
As a distributor we have very little environmental impact and consume very little energy, but we will do better and the real fund is helping others with their with our technical expertise to reduce their energy consumption carbon capture renewable energy and safety.
These growth strategies, which include both organic and inorganic plans are what we are doing to grow DXP and help the environment by helping our customers with their sustainability goals. Our Q3 results were great and everyone did a good job of passing on supplier price increases our gross margins.
We're still being affected by payroll cost and inflation, which is to be expected and overall inflation is good for DXP, we sold dxp's, 49% ownership and pump work pass things to the 51% ownership.
A $1 $3 million loss, which is a one time event, we will still have access to this foundry versus supply chain health and quick deliveries. It is worth noting that all of the acquisitions over the last few years have helped us improve EBITDA margins or adjusted EBITDA dollars increase.
Actually which is always our goal.
In terms of Dxp's industrial energy and utility markets, we seem to be well positioned headed into next year as our end users such as aerospace water and wastewater air compression food and beverage renewable energy hydrogen environmental.
<unk> seem to look like growth markets, even in a slow overall economy.
Dxp's industrial market, which is our largest market continues to have legs and shows signs of positive upward movement.
Ism's PMI manufacturing index, which gives us an indication of how dxp's broad industrial markets will perform have an average rating of 53% through June .
September reading of still 59.
Percent.
These in person.
These end markets, including food and beverage chemical aerospace compressed their manufacturing general industry should serve us well.
That inflation is good for DXP, and a slower economy or even a declining economy is manageable, but we have not yet seen any decline in activity in the markets DXP is serving.
In terms of our energy market, we continue to see growth in oil gas biofuels carbon capture hydrogen.
Sequestration.
We experienced a significant pickup in organic sales activity in Q3, which reflects the increase in backlog we began to see during Q3 of last year.
The pickup in <unk>.
<unk> with commentary around U S majors, and small exploration and production companies increasing cap budgets in 2023.
That said, we are seeing delivery impacts related to supply chain issues that is slowing deliveries are oil and gas activity is not back to 2018 levels, albeit growing in that direction.
Dxp's technical expertise within energy has positioned us on the core front of engineering design fabrication, and many environmental solutions and projects.
So let's shift to renewable DXP has designed and fabricated many biofuel and hydrogen projects as to the environment Dxp's effort to help our customers with carbon cash capture and sequestration projects continued to gain momentum DXP is excited to be participating in.
Engineering on many projects with our legacy customer base hydrogen is also an emerging technology and DXP is leveraging packaging capabilities to.
<unk> and projects around Green Blue Gray and other hydrogen solutions.
<unk> is excited and well positioned to capitalize on a energy trends.
<unk> efforts for years to come.
We are seeing increase in energy cap budgets, which have been gradual and should accelerate as we move into 2023.
Our utility market of water and wastewater is gaining traction with non acquisitions plus organic growth within existing DXP service centers. The outlook is great for 2023.
Several projects in 2022 have exceeded their budgets because of inflation. So we should see increased demand in 2023 and beyond with three market categories in many markets.
We are building a more resilient diversified business that can generate solid performance in more uncertain markets and we believe we are seeing the evidence of these efforts regarding acquisitions during the quarter, we closed the Sullivan Environmental Technologies, Inc.
As we mentioned earlier.
We're excited to have them as part of our DXP water Division.
We are continuing to see inflation across our product groups, but as we have discussed over the years inflation is good for our business price increases are pass through to our customers. We have received multiple price increase notices from our vendors and expect this to continue throughout the year.
Increases have moderated down to more normal amounts for the beginning of next year.
Global supply chain problems, our backlog at all time high it does appear the supply chains are not getting worse as we head into the holiday season bookings are starting to flatten in some areas as we close out 2022.
All of our segments are doing very well and have positive outlooks for next year service centers as hiring sales professionals national rotating equipment contracts have reached activity levels that require us to hire two additional sales professionals plus ses can help with supply chain problems.
Which puts their services in demand and Ips is busy with environmental projects renewables re manufacturing and energy companies are increasing new capital budgets for 2023.
During our financial results, our third quarter reflects sequential growth and improvements in our end markets total DXP sales for Q3 increased five 3% sequentially.
And $38 7 million or 33, 8% year over year as always thank you to our Dx people family for your hard work and dedication. We are excited to add Sullivan in Q3 and look forward to continued continued growth in our DXP water division all of our <unk>.
