DXP Enterprises Inc (DXPE) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome the DXP Enterprises Incorporated 2009 year-end results conference call. During today's presentation, all parties will be in a 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, Senior Vice President and CFO, Mr. Mac McConnell. Please go ahead sir.

This is Mac McConnell. Good evening, and thank you for joining us. Welcome to DXP's fourth quarter and full year results conference call. David Little, our CEO, will also speak to you and answer your questions. Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings, but DXP assumes no obligation to update that information.

I will begin with a summary of DXP's fourth quarter 2009 results. David Little will share his thoughts regarding 2009 results, then we'll be happy to answer any questions. The fourth quarter results include an impairment of goodwill and other intangibles of $53 million. A $13.8 million reduction in the value of inventory acquired from Precision and $5.6 million of restructuring and other special fourth quarter charges amounting to $72.4 million of charges. $2 million of these charges were included in selling, general and administrative expense, $17.4 million of these charges were included in cost of sales. The impairment of goodwill and other intangibles was $53 million. Sales for the fourth quarter decreased 28.8% to $137.8 million from the fourth quarter of 2008. Excluding fourth quarter 2009 sales of $1.3 million from businesses acquired in 2008 on a same-store sales basis, sales for the 2009 fourth quarter decreased 29.5% from the 2008 fourth quarter.

Sales for Precision Supply Chain Services decreased 10.8% to $33.1 million compared to the 2008 fourth quarter. Sales of innovative pumping solutions product decreased 49% to $12.4 million. Sales of MRO products by our service centers decreased 30.1% to $92.3 million. Excluding sales of acquired businesses, sales of MRO products by our service centers decreased by 31.2% on a same-store sales basis. Gross profit for the quarter decreased 59% from 2008. Gross profit as a percentage of sales decreased to 26.8% from 29.4% in 2008 fourth quarter. This decrease in the gross profit percent is primarily the result of the $17.4 million of special charges recorded in cost of sales during the fourth quarter.

SG&A decreased 15.1% compared to the 28.8% sales decrease. Excluding the $900,000 of SG&A expenses associated with the businesses acquired in 2008, SG&A decreased $7.5 million on a same-store sales basis. This decrease is primarily the result of decreased payroll related expenses. As a percent of sales, SG&A increased to 26.8% from 22.5% for the fourth quarter of 2008. SG&A for the fourth quarter of 2009 includes $1.8 million accrued for future rents and related expenses for closed locations and $200,000 of out-of-pocket expenses associated with the conversion of Precision MRO business, the DXP's computer system during the fourth quarter. Interest expense decreased 42% as a result of reduced debt and lower interest rates.

For the full year, 2009 sales decreased 20.9% to $583.2 million from 2008. Excluding 2008 sales of $36.1 million from the businesses acquired in 2008, on a same-store sales basis, sales decreased 25.7%. Sales for our supply -- for our Precision Supply Chain Services decreased 17.8% to $133.7 million compared to 2008. Sales of Innovative Pumping Solutions products decreased 38.9% to $60.5 million for the year. Sales of MRO products by our service centers decreased 18.1% to $389 million. Excluding sales of acquired businesses, sales of MRO products by our service centers decreased 25.7%. Gross profit for the year decreased 27% from 2008. Gross profit as a percentage of sales decreased to 26% for 2009 from 28.1% for 2008 as a result of the $13.8 million charge recorded in the fourth quarter of 2009 to reduce the value of inventory acquired with the acquisition of precision. Excluding the $13.8 million charge, gross profit as a percentage of sales for 2009 would have been 28.3%, an increase from the 28.1% recorded for 2008.

SG&A for 2009 decreased 6.9% compared to the 20.9% decrease in sales. Excluding the $11.2 million of SG&A expenses associated with the businesses acquired in 2008, SG&A decreased $22.2 million. This decrease is primarily the result of decreased payroll related expenses. As a percentage of sales, SG&A increased to 25.3% from 21.5% for 2008. Interest expense decreased 14%, primarily as a result of lower interest rates. Total long-term debt, including current portion, decreased $53 million during 2009. Long-term debt, including current portion as of December 31, 2009, was $115.5 million compared to $168.6 million at December 31, 2008. Availability under our credit facility at December 31, 2009 was $37.3 million. We have successfully amended our credit facility to relax the fixed charge coverage ratio and leverage ratio requirements and provide greater financial flexibility. Now I would turn the call over to David Little.

