DXP Enterprises Q2 2024 Earnings Call Transcript

There are 4 speakers on the call.

Operator

you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises Second Quarter 2024 Earnings Release and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer As a reminder, this call is being recorded.

Operator

Thank you. I would now like to turn the call over to Kent Yee, Chief Financial Officer. Please go ahead.

Speaker 1

Thank you, John, and thank you to everyone joining us this morning. This is Kent Yee, and welcome to DXP's Q2 2024 conference call to discuss our results for the Q2 ending June 30, 2024. 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.

Speaker 1

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. 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.

Speaker 1

I will now turn the call over to David Little, our Chairman and CEO, to provide his thoughts and a summary of our Q2 performance and financial results. David?

Speaker 2

Good morning, and thank you, Kent, and thanks to everyone for joining us today on our fiscal 2024 Second Quarter Conference Call. We delivered another quarter of strong results with sequential and year over year improvements by solid execution. We are pleased to see end market demand and DXP's performance continue through Q2 and remain at record levels through the first half of 2024. This allows us to achieve another quarter of both solid sales growth and 10% plus EBITDA margins. I want to thank our DXPeople for their passion and dedication to support our customers in delivering these impressive results.

Speaker 2

Overall, we had a great second quarter. We are establishing new highs for DXP and look forward to the second half of twenty twenty four. The first half of twenty twenty four highlighted solid execution and our ability to grow organically and through acquisitions. We continue to execute our acquisition strategy to continue to grow DXP water and wastewater platform as well as to add 2 industrial rotating equipment acquisitions. We continue to execute on our goal to diversify the business while maintaining our commitment to foundationally end markets like energy, which have been and will be a part of DXP.

Speaker 2

This is DXP's 5th quarter out of the last 6 of adjusted EBITDA margins more than 10%, which is great to see. And we look forward to maintaining the profitability momentum. This speaks to our relentless drive to center our strategy around our customers and remain customer driven experts while creating a win win for all stakeholders. We remain highly focused on providing expertise our customers have come to expect from DXP. This consistent approach has fueled our financial results.

Speaker 2

I personally want to thank all our DXP stakeholders, in particular, all our DXPeople for their determination and hard work as we continue to grow and improve the business and achieve new sales highs for our business. We're building the next chapter to DXP, which will define us as best in class industrial business. I will begin today with some perspective on our Q2 and thoughts on the remainder of 2024. Ken Yee will then take you through the key financial results after a and after his remarks and after his prepared comments, we will open for Q and A. In terms of our results, 2nd quarter adjusted EBITDA of $4,200,000 and adjusted diluted earnings per share of $1.02 was supported by year over year sales growth of 4.1% and sequential growth rate of 8%.

Speaker 2

As we move into the second half of the year, we remain confident that our well balanced business, strong balance sheet, exceptional teams, improved capabilities, robust acquisition pipeline position us well to navigate the current environment and achieve continued success. Total DXP sales for Q2 increased 4.1% year over year and 8% sequentially or were $445,600,000 or an average of $7,000,000 per business day for the Q2. Thank you to the 2,951 DXPeople for your hard work and dedication. In terms of Q2 segment financial results, Innovative Pumping Solutions led the way, growing sales 52.7 percent year over year, followed by supply chain services, which was virtually flat and service centers declining 2.3%. Our IPS or Innovative Pumping Solutions segment continues to have a strong bookings and backlog of pump projects for water and wastewater, green energy, biofuels and oil and gas.

Speaker 2

We are very pleased with the diversification of the pump markets we serve. Our energy related bookings and backlog continue to show resilience and perform above our long term average, albeit not at all time highs. Additionally, our year to date average remains above our long term average energy IPS backlog going back to 15, which we mentioned first occurred in Q1 of this year. What this indicates is that we are continuing to get bookings and we feel good at this point in the cycle on the energy and water related project work. We look forward to seeing how this impacts our results or project revenues in both revenue energy or projected revenue in both energy and wastewater as we move through 2024 and over the next 9 to 12 months.