Acquisitions continue to perform during Q3, and we look forward to having everyones results for a full year in 2023.
Again keep up the good work and we're excited to have everyone as part of our DXP family. It is always my pleasure to share our performance and financial results on everyone's behalf.
We continue to build our capabilities to provide technical set of products and services in all our markets.
Which makes DXP unique in our industry and gives us more ways to help our customers win.
In terms of our segment financial results Service Center sales of $260 1 million followed by supply chain service sales of $68 2 million and innovative pumping solutions sales of $59 million in adversity.
Adversity of the end markets and MRO nature within service centers allows us to continue to remain resilient and gross sales.
Supply chain services experienced significant sales improvement in the quarter driven by the addition of the diversified chemical customer as well as overall growth in existing customer base and expect activity to increase as we move through the year.
With disruptions in global supply chain Dxp's SCS is uniquely qualified to help customers with their maintenance repair operating and production plus we are excited about the supply chain business moving forward because our customers are looking for companies that can digitize the supply chain, resulting in a reliable supply.
Of MRO P goods and services.
Customers are.
Meaning demand planning and forecasting for someone to monitor transportation logistics and inventory levels detecting issues and taking action well in advance of a problem.
DXP supply chain services is well qualified to manage the complete supply chain by increasing efficiencies eliminating downtime all while keeping the customers facility up and running.
<unk> increased production ultimately saving customers money, while improving their bottom line.
Our Ips segment is growing backlog and continues to increase bookings as our energy business continues to grow but has slowed by supply chain constraints, our utility markets through water and wastewater.
Included in Ips because of all the capital nature of this business is growing and it should have a positive runway for several years looking forward.
Dxp's overall gross profit margins for the quarter improved to 28.
8%. This reflects positive contributions from our acquisitions and continued improvement, albeit a decrease from a year ago because of increased labor cost inflation and a mix shift and increased supply chain services growth, which as you know has lower gross profit margins.
Overall DXP.
Produced EBITDA of $34 3 million and EBITDA as a percent of sales of eight 9%.
Which is a 240 basis point improvement over Q3 of 2021.
This is a continued sign of DXP, gaining getting operating leverage which we saw in Q1, and Q2 as well and which we would expect as we grow organic search.
In summary <unk>.
<unk> financial performance was great to see with continuous sequential increases we look to continue to drive improvement in our organic sales and marketing strategies and inorganic growth through acquisitions in certain geographies and industries.
While we are encouraged by our performance in the third quarter. We are continuing to plan thoughtfully for next year, given supplier price increases labor shortages and supply chain constraints and concerns of when a slower economy is coming we continue to see the industry and consumers we serve continued to.
Grow as our backlog and bookings continue to perform.
Dx people are working hard to give our customers the service they deserve and expect which is not easy given the headwinds we all pace I am pleased with our performance in Q3 as we continue to move forward to achieve our goals our strategies and digital tools are helping us grow sales and we are.
Expect to drive productivity manage working capital and create free cash flow with that I will now turn it back to Kent to review the financials in more detail.
Thank you David and thank you to everyone for joining us for a review of our third quarter 2022 financial results.
Q3 financial performance.
Flex our eighth quarter of sequential sales increases during this COVID-19 cycle and the subsequent interrelated challenges included inflation supply chain constraints and award the.
Despite these challenges THP continues to successfully navigate through the market and has been able to execute and create value for all our stakeholders.
I'm excited to report that our Q3 2022 financial performance is the highest performing sales quarter in Dxp's history.
A notable milestone we look forward to continuing to strive to meet new sales thresholds and build DXP organically and through acquisitions, we have been successful in transforming growing and diversifying DXP.
As it pertains to our third quarter Dxp's third quarter financial results reflect the combination of business actions we have undertaken.
More specifically Q3 takeaways are as follows continued.
Due to strong organic sales growth and contribution from acquisitions consistent ability to manage inflation and price increases strong service center performance marked by continued gross margin stability.
Further sales increases within SCS, along with another quarter increase in the Ips backlog and consistent operating leverage leading to sustained adjusted EBITDA margins.
Total sales for the third quarter increased 33, 8% year over year, and five 3% sequentially to $387 3 million Act.
Acquisitions that have been with DXP for less than a year contributed $16 1 million in sales during the quarter.
We are excited to have our most recent acquisition Sullivan environmental technologies as a part of the DXP family.
Sullivan environmental will provide additional sales within the water and wastewater platform and provide margin enhancement and product and end market diversification.