Thanks Mac, and thanks to our participants on our conference call today. I also want to give a big thanks to our DXP people for their efforts, dedication, loyalty and commitment to making DXP the best it can be. During these very difficulty economic times, we have succeeded in making DXP a better, more productive Company and given our determination to be customer driven, we continue to increase our standard of customer service. Our individual accomplishments in 2009 are many, and they are all appreciated. DXP's strategy to reduce cost and grow margins focused on one, aligning incentive compensation with the Company's objectives. This was hard, but necessary. The merging to our IT system will make us more efficient and enable us to leverage resources, such as inventory. Consolidation of various acquisitions, administrative functions such as HR, inventory control, accounting, marketing, operations, information technology, this will make us more efficient, save money, increase controls, make us SoX compliant, better processes, more timely information and a singular culture. Consolidation of overlapping service centers and the closing of non-profitable service centers, reduction of debt by destocking inventory and managing capital improvements and increasing gross margins that are legacy precision service centers.

We have continued to maintain investments in people and products to better position DXP for the upturn economy such as restructuring our management team to create focus on product divisions and regional management to drive supercenters, our sales strategies and our operational excellence. DXP service centers/MRO groups continue to invest in growing supercenters. We have 23 supercenters and 14 under construction. We added product lines and inventory in each of our four product divisions, and we continue to add value added services. Innovative pumping solutions has struggled with capital projects being down, but they have made investments in a new HP plus pump which has resulted in new business, and quoting on capital projects is starting to increase.

Precision Supply Chain Services continues to implement and add new customers. Its growth has been disappointing as existing business and loss business has been a negative pull against the new business we have added. This will turn positive as the fourth quarter is slightly up from the third quarter. We have significant presence in the oil and gas chemical mining, food and beverage and general industries. We consider these to be great growth markets. Our acquisition strategy includes a fantastic opportunity to acquire Quadna Inc. We normally do not announce acquisitions until they are complete, but since the wording regarding whether or not we complete Quadna acquisition was included in the amended credit facility with the bank, we announced both transactions together.

Let's talk about Quadna. Quadna is one of the leading suppliers of fluid handling systems in the United States and is recognized globally for its system application expertise. The Phoenix, Arizona based company has nine branches in six states and mexico, principally serving the mining, oil and gas, municipal power, food and beverage, semiconductor and chemical and pharmaceutical markets. Quadna is the third or fourth largest Goulds distributor. DXP's largest vendor is Goulds.

When we look at DXP, our first product category over 100 years ago was pumps. The most successful DXP acquisition has been regional pump distributors such as Delta Process, MW Smith, PMI Production Pump, RA Muller. They also give us tremendous expanded growth carry forward, especially in the area of Goulds pumps, included Sonora, Mexico, all of Arizona, parts of Nevada, half of New Mexico that we don't presently cover, Colorado, Wyoming, Montana, parts of Nebraska, South Dakota and North Dakota. They also have very attractive markets, mining, oil and gas, utilities, municipal, and what is most impressive in looking at their 2009 is they weathered the storm much better than most of our competitors. They have 34 years experience in designing, engineering, manufacturing and servicing fluid and handing pumps. They are a great fit because of the fact that from a cultural point of view, they have a high incentive compensation plans, which you know I like. They have very low inventories, they're very customer driven, and they have a great team of people with individual pride and ownership. We also feel that we will be able to convert them to supercenters.They have an innovative pumping solution as part of their business and they're into service and repair.

DXP is not assuming any cost savings over than the owner's compensation and his assistant. Quadna's president for a long time is a man named Jeff Wright who's done an excellent job of running the business, and he's a person of high moral and ethical standards, and we are glad he is staying. We will proceed immediately to reduce additional cost by consolidating IT systems, HR inventory control and purchasing, accounting, marketing and selected engineering processes. We also have some synergisms around consolidating their stores with our DXP stores in Billings, Montana, Denver, Farmington, New Mexico and Rock Springs, Wyoming.

