DXP Enterprises Inc (DXPE) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the DXP Enterprises, Incorporated first quarter 2008 results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS).

I would like now turn the conference over to Mr. Mac McConnell, Chief Financial Officer. Please go ahead.

This is Mac McConnell, CFO of DXP. Good morning, and thank you for joining us. Welcome to DXP's first quarter 2008 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 events or results can differ materially. A detail 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, and DXP assumes no obligation to update that information. I will begin with a summary of DXP's first quarter 2008 results. David Little will share his thoughts regarding our 2008 results. Then we will be happy to answer questions.

Sales for the first quarter increased 101% to $168.5 million from the first quarter of 2007. Excluding first quarter 2008 sales of $73.6 million from businesses acquired in 2007 and 2008, sales for the 2008 first quarter increased 13.5% from the 2007 first quarter. Sales for our supply change solution increased 312% to $40.2 million compared to the 2007 first quarter. Excluding sales of acquired businesses, supply chain sales increased 15.1%. Sales of Innovative Pumping Solutions products increased 23.7% to $22.9 million. Sales of MRO products by our service centers increased 90% to $105.4 million. Excluding sales of acquired businesses, sales of MRO products by our service centers increased 9.8%. Sales by Precision Industries were $63.5 million for the first quarter of 2008. Gross profit for the quarter increased 84% from 2007. Gross profit as a percentage of sales decrease to 27.3% from 27.8% in 2007's first quarter, primarily as a result of lower margins on sales of pump related equipment and the acquisition of Precision Industries in September 2007. Precision's gross profit margin for the first quarter of 2008 was 25.1%. SG&A increased 94% compared to the 101% sales increase and the 84% gross profit increase. SG&A for the first quarter of 2008 includes $1.2 million of amortization of intangibles compared to only $124,000 of amortization of intangibles in the first quarter of 2007. Excluding the $15.8 million of SG&A expenses associated with businesses acquired in 2007 and 2008, SG&A increased $1.3 million.

This increase is primarily the result of increased payroll related expenses associated with hiring more personnel for the purpose of increasing sales. As a percentage of sales, SG&A decreased to 21% from 21.8% for the first quarter of 2007. Interest expense increased 134%, primarily as a result of increased debt incurred to fund the acquisitions and internal growth. Long-term debt increased $3.2 million during the quarter, primarily as a result of the acquisition of Rocky Mountain Supply in the first quarter of 2008. EBITDA increased 79% and pre-tax income increased 50% compared to the first quarter of 2007. Net income increased 46%. Net income increased less than the pre-tax income increase because of increased state income taxes. Diluted earnings per share for the quarter increased 23% to $0.80 from $0.65 for the 2007 first quarter. The first quarter of 2008 was a very successful start to what we expect will be a very successful year. Now I would like to turn the call over to David Little.

Thanks, Mac, and thanks to all the participants on our conference call today. I am pleased to report that we continue to out perform our peer group with substantial growth in sales and net income. We continue to successfully execute our acquisition strategy and we've produced organic growth of 13.5% on a quarter-over-quarter basis, resulting in slightly more than doubling total sales. As Mac has stated, all three segments reported organic growth, with Supply Chain Services growing 15%, Innovative Pumping Solutions growing 24%, and DXP Service Centers growing 10%. We believe that the markets we serve are good, and we continue to take market share away from our peer group and the small independent distributors. We continue to be successful in finding acquisition targets that are profitable, and our integration process continues to produce top line and bottom line growth. Specifically, Precision has grown sales since we acquired them, even though at a slower rate than expected because of the customer slowness and what they wanted to achieve versus how fast we can go and what we scheduled for.