We welcome you Sullivan and we're excited to have you as a part of DXP.
Average daily sales for the third quarter were $6 1 million per day versus $5 8 million per day in Q2.
Adjusting for acquisitions average daily sales were $5 8 million per day for the third quarter.
That said the average daily sales trends during the quarter went from $5 5 million per day in July to $6 8 million per day in September , reflecting a typical quarter and push.
In terms of our business segments supply chain services grew sales 68, 3% year over year this year.
Excuse me 68, 3% year over year. This was followed by innovative pumping solutions growing 62% year over year, excluding acquisitions Ips grew 55, 2% our sales increased $21 million. This was followed by service centers growing 22, 4% year over year.
Excluding acquisitions sales sales within service centers grew 16% to <unk> 33.
$33 nine maintenance excuse me.
Yes.
In terms of our service centers regions within our service Center business segment, which experienced sales growth year over year include Ohio River Valley, South Central Texas Gulf Coast, South Atlantic and North Texas.
Key products and end markets driving the sales performance include air compressors, rotating equipment, and water and wastewater food and beverage mining municipal air transportation and specialty chemicals.
Supply chain services performance reflects an increase in key existing food and beverage and energy contracts as well as the addition of a large diversified chemical customer that we mentioned in Q2 and that began to ramp in Q1. This.
This customer contributed $16 $5 million in sales during the quarter.
In terms of innovative pumping solutions, we continue to experience increases in the backlog.
Our Q3 average backlog grew 6% over our Q2 average backlog is it and is ahead of our 2017 average backlog and down 6%.
From the 2015 average backlog.
<unk> here is that we are now trending meaningfully above 2016, and 2017 levels and we are continuing to move towards 2015 levels based upon where our backlog stands today.
We are transitioning to strong organic growth within Ips and look to find opportunities in other markets, including biofuels hydrogen carbon capture and sequestration versus our traditional oil and gas but.
But we do expect energy to continue to contribute meaningfully.
Turning to our gross margins Dxp's total gross margins were 28, 8%, a 121 basis point decline over 2021.
Klein is attributed to the Ses contributing more to the overall DXP quarterly results our business segment mix contribution as we mentioned in Q2 that historically has been offset by Ips's contribution or higher mix for the third quarter SCS was 18% of total sales versus 16% at Q2 and <unk>.
15% of Q1 Ips for Q3 was 15, 2% and service centers was 67, 2% historically supply chain services has been closer to 14% or less of a contribution to DXP.
In terms of operating income combined all three business segments increased to 115 basis points and year over year business segment operating income margins or $15 5 million versus 2021.
This was primarily driven by improvements in organic operating income margins within Ips total DXP operating income increased 299 basis points versus 2021 to $26 $5 million.
Our SGA SG&A for the quarter increased $9 $3 million from 2021.
The increase reflects the growth in the business and associated incentive compensation as well as DXP investing in its people throughout merit through excuse me merit pay raises.
G&A as a percentage of sales decreased 420 basis points year over year to 22% of sales.
Selecting the leverage inherent in the business that we mentioned earlier, despite increased operating dollars supporting our growth cost inflation and the impact of acquisitions.
Turning to EBITDA Q3, 2022, adjusted EBITDA was $34 3 million.
Adjusted EBITDA margins were eight 9% year over year, EBITDA margins increased 239 basis points or $15 6 million.
This reflects the fixed costs SG&A leverage we experienced as we grow sales. This translated into two five times operating leverage.
In terms of EPS. Our net income was for Q3 was $13 2 million or earnings per diluted share for Q3 was 67 per share versus 36 per share last year adjusting for onetime noncash item our earnings per diluted share for Q3 was <unk> 75 per share.
Turning to the balance sheet and cash flow in terms of working capital our working capital increased $25 7 million from June to $272 7 million as a percentage of last 12 months' sales this amounted to 19, 9%.
This primarily reflects a $10 million increase in accounts receivable and $12 million increase in inventory and continued investments in our project work activity.
Additionally, Sullivan environmental.
And other acquisitions contributed $3 3 million.
Of the increase in accounts receivable.
As discussed during Q Q2, we are still at a point, where we are in line with our historical averages a range in terms of investing in working capital, but we would expect this to level off as a percentage of last 12 months' sales as we onboard some of our recent acquisition for a full 12 months.
In terms of cash we had $17 $1 million in cash on our balance sheet as of September 30th. This is a decrease of $3 6 million compared to the end of Q2. The reduction was a result of the purchase of settlement environmental share repurchases and working capital uses.
