DXP Enterprises Inc (DXPE) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the DXP Enterprises, Incorporated, 2009 first quarter results conference call. For today's presentation, all parties are in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions).

I would now 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 evening, and thank you for joining us. Welcome to DXP's first quarter 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 detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis are contained in our SEC filings, but DXP assumes no obligation to update that information. Our first quarter press release is available on our website, www.dxpe.com.

I will begin with a summary of DXP's first quarter 2009 results. David Little will share his thoughts regarding 2009 results. Then, we will be happy to answer your questions.

Sales for the first quarter decreased 6.5%, to $157.6 million, from the first quarter of 2008. Excluding first quarter 2009 sales of $14.2 million from businesses acquired in 2008 on a same-store sales basis, sales for the 2009 first quarter decreased 14.9% from the 2008 first quarter.

Sales for the Precision Supply Chain Services decreased 12.4%, to $35.2 million, compared to the 2008 first quarter. Sales of Innovative Pumping Solutions products decreased 21.3% to $18 million. Sales of MRO products by our service centers increased 1% to $104.3 million. Excluding sales of acquired businesses, sales of MRO products by our service centers decreased by 14.5% on a same-store sales basis.

Gross profit for the quarter increased 0.3% from 2008. Gross profit as a percentage of sales increased to 29.2% from 27.3% in 2008's first quarter. The increase in gross profit percent resulted from increased gross profit percent for each of our business solutions -- Precision Supply Chain Services, Innovative Pumping Solutions, and MRO.

SG&A increased 11.3% compared to the 6.5% sales decrease and the 0.3% gross profit increase. Excluding the $4.4 million of SG&A expenses associated with businesses acquired in 2008, SG&A decreased $400,000 on a same-store sales basis. This decrease is primarily the result of decreased incentive compensation. As a percent of sales, SG&A increased to 25% from 21% for the first quarter of 2008. The majority of this increase results from the effect of sales decreasing more than SG&A decreased.

Interest expense increased 5.1%, primarily as a result of increased debt from the acquisitions in 2008. We reduced long-term debt by $20.3 million from December 31, 2008. Long-term debt, including current portion at March 31, 2009, was $148.3 million, compared to $168.6 million at December 31, 2008.

Availability under our bank lines of credit increased to $45.7 million as of December 31, 2009, compared to $37 million at December 31, 2008, primarily as a result of the $15 million reduction in the amount outstanding under the line of credit portion of our credit facility.

In consideration of the current economic environment, we are very focused on continuing to reduce inventories and collect receivables so that we can additionally reduce outstanding borrowings during 2009.

The leverage ratio under our credit facility, which declined to 3-to-1 times at December 31, 2009, is the most restrictive covenant at March 31, 2009 and was approximately 2.4 times at March 31, 2009.

EBITDA for the 12 months ended March 31, 2009, was approximately $11.6 million, or 23%, greater than the amount required to meet the 3-to-1 ratio at year-end. EBITDA decreased 24.9% and pre-tax income decreased 42.9% compared to the first quarter of 2008. Net income decreased 41.7%. Diluted earnings per share for the first quarter of 2009 decreased 41% to $0.23 per share, from $0.39 per share for the 2008 first quarter.

Capital expenditures during the quarter were $921,000. Vertex was $0.04 per share diluted during the first quarter of 2009. That number includes all interest -- all increased interest expense due to the acquisition of Vertex, along with the amortization of all intangibles associated with Vertex.

Now, I'd like to turn the call over to David Little.

Thanks, Mac, and I'd like to welcome everybody and thank you for your participation in our conference call today.

Well, as we expected, sales for the quarter were down less than 20% compared to our record fourth quarter of 2008. We continue to believe that even though the economy continues to contract, DXP appears to have established a bottom by gaining market share at the expense of our competitors.

We are looking at 2009 as a great opportunity to gain market share, because our growth strategies will be even more desirable to our customers and easier to execute because of weaker competition.

