DXP Enterprises Inc (DXPE) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the DXP Enterprises Incorporated fourth quarter 2007 results conference call. At this time all participants are in a listen-only mode. Following the presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS).

I would like to turn the conference over to Mr. Mac McConnell, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

This is Mac McConnell, CFO of DXP. Good morning and thank you for joining us. Welcome to DXP's fourth quarter and full year results conference call. David little, our CEO, will also speak to you and answer your questions.

Before we 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 events or results 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 that information.

Our fourth quarter press releases available on our website, www.DXPE.com. I will begin with a summary of DXP's fourth quarter and full year 2007 results. David Little will share his thoughts regarding 2007 results, and then we will be happy to answer your questions.

Sales for the fourth quarter increased 113% to $168.8 million from the fourth quarter of 2006. Excluding fourth quarter 2007 sales of $68.9 million from businesses acquired in 2006 and 2007 on a same-store sales basis, sales for the 2007 fourth quarter increased 25.9% from the 2006 fourth quarter.

Gross profit for the quarter increased 107% from 2006. Gross profit as a percentage of sales decreased to 27.5% from 28.3% in 2006's fourth quarter, as a result of the acquisition of Precision Industries in September of 2007. Precision's gross profit margin for the fourth quarter was 24.7%.

SG&A increased 111% compared to the 113% sales increase and 107% gross profit increase. SG&A for the fourth quarter of 2007 includes $1.4 million of amortization of intangibles compared to $500,000 of amortization of intangibles in the fourth quarter of 2006. Excluding the increase in amortization expense, SG&A increased by 106%, which is less than the increase in gross profit. As a percentage of sales, SG&A decreased to 20.8% from 20.9% for the fourth quarter of 2006.

Interest expense increased 189%, primarily as a result of increased debt incurred to fund acquisitions and internal growth. Long-term debt increased $8.1 million during the quarter, primarily as a result of the acquisition of Indian Fire & Safety during the fourth quarter of 2007.

EBITDA increased 93%, and pretax income increased 70% compared to the fourth quarter of 2006. Net income increased 64%. Net income increased less than the increase in pretax income because of the combination of increased state income taxes and our federal tax rate increased 100 basis points due to our increased level of pretax income.

Diluted earnings per share for the fourth quarter increased 38% to $0.84 per share from $0.61 per share for the 2006 fourth quarter. Diluted shares for the fourth quarter were 6,838,000 shares.

During the fourth quarter of 2007 Precision reported revenues of $59.9 million and was approximately $0.03 per share dilutive. The implementation of a large new customer has gone slower than originally expected; however, Precision has signed up additional new customers since the completion of the acquisition in September. We expect Precision to be accretive in the first quarter of 2008 and to grow revenues and profits as 2008 progresses.

For the full year 2007 sales increased 59% to $444.5 million. Excluding 2007 sales of $121.1 million from the businesses acquired in 2006 and 2007 on a same-store sales basis, sales increased 15.6%. This 15.6% sales increase results from a 28.8% increase in supply chain sales, a 29.8% increase in Innovative Pumping solutions sales, and an 8.5% increase in MRO sales by our service centers. Our service centers also sell Innovative Pumping solutions products. When Innovative Pumping solutions sales by our service centers are combined with the MRO sales, service center sales increased by 12.2% over 2006.

Gross profit for the year increased 59.9% from 2006. Gross profit as a percentage of sales increased to 28.3% for 2007 from 28.1% for 2006, primarily as a result of the implementation of various strategies to increase margins, including pricing software and revised commission plans.

SG&A for 2007 increased 62% compared to the 59% increase in sales and the 60% increase in gross profit. As a percentage of sales, SG&A increased to 21.1% for 2007 from 20.7% for 2006. The increase in SG&A as a percentage of sales is the result of the $2.2 million increase in amortization of intangibles associated with acquisitions.

Interest expense for 2007 increased 72%, primarily as a result of increased debt to fund acquisitions and internal growth. Long-term debt increased $66.8 million during 2007 as a result of spending $126 million on acquisitions during the year. This was partially funded with $44.6 million of net proceeds from the sale of common stock during June 2007. At December 31st, 2007, $17.1 million was available to be borrowed under our line of credit, and $4 million of cash was recorded on our balance sheet.

EBITDA increased 61%, and pretax income increased 49% for 2007 compared to 2006. Net income increased 45%. Again, net income increased less than the increase in pretax income because of the combination of increased state income taxes and our federal tax rate increased 100 basis points because of our increased level of pretax income.

Diluted earnings per share increased 30.5% to $2.71 from $2.08 for 2006. Diluted shares for 2007 were 6,391,000 shares. 2007 was a very successful year.

Now I would like to turn the call over to David little.

Thanks for all the participants on our call today. I would also like to give a big thanks to the DXP people, customers, suppliers and shareholders who have made 2007 a great year.

