DXP Enterprises Inc (DXPE) 2008 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the DXP Enterprises, Inc. third quarter 2008 results conference call, on the 30th of October, 2008. Throughout today's presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (OPERATOR INSTRUCTIONS)

I would now like to turn the conference over to Mac McConnell. Please go ahead, sir.

This is Mac McConnell, CFO of DXP. Good morning and thank you for joining us. Welcome to DXP's third quarter 2008 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 third quarter press release is available on our website, at www.dxpe.com.

I will begin with a summary of DXP's third quarter 2008 results. David Little will share his thoughts later regarding these results, then he will be happy to answer your questions.

Sales for the third quarter increased 75% to $186.9 million from the third quarter of 2007. Excluding third quarter 2008 sales of $65.7 million from businesses acquired in 2007 and 2008, sales for the 2008 third quarter increased 13.5% from the 2007 third quarter. Sales for our Supply Chain Services increased 158% to $43.1 million compared to the 2007 third quarter. Excluding sales of acquired businesses, Supply Chain sales decreased 2%.

Sales of Innovative Pumping Solutions increased 22% to $20.2 million. Sales of MRO products by our service centers increased 68% to $123.7 million. Excluding sales of acquired businesses, sales of our MRO products by our service centers increased by 15.2%.

Sales by Precision Industries were $68 million for the third quarter of 2008, up $600,000 from the second quarter of 2008 sales of $67.4 million.

Gross profit for the quarter increased 75% from 2007. Gross profit as a percentage of sales was almost equal to 2007's third quarter.

SG&A increased 79% compared to the 75% sales increase and 75% gross profit increase. Excluding the $11.9 million of SG&A expenses associated with businesses acquired in 2007 and 2008, SG&A increased $5.5 million. This increase is primarily the result of increased payroll-related expenses. These expenses increased partially as a result of increased profits, which increased incentive compensation, and due to hiring more personnel for the purpose of increasing sales.

As a percentage of sales, SG&A increased to 21.1% from 20.6% for the third quarter of 2007. The majority of this increase results from the $1 million increase in expense from amortization of intangibles.

Interest expense increased 190%, primarily as a result of increased debt incurred to fund acquisitions. EBITDA increased 71.7%, and pretax income increased 51.4% compared to the third quarter of 2007. Net income increased 56.9%. Diluted earnings per share for the third quarter of 2008 increased 54% to $0.51 from $0.33 for the 2007 third quarter.

Sales for the first nine months of 2008 increased 97% to $543.2 million from the first nine months of 2007. Excluding the first nine months 2008 sales of $215.4 million from the businesses acquired in 2007 and 2008, sales for the 2008 first nine months increased 18.9% from the 2007 first nine months.

Sales for our Supply Chain Services increased 248% to $125.6 million compared to the 2007 first nine months. Excluding sales of acquired businesses, Supply Chain sales increased 5.4%.

Sales of Innovative Pumping Solution products increased 41% to $74.7 million. Sales of MRO products by our service centers increased 83.7% to $342.9 million. Excluding sales of acquired businesses, sales of MRO products by our service centers increased 15.2%.

Gross profit for the first nine months increased 89% from 2007. Gross profit as a percentage of sales decreased to 27.6% from 28.8% in 2007's first nine months, primarily as the result of lower margins on sales by Precision, which was acquired in September of 2007.

SG&A increased 96% compared to the 97% increase in sales and the 89% increase in gross profit. SG&A for the first nine months of 2008 includes $4 million of amortization of intangibles compared to $1.3 million of amortization of intangibles for the first nine months of 2007.

Excluding the $43.9 million of SG&A expenses associated with the businesses acquired in 2007 and 2008, SG&A increased $12.6 million. This increase is primarily the result of increased payroll-related expenses. These expenses increased partially as a result of increased profits which increased incentive compensation, and hiring more personnel for the purpose of increasing sales. As a percent of sales, SG&A decreased to 21.2% from 21.3% for the first nine months of 2007.

Interest expense increased 150%, primarily as a result of increased debt incurred to fund acquisitions. Long-term debt increased $68 million during the first nine months of 2008, primarily as a result of the acquisitions of Rocky Mountain Supply in the first quarter of 2008 and PFI in the third quarter of 2008. Long-term debt at September 30, 2008 was $174.2 million.

Working capital increased $43 million as of September 30, 2008 compared to December 31, 2007. Availability under our lines of credit increased $16.9 million as of September 30th compared to December 31, 2007, primarily as a result of increased accounts receivable and inventory.

