DXP Enterprises Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 4 speakers on the call.

Operator

Good morning. My name is Christa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, Filavio question and answer session.

Operator

Thank you. I will now turn the conference over to Kent Yee, Chief Financial Officer. Kent, you may begin.

Speaker 1

Thank you, Christa. This is Kent Yee, and welcome to DXP's Q3 2023 conference call to discuss our results for the Q3 ending September 30, 2023. Joining me today is our Chairman and CEO, David Little. Team. Before we get started, I want to remind you that today's call is being webcast and recorded, and it includes forward looking statements.

Speaker 1

Financial 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. However, DXP assumes no obligation to update that information as a result of new information or future events. During this call, we may present both GAAP and non GAAP financial measures. And Exchange Commission.

Speaker 1

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.dxpe.com. I will now turn the call over to David Little, our Chairman and CEO to provide his thoughts and a summary of our Q3 performance and financial results. David?

Speaker 2

Thanks, Ken. Thanks to everyone on our 2023 Q3 conference call. Kent, we will Thank you. Kent will take you through the key financial details after our remarks after my remarks and after our prepared comments, we will open for Q and A. It is my privilege to share DXP's 3rd quarter results with you on behalf of over 2,799 DXPeople.

Speaker 2

Congratulations to all our stakeholders and a special thank you to our DXP people you can trust. We are pleased to see end market demand And DXP's performance continued through Q3 and remain at record levels as we move through the second half of twenty twenty three. Segment. This allows us to achieve another quarter of both solid sales growth and 10% plus EBITDA margins. We are pleased to announce strong third quarter results with sales, operating income and earnings per share all up over the prior year.

Speaker 2

This is a great way to start the second half of fiscal twenty twenty three. We continue to deal with the macro uncertainty and the impacts of inflation and Exchange Commission in elevated interest rates, but we remain focused on serving our customers, providing products and services that help them save money, Inc. Consolidate their MRO spend, manage inventory, provide solutions to solve their evolving needs. Segment. Being customer driven and growing sales profitably is our goal.

Speaker 2

We continue to focus on driving organic and position growth, increasing gross profit margins and increasing productivity. Our execution segment. Has resulted in the fiscal 2022 2023 top line growth and bottom line organic and acquisition growth. Segment. That said, our growth has not been as large as we would like.

Speaker 2

So we expect to add some acquisitions to our results segment as we close out fiscal year 2023 and going into fiscal year 2024. We continue to be excited about the future and delivering differentiated customer experiences, creating an engaging winning culture for DXPeople and investing in our business to strengthen our core capabilities and drive long term growth. Year to date through September 30, total sales are up 18.3% and operating income is up 46.9 percent. Last 12 months sales, adjusted EBITDA were 1.68 $1,000,000,000 $164,000,000 respectively in EBITDA margins for a margin of 9.8%. Moving to our Q3 results.

Speaker 2

Total DXP revenue of $419,200,000 for the Q3 of 2023 segment. In terms of Q3 financial results, service centers led the way, growing sales 13.2% year over year, Exchange, followed by Innovative Pumping Solutions, essentially performing flat at $59,000,000 in sales And supply chain services declined 3.5 percent or $2,400,000 to $65,800,000 year over year. In terms of service centers, the diversity of our end markets and our MRO nature within service centers community. Allows us to continue to remain resilient and continue to experience consistent top line year over year growth. From a regional perspective, a majority of our regions continue to experience year over year growth, including the North Rockies, Northern Central, Alaska and Texas Gulf Coast.

Speaker 2

Additionally, we continue to see strength in our air compressor product division. We continue to expect that our end markets will remain constructive over the near future. It is per as it pertains to energy, We believe that we could be in the early stages of an upcycle supported by the energy transition,

Speaker 1

and

Speaker 2

Exchange Commission. Our segment. Additionally, our year to date average continues to exceed our long term average of IPS going all the way back to 2015, segment, which we highlighted and occurred for the first time in the Q2 and continues to move into fiscal year 2024. What this indicates is that we are continuing to get bookings and we are as we mentioned earlier, we are likely in the front end segment of a good cycle on the energy related project work that we look forward to as we move through 2023 and into 2024. Segment.