As Mac has stated, DXP's supply chain services had organic growth of 29%. Innovative Pumping solutions had organic growth of 30%. And MROP for the last 12 months (inaudible) organic growth of 12%.

Our acquisition program had a very measured year with three strategic purchases of Delta, Indian Fire & Safety and Precision Industries. All three are very important to our future. And even though Precision was slightly negative in the fourth quarter, we believe they will have a very positive growth of both the top line and the bottom line for 2008.

Our outlook through 2008 is very positive, despite what is happening to our stock and our stock market. We have got a field survey that I would share -- of our customers -- and I thought I would share some of the results. When we look at the oilfield customers, we see the market remaining strong. Refinery, strong; chemicals, good to strong; manufacturing, down; ethanol, strong; power, strong; steel, strong; styrene, bad; polystyrene, bad; ABS plastics, bad; [Havener good], strong; semiconductor, strong; general industry, good; food and beverage, good to strong; pipeline, strong; mining, strong.

When we looked at the drilling rig count, the worldwide is up 8% over last year. And we looked at agricultural being strong. These are a lot of our markets, and we feel really good about them, even though some of them are slightly down.

DXP's 2007 average price change, looking at product categories and what was the inflation factor of products was 4.63% last year, and we expect this to be slightly lower for 2008. Based on our understanding of the markets we serve and the fact that our growth strategies are taking market share from our competition, we believe that 2008 will be another great year.

My personal goals are as follows -- to be a great place to work, learn and prosper for each and every DXP person -- DX people, a $1 billion revenue Company by the year 2010. I've said that several times, obviously. Some people ask, what happens after that? And I guess we'll work on the next billion. EBITDA to be 10% of sales. I envision all service centers becoming supercenters over the next five years. My definition of a supercenter is that we have sales, local sales and support for all product categories that DXP represents on a local market need.

Innovative Pumping solutions to be worldwide, supply chain (inaudible) to be the biggest and best solution for the industrial customer and wants to maximize their supply chains. I am also in favor of multiple brands such as Precision, Delta, Ram, DXP and multiple service centers in a single market. We have all from small entrepreneurial companies, and it is my desire that we keep the entrepreneurial shift as we become one company, DXP.

I am excited about the fact that we're blessed with a vision that is unique in the marketplace. I'm excited that we're blessed with customers that see that our vision helps make them a better company. I'm excited about the progress we have made and about our successes. I'm excited about the future of DXP and the generation of DXP people that are eager to embrace the challenge and opportunities of making DXP a great Company for generations to come.

Thanks for all the participants, and now we will answer any questions you might have.

(OPERATOR INSTRUCTIONS), Matt Duncan with Stevens, Incorporated.

Congrats on a great quarter. The first couple of questions I got are really with regard to Precision. And I appreciate the commentary that you gave us there. I'm curious if you can talk a little bit about maybe the revenue impact of the new integrated supply deals that you said Precision has signed. Since the deal closed, are these larger deals, medium-sized deals? Kind of what is the impact of these deals?

They are smaller. As you know, as we all should know, that Precision lost two major contracts in 2007 that represented 25% of their business. Since that time, they have signed two large contracts, one of which was kind of sales had been deferred really into 2008. And so they are coming, they haven't gone away, but they didn't happen as quickly as we would like.

In the meantime they have signed several, I would say, $3 million type deals. One is an extension of an existing customer. And I think there's two others that are brand-new.

Then on top of that, given that they have now signed these new deals, despite the fact that one of these larger ones is ramping a little slower, do you think those offset each other, and Precision is still unable to do the roughly $300 million in revenue that you guys expected it to do in 2008 when the deal closed?

We're not going to give guidance on what the sales should be, but I will say that we're very optimistic -- they are very optimistic that they are going to have a really good year. I think there was some sort of indication that they would get back to where they were in 2006 or greater. So we feel good about that.

You gave us the growth rate for your three different businesses in the full year of 2007, and I'm curious if you have got the organic growth in front of you for service centers, supply chains services and the Innovative Pumping solutions there in the fourth quarter?

Yes. Supply chain in the fourth quarter, the growth rate -- organic growth rate, was 15.7%. For Innovative Pumping solutions it was 67.1%. And for MRO sales by our service centers, it was 10.95%, so 11%.

I know LIBOR has been moving down, and you guys borrow a lot against LIBOR. So I'm curious what your average interest rate is today.

Well, that sounds like a question I ought to know the answer to. I don't know what the average has been for the first quarter. I know we just renewed a small LIBOR contract at 3.08% yesterday, and so with the 125 added to that, it was 4.3-something.

Pretty soon that LIBOR plus 1.25 should adjust to download a little bit, correct?

It should.