In review, Quadna is the market leader in their area for pumps, and they have a very talented group of people that will complement our very own talented and dedicated team. We are positive Quadna's acquisition will help make DXP a formidable company from Arizona to Billings, Montana. The future looks promising. Quadna's territory currently encompasses one of the largest sources of energy in America. We strongly believe that oil and gas is starting to make a slow comeback and should be in full gear by 2011.

We did have a few negative non-cash events that is we are glad are behind us. The first one an impairment charge of goodwill and other intangibles, and the second one an impairment of debt and slow moving inventory we found during the Precision Service Center conversion to our computer system. Plus, we had some restructuring and one time charges to the tune of $5.6 million in the fourth quarter. Our outlook is improving as our markets seem to be getting better. Our growth strategies are solid, and we have continued to invest in people and products that will position us to grow market share as the economy recovers. We continue to take cost out of our processes to serve our customers which will enhance profits and growth. I want to thank our DXP people, our customers, (inaudible) and shareholders for their continued support. We are now open for questions.

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

Good afternoon, guys.

Hi Matt.

I'm sorry if I'm asking a few things here that we might ought to know, but the press release actually came out during the call, so I'm just trying to digest this. But on the growth profit margin for the quarter, excluding charges, what would that have been Mac?

(inaudible) It was slightly up.

I know that for the year, I didn't calculate it for the quarter, but I can sit here and do that. The charges -- the fourth quarter charges that were in cost of sales were $17.4 million.

Okay. We can talk about it offline. Maybe if we can locate a sort of, first of all, what your progress has been in cutting cost. Obviously, you guys have a $5.6 million restructuring charge this quarter. If you could break out for us what is in those charges, and then what do you think your quarterly SG&A run rate is going to be going forward here?

Sorry. What were all those questions? (laughter) I got most of them.

I was adding up -- calculating the gross profit.

First of all, gross profit from a yearly basis, I think we went from 28.1% to 28.3% on gross profit margins for the year. Mac, he asked about the one time charges. You want to go over --

Okay, well, the biggest one-time charge was the $53 million impairment of goodwill and other intangibles. 10

Yes, Mac, I'm looking more at the $5.6 million in restructuring charges. What all is in that?

Okay, the $5.6 million was $2.3 million to correct the estimate of rebates and other vendor pricing, it's been estimated through the first nine months, and we didn't meet the threshold, didn't get where we thought -- Precision thought they were going to get. And so it took a $2.3 million hit to writeoff what had been accrued in earlier quarters. We have a $1.8 million, and of course, that went to cost of sales. There's a $1.8 million accrual for future rents and expenses on closed service centers.

Okay, and that is in SG&A?

In SG&A. We have $500,000 loss on an employee theft, an employee that was -- it was an inventory writeoff, but it was of inventory that didn't exist. The employee had taken that or -- anyway, gotten the money for it.

Was that a legacy DXP or legacy Precision location?

Legacy Precision location, long term Precision employee. He may be listening to the call. He hasn't had the opportunity to hear about all this from us yet. He was fired back during the summer. Okay. Didn't know about the theft at the time. And the computer, certain costing -- the costing didn't get converted exactly correctly. Some unique things that Precision did we didn't fully encompass, so we believe that we sold our -- in fact, we know that we sold things to our customers at about $800,000 less than what we should have.

Okay.

Because of computer issues. Then we spent a couple hundred thousand just for travel for all the people for all the training for the computer conversion, and that $200,000 goes into -- within SG&A. So the two things that went into SG&A are the accrual for rents and the cost of travel for the computer conversion. So that was $2 million.

Okay. And then maybe Mac, if we can take a step back for second and as you look -- as you forecast your business going forward and you look at what your quarterly SG&A expenses ought to be after the cuts that you guys made throughout the second half of 2009, do you have a feel for what sort of a quarterly run rate should be for SG&A expenses going forward? Are you all still there?

Yes, we are still here.

So I guess it's just too early to tell on that right now?

