Release Date: August 09, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- DXP Enterprises Inc (DXPE, Financial) achieved a 4.1% year-over-year sales growth and an 8% sequential growth rate.
- The company reported a strong adjusted EBITDA margin of 10.8%, marking the fifth quarter out of the last six with margins above 10%.
- Innovative Pumping Solutions (IPS) segment saw a significant sales increase of 52.7% year over year.
- DXP Enterprises Inc (DXPE) completed four acquisitions in the first half of 2024, contributing $23.4 million in sales during Q2.
- The company maintained a strong balance sheet with $49.9 million in cash and a secured leverage ratio of 2.6:1.
Negative Points
- Service Centers segment experienced a 2.3% decline in sales year over year.
- Supply Chain Services (SCS) sales were flat, reflecting challenges in adding new customers and facility closures with existing customers.
- Increased SG&A expenses by $6.1 million year over year, reflecting growth in the business and associated incentive compensation.
- Higher interest expenses impacted net income, resulting in a slight decrease in earnings per diluted share from $1.06 last year to $1.02 this year.
- Working capital increased by $18.1 million from March, indicating higher inventory and operational costs.
Q & A Highlights
Q: 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 $23.4 million of revenue during the quarter?
A: That's correct. Sales per business day increased from $6.88 million in April to $7.63 million in June, averaging $6.96 million for Q2, up 4% year-over-year. Water markets, driven by both organic growth and acquisitions, and the native energy IPS business, which grew 6.9% year-over-year, were significant contributors. Food and beverage also performed well.
Q: Regarding ADS trends, can you walk through what you've seen quarter-to-date so far in July and early August, both on an organic and inorganic basis?
A: July's flash data shows an average of $6.4 million to $6.5 million per day.
Q: How many selling days are you assuming here in the third and fourth quarter?
A: The third quarter will have 64 selling days, while the fourth quarter, due to holidays like Thanksgiving, Christmas, and New Year's, will have around 61 to 62 days.
Q: Should we expect a similar trend of EBITDA margin compression in the third and fourth quarters as seen last year?
A: There could be some light compression due to investments in the business, including pay raises and merit increases. However, acquisitions, which have been accretive to margins, will counterbalance this. Water and wastewater acquisitions typically have EBITDA margins north of 11-12%.
Q: Can you elaborate on the performance of the Innovative Pumping Solutions (IPS) segment?
A: IPS grew 17.9% sequentially and 52.65% year-over-year, driven by increases in energy-related bookings and backlog, as well as water and wastewater projects. The energy-related average backlog grew 1.9% over Q1 and is trending above notable sales levels.
Q: How did the Service Centers segment perform?
A: Service Centers grew 6.27% sequentially but declined 2.3% year-over-year. Despite this, Q2 was the second highest performing quarter over the last six quarters. Regions like the South Rockies, California, and Canada saw year-over-year growth, and there was strength in the US Safety Services and Metalworking Products divisions.
Q: What is the outlook for Supply Chain Services (SCS)?
A: SCS sales grew 5.9% sequentially but declined 0.76% year-over-year due to facility closures and streamlining efficiencies. New customer additions are expected as we move through 2024 and into 2025.
Q: Can you provide details on the company's capital allocation and acquisition strategy?
A: During Q2, DXP completed one acquisition and repurchased 139,000 shares for about $7 million. The company plans to close at least two more acquisitions in the second half of the year. The acquisition pipeline remains active, and valuations are reasonable.
Q: How did the company's financial performance reflect in terms of gross margins and operating income?
A: Total gross margins for Q2 were 30.93%, a 12 basis point improvement over Q2 2023. Operating income increased 141 basis points sequentially, driven by improvements across all business segments, particularly IPS. Total operating income was $37.4 million.
Q: What were the key drivers behind the company's adjusted EBITDA and EPS performance?
A: Adjusted EBITDA for Q2 was $48.2 million, with margins at 10.8%. Net income was $16.7 million, and adjusted EPS was $1.02 per share. Higher interest expenses impacted EPS, but profitability improvements and acquisition contributions supported overall performance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