As stated, we are very pleased, though, with our bottom line growth of 7%, and this was achieved through efficiencies and gross margin improvements. Our gross profit margins were as expected, and we feel confident that they will improve slightly as the year progresses because of our price matrix programs. Selling expenses were about $1 million higher than normal because we had invested in the necessary personnel to start up 14 DXP Super Centers and three new Service Centers, which resulted in 51 new employees. We would normally have only three or four DXP Super Centers in process at the same time, and only -- and probably one to zero new Service Centers. We do look forward, though, to the organic growth that these efforts will produce on the top line and bottom line within normally a one year period. EBITDA grew 78%, but as a percent of sales decreased to 7.6% because of expenses discussed already. In some -- we also had, though, some benefit in interest expense. We expect this to improve, as our goal is to be at 10% long term and we expect to be north of 8% for the second quarter. Net income grew 46%, which was negatively affected by the amortization of intangibles created by the goodwill we pay for buying profitable companies. I must say that all of our acquisitions to date have been accretive, which is a function of buying them right and our integration process. And of course, we have grown EBITDA and cash flows substantially. We expect improvement in sale and net income in the second quarter, and we feel good about the analyst consensus for the year. Thanks again to all the participants on our conference call today. We will now be glad to answer your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Matt Duncan with Stephens. Please go ahead.

Good morning, David and Mac, and congrats on a nice quarter.

Good morning, Matt.

Thank you, Matt.

First question I've got, David, I want to talk more about these Super Center conversions. You guys are having a lot of success finding the sales guys that you need to convert Super Centers. Remind us, number one, how many do you have that you would call completely converted -- so you would actually call them a Super Center today, and then I guess you said 14 that you have got the sales people hired that you are in the process of converting?

Yes. In our press release, we said 12, but I was corrected and it's actually 14. We have eight and we still have eight. We go from what we call in construction to being a full-fledged DXP Super Center when we have three or more product categories that are doing over $500,000 a year. So if we have an existing product category, the branch is normally doing around a couple million. So adding a new product category, when we've added two people to start that up, we feel like we're slightly profitable at the $500,000 range. So that's when we would call it a Super Center.

Okay. And do you think there's anything that's changed that's making it easier for you to find these sales guys or are you just getting more aggressive at looking for them?

Well, I think what happened was we were very aggressive at trying to find them all of last year. And it was a slow process, and then it just all kind of came together in the perfect storm.

Okay, so you are finding guys successfully. Are you going to continue to try and find more or are you going to wait and kind of let these 14 ramp before you go out trying to find more?

Well, we are always -- we are always in the process of looking for new store opportunity, an opportunity to create new product categories within the same-stores and you know, actually marketing and sales, we actually added 81 people in the last two quarters that are -- some are just, the addition from the 51 to 81 is just normal growth, just normally finding good salesmen to increase a product category that we are -- that we are already in substantially. So we continue to make investments to take market share away from the local independent mom and pop.

So it would be safe to assume that these investments you think are going to continue to help you guys grow organically 10% plus.

Yes, that's the plan. If we look at Precision for a second, I was pleasantly surprised by the $0.07 of accretion you guys got there in the quarter. That was a nice improvement over the fourth quarter. Was there anything unusual this quarter or is that just the sales growth starting to show up there at the bottom line for those guys? No, I think they're on a pretty tight expense budget, and they're start to go have incremental sales growth and that's helped them, plus they, they have installed their own price matrix system and so they're having some market improvement.

Okay. And then if I look at the rest of the year, David, for Precision, is there any reason to expect that that accretion on a quarterly basis should not continue to grow as long as you have got sales growth there and interest rafts hold where they are, should we expect Precision to increase and get better each quarter throughout the year?

I would say, yes, and -- but I would also caution you that it will, it won't be substantial -- it's not going to go from seven to 14 to 20 and stuff like that, because they are having difficulties with ConAgra, which is the largest contract and somewhat Hershey, where the customer is not able to go as fast as we can, and so they have budgeted substantially more sales growth than they're going to be able to achieve. Now, that sounds negative, but fist of all, it is the customer's fault -- it's not market conditions. It is not our fault. But at the same time, they are growing sales -- I think they grew sales close to 15% which is pretty nice. I compliment them on that. I compliment them on the rest of their plan is to continue to grow sales and those incremental sales growth will be profitable. So therefore, there will be small pluses on the accretion number.

So David, if I am hearing you correctly, at the time you guys made that acquisition, you had talked about those guys trying to do something close to $300 million in revenues this year. Maybe it will be a little bit below that, but they're growing profitably, and it's the customer holding you up, not anything at Precision?