We are focused on maintaining and improving gross margins in this tough economy by bringing a solution and being a solution. We continue to streamline operations and managing cash flow. I am pleased that we paid down debt $20.3 million in the quarter. We will continue to pay down debt with further right sizing of our inventories. We are managing the bottom line through consolidation of operations, getting on one system, and limiting the number of supercenters under construction.

SG&A expense did, however, balloon to 25% of sales because of the sharp decline in sales. This percentage will improve as we right size and become more operationally efficient by getting on one computer system.

As we deal with the realities of today and this year, I cannot help but be optimistic about our future. I like the markets we serve. I like that we have incentives for performance.

Innovative Pumping Solutions, who serves the energy market, is doing reasonable well in a down market, and energy could be a great market sooner than we think. Precision Supply Chain Services guarantees customers savings, and this market will be a growth market for a long time. Our ability to create supercenters and consolidate a fragmented industry gives us unlimited growth opportunities.

We did an exercise where we took our 23 supercenters, calculated organic growth rate for these locations from 2006 to 2008. It gave us a 20% compounded growth. Nobody in our industry can claim an existing store growth rate of 20% per year.

I like our future, and thanks for participating on our call today. We will now be glad to answer any questions you might have.

Thank you, sir. We will now begin the question-and-answer session. (Operator instructions). And our first question comes from the line of Matt Duncan with Stephens, Incorporated. Please go ahead.

Good evening, David and Mac, and congrats on a solid quarter given the conditions you're operating in.

Thanks.

The first question I've got, David -- I may have missed it. Did you give a total number of supercenters? Did you guys convert any this quarter?

No, we did not. We still have, I believe it was, 14 under construction, and it's the same number.

So it's 23, and 14 under construction. Okay, thanks. David, as you look at your month-to-month sales progression throughout the quarter, did you guys end up seeing sales improving each month throughout the quarter? Can you just give us some insights there?

I mean, the sales -- I calculated them on a per-business-day increase, and they did increase. March was 3% better in sales per day -- business day compared to January, and it was 30 basis points better than it was in February.

Okay. And then, yes --

(Inaudible).

Do you guys see that trend continuing? I don't know if you have a feel for how April went, but I'm just curious, do you feel like your -- your second quarter sales, if I look back, last year were almost $20 million higher than the first quarter. Obviously we're in a different world, so that kind of improvement is unlikely this year. But would it be reasonable to expect that as you convert supercenters and increase your Supply Chain Services revenue by implementing some of these new locations and agreements that you've won, should we see sales up sequentially each quarter throughout '09?

Well, I think you have to look at the business in the sense that the economy is contracting, and it appears to me that the stock market thinks that in six months it'll maybe -- it'll stop, it'll find its bottom. And so we have -- all our existing customers, almost in every market we're in besides -- I think food-and-beverage is pretty solid -- it is contracting, so our existing customers are buying less.

Now, we're adding product categories, as you know, through the supercenters. We're adding supply chain services agreements. And so we're adding stuff that's coming into the top as stuff falls through the bottom. So our first three quarters -- first three months were pretty solid and relatively flat.

April is normally going to be a softer month, and it was. It was down somewhat below March. That doesn't surprise us in the sense that we're such performance-base driven that all our guys are going to ship everything, including the kitchen sink, through the end of March, and so typically the first month after a quarter is going to be a little softer.

Our forecast from our guides is predicting that the second quarter should be up slightly. So again, I think as we put new customers and new agreements and new product categories in the top, it sort of becomes a function of how much the economy keeps contracting and taking off the bottom. And so if you could give me an answer as to when the world's going to stop contracting, I could probably answer your question better.

Sure. No, I know it's a hard one to answer right now. So if I heard you correctly, sales up a little bit in the second quarter from the March quarter, but probably not up a big increase just yet.

Right.

And David, how much of that do you think is related to inventory destocking at your customers, and where in that process do you feel like we are today?

