DXP Enterprises Inc (DXPE) 2007 Q2 法說會逐字稿

Good afternoon. My name is Mary and I will be your conference operator today. At this time I would like to welcome everyone to the DXP Enterprises Inc. second quarter 2007 results conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, Senior Vice President of Finance and Chief Financial Officer, Mac McConnell. Sir, you may begin.

This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP's second quarter 2007 results conference call. David Little, our CEO, will also speak to you and answer your questions.

Before I begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual results or events can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings. But DXP assumes no obligation to update this information.

Our second quarter earnings press release and June 30, 2007 Form 10-Q are available on our website at www.dxpe.com. I will begin with a summary of DXP's second quarter 2007 results. David Little will share his thoughts regarding 2007 results and the future. Then we will be happy to answer questions.

Sales for the second quarter increased 22.3% to $85.3 million from the second quarter of 2006. Sales by the four businesses we acquired in 2006 were up to 12 months after the date of acquisition, and the business acquired in 2007, accounted for $13.3 million of the sales increase. Excluding sales for the acquired businesses, sales for the 2007 second quarter increased 3.2% from the 2006 quarter. This 3.2% sales increase, excluding acquisitions, is primarily due to a 33% increase in sales for our SmartSource locations, a 4% increase in our sales for our MRO service centers, partially offset by an 11% decrease in shipments by our Innovative Pumping Solutions locations.

Gross profits for the quarter increased to 28.2% from 2006. Gross profit as a percentage of sales increased to 28.7% from 27.4% in 2006 the second quarter as a result of increased sales and margins on pump products, and the higher than average margins of our successful acquisitions completed in 2006 and 2007. We continue to look for opportunities to acquire higher margin, high service businesses, which we can grow as part of DXP.

SG&A increased 33% compared to the 22.3% increase in sales and the 28.2% increase in gross profit. The increase in SG&A results from increased salaries, incentive compensation, employee benefits, payroll related expenses, information technology expenses, and $700,000 of expense for amortization of intangible assets. Salaries are up partially because we have increased our service centers sales force by approximately 12% during 2007 in an effort to create more super centers which sell more product categories.

Readings before interest, taxes, depreciation and amortization increased 29.6% to $7.2 million for the second quarter of 2007 from $5.6 million for the second quarter of 2006. EBITDA increased more than sales and gross profit because of increased depreciation and amortization.

Interest expense for the second quarter increased 7.7% primarily as a result of increased debt incurred to fund acquisitions and internal growth, partially offset by the effect of using proceeds from the sale of common stock to pay all borrowings outstanding under our line of credit during June 2007. At June 30, 2007 we had $15.6 million of cash and $10.4 million of long-term debt, including the current portion. At June 30, $46.5 million was available to be borrowed under our line of credit.

Pretax income increased 17.9% compared to the second quarter of 2006. Net income increased 15.8%. Net income increased less than the pretax income increased because our federal tax rate increased 1% due to our increased level of income.

Diluted earnings per share for the second quarter increased 9.8% to $0.56 per share from $0.51 per share for the 2006 second quarter. Diluted average shares outstanding increased 6%, primarily as a result of the sale of 1 million shares of common stock during June 2007.

Despite the second quarter results not meeting our expectations, we do expect 2007 to be a very successful year. Now I would like to turn the call over to David Little.

I would also like to thank everyone for their participation on our conference call today. We did not meet our expectations for the second quarter, and I welcome this opportunity to explain the analysis of why.

First we have discussed in the past the fact that Innovative Pumping Solutions fabricates large pumping systems. And these pumping systems when they ship can cause our sales to be lumpy on a quarter to quarter basis.

In the second quarter Innovative Pumping Solutions had $2.6 million that was shipped in the third quarter that was expected to ship in the second quarter because of the slippage of our suppliers delivering us materials on time. We expect our third quarter to be pretty much as expected. And the fourth quarter will more than make up for the shortfall in the second quarter, as we have several jobs that are all scheduled to be shipped in the fourth quarter. And as what we know today, that all their manufacturers are going to ship us products on a timely fashion.

Power Machinery, which is also part of the IPS Group, had a great first quarter. And they had a pretty soft second quarter, but they are also because of their backlog expected to have an excellent fourth quarter.

DXP Service Centers, which sells day-to-day MRO supplies had sales that were excellent through May, but we did see some softness in June. This group has, as Mac have said, it has added approximately 12% increase in headcount for outside salesman to support our DXP super centers' initiative.

And then they also feel like that the markets that they serve, which is oil and gas industry, the mining industry, the chemical industry, the petrochemical industry and the refining industries are very healthy. So we went through a pretty extensive exercise, and then projecting out what they thought they would do in the second half of the year. And they came up with 7% greater sales in the second half than in the first half.