Speaker 2

As we maintain growth, our main focus within IPS will be managing the demand levels we have, Finding opportunities in all markets such as energy, biofuels, food and beverage, water and wastewater and pricing appropriately given the supply chain dynamics and ebbs and flows of inflation. Supply Chain Services experienced a decline year over year, primarily due to some facility foreclosures segment with our customers as well as streamlining and the efficiencies we brought to our new diversified chemical customer that we added last year. This happens as part of our value proposition, but we do not anticipate any further material saving impact on DXP. Segment. As we move into Q4, we will look for new customer additions as well as continuing to manage procuring products and managing inflation both year over year and sequential growth will flatten out until we start ramping new customers.

Speaker 2

That said, demand for SCS services is increasing because of the proven technology and efficiency they perform for all their industrial customers. But the sales cycle can be protracted, and we will look to our SCS leaders to add new customers as we move into 2024. DXP's overall gross profit margins for the 3rd quarter were 29.9%, a 113 basis point improvement over 20 22 and down 85 basis points sequentially. Overall, I'm pleased with our gross margins and our steady improvement over the last 7 quarters. Segment.

Speaker 2

SG and A for the Q3 increased $4,600,000 versus Q3 of 2022, but and A as a percent of sales declined going from 22% in Q3 of 2022 to 21.4% in Q3 of 2023. SG and A continues to reflect our investment in our people and organization. And as always, it is my privilege to share DXP's financial results on behalf of these DXP people. DXP's overall operating income was 8.6% or 35,900,000 segment, which included corporate expense and amortization. This reflects 170 basis point improvement in margins over Q3 of 2022.

Speaker 2

That being said, we still feel there is opportunity in operations to be more efficient. Consumer Services operating income margins were 14.1% and IPS operating income margins were 18.9% and Supply Chain Services operating income margin was 8.5%. Overall DXP produced adjusted EBITDA of $44,000,000 versus $34,300,000 in 'twenty two. This turned into a year over year increase of $9,700,000 or 28.3%. Adjusted EBITDA as a percent of sales was 10.5%,

Speaker 1

Conference Call.

Speaker 2

Up 164 basis points versus Q3 of 2022 and essentially flat with Q2 of 2023. Board. I am pleased by our performance in the Q3. We still have substantial work to do to achieve our goals, But I am confident that team will continue to execute. We are growing sales in excess of market and expect that in the near future.

Speaker 2

We expect to drive strong SG and A leverage, manage working capital and generate free cash flow. If organic growth slows, and free cash flow will grow and we will take advantage of the economy to grow profitably through acquisitions. We have grown sales on a compounded annual growth rate of over 23% since COVID, and we have achieved new highs in both sales and profitability. And I would like to thank our stakeholders and especially our DXP people. With that, I will now turn it back over to Kent to review the financials in more detail.

Speaker 1

Thank you, David, and thank you to everyone for joining us for a review of our Q3 2023 financial results. Q3 was a great quarter for DXP and our results are in line with our expectations and reflect the positioning we were anticipating as we prepare to go into fiscal 2024. This quarter reflects our Q3 of 10% plus adjusted EBITDA margins, strong free cash flow generation and meaningful diluted EPS growth. We are excited to report these results, and we look forward to successfully closing out 2023 and starting fiscal 2024. Specifically, Q3 financial performance reflects our ability to continue to successfully navigate through the market and create value for all our stakeholders.

Speaker 1

Segment. As it pertains to our Q3, Q3 highlights are as follows: strong year over year organic sales growth, segment. Lessening impacts from inflation and price increases compared to a year ago, continued gross margin strength and stability, continued year over year and sequential growth in the IPS Energy related backlog, consistent operating leverage leading to sustained adjusted EBITDA margins, segment. More notably, our Q3 of 10% plus adjusted EBITDA margins and significant capital return to our shareholders through our share repurchase program. Total sales for the Q3 increased 8.3% year over year to 419,200,000 acquisitions that have been with DXP for less than a year contributed $3,900,000 sales during the quarter.