In terms of project work activity has increased within Ips and we experienced a $4 5 million increase in costs and estimated profits in excess of billings over Q2 and have increased $12 9 million since Q4 of last year.
In terms of Capex capex in the third quarter was $1 6 million or increase of 471000 compared to Q2, while we do expect capex to pick up in Q4 2022 and into 2023, our year to date Capex of $3 $4 million is minimal and continues to reflect our ability to control maintenance capital expenditures.
The increase was primarily driven by strategic investments as.
As we move forward, we will continue to invest in the business and focus on growth.
Turning to free cash flow free cash flow for the year is minus $1 2 million.
This primarily reflects significant investments in inventory and project work as mentioned earlier throughout the year, specifically inventory has increased $30 3 million since December of last year, while our project investments have increased $12 9 million as we increased project activities in our Ips business will experience higher uses of cash, which we are seeing.
But this likely will be a little bit more sporadic as we continue to manage through supply chain delays.
Return on invested capital ROIC at the end of the third quarter was 25% and should continue to improve as we drive margins and operating leverage and improve our run rate EBITDA.
As of September 30th our fixed charge coverage ratio was four two to one and our secured leverage ratio was $2 86 to one with a covenant EBITDA for the last 12 months of $122 million.
Total debt outstanding on September 30 was $364 8 million.
In terms of liquidity as of the quarter, we were drawn on our ABL at $46 million with $91 $7 million of availability.
In terms of acquisitions, we closed on the acquisition of southern environmental technologies during the quarter and we're excited to have Sullivan with the DXP team as I mentioned earlier, and we look forward to them reporting with us from the full quarter of Q4.
Some of them provides DXP with a leading platform within the municipal and industrial water and wastewater industries in the states of Ohio, Kentucky, any kind of welcome to DXP Sullivan.
Dxp's acquisition pipeline continues to grow and the market continues to present compelling opportunities. While the backdrop may seem challenging we are finding that there are no shortage of opportunities and so sellers are reasonable and when it comes to valuation.
Our acquisition strategy has created significant value for DXP.
Our end markets margins and Dxp's cash flow profile looking forward. We expect this to continue into 2023.
Regarding capital allocation, our primary goal is to invest in our business, including the execution of our acquisition strategy. We are also committed to maintaining a conservative balance sheet as we demonstrated by a target leverage ratio of three five times or less to the extent, we have excess capital after achieving these objectives. The share repurchase program will provide us the mechanism to return.
Capital to our shareholders during the quarter, we repurchased $3 4 million in shares and year to date for the nine months, we have purchased $18 $5 million, including open market purchases and private negotiated transactions in summary, our priority from a balance sheet perspective is to maintain our financial flex effects, the flexibility and strength.
Sacrificing long term growth our market opportunities.
As we have outlined this morning, we have outperformed the market delivering impressive sales growth and margin strength, while achieving record sales results all while deleveraging the balance sheet, a resilient and critical MRO and supply chain solutions combined with our project capabilities and exposure to the sustainable secular trends, including water and wastewater and various <unk>.
<unk> energy markets will drive our future sales and profitability. We are excited because there are still substantial value embedded in DXP. We look forward with great confidence to a feature of sustained growth and market outperformance now ill turn the call over for questions.
Thank you as a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
The first question is from Tommy Moll with Stephens. Your line is open.
Good morning, and thanks for taking my questions.
Good morning, Tommy.
I wanted to start at the top of the P&L on your daily sale.
Can you give us any context on what October looked like and then as we look towards November and December based on your commentary.
It sounds like.
Ex oil and gas revenue might continue to trend higher.
But then you've got the seasonality or the typical seasonality in that oil and gas market. So I wonder on a consolidated base.
Basis, how do you see that daily sales progressing through this quarter.
Yes, so Tommy I'll jump in there and then maybe David can give a little color just from a market perspective, but the trend and I will just really go through the quarter and into October .
It was $5 5 million per day, $5 9 million $6 8 million in September .
And then October another five eight.
Sure.
Our October sales per business day is up 25, 1% on a comparative year over year basis. So.
We're seeing the trends continue early on here in the fourth quarter.
But if you add some other comments I don't know if David wants to jump in and around oil and gas and some other things.
Well sure.
Oil and gas.
You either.
Head to the end of the year and people.
Of run out of budget money.
Or they haven't and they want to spend it.
And then you have the holidays and so I mean, that's that's kind of how the oil and gas piece works.