B2B, which is working on several possible large contracts which are larger than normal for us, since normally we do installations that are in the $2 million to $3 million range. They have several deals that are in the $5 million to $8 million type range. And they also expect to close -- to implement and close a large deal in the latter part of the third quarter. They're confident that they will hit their yearly budget.

Our markets, our growth strategies are excellent and we expect to meet our yearly projections. Because of the schedule of these IPS capital projects shipments for the fourth quarter, we will more than make up for the second quarter.

In general I would just like to in summary say that the second quarter had some silver lining as far as I am concerned. The third quarter looks to be as expected. And we really look to have an excellent fourth quarter.

I would turn in over for questions now.

(OPERATOR INSTRUCTIONS). Matt Duncan, Stephens Inc.

First question here for you. Looking at the revenue softness in the quarter and then looking forward, David, you mentioned that you expect third quarter to be as expected, and the fourth quarter to really pick up some steam. When you say as expected in the third quarter what type of growth would you be looking for there? And then in the fourth quarter did you look at that yet?

That is a really good question in terms of light percentage growth. But I think we would -- let me -- before I answer that off the top of my head, I better look at something. I appreciate the question.

I'm just really trying to get a sense if the revenue shortfall this quarter, if we can be pretty continent that you are just going to pick that dollar amount up and move it to another quarter later in the year, and what the revenue projects progression should look like from hear?

I do have your answer by the way. We are expecting the third quarter to be more in line with 37% growth. I think that's right.

Then what about the fourth quarter?

The fourth quarter, again these are year-over-year growth numbers. The fourth quarter, which is substantially higher than the third quarter still comes -- still just comes to be about 36%.

At the end of the day do you think this is really just a blip on the radar and that your revenue growth rate should pick up from here?

I think that what really happened to us was that April and May looked excellent. And then for some reason June fell off the chart. And so when we looked at -- looking at June we found several jobs that added up to $2.6 million that will now move to September. We actually have asked the question, what is in September that is going to move to the fourth quarter. And they have come up with $1.6 million that they know about. But the MRO Group kind of really flattened out in June. And we have been spending a lot of money adding headcount to try to grow that particular part into our DXP super centers. So we were a little surprised by that. But when we asked all the guys what was -- what they had an explanation for. If they really didn't -- and we revisited all our markets. And our markets are doing really, really good. And so they all thought that they would more then make up for it in the second half.

Looking at we are almost through with July now, is the MRO, the service center-based business, has it picked back up in July?

Yes, it has.

You are seeing acceleration there then?

Right.

Mac, on the margins, can you talk a little bit about what caused gross margin to be down sequentially? You guys did mention that some of it is mix because of the Pumping Solutions stuff. But just talk a little bit about margins here in the quarter and what your expectations would be going forward. I know you put up almost a 30% gross margin in the first quarter. Should we be expecting that again in the second half of the year now that the pumping stuff is going to turn back around do you think?

I will answer it. There is some mix. As you know, our Power Machinery Group which probably did about $6 million in the first quarter and like $1.5 million in the second quarter is about a 40% business on gross margin. So that somewhat has that effect. They expect to have about a $7 million fourth quarter, probably another down quarter in terms of the third quarter. And then a lot of these larger jobs that IPS is also having are starting to be more normalized, I guess, based on the size that they are. And so I personally think that we are probably somewhere around 80 to 90 basis points lower than what we had in the first quarter, just based on mix.

Two more questions and I then will jump back in queue. First on the $700,000 in amortization that you mentioned, what is a typical quarter for you guys in amortization, and what caused that uptick?

We have been doing a lot of acquisitions. The future runrate appears to be about $400,000 a quarter, and we had $700,000 in the second quarter. And the increase is a combination of the Delta acquisition and a change in estimate as we get these numbers finalized going forward.

What caused -- if the future runrate is $400,000, what caused it to be $700,000 this quarter? Was there some kind of catch-up or --?

Yes, catch up on the change in estimate of what --.

How much was that catch-up?

Around $300,000.

Last question. David or Mac, when you guys did your recent offering I know the purpose of that was to go out and make some acquisitions. I know it is a big part of your growth strategy. Can you give us an update on what the acquisition pipeline looks like and when we might expect to see you guys close something?

The pipeline is -- there are a lot of opportunities and a lot of conversations. We're glad we have the money from the offering because we think we can put it to good use.

But is there anything we should be looking for in the near term that you might be closing soon? I think last quarter you mentioned about $200 million in revenue in the pipeline. What does that pipeline look like now?

It certainly looks that large. Timing is hard to project on all these deals, but we're going to have -- I feel pretty comfortable that we're going to have this money put to use certainly this year.

(OPERATOR INSTRUCTIONS). Andrea Sharkey, Sidoti & Co.