Speaker 1

Average daily sales for the Q3 were $6,700,000 per day or essentially flat to Q2 and were up 10% versus Q3 2022. Adjusting for acquisitions, average daily sales were $6,600,000 per day for the 3rd quarter. That said, average daily sales trends during quarter went from $6,580,000 per day in July to $7,100,000 per day in September, reflecting a typical quarter end push as we close out the 3rd quarter and an uptick from the Q2, 2023 month of June versus September or $6,900,000 per day versus $7,100,000 per day. Segment. In terms of our business segments, Service Centers grew 13.2% year over year.

Speaker 1

This was followed by Innovative Pumping Solutions declining 0.1% segment, which is essentially flat year over year and supply chain services declining 3.5% year over year. In terms of our service centers, regions within our Service Center Business segment, which experienced notable sales growth year over year include the North Rockies, North Central, Alaska and Texas Gulf Coast. Key products and end markets continue to drive sales performance include air compressors, rotating equipment and Chemical, General Industrial, Food and Beverage, Transportation and Energy. Supply Chain Services performance continues to segment reflect the impact of the addition of a large diversified chemical customer that we added in Q2 of last year and is fully ramped as of Q2 of this year. That said, Supply Chain Services experienced a decline year over year, primarily due to some facility closures with existing customers as well as the streamlining and efficiencies we brought to our new Diversified Chemical customer that we added last year.

Speaker 1

As David mentioned, this happens as a part of our value proposition, Meeting, we anticipate reducing a customer's absolute spending volume by improving their purchase behaviors and inefficiencies. This customer contributed $16,100,000 in sales during quarter versus $16,500,000 a year ago. As we move into Q4, we will look for new customer additions as well as continue to manage procuring products and managing inflation, segment, but both year over year and sequential growth will flatten out until we start ramping new customers. In terms of innovative pumping solutions, segment. We continue to experience increases in the energy related backlog.

Speaker 1

Our Q3 energy related average backlog grew 7.9% over our Q2 average backlog, segment, which continues to be a notable uptick compared to Q1 of this year and continues to be ahead of our 2015, 2016 and 2017 average backlog. Segment. The conclusion continues to remain that we are trending meaningfully above 2016 2017 sales levels and we are moving towards 2015 levels based platform where our backlog stands today. We have been experiencing strong organic sales growth within IPS, as we mentioned in the first half of twenty twenty three. We expect that to continue throughout 2023 and into 2024.

Speaker 1

Additionally, we are also continuing to find opportunities in other markets. Water backlog, we experienced a sequential increase of 28.2%. Turning to our gross margins. DXP's total gross margins were 29.95%, a 133 basis point improvement over Q3 twenty twenty segment, which is a key contributor to our business segment, showing the greatest improvement with margins improving 430 basis points on a year over year comparative basis. This was followed by a 49 basis point improvement from Service Centers.

Speaker 1

That said, from a segment mix sales contribution, Service Centers contributed 70.2%, Supply Chain Services 15.7 percent and Innovative Pumping Solutions was 14.1%. Compared to last year, SES' mix contribution was higher at 17.6%, which impacted margins in Q3 of 2022. Segment. In terms of operating income combined, all three business segments increased 139 basis points in year over year business segment operating income margins or $9,800,000 versus Q3 2022. This was driven by improvements in operating income margins across all three business segments.

Speaker 1

IPS operating income margins improved 6.51 basis points driven by the addition of water and wastewater acquisitions and overall improvement within the Energy Related IPS Business. Service Center operating income margins improved 34 basis points on a Q3 comparative basis segment. Supply Chain Services operating income margins improved 67.6 basis points on a year over year comparative basis. Improvement in service centers reflects the impact of acquisitions at a higher relative operating income margin. Total DXP operating income increased 170 basis points versus Q3 2022 to 35,900,000 segment.

Speaker 1

Our SG and A for the quarter increased $4,600,000 from Q3 2022 to $89,700,000 The increase reflects the growth in the business and associated incentive compensation as well as DXP investing in its people through merit and pay raises that we continue to experience. SG and A as a percentage of sales decreased 57 basis points year over year to 21.4 percent of sales. We still anticipate that DXP will benefit segment from the leverage inherent in the business despite increased operating dollars supporting our growth, cost inflation and the impacts of acquisitions. Turning to EBITDA, Q3 2023 adjusted EBITDA was $44,000,000 Adjusted EBITDA margins were 10.5%. This is our Q3 of sequential adjusted EBITDA margins in excess of 10%, and we will look for this to continue.

