DXP Enterprises Inc (DXPE) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thanks for standing by.

Welcome to the DXP Enterprises, Incorporated 2009 third-quarter results conference call. During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions.)

I would now like to turn the conference over to our host, Mr. Mac McConnell, Senior Vice President of Finance and CFO. Please go ahead, sir.

This is Mac McConnell, CFO of DXP. Good evening, and thank you for joining us. Welcome to DXP's third-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 and 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-earnings press release is available on our Web site, www.dxpe.com. I will begin with a summary of DXP's third-quarter 2009 results. David Little will share his thoughts regarding the 2009 results. Then we will be happy to answer questions.

Sales for the third quarter decreased 23.3% to $143.4 million from the third quarter of 2008. Excluding third-quarter 2009 sales of $8.6 million from businesses acquired in 2008 on a same-store sales basis, sales for the 2009 third quarter decreased 27.9% from the 2008 third quarter. Sales for Precision Supply Chain Services decreased 23.5% to $32.9 million compared to the 2008 third quarter. Sales of the Innovative Pumping Solution products decreased 21.7% to $15.8 million. Sales of MRO products by our service centers decreased 23.5% to $94.7 million. Excluding sales of acquired businesses, sales of MRO products by our service centers decreased by 30.4% on a same-store sales basis.

Gross profit for the quarter decreased 22% from 2008 in connection with the 23.3% decrease in sales. Gross profit as a percentage of sales increased to 28.4% from 28% in 2008's third quarter. The increase in the gross profit percent resulted from an increased gross profit percent for Precision Supply Chain Services in MRO.

SG&A for the quarter decreased 10.9%. Excluding the $2.6 million of SG&A expenses associated with the businesses acquired in 2008, SG&A decreased $6.9 million on a same-store sales basis. This decrease is primarily the result of decreased salaries, incentive compensation, employee benefits, travel expenses and transportation expense. As a percentage of sales, SG&A increased to 24.5% from 21.1% in the third quarter of 2008. The majority of this increase results from the effect of sales decreasing more than the SG&A decreased.

Interest expense increased 15.4% primarily as a result of increased debt to fund acquisitions completed in 2008. We reduced total debt by $39.7 million from December 31, 2008, and by $16.1 million from June 30, 2009. Debt, including the current portion, at September 30, 2009, was $128.9 million compared to $168.6 million at December 31, 2008.

Availability under our bank line of credit decreased to $27.9 million as of September 30, 2009, compared to $37 million at December 31, 2008, primarily as a result of the leverage ratio covenant, which limited the amount which could be borrowed. In consideration of the current economic environment, we are very focused on continuing to reduce receivables -- reduce inventories and collect receivables so we can additionally reduce outstanding borrowings. The leverage ratio, which declined to 3 to 1 at December 31, 2009, is the most restrictive covenant at September 30, 2009, and was approximately 2.88 to 1 at September 30, 2009.

EBITDA, as defined by the credit facility, for the 12 months ended September 30, 2009, was approximately $45.1 million, which is approximately $1.8 million or 4% greater than the amount required to meet a 3-to-1 ratio. We are monitoring our compliance with our loan covenants very carefully. We have plans to continue to pay down debt and to increase earnings by reducing expenses. We have held informal discussions with the majority of our existing banks and other banks.

We want to see how the fourth quarter of this year is going to shape up in terms of performance and debt pay-down and determine whether or not we will need to amend the agreement before formally approaching the banks with the request. And that way, if we need to amend, we will have more information that will help us formulate exactly what we might need in terms of covenant relief and how long we might need it. We will be able to push off any higher pricing and amendment fees that will likely come with any formal request.

EBITDA decreased 44.5% , and pre-tax income decreased 61.3% compared to the third quarter of 2008. Net income decreased 61.8%. Diluted earnings per share for the third quarter of 2009 decreased 62% to $0.19 per share from $0.51 for the 2008 third quarter.

Sales for the first nine months of 2009 decreased 18% to $445.4 million from the first nine months of 2008. Excluding the first nine months 2009 sales of $34.8 million from businesses acquired in 2008, on a same-store sales basis, sales for the 2009 first nine months decreased 24.4% from the 2008 first nine months. Sales for Precision Supply Chain Services decreased 19.9% to $100.6 million compared to the 2008 first nine months. Sales of Innovative Pumping Solutions products decreased 35.6% to $48.1 million. Sales of MRO products by our service centers decreased 13.5% to $296.7 million. Excluding sales of acquired businesses, sales of MRO products by our service centers decreased by 23.6% on a same-store sales basis.

Gross profit for the first nine months of 2009 decreased 14.6% from 2008. Gross profit as a percentage of sales increased to 28.8% from 27.6% in 2008's first nine months. The increase in gross profit percent resulted from an increased gross profit percent for the MRO service centers.