Just a question on top line MRO being only 4%. I know you guys said you started to see some weakness in June. Just curious, do you think that there is some marketshare that you're losing here? Some of the other industrial distributors that have reported had some higher single digit, or even some have some low double-digit sales growth. Just looking at the disparity between your results and theirs is there any thing going on marketshare-wise that you can point to?

No, I think we are -- I think our growth strategies are still solid to grow DXP super centers, which is adding product categories, to existing stores. I think B2B and an integrated supply formula is a way of gaining great marketshare, and we have done so in the past.

I think the real shortfall that we haven't -- that we're not going to see for the yearly results is the lumpiness of the Innovative Pumping Solutions shipments. They are -- it kind of surprised us that we had this $2.6 million that slid over. But also when we really got into the detail a whole lot greater is a lot of stuff has been scheduled to be shipped in the fourth quarter.

So I feel like our guys -- actually what I'd went back to them and I said really want you to rebudget the rest of the year. They were kind of like, why, we are doing great and everything is good? I think they were frankly a little surprised by what was getting shipped versus the orders and the growth of our backlog, which is been pretty substantial.

Sure. But just to focus a little bit more on the MRO stuff, since that is a pretty big portion of your business. That 4% organic growth that we got in the quarter, do you think looking forward to the rest of the year on that, that is sort of a better runrate, or do you think that that can improve as the year progresses? Hello?

We're here. We are looking at our -- we are kind of looking at (multiple speakers).

We are still -- we have hired people. We are still working on the strategy of super centers where we sell more of our products in each of our service enters. And so as time goes on we think we can accelerate that growth rate.

In terms of the super centers what is the progress on that? Do you have anything -- your stores, other than the Oklahoma City one that already has been done, and considered kind of a super center? Any that are close to becoming one, or what is the status on that project?

The ones that come to mind for me are Farmington and Beaumont and La Porte -- and it seems like there is one other one -- oh, Cleburne, the clay line -- the oilfield clay that was up there we were adding safety and etc.

Everybody -- as you know, each region is supposed to do at least one. And they're all -- we have hired 12 new salesman that are specifically -- we're not trying to add another --. We have a lot of other salesman that we have added for the same product category. These 12 -- or 12% of the headcount -- is actually for the taking and adding a new product category to an existing store. So we are seeing a lot of expense on that side. And we're not -- at this point, it is a little too early to decide say, but we're not seeing a whole lot of incremental business, but we feel confident we will.

Just talking about the backlog on IPS, can you maybe give us a sense of what that backlog figure is, and maybe the timing throughout the year of -- percentage-wise the portion of the backlog that you expect to go out in the third quarter and the fourth quarter?

It is about $38 million. And it is -- they normally do about $18 million to $19 million, and we see that in the third quarter. And then we see something more -- something north of $30 million for the fourth quarter.

What was it in this quarter?

It was $17.8 million.

Just -- sorry to jump around a bit. To go back to MRO, you mentioned that you saw some weakening in June. Were there any particular end markets where that happened, where things seem to be slowing down that you could point out?

No. there wasn't any particular markets that we saw. We saw -- a little more specifically we saw regions. The Southwest region, which is mostly oil and gas -- we saw that sort of flatten out a little bit. And then the other one, which happened -- which was more significant really was our Houston market, or what we call greater Gulf Coast. And that has a really nice blend of petrochemicals, chemical manufacturing, oil and gas, and it was pretty much across all the markets.

But then you said you thought they would kind of come back in July a bit?

Right. We really don't have any clue as to why we thought -- we have heard stupid statements like well, the oilfield has been so busy that the guys finally decided they needed to take their vacations or something. But we didn't really get into anything of any meat.

Gentlemen, there appear to be no more questions at this time.

Matt, anybody else have a question?

There is another question from Matt Duncan from Stephens & Co.

Next thing I wanted to talk about is the pricing metric software. David, can you give us an update on the implementation of that? How is that going? And what impact do you expect that to have in the future?

To give you an idea, the first quarter we did -- they can actually track how many times we have used the software and the pricing, and it stuck. And it was about -- it had a runrate of about $1 million a month in the first quarter. And the second quarter we were almost at $3 million a month. They are pretty sure -- this year's goal anyway is to get to $5 million. The reason why it will slow down a little bit is you are always plucking the low hanging fruit first. And the results have been about a -- close to a 10% improvement on margins, by the way. But again, we're not expecting that across the whole gamut of what we do. We're just expecting that on the low hanging fruit stuff. But it is being successful and we're real pleased with it.

David, I wanted to double check a number that you gave us. The fourth quarter revenue growth rate, you said 36%, did I hear that correctly?

Yes.

And that is over a pretty tough comp from last year. Is that primarily going to be due to the Innovative Pumping Solutions business, or are you expecting some acceleration in growth elsewhere as well?