Speaker 1

Year over year adjusted EBITDA margins increased 100 and sixty four basis points or $9,700,000 This reflects the fixed cost SG and A leverage we experienced as we grow sales. Segment. This translated into 3.4x operating leverage during the quarter. In terms of EPS, our net income for Q3 was $18,200,000 Our earnings per diluted share for Q3 'twenty three was $0.93 per share versus $0.71 per share last share. Of note, we returned $22,600,000 to shareholders through our share repurchases during Q3.

Speaker 1

Turning to the balance sheet and cash flow. Segment. In terms of working capital, our working capital increased $10,400,000 from December and decreased $11,900,000 from June to 287 point $5,000,000 As a percentage of sales, this amounted to 17.1% of last 12 months sales. At this point, we have moved in line with our historical averages range in terms of investing in working capital, and we have moved off our Q3 2022 high of 19.9% of last 12 months sales segment as we have onboarded some of our recent acquisitions for a full 12 months. We do anticipate further acquisitions.

Speaker 1

Segment. So as we move into fiscal 2024, this could move upwards, albeit we are focused on managing working capital as efficiently as possible as we scale and grow. Segment. In terms of cash, we had $27,200,000 in cash on the balance sheet as of September 30. This is a decrease of $18,900,000 compared to the end of Q4 20 22 and an increase of $11,600,000 since June.

Speaker 1

This reflects the strong cash flow generation we experienced during the quarter, segment, which we will touch upon later on in my comments. In terms of CapEx, CapEx in the Q3 was $1,500,000 Consumer Solutions Company for a decrease of $327,000 compared to Q2 'twenty three. We still are ahead of our fiscal year 2022 levels. Segment. We continue to reinvest in some of our facilities and equipment on behalf of our employees.

Speaker 1

As we move forward, we will continue to invest in the business as we focus on growth. Segment. Turning to free cash flow. Free cash flow through Q3 was a positive $56,700,000 which reflects free cash segment. This was driven by an $11,900,000 reduction in working capital along with our sustained earnings through the quarter.

Speaker 1

Specifically, we lessen the impact from investments in project work along with a small increase in payable days. That said, while we continue to make improvements in our free cash flow when we are growing, DXP makes significant investments in inventory and project work throughout the year, and we have experienced significant step ups since Q4 of last year. Capital, or ROIC, at the end of the 3rd quarter was 34% and continues to be above our cost of capital as reflecting our improved profitability levels. As of September 30, our fixed charge coverage ratio was 2.67:one and our secured leverage ratio was 2.36

Operator

Securities and Exchange Commission. Ladies and gentlemen, this is the operator. And Exchange Commission.

Speaker 1

I understand we got temporarily disconnected, so I'll turn back a few paces to when we started discussing our balance sheet. So turning to the balance sheet and cash flow in terms of working capital. Our working capital increased 10 point $4,000,000 from December and decreased $11,900,000 from June to $287,500,000 As a percentage of sales, this amounted to 17.1%. At this point, we have moved in line with our historical averages or ranges in terms of investing in working capital and we moved off our Q3 2022 high of 19.9% of last 12 month sales as we have onboarded some of our recent acquisitions for a full 12 months. We do anticipate further acquisitions.

Speaker 1

So as we move into Fiscal 2024, this could move upwards, albeit we are focused on managing working capital as efficiently as possible as we scale and grow. In terms of cash, we had $27,200,000 in cash on the balance sheet as of September 30. This is a decrease of $18,900,000 compared to the end of Q4 20 22 and an increase of $11,600,000 since June. This reflects the strong cash flow generation we experienced during the quarter, which we will touch upon later segment. In terms of CapEx, CapEx in the Q3 was $1,500,000 or a decrease of $327,000 compared to Q2 'twenty three.

Speaker 1

Financial. We still are ahead of our fiscal 2022 levels. In terms of liquidity, as of the quarter, we were undrawn on our ABL with $2,900,000 and letters of credit outstanding with $132,100,000 of availability and liquidity of $159,300,000 including the $27,200,000 in cash. Segment. Subsequent to the quarter, we announced that we refinanced and repriced our Term Loan B, which now has a maturity of October 2030.