The general industrial piece.
A lot of money.
The manufacturers will shut down a week during the holidays et cetera. So you have some softness there. So you have a little less days you have manufacturing probably taken advantage of.
Or maybe not I mean, they may be so far behind on their deliveries because of the supply chain problems.
They don't take the usual weaker to all.
I'm not sure how that's going to play out I do know in oil and gas that.
That people are at these prices third trying to produce as much oil and gas as they can.
Doesn't mean there.
Drilling.
Julian holes or <unk>.
Halliburton and Schlumberger are doing a lot of work around workovers.
And ducks.
Etc. So thats.
That's kind of normal stuff I mean in general.
Oil and gas is going to be a good market.
For the rest of this quarter really in my opinion and through all of next year. So.
<unk>.
I don't know if I answered your question or not but.
That's my attempt.
No. It's helpful context I appreciate it.
If we just move down the P&L.
I would ask you for your outlook on fourth quarter gross margin or SG&A as a percent of revenue, although understanding it's hard to pin.
On the revenue.
There may be some uncertainty there but.
Maybe we could just start with any qualitative headwind or tailwind.
For gross margin or G&A in the third quarter, and the extent to which those would improve or get a little worse as you go into fourth quarter.
Yes, Tommy I'll jump on that one I don't know if they are necessarily headwinds, but we've been kind of really communicating it since Q2 is we've got a significant.
Diversified chemical customer within our supply chain services segment that the overall profitability, including SG&A cost is in line with where we're typically at.
But from a gross margin perspective.
It's put a put a little bit.
A weight on the downside to our gross margins, they're obviously, a significant sales volume customer too. So it's a combination of both and that's what's led to the business segment mix contribution kind of shifting here on us.
And.
<unk>.
We're always looking for more opportunities with both our existing customers and new customers. So so.
Net overall profitability.
Is in line for the segment.
But from a gross margin perspective kind of puts a little weight on our gross margin. So that said I don't think we will continue to see too much further drag unless those sales just extremely ramped up in Q4, where we're close to full ramp at this point so.
We.
Yes, we do a good job somebody calls us today, they need a pump.
We used to replacement cost and market up our normal markup.
And that transaction happens just fine.
There is there is a little bit of fixed cost we try to avoid those and go with a fixed margin.
There's still some lag between when the supplier gives us a price increase and when we get those.
The price increase passed on to the customer so there's a little lag there and then on things that projects that we quote and we quoted a $4 million project and we get the order.
We have the right to not.
Take the order obviously, if if it's pricing has gone really astray, but if pricing is pretty normal.
Then.
And it takes six months to build out the order maybe longer.
Labor costs go up.
A lot of the stuff, we didn't order everything exactly the day, we got the order.
So there's there's always some.
Some lag and I think the difference between the 30% gross profit margins, which would be more of our targeted gross profit margin number which is what we did last year at this time.
And the 28 point, none or aid wherever we are today is because of those reasons. We just listed.
So I wanted to cash flow you called out a couple of areas of investments year to date.
In terms of inventory and receivables.
Impacted their performance there I guess to start just versus your expectations, how have operating cash flow has progressed.
And as you look into Q4.
Do you see any potential for.
The release of cash from inventory or receivables.
A pathway to the black so to speak on the operating cash flow line this quarter.
Yes Tommy.
Give you a high level answer here and then I'll, let Ken with the details but.
Right.
But realistically.
If we're growing organically 10%.
And therefore receivables and inventory go up.
Some percentage of that growth normally were in the.
Working capital.
15.
Watermark would be 19, 15% to 19% of that sales growth.
Well what happens what happens when we grow 35% organically.
Well.
Thanks, more working capital so within a short period of time Youre going to Youre going to have to increase your inventory levels to support the greater sales number and obviously receivables goes up and then Kent pointed out that we get.
Progress billings loan on projects.
And that.
On those projects.
Of course, our customer doesn't want to pay us.
And of course, we want to be paid more than our cost we want the customer to fund the cost of those projects.
And so somewhere in the middle is what ends up getting negotiated on the terms and conditions of those contracts.
And really.
When you look at Ips It is coming.
Out of a buyer's market.
Sales were down substantially because of oil and gas and et cetera.
So yes heavily.
And we.
Let the customer beat us up a little bit on cash terms, yes.
Will that continue going forward.
No not not as soon as we have a seller's market.
Well it really aggressive so I don't think theres anything.
That.