Speaker 2

As said, as we maintain our growth, DXP's focus within IPS will be to continue to manage the demand levels we have, finding opportunities in all markets such as energy, biofuels, food and beverage, water and wastewater and managing prices while improving and maintaining margins. In terms of service centers, our performance reflects our multi product division approach and our ongoing investments in progress with our internal growth initiatives against the mix and involving end market dynamics. MRO nature within Service Center allows us to continue to remain resilient and continue to experience consistent sales performance. On a comparative basis, last year was our strongest quarter within service centers. That said, Q2 of this year is the 2nd highest sales quarter over the last 6 quarters.

Speaker 2

We continue to expect that our end markets will remain constructive over the near term. From a regional perspective, regions that continue to experience year over year growth included the South Rockies, California and Canada. We have also seen strength in our U. S.

Speaker 1

We start over.

Speaker 2

We also seen strength in our U. S. Safety Services division and our Metal Working Products division, which is great to see. And we have made investments in our service and repair of rotating equipment to upgrade our customer service capabilities and our organic strategy to grow automation by increasing our automation experts is coming along nicely. Supply Chain Services or SES sales were flat.

Speaker 2

Note, SES job is to reduce the customer spend. So flat is actually good for the existing customers. However, we are increasing sales by adding pumps and pump parts to our supply chain service agreements. And we look for new customer additions as we continue to manage procurement products and manage inflation as we have mentioned, sales will flatten out until we start adding and ramping new customers. We anticipate this could happen in early 2025.

Speaker 2

Demand for SCS services is increasing because of the proven technology and efficiency they perform for all their individual industrial customers. DXP overall gross profit margins for the quarter were 30.9%, a 90 basis point sequential improvement over Q1 and a 12 basis point improvement over Q2 of last year. A special thanks to our DX people who have stayed on top of supplier product increases, labor costs and overall efficiencies. Overall, DXP produced adjusted EBITDA of $48,200,000 and adjusted EBITDA as a percent of sales of 10.8%, which reflects the operating leverage we expect to get with sales growth. This also marks our 5th quarter of 10 percent plus in adjusted EBITDA margins and we look and we will look for this to continue as we move through the second half of twenty twenty four.

Speaker 2

Regarding capital allocations, we continue to make investments to fuel growth and diversify DXP through acquisitions, while opportunistically repurchasing shares. During the quarter, we completed one acquisition and purchased 139,000 shares for about $7,000,000 Again, let me thank all our DXP shareholders, in particular, all our DXPeople for their continued effort and adaptability as we grow and evolve DXP into a more diversified and less cyclical business, The next chapter. Let me continue my remarks by saying that I am encouraged with our continued sequential improvement in sales and profitability. We continue to make progress on our growth strategy and our commitments to customer is stronger than ever. We are driving growth and improvements at DXP.

Speaker 2

We look forward to navigating and working through the remainder of fiscal 2024 and further developing the next chapter. We continue to build our capabilities to provide technical set of products and services in all our markets, which makes DXP very unique in our industry and gives us more ways to help our customers win. Finally, I would like to thank our DXPeople for continuing to maintaining the 10% plus EBITDA margins, hitting a new quarter sales high of Q2. Q2 was another great quarter as we continue to have a successful year in 2024. We remain excited for what is next.

Speaker 2

With that, I will now turn it back to Kent to review the financials in more detail.

Speaker 1

Thank you, David, and thank you to everyone for joining us for our review of our Q2 2024 financial results. Q2 financial performance reflects DXP's ability to continue to successfully navigate through the end market through the market, excuse me, execute and create value for all our stakeholders. Our 2nd quarter results also reflect a new record high sales watermark, along with a new all time high in adjusted EBITDA margins. As it pertains specifically to our 2nd quarter, DXP's 2nd quarter financial results reflect solid sales growth within IPS and continued strength within the IPS Energy and Water backlog, continued contribution from acquisitions along with closing an additional acquisition during the Q2 or completing 4 year to date through Q2, in line service center performance marked by gross margin strength and stability and consistent operating leverage leading to sustained adjusted EBITDA margins. Total sales for the 2nd quarter increased 8% sequentially to 445,600,000 dollars Acquisitions that have been with DXP for less than a year contributed $23,400,000 in sales during the quarter.