That's correct.

Okay. Fair enough. And then moving on, you're comfortable about the marketplace and you said your markets remain strong. Are you seeing any weakness in any markets out there or are for the most part all of your markets remaining pretty healthy right now?

Well, we mentioned the markets last time, and there are certain markets that are -- that are weaker than others, but there are a lot of markets that are very strong and I am very pleased with our 13.5% organic growth and it was across all segments -- meaning not only capital projects but our kind of MRO, day-to-day business was 10%. Integrated supply is a way of capturing market share. So we feel good about our strategies and we feel good about the overall market.

Okay. Last thing here, acquisition pipeline, you guys have obviously done a good job making accretive acquisitions. What are you seeing out there for acquisitions right now?

Well, we have -- we feel good about that. That's certainly part of your continuing strategy, and we would probably like to leverage our balance sheet a little more to create more shareholder value.

Okay. Thanks, and congrats again on a good quarter.

Thanks.

Thank you. Our next question comes from the line of Holden Lewis with BB&T. Please go ahead.

Thank you. Good morning.

Hi, how are you?

Hi.

You know, when you look at sort of the acquisition contribution, I think if you take the $0.07 from Precision -- and I am assuming sort of Indian Fire, Rocky Mountain, maybe whatever is left at Delta might account for another potentially five pennies or so, and maybe you can give us a little bit of color as to what that number might be. But the point is, when you sort of take out the accretion from acquisitions, you are probably looking at kind of mid single digit type growth in EPS, you know, against a 13.5% organic revenue growth rate. Can you just give a little -- is it just, you know, the people -- or can you just give a little bit of color as to why sort of organic margins were down in the quarter?

The -- I just -- the only thing I can point to in our analysis is just an unusual amount of expenses in the quarter in terms of new store openings and the 14 Super Centers that we have going on all at the same time. We always want to have some of that going on. This is just an unusual amount of opportunity that we have that, that has kind of hurt the expense side of the equation and all of that, all of that is in the number that you are talking about, which is it is double digit. It was 10% of our DXP Service Centers, organic growth was 10%. But their expenses are higher than that.

Okay. And what about -- I think you referenced something on the pump, the lower margins on the pump related equipment business. Can you just go into a little bit more color on that?

Mac, that's some information we're -- we had -- we did have a job -- we are not perfect -- that had very, very low margins. I don't think we expected that when we didn't quote it that way. But I think that's how it turned out. Mac, you want to?

No. I think the margins do vary. They're not always -- each quarter has different gross profit, and I think last year, first quarter was particularly good margins on Innovative Pumping Solutions, and I think this quarter's were lower than normal.

Okay.

I'd give a little more color on two things, that PMI specifically had very, very high margins and their margins for the first quarter were not as high as normal and they expect to -- to have higher margins for the rest of the year.

Okay. And just, I might have missed something. In terms of the high Super Centers and all of that, you said this quarter you added 51 people. Is that right?

Yes.

And this quarter you are working on 14 Super Centers whereas last quarter you were working on 12?

No. No. We had -- no, that's not correct. We have added 51 people sort of over the last two quarters.

So that was 81 over the last two quarters.

Yes. It is, well, it is -- it is 81 over the last two quarters. We have added 81 sales people. We have added a lot more people than that, by the way. But actually sales people, 81 sales people over the last two quarters. These new start up stores were started in the fourth quarter. The DXP Super Centers were started in the fourth quarter. And so it has been over the last two quarters.

Okay. 81 sales people the last two quarters, and how many store openings have you done?

There's at least three.

At least three. And that's separate from the Super Centers?

Yes, right.

Okay. And the Super Centers, you are working on 14 of those currently.

Right.

Was that 12 in Q4 or is 14 the right number to use?

No, 12 was right in Q4.

Okay. You have actually sort of upgraded your efforts as two more [inaudible].

Correct.

Okay. And then can you just, you know, back on to IPS -- on the IPS business, give us a little flavor for backlog, give us a little flavor for orders. You know, I mean, are you still comfortable -- or are you comfortable with sort of the -- you know, sort of a flattish revenue rate there? Are you seeing business conditions such that maybe that's not possible this year? Where do we -- can we get an update there?