Speaker 1

We successfully repriced the new Terminal B, reducing our borrowing cost by 50 basis points to SOFR plus 475 versus SOFR plus 525 Group, while also raising an incremental $125,000,000 in capital to support our acquisition program over the next 6 to 9 months. Financial. In terms of go forward financial statement impacts in the Q4, we will write off an estimated $12,400,000 unamortized debt issuance cost and capitalize a new estimated $12,000,000 to $13,000,000 of financing cost. Pro form a interest is expected to be in the range of $16,000,000 to $17,000,000 per quarter. In terms of acquisitions, we closed on one acquisition after the quarter, Alliance Pump and Mechanical Service, and we are excited to have them and they will start reporting with us for the Q4 of 2023.

Speaker 1

DXP's acquisition pipeline continues to grow and the market continues to present compelling opportunities. Looking forward, we expect this to continue through 2023 2024, and we look forward to closing a minimum of 4 to 5 acquisitions by the end of the Q1 of 2024. In terms of capital allocation, we repurchased 22.6 1,000,000 in the quarter and year to date 56,200,000 or a total of 618,000 shares in Q3 and 1,700,000 shares year to date of DXP stock. Segment. In summary, we are pleased with our Q3 performance, and we look forward to finishing 2023 strong as we position ourselves for 2024.

Operator

Your first question comes from the line of Tommy Moll from Stephens Inc. Please go ahead.

Speaker 3

David, you used the word constructive to describe your end markets, and I wondered if we could unpack that a little bit. And I'm specifically talking about DX oil and gas, so more on the industrial side. How would you characterize that environment today just based on any anecdotes segment. How does it feel like it may have changed over the last quarter?

Speaker 2

So Tommy, thanks for your question. And it's that's a good question. I think Financial. I think you have people that are being affected by higher interest rates. I think you have people that aren't being affected by that.

Speaker 2

And then of course, the consumer ultimately It's probably the driver of all of that. And so it's interesting that It seems to all be balancing out. We whether aerospace is up and DX oil and gas, but actually that's kind of been down through most of this year. And of course, we think that's going to get better. But Other industrial, the PMI index is saying we're in contraction, And yet my metal working group has been relatively flat most of the year, maybe ever so slightly down.

Speaker 2

And then when I say up and down, I'm really not talking about it being drastically up and down. I'm just talking about it being Up a little bit and down a little bit. So we don't we're not there's no panicking going on over here. We have some very strong growth initiatives for to be very specific And they are producing good results. Because they're new in nature, They don't move the needle a whole bunch.

Speaker 2

We're doing extra $1,000,000 here and an extra $2,000,000 here and $3,000,000 here. That's not offsetting. We have some customer that just his business is down 10%, so he comes down. So It's really hard. It's really why we're not overly Positive or negative.

Speaker 2

I think we don't we're not taking a positive or negative stand on anything. And we're just dealing with what hand we're dealt with, and I think we're trying to grow the business. And I think I'm pretty proud of our DXP people for our gold is always 10% 10% organic growth and we've exceeded that. And then 10% EBITDA margins and that's we've exceeded that. We're picking acquisitions that are have high EBITDA margins.

Speaker 2

That's kind of the goal. We're trying to pick acquisitions that actually are small in nature typically, but they have some record of growth. There's a lot of opportunities. We're not paying 10 times for some company that's for the last 5 years has had flat growth. So and segment.

Speaker 2

We're going to generate a lot of cash flows, so that's a good thing. So I don't know, I'm Answering a lot of questions and I'm back to your point of how about looking at each individual market. We could go through that, but it's just going to be 10% up and just slightly up and 10% down, slightly down. And so This is kind of an interesting economy out there.

Speaker 3

Yes. Well, if you roll it all together and you look at the 419 1,000,000 you just reported for the Q3. What's your best guess on 4th quarter above that level, below that level, about the same?

Speaker 1

Yes, Tommy, I'll jump in here a little bit. One thing just to tag on to David's just comments about the end markets segment. It is sequentially $419,000,000 I think from your estimate be considered down. I think the one thing We missed there is we had 63 business days in Q3 versus 60 4 in Q2. So if I adjust for our sales per business day, we're essentially flat to Q2, which was in line, I think, with directional comments.