Well, it varies by market, but certainly we have destocking going on. We have significant amount of destocking going on in Vertex, which, with [first] sales, are down considerably. And so we're getting signs that things are starting to bottom there as well, so I have to feel like we're going to go through this cycle. I'd like to think, again, that the market's got this all figured out and that by the end of the second quarter, starting in the third and fourth quarters, we're going to see things solidify and destocking programs and all that kind of stuff will be behind us. But I'm not sure I really know the answer to that.

Okay. Sure, understood. And then, last thing here, you guys now have, what, $47 million I guess was the number, somewhere around there, borrowing capacity. As you look at acquisition opportunities, are you starting to think more about maybe making a few acquisitions, maybe smaller acquisitions here, or are you still wanting to kind of keep your borrowing capacity until you feel like maybe the economy is finding a bottom?

I think we would like to make acquisitions. We certainly have some we could make, but we just -- we have a hard time figuring out the value of that company. They'd like to use their last trailing 12 months, and of course, we would like to use their first month -- their first quarter discounted 50%, and then we would pay that price.

Sure.

So we're pretty far apart in terms of what somebody will take versus what somebody -- what we're willing to pay, so we'll have to see. We're going to wait, and that'll come together once we all get a clearer picture about the business becoming normal again.

Okay. I appreciate it. Thanks.

Thank you. (Operator instructions). One moment, please. And our next question comes from the line of Holden Lewis with BB&T. Please go ahead.

Hey, good afternoon and thank you.

Hi, Holden.

Looking at the segment information a little bit, Integrated Supply has a significant amount of food and beverage, which I guess is the one end market that you said was still doing okay. And yet the revenue numbers, at $35.2 million, was below fourth quarter and certainly well below where you were Q1, Q2, Q3. So I mean, I know that, A, food-and-beverage should be doing well, there's a lot of that in there, and B, you're working on a lot of new programs. Can you give sort of an update as to why the supply chain services revenue is still coming down sequentially and kind of when you expect to add more revenue onto that line in any greater clarity?

Yes. First of all, International Truck is a big Integrated Supply customer, and they're down substantially, along with Navistar, who makes bus and truck engines, and they're down pretty substantially also. So overcoming that versus the fact that we're adding Hershey's and we're trying to add some Coca-Cola bottling plants and we've extended the scope of the Navistar agreement. So it's like you have X amount of dollars' worth of business that all goes down 20%, and yet on the adding stuff back, adding new products and new items and new customers, we're lagging that. And so -- and then your last question was a good one -- well, when do we think that the part we're putting in the top's going to be faster than the part that's going out the bottom, and we really think that that'll show up -- start showing up significantly in the third and fourth quarters.

Okay. And can you give -- if memory serves, I think you have Hershey's; you have Coke; I think there was a ConAgra maybe in there. In terms of sort of the most recent signups, can you talk about kind of what the incremental revenues that those contributed in the quarter? And are you still kind of on track to get about $35 million in revenues -- I think that was the number, refresh my memory -- for the full year from those things? Just give a little bit of quantification of where we're at.

Right. I think we're -- whether or not we ultimately get the full benefit of the -- I think we'll incrementally add $35 million, whatever that number was. I'm not quite sure, I'd have to go back to the last conference call, but it was around $30 million-something, so I think you're correct. So let's just say $35 million. Whether we get the full benefit of that $35 million showing up as incremental sales, I think that the answer to that is probably going to be no. I think we will get the $35 million implemented; I think we will get it on the books. But again, what we don't know is what the contraction of the existing customers is going to be. I don't know what the net result's going to be.

Sure, and that's fair. But in terms of that 30, is that a little bit different -- before, were we expecting to actually realize that amount and now we're just kind of expecting to get to that run rate heading into next year? Is that a change, and does that reflect just kind of the economy and that sort of thing, or is that kind of consistent with what we've been thinking for a while?

I think we felt that we were going to get most of that as incremental, and I think now we think that we're going to get -- that Precision Supply Chain Services will end the year with a growth rate, but I don't think it's going to be the 20%, 25%-plus that we thought we were going to get.