We did see a little bit of slowdown in quoting activity toward the ends of last year, but that has really picked up and so we are -- we feel good about that. Of course, we went into the year with a backlog of -- that was close to being equal to the previous year. So, you know, I think the IPS people feel really good about this year exceeding last year.

Exceeding last year?

Yes.

Okay.

And that -- you know, that's sort of, kind of overcoming the hurdle of having one job that was 11 point some million.

Right. Obviously, Q4 looks like a tough comp, but you think for the whole year you should be able to achieve revenues at or above what you did in 2007? You are still on pace for that.

Yes.

Okay, so by that I can assume that backlogs at the end of Q1 were in excess of backlogs at the end of 2007?

Yes, yes.

Okay. Great. Thanks, guys.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from the line of Paul Resnick with Dutton Associates. Please go ahead.

Thank you. Very nice quarter, guys. First I'd like to thank Matt Duncan for asking just about all of my questions. I do have one question. When you acquired Precision, you were hoping that this would add to your purchasing power and improved your -- your market on that basis. Are you begin to go see any -- you were kind of focusing more on the second half of the year. But I was wondering if you were beginning to see any improvement in that regard.

Yes, there's a, there's a meeting every Monday at 9:00 for the two companies to get together and strategize about who they're going to meet with and whether we are going to switch maybe to their products or they're going to switch to our products and give us the best deal. And they're being very successful and we feel like we are on target to do north of that $2 million number.

Very good. That's all I have got. Have a good day.

Thank you.

Thank you. Our next question comes from the line of Raymond Rund with Shaker Investments. Please go ahead.

Thank you for taking this question. Mac, I have gotten a little bit confused with trying to account for all of the different pieces of the business because you have been adding companies and you know, acquiring businesses and there's a lot of moving parts. But the one question that I did have, which might isolate this is, if I look at the first quarter of '07, your operating income was $6.7 million, and as I look at the first quarter of '08 your operating income is 10 point -- let's call it $6 million. Was the core business -- was the operating income of the core business year-over-year, did that improve and can you kind of talk about how much that contributed to the -- to about the, you know, the $4 million increase?

That's a good question. Yes, it did. It did improve on core business. I am trying now -- I really haven't calculated that number on an operating income level. I will do that now. I may need to get back to you on that.

Okay. Well, perhaps another way of asking part of that question, which might be easier to answer, just give me a clarification, when you talked about Precision being accretive $0.07, is that on an operating income line or is that on a net income line?

That's a net income -- net income after recording interest expense, amortization of intangibles, even restricted stock -- compensation related to restricted stock that was given to Precision and [voice].

Okay. So, then the next question from that is of the -- you are talking about the difference between the $0.80 and the $0.65; you are saying $0.07 was due to Precision, right?

That's correct.

So that leaves approximately $0.08 to the rest of the business in accretion, I guess, if you want to look at that.

That's correct.

Okay. So another way of looking at that is even over the increased share count, your core business added about $0.08 year-over-year?

Yes. Well, I mean, I have to admit there are a few other little smaller acquisitions --

Right.

-- there that have added a little bit.

But the bulk of that would have been from the core you think?

Yes.

Okay. Perhaps we can talk about the operating income line off line, but I appreciate you trying to help me triangulate on this. Thank you very much.

All right. Thank you.

Thank you. Our next question comes from the line of Holden Lewis with BB&T. Please go ahead.

Thank you, again. Sort of building on an earlier question about Precision Industries, can you talk about not so much where we are now, though I would be interested in hearing maybe what the margin trend has been in that business and if you know, your price matrix [operators] had a tangible effect -- but now that you have had it for six months, what are sort of your expectations, your plans, your anticipations about you know, perhaps getting more aggressive in terms of integrating the two businesses more completely? Can you give a little update on where you stand with that and what you might be able to get out of it?