Speaker 1

Once again, we typically don't give guidance, but directional comments around our Q2 commentary. That said, to pull that forward, I think in Q4, what we see is there's 61 business days, so You even go down an additional 2. So our sales per business day continues to perform. As I outlined, kind of the trend was segment. Through the quarter, dollars 6,600,000 in July, dollars 6,300,000 in August, September was $7,100,000 October, dollars 6.4 So if you take a blended average and do that by 61 days, you can get to kind of our macro directional comments of where we think The business will perform in Q4 and some of that's just once again function of the number of business days.

Speaker 1

You go into the holiday season, etcetera, Some other things going in there. That said, we did have an acquisition in the quarter that on a full year basis is roughly around $2,000,000 in sales. So once again, people Can do the math of incorporating that. And so those would be our thoughts about how to think about kind Going forward, I don't think we see, to David's comments, we have a balanced mix of end markets, the consumer facing ones would probably is would be the way I'd summarize it, tends to probably see the ones that you have those slightly downs. And then in terms of our hardcore true industrial markets, to David's point, you have some that are up or down that are offsetting that are having lessening impacts from inflation.

Speaker 1

And so Net, the business is still growing year over year. So,

Speaker 3

So, Kent, all the detail was helpful. And just to make sure Following correctly, your 63 business days in the 3rd quarter steps down to 61 in the 4th quarter. And I think what I heard you say is if we calculate that daily sales rate for The 3rd quarter across the average of the 3rd quarter. There's no reason that shouldn't look meaningfully different in the 4th quarter. Did I hear that correctly?

Speaker 1

That's directionally correct. Once again, we had an acquisition without being too specific. But Yes. I mean, that's how one of the KPIs here at DXP that we monitor that we always talk about obviously on the earnings calls It's very simplistically a very high level of sales per business day.

Speaker 3

Okay. And then on the margin side, 3rd quarter in a row Hitting that double digit target. And I think I heard you all say you don't see any reason that shouldn't continue. So I would just ask a more Open ended question. I mean, 1st of all, make sure I heard that correctly.

Speaker 3

And second of all, just talk to what's supporting some of that double digit margin performance and where do you think you had medium term?

Speaker 1

Yes. I mean, at the high level, what starts off really supporting that is our gross margins. If Look at our gross margins over the past year and a half, two years, we've taken a step up by about 100 basis points to 200 basis points, call it, on average. So that 29% to 30% gross profit range is the biggest driver. And then as is inherent in distribution, You get SG and A leverage.

Speaker 1

And so if you're managing costs correctly, which we work pretty hard If you get the 30% and then you've got the 20% SG and A, which has been one of David's long term goals, you get to the 10%. And so we've been able to do that. Part of that is driven by mix. Once again, our water wastewater acquisitions tend to perform at a higher level gross margin. So it was our air compressors, and then our base business.

Speaker 1

We're always pushing Our heritage, if you will, DXP business to perform in line with those businesses and get to that 30%, and we surely have some that do that and more. So, those are the levers at a high level, And we've been experiencing that quarter over quarter.

Speaker 3

Kent, on interest expense, I just want to make sure I heard everything you said correctly and there's a couple of layers here. So maybe we'll start with the easier one. I think what I heard you say is forgetting about Q4 for a minute where there's some noise, But that post the refinancing on today's SOFR, it's about a $16,000,000 to $17,000,000 a quarter expense line. Did I interpret that correctly?

Speaker 1

Yes, yes. It's a floating rate, right. So it's a little bit of a moving target, Tommy, but that's correct. If you just kind of With everything you know today, pro form a spread in about $16,000,000 to $17,000,000 in interest expense a quarter for the new incremental 125, itself.

Speaker 3

Okay. And then 4Q, which will be a little bit trickier, there was a $12,400,000 item, $12,000,000 to $13,000,000 item. Can we just go back over those again?

Speaker 1

Yes. Essentially, you have you already For lack of better words, expense and pay for it, but due to the accounting, you have unamortized debt issuance costs that you write off as part of A new facility and a new transaction. So we'll write that off and flush that through the P and L, if you will, in Q4. And then we'll capitalize A new $12,000,000 to $13,000,000 worth of debt issuance costs associated with the new facility or the new 550,000,000 Group raised here just recently. So, that's essentially what will go on.