EBITDA increased 80% and pretax income increased 60% compared to the first nine months of 2007. Net income increased 62%. Diluted earnings per share for the first nine months increased 48% to $1.38 from $0.93 for the 2007 first nine months. The first nine months of 2008 were very successful.

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

Thanks, Mac, and welcome, everyone. I want to thank our DXP people, customers, suppliers and shareholders for a very strong third quarter. We weathered two hurricanes and the sacrifices our DXP people made to help each other and to help service our customers' needs went way beyond the call of duty. I am very proud and grateful for these super acts of humanity.

I want to welcome Vertex Distribution, our latest acquisition, to our DXP family. We are excited about the future together, as they can help us with offshore sourcing of products and we can help them with better inventory management tools and sales growth through our DXP sales channels of Supply Chain Services and Super Centers.

As we gain market share by selling more product groups to existing customers and we accomplish this by creating Super Centers and Supply Chain Services, it becomes very important that we do not become generalists, but we maintain our expertise by being the very best pump company or the very best bearing MPT company or very best safety company mills supply we can be.

And to give this more focus, I am pleased to welcome Skip [Geesing] as our new VP of Rotating Equipment, who will lead the charge to make sure we stay the best technical pump company in the world. His mission is to grow our pump and service business, top line and bottom line, through our Super Centers, Supply Chain Services and Innovative Pumping Solutions channels. Similar positions will be created across our different product categories in 2009.

In 1996 we had a dream to be a single-source supply to the industrial market. We did a reverse merger and became a public company with very limited financial resources. We then bought companies that were turnarounds in new product categories we knew very little about. In 1999 to 2002 we had a great strategy with a declining market and we simply could not execute that strategy. Through a lot of really hard work, we built IT processes, the Customer First Center, which is a call center, a BDC which could ship consolidated shipments and developed incentive plans around growth.

We put this great strategy with the right people and developed processes that allowed us to start executing -- the right strategy with the right people and the right processes that allowed us to simply execute. Since 2003, our performance speaks for itself. DXP people are winners and we are passionate about growth because that is how we are paid.

While today the strategy is more refined and the processes have improved and we have a lot more of the right people, most important, we can execute. And I believe we can execute in any environment.

Our major markets of food, beverage and energy continue to be good. Oil prices of $60-plus dollars per barrel and gas prices of greater than $6.00 an Mcf have not affected activity to date. While the worldwide financial problems and credit disruptions indicate some near-term uncertainty in some markets, our significant ability to grow Service Centers at the expense of small competitors, our Supply Chain Services ability to create cost savings for industrial customers, plus the fact Innovative Pumping Solutions serves the production side of oil and gas, gives me great comfort that we will continue to outperform the market.

When we think about Super Centers, we think about adding local talent to an existing DXP store. We feel like that as our small competitors become weaker, that those opportunities will increase for us, which will allow us to create Super Centers faster.

On the Supply Chain Services we have customers that when times are great, they're reluctant to give up control of outsourcing, purchasing, inventory management, etc. When times get a little soft it's our customers that are looking for cost savings that DXP can provide them through our Supply Chain Services, so we see that as being a real plus in the near future.

On the Innovative Pumping Solutions side, these are long-term projects with major oil companies. They come and go, they're very long-term natured and there is certainly still some lumpiness to that market. But long-term, these projects and our quoting activity have been excellent and we have not seen any jobs cancelled.

I'd now like to share with you some added non-financial statistics. When we think about DXP's locations, we went from 117 locations in the second quarter to 122 Service Centers across the country; we went from 65 Supply Chain Service locations to 66. DXP has 67 of these Service Centers, Precision has 55, including a new one in Mexico. We've gone from 3 regional distribution centers to 6 regional distribution centers, with the addition of Vertex Distribution. We still have 6 fabrication centers and 1 national call center.

When we think of Super Centers, in the second quarter we had 14. This quarter we now have 21; 7 of those come from Precision -- they had 3 and now it's 7. And DXP has gone from 11 to 14. DXP has also gone from 11 Super Centers under construction to now we just have 7 and Precision has 3 under construction.

On the Supply Chain Service side of our business, this has been a slow year for us and we're a little surprised by that. But as we head into 2009, we have a very substantial backlog and we see this as being a real growth area. We have simply gone from 65 SmartSource locations to 66; 12 are under DXP's wing; 54 are under Precision's.

Lastly, I'll share with you our employee base. We've added 81 people since the second quarter to the third quarter. Current number of new personnel for the year is 329. Total number of personnel is 1,910. DXP is 1,240 of those and Precision is 670. Total employee count at 12/31/07 was 1,581; DXP 956 and Precision 625.