Speaker 1

Average daily sales for the 2nd quarter were $6,960,000 per day versus $6,550,000 per day in Q1 and $6,690,000 per day in Q2 2023. Adjusting for acquisitions, average daily sales were 6 point $6,000,000 per day for the Q2 of 2024 versus $6,580,000 per day during the Q2 of 2023. That said, the average daily sales trend during the quarter went from $6,880,000 per day in April to 7.6 $3,000,000 per day in June, reflecting a typical quarter end push as we closed out the 2nd quarter. In terms of our business segments, Innovative Pumping Solutions grew 17.9% sequentially and 52.65% year over year. This was followed by service centers growing 6.27 percent sequentially and sales declining 2.3% year over year.

Speaker 1

Supply Chain Services grew 5.9% sequentially and declined 0.76% year over year. In terms of Innovative Pumping Solutions, we continue to experience increases in the energy related bookings and backlog as well as the water and wastewater bookings and backlog. Our Q2 energy related percent above all notable sales levels and we are moving towards 2018 2019 levels based upon where our backlog stands today. On a 6 month comparative basis, our native energy IPS business is up 6.9% year over year. We expect this to continue throughout 2024.

Speaker 1

We also see strength in our IPS Water backlog as it continues to grow due to a combination of organic and acquisition additions. In terms of our service centers, our service center performance reflects our internal growth initiatives along with our diversified and evolving end market dynamics. As David mentioned, on a comparative basis, our Q2 of 2023 was our strongest quarter within service centers over the last 6 quarters, and Q2 of this year is the 2nd highest performing quarter over the last 6 quarters. The point here is, while we are technically down 2.3% year over year, our sequential growth of 6.3% is encouraging and we feel good at this point in the cycle. Regions within our Service Center business segment, which experienced year over year sales growth include the South Rockies, California and Canada.

Speaker 1

From a product perspective, we are also experiencing strength in our U. S. Safety Services and Metal Working Product divisions, which is great to see. Supply Chain Services sales continue to perform in line with the performance we experienced in the second half of twenty twenty three. Supply chain services sales grew 5.9% sequentially and declined 0.76% year over year.

Speaker 1

This is primarily due to some facility closures with existing customers as well as the streamlining inefficiencies we bring to our new customers that we mentioned back in Q4 of last year. As David mentioned, we look forward to new customer additions as we move through 2024 and into 2025. Turning to our gross margins. DXP's total gross margins were 30.93%, a 12 basis point improvement over Q2 2023. This improvement is attributed to consistency in margins within Service Centers and a 4 78 basis point improvement within Innovative Pumping Solutions gross margin from Q1 of this year.

Speaker 1

Additionally, the contribution from acquisitions at a higher overall relative gross margin versus our base DXP business. Acquisitions continue to be accretive to both our gross and operating margins. That said, from a segment mix sales contribution, Service Centers contributed 68.79 percent, Innovative Pumping Solutions 16.47% and Supply Chain Services was 14.74 percent in Q2. In terms of operating income, combined all three business segments increased to 141 basis points sequentially and business segment operating income margins were 10,500,000 dollars versus the Q1 of this year. This was primarily driven by improvements in operating income margins across all three business segments, but more notably within IPS.

Speaker 1

The improvement in Innovative Pumping Solutions reflects the impact of our water and wastewater acquisitions at a higher relative operating income margin and a growing percentage of revenue or sales mix along with improvements this quarter within our pump manufacturing operations. Total DXP operating income was $37,400,000 in the 2nd quarter. Our SG and A for the quarter increased $6,100,000 from Q2 2023 $5,700,000 from Q1 of this year to $100,400,000 The increase reflects the growth in the business and associated incentive compensation and DXP investing in its people through merit and pay raises. SG and A as a percentage of sales increased 49 basis points year over year to 22.54 percent of sales and decreased sequentially 42 basis points from Q1 of this year. Turning to twenty four adjusted EBITDA was $48,200,000 Adjusted EBITDA margins were 10.8%.