SG&A decreased 3.9% compared to the 18% sales decrease and the 14.6% gross profit decrease. Excluding the $10.8 million of SG&A expenses associated with the businesses acquired in 2008, SG&A decreased $15.2 million on a same-store sales basis. This decrease is primarily the result of decreased salaries, incentive compensation, employee benefits, travel and transportation expense. As a percentage of sales, SG&A increased to 24.9% from 21.2% for the first nine months of 2008. The majority of this increase results from the effect of sales decreasing more than SG&A decreased.

Interest expense for the first nine months of 2009 and 2008 were essentially the same.

EBITDA decreased 37.6% and pre-tax income decreased 56.4% compared to the first nine months of 2008. Net income decreased 57.4%. Diluted earnings per share for the first nine months of 2009 decreased 58% to $0.57 from a $1.36 for the 2008 first nine months.

Sales for the third quarter of 2009 compared to the second quarter of 2009 decreased 0.7%. Sales for Precision Supply Chain Services for the third quarter of 2009 increased 1.5% compared to the 2009 second quarter. Sales of Innovative Pumping solution products increased 11% from the second quarter of 2009. Sales of MRO products by our service centers decreased 3.1% from the second quarter of 2009.

Gross profit for the third quarter decreased 1.5% from the second quarter. Gross profit as a percentage of sales declined from 28.7% for the second quarter to 28.4% for the third quarter. SG&A for the third quarter declined $1.1 million or 3.1% from the second quarter. EBITDA for the third quarter increased $600,000 or 6.8% from the second quarter.

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

Thanks, Mac, and I want to thank our participants for joining our conference call today.

Economic conditions for the oil and gas industry and industrial manufacturing seem to be stabilizing. The oil and gas industry has turned to putting more emphasis on oil as the supply of natural gas is at an all-time high. Manufacturing in certain segments, such as food and beverage, mining, utilities, are doing better. And our chemical industry should benefit from the low natural gas prices.

Our third quarter sales compared to the second quarter contracted less than 1%. On a sequential second quarter to third quarter basis, Precision Supply Chain Services increased by 1.5%. We expect Precision Supply Chain Services sales to continue to improve in the fourth quarter and into next year. This segment has grown from 57 locations to 64 locations from the second quarter to the third quarter.

Innovative Pumping Solutions sales, as Mac has stated, has grown 11% -- increased 11% on a sequential quarter-to-quarter basis. Going forward, we see sales, though, in this segment declining. Quoting activity is good with international and oil projects being the most active.

MROP, maintenance, repair, operating and OEM, segment sales declined 3% sequential quarter to quarter. And during August, we closed or consolidated nine service centers giving us 112 total service centers. We still have 23 supercenters and 12 under construction.

We are pleased to announce that our conversion of all the Precision service centers is complete. We feel that this will improve our customer service levels, cash flow and profitability. We see some signs of improvement in other industries, but because oil and gas is such a big part of our sales we see continued small declines in our MROP segment through the fourth quarter.

Gross margins declined from 28.66% in the second quarter to 28.43% in the third quarter. We were feeling some pricing pressures and reduced in supplier incentives caused by lack of volume.

SG&A expenses, not including depreciation and interest expense, was reduced an additional $1 million in the third quarter. We continue to consolidate all corporate functions such as IT, accounting, inventory control, management and human resources. We are executing our strategy to have everybody on one computer system, giving us the ability to leverage resources such as inventory, our BDCs, helpdesk, data lines, exchange servers, Customer First Center and our corporate product experts.

Our strategy is to have the right-sized corporate and operations to establish one culture that is highly incentive-based, ensures those incentives are in line with DXP's goals of growing the top line and bottom line. Through the efforts of everyone involved, culture and incentive plans have been addressed and executed. We should see some additional savings show up in the fourth quarter.

I'm very thankful for the dedication and efforts of our DXP people. This has been a challenging year for them and for DXP, but we have successfully executed a culture change, a compensation change, a technology change and an organizational change all in less than one year. These changes, plus our commitment to growth, strategy of supercenters, new supply chain customers and new products for Innovative Pumping Solutions will drive sustained and meaningful growth for our employees, suppliers and shareholders.

Thanks, and we're now open for questions.

Thank you, sir. (Operator instructions.)

And our first question comes from the line of Matt Duncan with Stephens, Inc. Please go ahead.

Good afternoon, David and Mac.

Good afternoon.

The first question I've got kind of going back to the debt situation you guys are in, Mac, I appreciate the color that you did give us there. Are you at liberty to talk about sort of what type of increase in your interest expense or in the spread against LIBOR you think you might experience if you did have to renegotiate that agreement?