We think we are at the -- say a $10 million to $10.5 million a month number.

Okay. That's helpful. And then guys, maybe just taking a step back for a second, as you look at your business today David, I guess we've certainly seen signs that the economy is improving. What have you guys experienced here so far through the first quarter in terms of sales? Are you starting to see improvement each month as we go forward in your sales right here?

Yes.

Yes.

All right. So it sounds like then you would expect revenues to be up in the first quarter from the fourth quarter?

Yes.

All right. As then as you look at your various end markets, which end markets seem to be recovering the earliest, and which one seem to be lagging a little bit? What are you seeing from your different end markets?

They are all -- all the ones I'm aware of, of course, people could only be telling me the good ones, but everything seems to be on the uptick, supply chain services customers which go from automotive to food, they seem to be ticking up. Everything with the exception of capital projects, we see activity, but the revenues aren't coming in yet.

Okay. And then I missed the numbers that you guys gave us on service center closures and then also, your numbers of supercenters. How many service centers do you have today? How many did you close during the quarter, and then how many supercenters do you have and how many are you working on, David?

We have 23, and we did not successfully increase that number for the whole year. Okay? We have 14, which I believe is up one or two that are under construction, and we have a really big, big push. As you know, as sales were declining, they were faster and we were able to put them in the top. So that's -- it was to be expected that we might not, by definition, have any new supercenters, but we've continued to invest in them. We feel like if sales would just start climbing instead of declining that we'll have some that will turn into being as supercenter in the first quarter of this year, and we will continue, and we look for great success in that area.

How many total service centers do you have today, and how many did you close during the 4Q?

Oh, man. Sandy, you all were supposed to give me that number. I didn't have that number. I have got it somewhere, but it -- don't hold me to this exact number, but I believe we had 112, I believe the number today is 109. No, it's down. It's down because we closed some. Let me get you that number. I asked for it.

Okay, and last things I've got guys, are with with relation to Quadna. I don't know if you are in a position yet to tell us more about Quanda than what was in the press release when you announced the acquisition. The things that would be helpful is A, kind of go through again, David, the strategic rational for that deal, beyond those guys being a good Goulds distributor. What other things did you pick up there? And then also, if you can tell us -- whatever you can tell us about how you are financing the acquisition, and then what was Quadna's 2009 sales and EBITDA? Any of the info you can give us there would be useful.

I'll tell you, strategically,we are very pleased with A, Goulds okay in the transaction, it makes us a very large Goulds distributor. The pump business is our core business in terms of the fact that we've been in it for a hundred years and it reflects in all of our acquisitions that have been the most successful have always been (inaudible). They are a dominant player from Phoenix to Billings, Montana, and they have got a great, great group of facilities people, just a real first-class operation that has very little -- like $1 million, $1.5 million or something like that in terms of the inventory. So, minimal investment and that. They're -- yes, okay. It was 109 service centers. They fit us because they are a young, kind of aggressive company, and they love the idea of our supercenters, and so we have bearing and safety companies in those -- in some of the areas where they are. So we are going to be able to move towards leveraging their bricks and mortars since it's really nice bricks and mortar, in making future supercenters. We have, they are not too particularly fond of their IT system and things like that. So all that, they want to be converted, and we can eliminate a lot of their administrative cost. And so we expect the financial side to be very positive. And I'm not sure, but Mac, I think that's probably maximum we should say at this point.

Yes.

Okay. And you guys still expect that deal to close by, what, April 1 of next week?

I think that's exactly right. The only thing that can keep that probably from happening based on my knowledge today is some ESOP lawyers. They have an ESOP owned 26%, 29% of the company, and they -- we can't control the lawyers. But both the main seller that owns over 60%, or right at it, and myself are all is in step to get it done April 1.

Okay, all right, guys. Thanks for the answers.

Thank you.

Thank you. (Operator Instructions) Our next question comes from the line of Ray Rund with Shaker Investments. Please go ahead.

Thank you. I received your press release during the middle of the call, so I was kind of scrambling to listen to what you were saying and to read it at the same time. I did have some questions. I apologize if you've already answered this, but you mentioned that you had a goodwill and other intangible impairment of $52.9 million. Can you explain where that came from? Is that related to the Precision Industry's writeoffs?