Speaker 1

As discussed in Q1, we expect this to pick up as margins have improved as we move through the first half of twenty twenty four. We continue to benefit from the fixed cost SG and A leverage we experienced as we grow sales. In terms of EPS, our net income for Q2 was $16,700,000 Our earnings per diluted share for Q2 2024 was $1 per share versus $1.06 per share last year. This primarily reflects the impact of higher interest expense associated with the repricing amendment of our Term Loan B in Q4 of last year. Conservatively adjusting for one time items, earnings per diluted share for Q2 2024 were $1.02 per share.

Speaker 1

Turning to the balance sheet and cash flow. In terms of working capital, our working capital increased $18,100,000 from March and $15,000,000 from December to $287,100,000 As a percentage of the last 12 months sales, this amounted to 17%. This is an uptick from where we have been and $10,900,000 of the increase since March is associated with our recent acquisitions. We will grow into the working capital as a percentage of sales as we moved into the second half of twenty twenty four and our first half of the year acquisitions are with us for a longer period. In terms of cash, we had $49,900,000 in cash on the balance sheet as of June 30.

Speaker 1

This is a decrease of $89,800,000 compared to the of Q1 and reflects our acquisition activity as well as $9,200,000 in share repurchases. In terms of CapEx, CapEx in the quarter was $8,800,000 or an increase of $5,900,000 compared to Q1 and a $7,000,000 increase versus Q2 2023. We continue to expect CapEx to pick up in 2024 versus 2023. We are continuing to make investments in our business, including software, our facilities and operations for our employees. As we move forward, we will continue to invest in the business as we focus on growth and we'll communicate these investments as appropriate.

Speaker 1

Turning to free cash flow. Free cash flow for the 2nd quarter was $5,900,000 versus a negative $4,200,000 in Q2 of 2023. This primarily reflects improvements in profitability along with continued management of our project work, which we have highlighted in the past as requiring investments in inventory, product and costs in excess of billings. That said, we continue to focus on tightly managing this aspect of our business from a cash flow perspective and look to align billings with the investments, which did occur in a noble fashion during the Q2. Return on invested capital or ROIC at the end of the second quarter was 36% and reflects the improvements in EBITDA and operating leverage inherent within the business.

Speaker 1

Additionally, it also points out to our recent acquisitions performance and positive contribution and accretive impact to both gross profit and EBITDA. As of June 30, our fixed charge coverage ratio was 1.4:one and our secured leverage ratio was 2.6:one with a covenant EBITDA for the last 12 months of $187,600,000 Total debt outstanding on June 30 was 545,870,000 In terms of liquidity, as of the Q2, we were undrawn on our ABL with $3,600,000 in letters of credit with $131,400,000 of availability and liquidity of $181,300,000 including $49,900,000 in cash. DXP is poised to execute on our acquisition strategy and would anticipate at minimum closing another 2 acquisitions during the second half of this year. In terms of acquisitions, we have closed 4 acquisitions during the first half of twenty twenty four and we will look to close at minimum another 2 before year end. DXP's acquisition pipeline continues to remain active and the market continues to present compelling opportunities.

Speaker 1

That said, we remain comfortable with our ability to execute on our pipeline and valuations continue to remain reasonable. Regarding capital allocation, we repurchased or returned $9,200,000 to shareholders via share repurchases in Q2. We are close to finishing up our current program and we will look to close this out before the year end. As previously mentioned, we will continue to be opportunistic as we move through 2024 and support our shareholders as we move through cycles. In summary, we are excited about the future of building the next chapter.

Speaker 1

We will keep our eyes focused on those things we can control and what is ahead of us. We are excited because there is still substantial value embedded in DXP. We look forward with great confidence to a future of sustained growth and market outperformance. I will now turn the call over for questions.