Oh, we've been -- we're heard various ranges. But generally, where we're at LIBOR -- most of our borrowings are at LIBOR plus 175 today, they're saying that generally we'd be at LIBOR plus 400 today.

Okay. And it sounds like, Mac, you're going to kind of wait through the fourth quarter, see how that shapes up and, if you do end up needing to renegotiate, that's going to happen probably late this year or early next year. Is that a fair guess?

I think that's exactly right. I mean, we are actually -- the banks were in here today. We had a meeting with them. But I think we'd probably be going forward sometime which you just described, December or January.

Okay, that's helpful.

If you guys look at the month-by-month sales progression that you experienced during the quarter and maybe even through October, what did that look like? Did it perk up at all later in the quarter, or was it fairly flat with what you saw in the second quarter across the business?

Generally flat.

Okay. Okay, that's helpful.

When you look at the goal you guys had laid out to cut about $1 million a month out of your SG&A expenses, it looks like you're probably not quite all the way there yet. Do you still feel like that ultimately you can get to that level, David?

Well, I think what's -- there's a couple of things working against us on that. One was when we changed these compensation plans, so that we didn't end up having mass exodus of all of our sales people, we kind of bridged some gaps from one plan to the next and gave them some six-month type guarantees. That hurt our total objective.

And then we have some residual expenses that haven't showed up fully, and so we'll see some reduction in the fourth quarter. But really -- and then thirdly, I guess, supply chain services is actually starting to grow again. So actually our headcount has gone up slightly, I don't know, four or five, back --.

In October compared to September.

Yes, in October. And so they have additional growth things to come, and so -- and then it's our hope that our business will start growing. And so if that happens, I would say that we're probably not going to meet that $1 million threshold. It'll be more like around $600,000. And should business not grow and we're still suffering through declining sales, which we certainly hope doesn't happen, then we do have some further cuts we could make.

Okay. But David, if I hear you correctly, the bridge you gave to the Precision guys is still going to be affecting you at the fourth quarter, so there might be a little bit further drop in the first quarter after that bridge wears off. Is that fair to say?

It's --.

Would that be about right?

Six months would be --.

Yes, (inaudible - multiple speakrs) --.

(Inudible - multiple speakers) the end of the -- yes.

Okay. And David, I appreciate the color you gave us on some of your end markets that are starting to show signs of life. And I guess probably the biggest end market that impacts you guys is going to be energy. And I'm curious sort of what you're hearing and seeing from your customers in terms of what they're telling you but also what their behaviors suggest they plan to do there going forward.

Where do you think the bottom comes in both the broader industrial end market and then specifically in the energy end market? I'd be curious to hear kind of what your thoughts are on when you think you might start to see yourselves perk up to those customer groups?

I think we're into the second half of next year before people start looking at producing natural gas again in any significant way. I think they produce what they're producing but people aren't really going after natural gas. They've turned their attention -- and that's just not so much the price. At $5 an Mcf, the price is okay. It'd be better if it was higher, but it's okay. It's just the fact that every storage bin in the world is full of natural gas. So until we burn off a surplus, then I don't think there's much incentive to add to the problem.

Oil is a different animal. We're an exporter and an importer of oil. So to the extent we can find oil, every independent, every major/minor person in every major has shifted their attention to oil. That said, also international seems to be much more stronger than domestic. So that's why our service centers are affected a little more negative than our Innovative Pumping Solutions because it sells product all over the world.

With that said, again, I guess to really get back up to where we were blowing and going, we need to figure out how to use all of this natural gas that we have found in these shale plates.

But then I guess if we look at what the fourth quarter ought to look like relative to the third, it sounds like you still think it'll probably be sequentially down at the top line and then flat to up a little bit at the bottom line, if you can get a little bit more cost out.

And then I guess a lot of it's going to be depending on sort of what the competitive pressures look like for gross margin. But at the end of the day, revenues are probably going to be slightly down again in the fourth quarter. And that's more IPS and service center driven, but integrated supply is actually implementing some new deals. Is that the right way to look at it?

That is, and then plus the fact that, the years past, we've always had a really strong fourth quarter. And yet, years before that, fourth quarter has always been kind of weak because of the holiday season. So I personally just think we're going to have a more typical holiday season where people are saying, "Look, let's just take off and get ready for next year."

So I'm just -- I don't know if that's a good answer to the fact that the general climate is not bad, it's just not good. And so I think we're going to -- I think we'll see a soft fourth quarter, and then I think that we'll see things improve.

Okay. I've got two more things, and then I'll hop back in queue here. When you look at where you are in terms of cutting your inventory, you took another $12 million out of inventory this quarter. How do you feel about your inventory levels currently and do you think there's more inventory reductions to come?