We are expecting the MRO piece to be 7% higher than the first half. And we are expecting about a 20% increase on B2B as it relates to the first half runrate. And then almost a 200% -- or whatever that is -- I mentioned $30 million versus $18 million or $19 million.

The 36% in the fourth quarter is really going to be across the board then -- growth in all areas?

Pretty much.

One more thing. Back on the B2B --.

That is not quite right. It is heavily weighted towards IPS. And IPS is going to be higher than -- it is going to 200%, so the others have got to be less than 36.

Before we move then maybe you can -- you had some revenue slip this quarter. It sounds like a little bit more is going to slip in the third. Just talk to us a little bit about what gives you confident that the fourth quarter of these orders are going to come in. And is a lot of this stuff -- it sounds like some of the problem has been getting product from manufacturers. Is it just as simple as the product from -- the supply from the manufacturers is going to be arriving in time to get those things out then?

That is exactly right. So there is -- just to be honest, there is no guarantee that somebody is not going to live up to what they committed to. But based on what has been committed to us in terms of supply from our pump manufacturers or from our motor manufacturers or our engine manufacturers, this is the schedule that we feel like we can live with.

Then looking for a minute at the backlog in Innovative Pumping Solutions, you mentioned it was about $38 million at the end of this quarter. Can you remind us what it was at the end of the first quarter? Is that backlog growing?

Oh yes. No, it was more like $27 million.

You had an $11 million increase in backlog, so the order flow is still strong. Is that -- it sounds to me like it is still pretty good order flow there. Just talk a little bit about what you're seeing in your end markets for those products?

We continue to see the offshore industry, the international industry be extremely strong. We see the domestic oil and gas industry doing really, really well. We see the -- of course PMI is a lot of pipeline industry, and they are expected to have another really, really good year.

And then some of the chemical items are little soft, but other parts of chemical is really doing well. Petrochemical is doing well and then the refineries are doing well.

Moving on then from that on to the B2B. Talk about -- how many -- I guess there was 18 locations that you had at the end of last quarter. I think you added one right at the end of the quarter. How many locations did you had at the end of this quarter? And what are you looking for going forward?

We didn't add any during the second quarter. And we expect to add one in the third quarter.

Can you characterize that -- is it going to be about average for these or is it a bigger or smaller location?

It is a $3.5 million location.

Andrea Sharkey, Sidoti & Co.

Just one quick question. Looking at CapEx, what is your expectation for the rest of the year, and what is that basically going towards?

I would assume the CapEx would be about the same. Do you have everything --?

It is normally for IT, and it is -- I don't think we have any --.

No ballistic --. (multiple speakers)

No distribution items or anything with that. There is one. I am aware of one. It is not -- in the scheme of things it is not that much. It is like $150,000 to enhance our disaster recovery system. That is about all I know.

Like last year $2.3 million type of annual rate?

And we spent approximately $1 million in the first six months. Last year we spent $1.4 million in the first six months. So I would think the this year and last year would be comparable.

Then just looking at your SG&A, what is your expectation going forward? Obviously it has gone up quite a bit year-over-year between acquisitions and adding extra salespeople. Is this $18.4 million a pretty good runrate, or are you still anticipating continuing to increase that SG&A to add more salespeople and compensation benefits and things like that? How should we look at your SG&A going forward?

I truthfully expect SG&A to go up. And this may sound strange, but I hope it goes up. I explained before that a lot of our compensation is incentive-based. And so what we have -- if our gross profit and profits go up, our SG&A is going to up. And I think we will --. We have been making a lot of investments, but we're going to continue to make investments. As a percentage of sales I would like to see it go down.

Anything you can talk about in terms of pricing power. On your Innovative Pumping Solutions have you been able to increase margins through pricing? And also on the MRO side have you seen any price increases continue to come through from suppliers that you need to pass on to your customers, and how is that working?

There have been continuous price increases.

The price increases seem to have moderated a little bit in terms of being more of the 3 to 5% range versus what they have been in the past. We continue to look for alternative sources, whether that is a abroad or domestically. And it is just an ongoing project to leverage the purchasing power we have, to leverage the customers we have also. If Innovative Pumping Solutions -- not Innovative, but if B2B were to get a big system's agreement, we would certainly leverage the purchasing power that that bigger customer might have. So that is an ongoing project. The incremental improvements on gross margins are going to be just that. They are not -- if we get a 25 basis point to 50 basis point, we have done a good job.

Looking forward -- and I don't know, I'm sorry if you already addressed this -- looking forward at the gross margin is sort of 29% more of the going runrate on what you think you can do versus maybe the 30% you did in the last quarter, or closer to 30%?

I think 29% is more appropriate based on the product mix we see for this year.

There appear to be no more questions at this time.

Thank you all very much for participating.

Thank you everyone. This concludes tonight's conference call. You may disconnect your lines at this time. And please have a wonderful day.