Operator

Thank you. We will now begin our question and answer session. Your first question comes from the line of Max Payne from Stephens. Please go ahead.

Speaker 3

Hey, guys. Thanks for taking my questions. Hey, Matt. Hey, how's it going? So you mentioned in your prepared remarks that revenue grew 4% year over year and 8% on a sequential basis.

Speaker 3

Yes. Can you provide some color on which underlying end markets or product categories grew during the quarter? And just to clarify, did you say acquisitions contributed $23,400,000 of revenue during the quarter?

Speaker 1

That's correct. That's correct.

Speaker 3

Got you.

Speaker 1

And Mac, let me do this. Give a fulsome answer starting with sales per business day and then address your question regarding end markets that were the positive during the quarter. Taking our sales per business day from March, which was we ended Q1 at a high watermark of $7,460,000 per day. April was $6,880,000 per day. May was $6,440,000 per day and then June was $7,630,000 per day.

Speaker 1

Q2 average was 6.96, which is coincidentally up 4% year over year. Last year for Q2, we averaged 6.6 $9,000,000 per day. So you can see that year over year, we're still trending up from a sales per business day perspective. In terms of markets that drove that or your question around water and some of the other ones, water was definitely up. Part of that's both organic as well as acquisitions.

Speaker 1

During the first half, obviously, we closed Hennessey and CAPI, which were 2 water acquisitions. And then I'm not sure if you picked up on it, but our I call it our native energy IPS business. But if you look on that on a comparative basis year over year within IPS, that was up 6.9%. And so that would be worthy of pointing out. Obviously, the other we've had puts and takes with all our end markets.

Speaker 1

Food and beverage continues to perform. And so those are some of the markets I'd point to.

Speaker 3

Got you. Thanks for the color there. And just sticking on revenue, regarding ADS trends, can you maybe walk through what you've seen quarter to date so far in July early August, just both on an organic and inorganic basis?

Speaker 1

Yes. July, we've got a flash. It's still up and we're looking at, but call it, point $4,000,000 per day, dollars 6,400,000 $6,500,000 per day.

Speaker 3

Got you. And then just looking out the rest of the year, how many selling days are you all assuming here in the 3rd Q4?

Speaker 1

3rd quarter will be another 64. And then Q4 is always light from actual business days just due to the holidays, both Thanksgiving, Christmas and New Year's. And so just dependent upon how you view those. One of those technically could still be a business day, but some people just kind of get quiet in particular on our supply chain and services business. But call it roughly around 61 to 62 days in Q4.

Speaker 3

Perfect. And then, yes, my last question here is on adjusted EBITDA margins. First off, congrats on exceeding your 10% target. But when we look at last year, during the Q2, it looked like 2Q showed the highest EBITDA margin before slightly compressing in the 3rd Q4 on a sequential basis. Should we expect a similar trend to play out this year?

Speaker 1

The way I'd answer that is, I mentioned in our SG and A. Our SG and A is growing because we're making investments in the business, both customer facing as well as supporting the back office, meaning pay raises and merit increases. And so there could be some light compression. That said, what offsets that, Max, is a lot of the acquisitions we've been doing have been accretive to our overall margins once again. And so it becomes a mix of kind of our base business, our existing portfolio and the pay raises and support and additions we're doing, we're making growth investments and salespeople to be a little bit more specific.

Speaker 1

And then that counterbalancing with acquisitions and then being at a higher relative operating income margin. And a lot of the water wastewater, I think we said it, but it bears mentioning, they're typically north of, I'll call it, 11%, 12% EBITDA margins.

Speaker 3

Okay, great. Thanks for the color there. And, yes, that's all I had. So thanks again for taking my questions, and I'll turn it back.

Operator

Ladies and gentlemen, that concludes our Q and A session as well as DXP Enterprises' Q2 2024 Earnings Conference Call. Thank you all for joining us. You may now disconnect.

Earnings Conference Call
DXP Enterprises Q2 2024
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