David, kind of more for you. I am just a little bit more curious about what you're seeing and hearing from the marketplace -- and I appreciate the survey you went through there for us -- about what you're hearing from some of your different end markets. But just anecdotally, maybe you can talk a little bit about what you guys are experiencing so far in the first couple of months of 2008, and what you're seeing out there in the marketplace, and sort of what are your customers telling you to expect from them in 2008?

Well, our guys are very positive. And when I say our guys, I'm really drilling down to our salesman, which have the voice of the customer and speak to the customers every day. And so they feel really, really good about this year, certainly a lot better than what we read in the newspaper.

The first two months have been good. February, slightly better than January, and January was good. So we are really not experiencing or seeing anything like what we keep reading about.

Acquisitions, what is your thought on acquisitions going forward? What does the pipeline look like right now? And do you expect to continue making acquisitions throughout this year?

Well, we already -- we purchased Rocky Mountain Supply, which we feel really good about. They are selling bearings and valve transmissions to the agricultural industry. And we have other deals. We're always working on deals. We always have a pipeline of deals. So, given the right deal, we're going to continue to pursue acquisitions. We don't feel -- when I say -- even last year, we did three, and I used the term measured. I use that because it's not something we feel like we have to do, but it's part of our growth strategy of getting to $1 billion is to do acquisitions, and so we want to do accretive acquisitions. And of course Rocky Mountain Supply, I think, was done at 4 times EBITDA, so it was very accretive.

Thanks, guys. Congrats again on the good quarter.

Paul Resnik with Dutton Associates.

Good morning, and again a great quarter. First of all, I would like to say that you're getting better and better on these quarterly conference calls. You're covering everything. And what you did cover, your first questioner just made sure he nailed everything. So it leaves me with me with the only question of when do you expect to get your 10-Q done?

The 10-K?

The 10-K, excuse me.

It may not be filed until March 17th.

Murrey Wanstrath, Bonanza Capital.

Innovative Pumping, can you give the dollar amount in that category?

For the quarter?

For the year.

For the year it was $87 million.

When you guys look at that line of your business, amazing growth 2007 from 2006. What are your sales guys telling you, and what's the environment there from a capacity standpoint?

That's a great question. We're running into two points of capacity. You said capacity. One is that, as you know, part of the Innovative Pumping solutions is that we buy a pump from a National, [Well, Gouls], or Sulzer Bingham or somebody like that. So their leadtimes are pretty long.

Then our own capacity strength, even though if you remember, we enlarged our [5.9] facility, and we fluctuate with production based on how many shifts, whether we're running three shifts, two shifts or -- I don't guess we ever get below two shifts. But we're running into some capacity. So I think they are projecting another really, really great year. They really make a lot of money over there. Their margins are higher than our MRO business. But I don't think we expect to see the same growth rate that we've had last year, even though I think we're really happy with the fact that we will have a nice growth rate. It just won't be as substantial.

And looking out, is that a -- the mix inside of Innovative Pumping, is that similar to where it's been in the past, offshore, some oil patch?

Over the last three years, and we expect this to continue, is we've had a lot more pipeline jobs. We still are doing offshore. We actually had some onshore jobs. We were also talking yesterday about some jobs in Wyoming and things like that. We're still doing the Chevron South Africa type stuff that is offshore. But there's a lot of pipelines stuff, pipelines domestically and offshore.

And back to Precision, you are four months or so into this thing -- five months, any positive or negative surprises with -- you wouldn't call it the integration, because you're not going a whole lot of that -- with how things have progressed?

We're actually surprised by the fact that some of the ideas being generated is to integrate quicker. So we look at that as being positive, getting everybody on one computer system. And then also the fact that they have what we'll call these product managers, but they are really, really good. And I've talked about we want to maintain expertise around the products we sell. We don't want to become just a general one star catalog house.

So they have a structure and some key people that really head up, maintain the fact that they are a General Mills supply company and that we are going to be the best General Mills supply company we can be, the best pump company we can be. And they have positions that we're leveraging at DXP, and we are pretty excited about that.

Then on the integrated supply side, they are really, really good at managing big volumes of data better than we are. So they are bigger in integrated supply than we are, so we are learning a lot from what they are doing. And we're actually using their data group as data management of some sort.

And then, of course, purchasing power and rebates and things like that -- we're all over those things. So there's a lot of interaction between the two companies, and it's very positive.

Does this change your perspective in shortening the timeframe to maybe get the 10% EBITDA margins, or is that still kind of just a long-term goal?

Well, they have adopted [allots]. We call that our -- they call it their -- what do they call it? I don't know. Anyway, we have programs that help us raise our margins. They have adopted those programs. I think the timeframe is getting shorter. I think Precision obviously took us back a step because their EBITDA percent of sales is not as high as ours. So that took us backwards a bit. But on a go-forward basis, they understand that that's where they need to be, and they are excited about getting there. Again, I think it's all positive.