In the fourth quarter is going to sit there and.
Say that we're just going to have a whole bunch of money fall in our lab, because thats I don't I don't know what Kent, Thanks, but I don't I don't know.
Not sure Thats going to happen because we need the inventory that we turned our inventory seven times. So then receivables collection and then we will do the best we can to improve progress billings.
But but really it all gets down to fundamentally if youre growing 30% 35%.
Youre going to spend more working cap.
Yes, Tommy the only thing I'd add there is a couple of things our cash from operating activities was really actually positive in Q1 into Q2. So.
We produced free cash flow in Q1, and Q2, which was.
A little bit.
An aberration from our historical trends, where we're typically.
Free cash flow negative.
Q1, and Q2, and then Q3 and Q4 point being is and I kind of mentioned it in my comments is I think.
It's project work activity, it's the sporadic nature of the supply chains.
Lot of thing factors contributing to it so.
Net thank kaye.
When we collect some cash in the fourth quarter to that.
Yes will it be larger than normal I don't think so.
I think we're always working to collect on those projects that David is talking about.
And then we've made some investments in inventory.
And so.
As we move through Q4, some of that naturally slows just from a seasonal perspective, but then we're going to be quickly going into Q1 again next year. So.
And really the emphasize.
0.2 is that.
Part of the.
Eliminating risk in our business is the fact that when sales go down.
We will then receivables and inventory go down and we generate a ton of cash flow.
So I'm not sure we want that I think.
Growing 30%, it's more funding goals.
But when we're growing 30% we're going to be.
We're going to use a lot of our cash for organic growth.
Alright.
Yes.
Well, maybe one more.
On M&A.
I think it was your comment about a growing pipeline there.
Curious about.
Alright, I'm curious whether you can.
Put any bands around the sizes of potential deals in terms of number of deals has been quite active in terms of size of deals.
I think probably turning below the historic average for DXP. So I'm wondering if you could characterize the pipeline as it sits today.
Yes.
I'd say the pipeline sits in a few buckets one as David mentioned in his comments I mentioned.
Around Sullivan, but is we have we have a pocket or a pool of water wastewater transactions, which I think you kind of hinted at but on average those transactions have been smaller than than I think historically.
For DXP meeting I'll call, it $10 million or less on average we've had some one or two sizable ones in there but on average you are talking in terms of revenue 10.
$10 million or less.
And then we have some air compressors, which we've done here more recently as well and those transactions have been some of them have been our average transaction size some of them have been a little bit larger and so I think youll continue to see that as well.
And then the last bucket is probably.
Opportunistically are also looking at some automation and some other things.
I'm kind of closer to the bearing and PT space in and once again some of those are much bigger than our average in some of those are in line with our average and so.
The point being it's like I said I see a fulsome pipeline.
And I see some opportunities out there.
For DXP.
And we've been able to get reasonable valuations. So yes, we look to kind of push into 2023 with.
US closing on hopefully some acquisitions and kind of keeping that ball moving forward. Once again, all assuming valuations are reasonable where discipline around valuation.
And.
And it makes sense for DXP.
I appreciate it all the time and I will turn it back.
Again as a reminder, please press star one if you would like to ask a question.
And it appears that we have no further questions I will turn it over to David Little for any closing remarks.
Yes, thanks, everybody for your participation today.
DXP.
Is really.
And an interesting reflection point, where we have a tremendous amount of organic initiatives.
We're pretty excited about.
We continue to do what we've.
<unk> always done which is.
Our founding was selling pumps, but.
There's a lot else that we can do in terms of <unk>.
Providing products that require <unk>.
Technology and that require a level of expertise, which which we love.
And so we're pretty excited about the transition the DXP is.
Moving towards the diversity.
Of the markets.
We're we're in energy.
But it's.
It's moving towards bio fuels.
And storage and carbon capture and some really neat stuff and so that's exciting for us and so we see.
Energy and its relevance.
Improving.
We were also in the utility market.
Water and wastewater a big utility market.
It is important to all of us and so we're excited about that.
Then the industrials.
Normal manufacturing chemical aerospace et cetera, all of those markets the same.
<unk> to us.
And we will.
I think service well I think.
We're obviously the fed's trying to slow down the economy.
And so thats, probably going to happen from a overall perspective.
But when we look at the things we're doing.
We think we're going really.
Really well so.
With that again, thank you for your participation. Thank you for your understanding of our story.
And they will have a great day.
Yeah.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
Okay.
Okay.
[music].