I thank you for your time and I now think we're open for any questions you might have.

(OPERATOR INSTRUCTIONS) Matt Duncan of Stephens, Inc.

David and Mac, congrats on a good quarter. First question I've got, David, I don't know if there's any way you can try and quantify for us the impact the hurricanes had on you guys and maybe if you can't put a number on it, just maybe qualitatively if you could talk a little bit about how the hurricanes impacted the quarter so we might be able to get a feel what it would have looked like without those hurricanes?

Well, Gustav and Ike significantly affected Delta, who had operations in Mobile, Alabama. We had operations in New Orleans, Lafayette, Baton Rouge, Lake Charles, Beaumont, Freeport, Houston, Conroe, La Porte -- and I'm sure I've missed a couple. We've had a significant number of locations that have been affected, I guess right at the end of August, with Gustav going through during that time and then just almost right on its heels was Ike.

It had an effect in terms of the fact of number of days we were shut down, the number of days that our customers were shut down. It had an effect on expenses, because we were feeding people, getting diesel fuel, running generator sets, etc., to deal with the situation for our customers and our fellow employees. And all that is hard to quantify. We can guess that it was several millions of dollars. And so, I don't know that I'm comfortable putting a number on it.

I've looked at it in pretty good detail. I will say that the destruction that happened will create new business as we move forward. Some will show up immediately in the fourth quarter and others will show up throughout the year.

Okay, that's helpful. If you look at the 15% organic growth, which is very good in this environment that you experienced at your Service Centers, can you talk a little bit about what you think is driving that and maybe give us a feel for how much of that organic growth is these Super Center conversions?

Again, I don't think we can quantify that, but I do think that the Super Centers, as you know, while they're under construction, pretty much means that they're more expensive than they're producing. And then as they become Super Centers by our definition of being $0.5 million in new product sales, we feel like that's a point where we start making money on them.

And of course, as we look at hiring, you know, the competition, you know, a guy that's selling a couple of million dollars a year and he's willing to change and come to us, we normally see that he brings about half of his business and half stays with his present employer. We see those opportunities increasing, so that will make that a run-rate of getting to $0.5 million much quicker and we'll be able to hire better people that have market presence and etc. So that program will work very, very well.

When we take that business, we're taking it away from the small competitors and then we have customers that ultimately get real comfortable with thinking that every time they have a need for an industrial product call those DXP guys, they have it and they have everything. So, that's sort of our goals there. It is working. Just normal cross-selling is working and then we've opened some new stores that are working. And so, all that is contributing to that 15%.

Okay, thank you. As you look at the month to month progress throughout the quarter, how did your sales do month by month and maybe if you could give us some color on what October has looked like so far?

October is running ahead of September and certainly given all the things I read in the newspaper, I'm very happy about that. I think that from a month to month point of view -- Mac, you've got that in front of you.

In terms of gross sales, July was definitely our slowest month and business increased as we went through the quarter, each month got stronger.

Okay, so that trend then has continued despite the headlines and a slowing economy. You guys, if I'm hearing you correctly, your continuing to see sales increase each month?

That's correct.

Okay. So maybe David, if you think about a slower economy in 2009 -- and I know you made some comments about this in your prepared comments, but as you look out to 2009 it looks like end market conditions may be more difficult. Maybe you could give us a feel sort of what you're hearing from some of your various end markets and which markets do you think may be weak in 2009 and then think about how that impacts your business? Do you still expect to be able to put up pretty good growth in 2009, despite the economy?

When we think about markets, the one that's a little soft and affecting Precision more than us, and it's not Precision's food and beverage business, but it's the OEM, just the general manufacturing business is really the only softness we're seeing. And again, I think we contribute that a little bit to as the dollar has strengthened maybe exports have diminished a little bit.

Besides that, food and beverage is really good, despite commodity prices coming down, our mining business is very good. Despite oil and gas prices coming down our oil and gas business is booming. We don't see any pull back in that area. And so, as long as those trends are stable and those markets are stable, then I don't foresee us having any significant amount of business through reduced consumption, let's say.

To the extent that we have some, we think we'll overcome that and be able to grow our business. To the extent that six months from now we find ourselves that business fell off the table 50%, you know, we're not going to be able to overcome that. But from a realistic point of view, we feel that our markets are pretty solid, with the exception of manufacturing, which has gotten a little soft, and we feel like we can grow our business.

Okay. Then last question here and I'll jump back in the queue. Mac, you gave us the sales for Precision. Could you give us PFI sales and then also the EPS accretion from both Precision and PFI?