The -- we have made very little dent in Precision's inventory, and so we're extremely ecstatic over the fact we've got them on our computer system so that we can start looking at their processes and why we haven't done a better job of reducing Precision's inventory. So we see a lot of gain there, and then the Vertex, they're doing about $1 million a month, and so we think that's going to be there and do quite well.

DXP, we -- I guess we got on top of the game a little quicker or something, but we think we're getting down to where we're trying to make sure we don't hurt our service levels through our customers. So we probably will not see as much decline on the level of what we call the legacy DXP companies.

Okay. So at the end of the day, if I -- two-thirds of the business you're probably done with inventory work-down, and a third of it you've still got some work left to do.

That's a good way to put it.

That's a good way to put it. I will say that the third that's left -- and we've got to get -- Precision has a lot of inventory, so we're -- we still think there's a lot of cash flow ground to be made there.

Okay, fair enough. And then last thing, when you look at the supply chain -- Precision Supply Chain Services deals that you've won, did you win any more this quarter? And then remind us what the annual revenue run rate should be for the deals you've won that you're still in the process of implementing right now.

Well it's $40 million worth of business, and we did not win any additional business. We've lost some -- not existing business but new -- we've bid on some new business on national contracts. But again, I'm tending to hold everybody's feet to the fire that we're not going just win those things to win them. And they have -- the pricing has been extremely low, and so we've not captured any new business there.

We are -- we have ongoing supply chain service business on the integrated supply that the -- some -- the Coca-Cola contract, they're looking at expanding that. And so -- and then we've -- we're getting a lot of this stuff implemented. And when you get it implemented, you start off with a dollar's worth of sales the first day, and then it grows over time. So they're doing well, and the -- and Chris has done a really nice job of getting that organized and functioning the way he wants it, and so we're pretty pleased with that segment.

Okay. Thanks, Dave and Mac.

Thank you. (Operator instructions.)

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

Thank you for taking my question.

Could you clarify what you said about what you see going into Q4 for Innovative Pumping Solutions? I'm not sure I understood.

We're going to see that decline. And the reason for that is that we've had a lot of quoting activity, and there's been a lot of shift towards oil, which is fine. That's good for us. But as we've downshifted all the oil and gas plays and the pipeline stuff that's been out there, we're going to see a lull for a couple of quarters. It's not going to go to zero or anything drastic, but it's -- but we're seeing -- we're going to see a decline in that segment.

Okay.

And did you say that you also expect Precision to see an increase in Q4 and going forward after that?

Yes. When we think of the old Precision, we think of their service centers and we think of their supply chain service business -- .

Right.

-- the supply chain services and the integrated supply. That piece of it we see increasing and we're already -- we already saw it increase in the third quarter. We think we'll see it increase in the fourth quarter and first quarter and on through next year.

The service centers that -- I don't know if you intended to ask that question, but it's a good one. They actually are in the more heart of food and beverage and some of those types of energy. They don't have any oil and gas energy part of their business. So they -- they're doing a little better than our branches that are in the oil and gas piece.

Right. I thought you had rolled the MRO business that they had into the DXPE, and you're now reporting (inaudible - multiple speakers).

Right, and that's really -- yes. That -- and I -- yes, that's why I didn't know if you were asking that question. Yes, that is correct. We've rolled that into the MROP side of the business, and so we don't really break that out. But I thought maybe you were asking that question. So --.

No. No, I wasn't.

The -- I'm just kind of curious. In your description of the situation out there, you said you'd seen things kind of stabilizing in oil and gas and in industrial manufacturing.

Mm hmm.

But as I look at some of the information that's coming out of ISM, Institute for Supply and Management -- I mean, they're talking about the manufacturing is starting to grow again. I mean, I think they came out with the ISM number 55 recently.

Right, and then --.

And so that would indicate that things are on the uptick. I'm wondering if you think you're just slow in seeing that. Perhaps it hasn't hit your region yet, or do you expect improvement to start kicking in soon?

Okay. Well first of all, anything above 50 means that it's growing, so 55 is just barely above 50. So -- and then I said that there are certain manufacturing segments that are doing a lot better than others. And that's why I thought -- when you mentioned Precision, we're talking about up in the northern part of the United States. That seems -- those particular geographies seem to be doing a little better. Certainly, we had some pickup in automotive. We have -- food and beverage is doing good. So there are segments of the manufacturing piece that have increased.

What brings that down for us, when we think of maintenance, repair and operating products, is the oil and gas piece of our business, and that has not picked up. And the OEMs that supply to the oil and gas industry have also not picked up.

I see.

So it's a blend of the good, the bad and the ugly.

Okay. Thank you very much.

Sure. Thank you.

Thank you. And I'm showing there's no further questions in queue.

Ladies and gentlemen, this does conclude today's DXP Enterprise, Incorporated 2009 third-quarter results conference call. Thank you for your participation. You may now disconnect.