Well, the first thing is they have had a pretty substantial increase in margins as it relates to the smaller accounts. In other words, if they have a large account and it is very competitive, then no software is going to raise the price on those guys. So you are really targeting the bottom end of your business, and they have done a nice job and I think that has resulted in going somewhere from 27 -- 24% to like 25 something. Then I think -- and we talk about integration. I'm a big believer -- I'm a big believer in the fact that you don't want to screw up something that is not broke. And so our integration process is limited to about three different areas. One is buying right, combining purchases. The other is a little unusual. I really like their model. They have these product categories managers, or it's a VP level position, where like they have a guy that really knows the industrial supply business. DXP did not have those people. So we are in the process of leveraging those people across DXP, and we hope that that will generate us more cross selling opportunities and a faster way of creating Super Centers. Then the last one is just administration and we are -- you can appreciate the fact that we are sort of under some pressure to always become SOX compliant, so we've elected to put them on our computer system, and frankly, that's probably going to be a higher expense before it's a lower expense, but it ultimately -- and it will take -- we are going to talk about it taking a year. They have a hundred locations that you've got to deal with. And they have some very sophisticated programming that is customer specific that we have got to deal with. And so it's going to take a while to put that together. And so we are trying to manage the expense of that the best we can.

Okay. And obviously, I mean, talking about the integration, the interest is to go and buy a company and have one plus one equal three when you do these things. I think you put a little number to sort of the buying right. I think it was 2 to 4, and I guess maybe you are talking about the low end of that. You know, the cross selling opportunities, the administrative costs or savings, I mean, have you gotten a little bit greater feel for what ultimately you think the savings amount is as you roll these things out and sort of at what point you think you're getting that full amount?

Well, no. First of all, we are not -- we are not trying to be a roll-up company. We are not trying to acquire people and think that one and one is going to equal three. That would be the first mistake to think that. The second point is, is that if we in fact could get one and one to equal two and a half, we would be really happy with that. And again, that's mainly because what we normally do when it's not Precision, because they are so big and it's only Rocky Mountain Supply, and as we speak we are putting Rocky Mountain Supply on our system, and there will be some administrative savings there; and more importantly -- and I don't know how to measure this -- is that we are going to provide them with products they haven't had in the past. So we are going to grow their sales and we don't really know how to measure the success of that. But we know it's there because we know that their business will grow, and a lot of these little small moms and pops a lot of times are not showing a track record of high growth. So we feel good about our ability to improve their bottom line slightly and to improve their top line 10% through organic growth of additional products. And so we are happy with that.

Okay. And just lastly, since you have the pricing matrix, can you talk about how much of your 13.5% organic growth rate -- how much of that can be attributed to price during the quarter? Do you have a good sense of that?

I think we are continuing -- I think last year we said that we had price increases that averaged 4%. Is that -- I'm trying to remember that number, Holden. You probably know it better than I do. But anyway, whatever I announced last time, and I think I said that we thought prices would slow in coming down. That's really not happened. I would expect to see another 4% overall level of price increases as commodity prices, as we know, are still high.

So of that 13.5, you think 400 basis points is from price and you think that that 400 basis points will be steady or you think it gets bigger?

Probably steady.

Okay. All right, thanks guys.

Thank you. Our next question comes from the line [inaudible] of Bonanza Capital. Please go ahead.

Yes, mine's been asked already. Thank you.

Thank you.

Where's [inaudible]? (LAUGHTER).

Our next question is a follow-up question from the line of Matt Duncan with Stephens. Please go ahead.

Hey guys, just to help clarify this organic operating income growth. If I'm doing my math right, Mac -- you may have this in front of you -- it looks like Precision at the operating income line added $2.2 million. If I give them all of the interest expense and assume that their tax rate is the same as your corporate tax rate and kind of back into it, they added about $2.2 million, so the rest of the operating income growth would have been maybe a little bit from the other smaller acquisitions. Am I doing this math right?

I agree with your $2.2 million.

Okay. And then, I guess, on the organic earnings growth, you guys do have a million more shares this year than you did last year correct?

Right.

So organic earnings would have been up more than that without that, then, right?

That's correct.

Okay. I just wanted to clear that up. Thanks.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and have a great day. You may now disconnect.

Thank you.