PFI sales were $6.4 million for the quarter and the accretion for PFI was a penny, it was $0.01. And of course we factored in all the interest from the amortization of intangibles. Did you ask for Precision's?

Yes, please.

Precision, their accretion for the quarter was between $0.04 and $0.05.

Chris Bamman from Morgan Joseph.

Could you maybe talk a little bit about -- ex acquisitions how Supply Chain Services was down about 2% in the quarter? Can you maybe talk a little bit about that dynamic?

Precision at the end of 2007 had received a contract with Hershey and a contract with ConAgra and ConAgra simply had other priorities, I guess. I don't think we've implemented one ConAgra store. And so, that has been a negative affect on us. They have since hired -- they realized that they didn't get that priority done this year and so therefore, they're hiring a guy to head up that process. And so, we're simply waiting on the customer. And so we expect 2009 to gain a lot more traction with that one account.

Hershey, we have implemented a store down in Mexico, but Hershey itself had 8 locations and we haven't made but 1 location described there. DXP actually [Peterburg] has been an integrated supply account for over 13 or 15 years, finally sold part of their business, so we lost part of that business, so that was sort of a negative. And we've added a couple of locations; Gulf Coast Chemical and Sergeant Control in Arizona.

We've added a couple, but more importantly, again, it's just sort of a fluke year. Both the DXP SmartSource group and the Precision Supply Chain Services group has created quite a backlog of business that we're going to take into 2009. And so we see that being a real strong growth area for us next year.

Your question specifically was with acquisitions and most of the Precision was not -- really the decline came from the DXP SmartSource side, which David described as Huber. But Precision dwarfs -- their run-rate for supply chain is in the $30 million range and ours is like $10 million.

And Precision has had supply growth.

Our total sales with Precision has gone up for supply chain each quarter during 2008.

But not to the extent that they had wished.

Okay. And you know, you read the headlines and I guess you even elaborated on companies are always looking to find ways to cut cost and the environment becomes challenging into 2009. Do you think the Supply Chain Services is something that can be opportunistic for you moving into 2009 and is that sort of reflective in the backlog that you talked about you think?

I think that it's very opportunistic. You have to understand that what we do is the company outsources purchasing and outsources warehouse management and inventory control to us, and so they're reluctant to do that if they don't have to, because they're giving up control. And of course there are other ways to control the process and that's what we preach to them. So, as they look for ways to reduce their supply chain costs and to be more focused on producing a product instead of managing these maintenance repairs and operating products and services, they're much more willing to make that change. And so, we are seeing a lot more activity in this area. It's already showing up. And also just like ConAgra, who basically said last year wasn't -- we signed up, we want to do this, but they didn't really make it a priority, are now looking at making it a priority and getting it done.

It's a lot of work on the customer side, too. They don't just hand it over to us. There's a lot of data and a lot information and work that has to be done by the customer. When they're busy making money, they just don't put that as priorities, putting in all that effort. When profits start going down, then clearly now it becomes a priority. And we're already getting phone calls from people and having meetings where now they're very interested.

Just out of curiosity, let's just say you sign up a customer for this and they decide to go ahead, how long does that process take to actually working, signing them up and actually physically moving in there and managing the location? How long does that process take on average?

We can move in and start implementing these things in a matter of a month. That's not the problem. The problem is the customer. Like Mac said, he has to do some things. He has to give us data. We have to scrub that data. He has to be willing to do it. And therein lies the problem. We're always waiting on the customer. But to answer your question specifically, if they were waiting on us, we could do it in a matter of a month.

Paul Resnik with Dutton.

One of the advantages of being late on the queue is that I get a lot of the other questions answered. I know I've talked to Mac about interest rates recently, but rates gyrate so rapidly. Can you just review your borrowing arrangements as they now stand?

Certainly. We have a line of credit and a term loan. I guess what you're asking is the interest rates. The rates can fluctuate based on ratio, so at this point in time on the line of credit we borrow at our option of either prime plus 25 basis points or LIBOR plus 175. And the LIBOR plus 175 is expected to be 75-100 basis points cheaper -- I mean, the LIBOR borrowing is supposed to be significantly cheaper than the prime borrowing, based on what's happened in the credit markets. The price borrowing at prime plus 25 is a whole lot cheaper than borrowing at LIBOR plus 175.

So we switched all essentially, except for the fact that we've entered into a $40 million swap that fixes the interest rate, all of our borrowings are now at prime. So today prime dropped to 4, so we're now borrowing at 4.25. So essentially we're back borrowing at about the same rate that we were borrowing a month ago before all this happened, but LIBOR is still -- even though LIBOR dropped this morning, it's still more expensive to borrow at LIBOR than prime. And the LIBOR -- I'm not the expert, but the LIBOR is still inflated by more than 100 basis points higher than it's supposed to be.