Great. Good quarter, guys.

(OPERATOR INSTRUCTIONS). Schon Williams of BB&T Capital Markets.

Can you talk a little bit about some of your 2008 margin initiatives? Can you talk maybe about some of the super center conversions? Did any of that take place in Q4? And then maybe also some comments on pricing. I know you have been trying to implement a new pricing matrix. And I was actually surprised to hear that you thought pricing might be coming -- I mean, I guess, decelerating a little bit in 2008. Can you just talk a bit about those two points?

I think the deceleration of pricing was talking about inflation.

Right, so I guess I'm surprised that, given what we have seen on some of the commodities side that you actually see inflation decelerating a little bit in 2008.

Yes, we looked at the price increases we got from our manufacturers in 2007 across -- of course, within different product groups it would be a different number, but as an average of what we purchased from them. We'll call it our inflation index was 4.63%. What we're seeing this year, again, can vary. If you're talking about special alloys and steel and the pump industry where, you know, we're seeing maybe 8, 9% increases. Then when we're seeing gloves and things like that, well then the increases are smaller. We just felt like overall that the number was still going to be north of 4%, but it wasn't going higher is sort of the point, and we thought it would be slightly less.

Okay. And you have no trouble passing that on at this point though?

No.

No.

Just back on the supercenters, any progress there to report on?

Yes. We have -- I wish I could remember the number. I think we have eight -- by our definition we have eight super centers.

Precision actually has three, by the way. So when they looked at what they are doing and using our definition, they had three. I believe they think they are going to have three more this your. And then DXP has 11 under construction. And I thought this was pretty cool -- I've learned this yesterday myself -- was that under construction means that they have hired the people, which is the hardest part to do, and they have an internal measurement that says until they are doing $500,000 in that product category, it's just under construction. So they've really done it, they just haven't realized the revenue growth from it yet.

And then back on, just a follow-up to Precision, are you guys still thinking -- you talk a little bit about the integration there and the progress, are you still looking at $2 million to $4 million in savings? Has that number changed? Do you think, in terms of timeline, are we looking at that happening in 2008, or is that more of a 2009 event?

We're still good with that number, and it is a 2008 event.

Can you tell me what CapEx was in Q4 and then what you guys expect in 2008?

I know I have the total year CapEx in front of me. It's $1.9 million. I will see if I have the quarter listed here some place for you. I don't know that I do have that.

Most of our CapEx is going to be IT-related. We'd normally -- like we have initiatives to open up four new stores, but we would lease the space. So most of that is IT. Our IT department is doing a really great job of keeping up with our acquisitions and our growth. And they just finished this past weekend a new project to get our backup systems and a whole bunch of stuff done. And I can't compliment them enough.

Any reason why that would accelerate in 2008?

We're talking about such a small number that it's going to be in that range of $2 million to $3 million.

Thanks, guys, and congrats on the quarter.

Ray Rund, Shaker Investments.

You had a great quarter, and I would like to congratulate you on that. But you were going so quickly at the beginning, I had trouble following you. I was wondering if you could just restate or re-mention what the sales were for Precision Industries in the quarter, if you gave that, and what the sales by the businesses acquired in the last 15 months were?

Precision sales in the fourth quarter were $59.9 million. And then is your question kind of broken down by our three business solutions, supply chain, Innovative Pumping solutions, are those the --?

In last quarter I believe you gave your core sales and sales by businesses that had been acquired in the last 15 months, is the way you had broken it out. I was wondering if you were defining it in the same way for this quarter, if you had gone to a new --.

I think at last quarter in the press release we released it one way, which is saying, okay, how many sales -- for businesses acquired during the year what were their sales? Then we also in the conference call, I think, disclosed what I would call kind of a same-store sales basis, where we were actually backing out the 2007 sales even of -- to the extent that if we only bought a business on July 1 of 2006, then we backed out the first six months of sales in 2007. So we were doing a comparison of having six months of sales in 2007 versus six months of sales in 2006.

Well, if you could give it on the same basis, then.

Well, over the same basis, the sales that we backed out for the fourth quarter was $68.9 million.

So that would be the total sales, including Precision, for businesses that were required?

That's right. It's backing out all of Precision sales. It's backing out sales for Indian Fire & Safety, Delta. And it's backing out a tiny amount of sales that we brought in the fourth quarter of last year where we purchased Safety Alliance, Safety International and Gulf Coast Torch. There were actually six companies that were -- that that number is backing out from sales. Do you want it for the year?

Sure.

The amount we backed out for the year was $121.1 million. And then with that one, it's the same companies, plus we're backing out some sales for the production pumps that was acquired in May, I think -- May or June of 2006.

There are no additional questions at this time. Ladies and gentlemen, this concludes the DXP Enterprises Inc. fourth quarter 2007 results conference call. You may now disconnect.