Speaker 1

The P and L impacts once again that people will see is just The write off of the debt issuance costs and then you'll start to see obviously the new pro form a interest kick in, in Q4. So those are the two things you're really seeing in the P and L. Okay.

Speaker 3

And if you think about the consolidated interest expense line for Q4. What does it all add up to?

Speaker 1

Well, once again, Also the missing piece, which once again is we do in today's environment, we are managing cash, meaning, hey, we do get some interest income on our cash That offsets that $16,000,000 to $17,000,000 but that's there's a daily movement there a little bit. So, net you could get down 15.5% to at the lower end of that forecast of interest expense is what I would tell you just in terms of what's rolling through the P and L.

Speaker 3

And that's for Q4 or for the run rate?

Speaker 1

Yes. For the Q4, for Q4. Once again, The facility also amortized if you go past Q4, Tommy, the 1% per year in terms of principal reduction. So You're effectively lowering that interest that ultimate interest over time, but not to get in the details of that math here on the phone. But I think In Q4, what you would expect to see is the $16,000,000 to $17,000,000 in interest expense.

Speaker 1

And then as you go forward, every quarter, The combination of debt amortization and the 1% per year or a quarter percent every quarter plus kind of some interest income associated with the cash on the balance sheet will offset that. And so it will peak probably in Q4, Q1 and then it will just lessen as we go out.

Speaker 3

Okay. Let's see, on a couple strategic items for you guys. M and A, I think I heard maybe 4 to 5 more deals. You've got soft circled for Q4, Q1. What can you tell us about that pipeline?

Speaker 3

Any particularly in terms of Just size of the deals you're considering at this point and what seller expectations look like in this rate and economic environment?

Speaker 1

Yes. So we actually have letters of intent in place, so we're just actively working through due diligence on those and that's why we set a minimum of 4 to 5 by the end of Q1. The timing, once again, the calendar is a little bit tough at this time of the year. You have holidays and different things. So we're team.

Speaker 1

Kind of working through that being sure we're being prudent from a due diligence standpoint, but we're anticipating potentially some here as we close out the year. And obviously, if we don't hit that timeline, we'll close them out in the Q1. So just to give you some color there. Just in terms of kind of overall expectations from a valuation standpoint. I mean, hey, we still continue to find good deals at good multiples, meaning our average purchase multiple has always been 7 times or less, and so we're still finding those opportunities out there in the marketplace.

Speaker 1

The themes in terms of the types of acquisitions. Water, wastewater continues to be a big thing. We do have some just industrial kind of, I'll call it, rotating equipment product and our repair and services. And so, those are also one of our themes. That's what Alliance Pump and Mechanical, was closer to.

Speaker 1

It did have some water, Water themes there, but also just some general rotating equipment repair type stuff. So, those are the themes we're seeing. And so we're kind of excited to work through those, and we'll be excited to kind of report those when we get those closed.

Speaker 3

Last question from me on oil and gas. There have been some large transactions announced for Some of the players in that industry to consolidate. And I just wonder from a strategic perspective, is there anything that that signals positive or negative to you for your business in that end market.

Speaker 2

Well, I think it's potentially negative. I think These big companies had their own budgets, their own people doing projects. We participate in those projects. And when you put the 2 of them together, assuming if they're doing it And we're just going to move forward with the same total budget, then that would be great. Segment.

Speaker 2

If they do it and they're wanting to consolidate and

Speaker 1

try

Speaker 2

to become more efficient, well then I think those budgets Could possibly be cut. And so therefore, there segment. There's going to be good activity and of course it's all about how much of we don't get 100% of anybody's budget. So still I don't We don't feel like that IPS, our Innovative Pumping Solutions Group, is pretty positive segment about a combination of alternative type fuels that are more environmentally friendly and The traditional stuff and both of those things are happening as we speak. And so in some ways, we feel They feel like things are continuing to improve for them and I feel that way.

Speaker 2

But specific to The mergers you're talking about, do they take some budget out of

Operator

We have no further questions in our queue at this time. And this does conclude today's conference call. Thank you for your participation and you may now disconnect.

Powered by Quartr
Earnings Conference Call
DXP Enterprises Q3 2023
00:00 / 00:00