(OPERATOR INSTRUCTIONS) Follow-up question from Matt Duncan from Stephens, Inc.

Guys, just a couple of quick things. David, you gave us the Super Center number at 21. How many of those are under construction right now?

We have 21 that are complete, up and running and meet our definition. We have 10 Super Centers under construction; 7 on DXP's behalf and 3 under Precision.

And as you look out through 2009, David, do you have any kind of plans for how many of those you'd like to convert during 2009? Have you thought about that at all yet?

I don't know if you meant to say convert, but since you said convert, I'd like all 10 of those to be converted as quickly as possible. And then I guess the real question is how many new ones are we going to plan for in 2009. And again, we're always opportunistic in creating more Super Centers, but we certainly tell every regional manager that they have to do at least one. So, I guess what will happen is that just like last year, we'll kind of have a tendency to make that a real focus at the beginning of the year. And so, I would see us converting those 10 and then probably adding as many as 10 to 15.

Okay, that's very helpful. I appreciate that. As you think about acquisitions, David, it's been a key part of your growth strategy and the current credit environment, how are you thinking about acquisitions and do you have anything you're looking at right now?

Well, we're keeping our hooks in the water. We still meet with people that would like for DXP to acquire them. And so we don't really want that to go away. But until we get a little more color and visibility on what 2009 really shakes out to be, which again, I think we feel pretty strongly that it's going to be good, but until we do, we're kind of putting acquisitions sort of on hold.

Okay, fair enough. And then the last question I've got is with regard to commodity prices. Steel prices are falling. I know nickel prices are down and I guess that would impact PFI's business. How are those falling commodity prices impacting you guys, both from a revenue growth point of view and from a profitability point of view?

Well, so far -- nickel prices have come down. We'll address Vertex first. There's only two major players in the stainless steel fastener business and that's Star and Vertex Distribution. And so, they have not significantly lowered prices, so margins have actually gone up. The flip side of that is that we also now are starting to see maybe some commodity prices bounce back up a little bit and stabilize as something more realistic.

But then as far as other products are concerned, if I'm not mistaken, I'll start with 2007 and I think we felt like we had price increases of 4 point something percent in last year. This year I think we're running at about 6%. So we would expect that the product pricing would stabilize and that we wouldn't see price increases from our manufacturers. And if we do, we would certainly expect to see something smaller, a couple of percent or so.

In the past month they still seem to be announcing price increases. There are always some.

At some point in time though, our customers are going to push back and say we don't see the justification for a price increase. And so, we would see that coming down. Of course, we like price increases, assuming we can pass them on. The only time that I felt like we had trouble managing that was when we had deflection and I'm not sure anybody -- with the amount of money everybody's pumping into the system, that we expect to have deflection. So, you know, so far so good.

(OPERATOR INSTRUCTIONS) Ray Rund of Shaker Investments.

Congratulations on your quarter. I was just wondering if you could give us a hint as to when your Q will be coming out? Because, there was no balance sheet on the press release.

I actually assume the Q will probably be coming out on November 10th.

Okay. And can you give us any more detail as to what your balance sheet looked like before then?

What in particular would you like to know?

Well, I'm wondering how your accounts receivable looked, I'm wondering what your net cash minus debt was for the quarter.

Okay, the cash was $4.7 million. The debt was 170 million total debt, including current portion was 174.2 million. Trade receivables were about 106 million. Inventories were approximately 118 million.

Those are good questions. We didn't address that, but we are very cognizant of our customers trying to use us for the banks, since the banks are being failures in supporting our industry. But we have not seen an increase in days sales, so we feel pretty good about receivables and we're certainly really on top of it and it's something that we're watching very closely.

And the same goes with inventory turns. We're not seeing any decline in inventory turns, yet I feel like it was prudent for us to reduce our safety stock, given that we think that things may slow down a bit. But again, we're in the business of providing same-day service, so inventories are important to us. But both of those numbers we feel like are in pretty good shape.

Okay. Did you say that your total debt was 174.2 million or did I get that wrong?

That's correct.

Okay. And how much of that was long-term?

13.8 million of it is current, so 160.4 million.

(OPERATOR INSTRUCTIONS) There appears to be no further questions at this time. Please continue with any other points you wish to raise.

Well, that concludes it. We thank everybody for their time.

Ladies and gentlemen, this concludes the DXP Enterprises Incorporated third quarter 2008 results conference call. Thank you for participating. You may now disconnect.