It comes from two reporting units, and one of them is PFI, or Vertex, and I've forgotten the exact -- I'll figure it out -- the exact number that was PFI and Vertex, and then the rest -- the other reporting unit under the rules was all the rest of DXP which yes, I think really where that comes from is Precision. It wasn't calculated -- Precision is so blended into DXP right now, it's hard to pull it back out.

Okay, also on the question of the writedown of the inventory, I believe you mentioned at one point that you started finding out about this during the summer, after you purchased Precision. And I was wondering if you had inklings that there were problems, why you didn't move ahead to try to get to the bottom of it before the warranties expired. And also, I wondering if you had found this out before the warranties expired, how much would you have been able to recover from the seller?

I want to answer all that. First of all, we did not know any -- well, I guess you go back to a series of events. First of all, we bought Precision two and a half years ago, and two and a half years ago, we had an audit done by --

KPMG.

KPMG -- got to remember those initials. And we even had a stub period audit done, and we pretty much relied on those audits, and they had a reserve set up of about $1.5 million for what they considered to be slow-moving inventory. And their arguments were that they had customer specific inventory and that the customers had to take back the contracts, which is true, by the way. And they also had vendors that would take stuff back, and that's why their reserve, which seemed to be really low to us, was their justification plus auditors signed off. Now from there, we go into a state that says we didn't believe the reserve, so we actually reserved -- made them reserve some more. And then, it wasn't until November of this year that we started converting their system. So they had an earn out, they were in control. They had their own accounting people, their own IT people, and everything was pretty much run by then. It wasn't until we started switching their system onto our system and started coming under our watchful eye that we recognized that there was a bigger problem here. And so at that time, we did notify them, and I guess at this point, we are not really at liberty to say anything about recourse.

I see. So I'm sorry if I'm being obtuse, but when you made the purchase, you had KPMG as an agent for you, bought at their inventory?

Okay, KPMG were the auditors of Precision. And Precision had two things. One, they had -- their reserve was only $1 million that they had on their books, but they had a schedule of exactly how they calculated it and the auditors audited it. It was included in their work papers, along with a raving review about what great controls and all that Precision had. And additionally, Precision had an asset based loan, which meant the bank auditors came in and did procedures because they wouldn't -- in theory, they would not loan against old, or really, just slow moving inventory.

And so it had been, Precision had been subjected to two sets of auditors that we thought had audited inventory. And after we bought them, we gave them, because we have a process and a methodology that we used to provide for obsolescence, and we had them do the calculation because they were on separate computer system, and we went through our methodology, and they calculated a reserve which came up to between $6 million and $7 million of reserves that was booked and recorded and purchased accounting to provide for slow moving inventory. When we put them on our computer system and we started calculating the numbers based on what we saw, we decided we had a problem, which took -- I guess various pieces of information started flowing in in the fourth quarter, because also our managers and people involved were commenting about some of the inventory and what they were seeing.

I'm having difficulty hearing you because there's a very loud tone in the background here. I don't know if it's just on my phone or if everyone listening has this.

We don't have the tone.

Have any employees of Precision or DXP even held accountable for what's happened with the inventory?

Our focus, when we discovered that we had a problem, and really the -- part of the thing was that we started seeing things and hearing things all in the fourth quarter. But it really wasn't until year end or close to it that we started doing calculations. It's hard when you have a $6 million or $7 million reserve and somebody says, well, I went in this location and they have a whole bunch of dead inventory. And our answer is, well, we kind of know, we provided for them to have dead inventory. But once we started doing the calculation ourselves, we knew that this appeared far in excess of what we provided for in purchase accounting.

Okay. Thank you.

Thank you. Management, there are no further questions at this time. Please continue.

I'd just like to say that we appreciate everybody's concern, and we'd be more than glad to offline or whatever, answer any questions that you might have, and thanks for participating today.

Ladies and gentlemen, this concludes the DXP Enterprises Incorporated 2009 year-end results conference call. Thank you for your participation. You may now disconnect.