Okay. And then moving over to the Integrated Pumping Solutions, $18 million is obviously down, but, frankly, not down as much as I kind of thought given what you're hearing in terms of CapEx spending in the oilfields and that sort of thing. I know you're sort of smoothing results, but can you give a little bit of detail about where we trend from here? Does this sort of represent a slope down as we get a better feel for the spending? Does this kind of look like the level? And then maybe any sort of color you might have on the backlog and order trends in that business.

Right. Yes, I -- actually, I think Innovative Pumping Solutions has performed quite well. I'm with you, better than I even expected. And I think that that's real positive. I think the point is that there's still -- these majors are doing their long-term projects no matter where the price is, and so we're -- we have a lot of business that we're quoting. The quoting activity has picked up, and so we feel good about that business going forward.

Okay. So sort of the volume levels that you're seeing right now, you think that that could persist?

Yes.

Okay. So you don't see that sort of dipping down much in terms of the visibility that you have?

No.

Okay. And then I think you had sort of mentioned gross margin, trying to hold onto the gross margin and then you're trying to get SG&A down. And I guess you kind of commented on trying to right-size the business. Have you been doing much in terms of trying to right-size the business? Have you been working down a lot of attrition or getting rid of a lot of costs, or were you just referring to integration of acquisitions, or what are we doing on the cost structure in light of the environment?

Right. Well, we'll certainly -- we've not had a hiring freeze because we have Integrated Supply agreements and a lot of different things where we have some growth areas, and so we're still hiring people. But we've also consolidated some Precision stores with DXP stores. We've reduced staff accordingly. We're continuing to do so as we make greater progress on getting on one system. We have a lot of back-office expenses that will come out. We've -- there are certainly no raises.

Vertex has taken more drastic measures in the sense that they've had to reduce staff, plus the fact that they have staff that's working four days a week instead of five. We're doing all the things that we can to not try to cut any muscle. We're a growth company. We want to be a growth company. We want to gain market share. We want to come out of this thing stronger. But certainly you have to make tough choices, and we're doing so, and you -- they don't show up. As an example, all the Vertex trimming that they did really won't show up until April, and yet it was planning done back in February. So does that answer your question?

And then certainly we're right sizing inventory. Receivables seem to be in really good shape. We're happy about that.

Okay, fair enough. And can you just -- what was your cash balances and your equity at the end of the quarter?

Cash was $6,283,000, so $6,300,000.

Okay.

And shareholders' equity was $133.7 million.

All right. And then lastly, I guess, operating cash flow?

Cash flow from operations, $21.8 million.

And then, this time, lastly, D&A?

Depreciation was $1,098,000, and amortization of intangibles, $1,806,000.

Great. Thank you.

Thank you, Holden.

Sure.

Thank you. And our next question comes from the line of Ray Rund with Shaker Investments. Please go ahead.

Thank you. Congratulations on a good quarter.

Thank you, Ray.

Considering the environment. I was wondering, you made a statement that even though you controlled SG&A expense, that the percent of sales of SG&A had gone up. Do you have any sense for what the trajectory of SG&A will be in the quarters going forward? Do you expect that to be coming down, or are you going to try and hold it constant, or is it going to vary? I mean, can you give me some sort of a feel?

If -- and we have a lot of incentive compensation, so assuming that the level of business and profitability stays the same, SG&A should continue to come down slightly. We're not making dramatic cuts. But as David said, there are locations that have cut and things that have happened that are reducing SG&A as we go forward.

We're going to -- this is David. Sorry. We'll do what's necessary to drive that back to 22%, 21%. And that'll start -- each quarter will be better.

Okay. Well, thank you very much.

All right, appreciate it.

Thank you. Ladies and gentlemen, that does conclude today's DXP Enterprises, Incorporated, 2009 first quarter results conference call. Thank you for your participation. You may now disconnect.