DXP Enterprises Inc (DXPE) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the DXP Enterprises Inc. 2010 first-quarter results conference call.

During today's presentation, all parties will be in a listen-only mode and following the presentation, the conference will be open for questions. (Operator Instructions). Now I would like to turn the conference over to 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 2010 first-quarter 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.

Our first-quarter press release is available on our website at www.DXPE.com. I will begin with a summary of DXP's first-quarter 2010 results. David Little will share his thoughts regarding these results and then we will be happy to answer your questions.

Sales for the first quarter decreased 6.7% to $147 million from the first quarter of 2009. Sales Precision Supply Chain Services decreased 10.8% to $31.4 million compared to the 2009 first-quarter sales of $35.2 million.

Sales of innovative pumping solution products decreased 31.9% to $12.3 million compared to the 2009 first-quarter sales of $18 million. Sales of MRO products by our service centers decreased 1% to $103.3 million compared to $104.3 million of sales for the first quarter of 2009.

When compared to the fourth quarter of 2009, sales for the first quarter of 2010 increased 6.6%. First-quarter 2010 sales for Precision Supply Chain Services declined 5% compared to the fourth quarter of 2009.

First quarter 2010 sales of innovative pumping solution products declined 1% compared to the fourth quarter of 2009. First quarter 2010 sales of MRO products by our service centers increased 11.9% compared to the fourth quarter of 2009.

Gross profit for the first quarter of 2010 decreased 8.9% from the first quarter of 2009 compared to the 6.7% decline in sales. Gross profit as a percentage of sales decreased to 28.5% from 29.2% in 2009's first quarter. This decrease in the gross profit mix is primarily the result of the effect of the economy and product mix in the MRO segment.

SG&A decreased 10.6% compared to the 6.7% sales decrease. This decrease is primarily the result of decreased payroll related expenses combined with a $500,000 reduction in amortization of intangible assets.

As a percentage of sales, SG&A decreased to 23.9% from 25% for the first quarter of 2009. SG&A for the first quarter of 2010 as a percentage of sales declined primarily as a result of reduced payroll related expenses due to reduced headcount.

Interest expense decreased 32% primarily as a result of reduced debt and lower market interest rates. On January 11, 2010 an interest rate swap which had been in place since January 10, 2008 expired.

This interest rate swap effectively fixed the LIBOR rate on approximately $40 million of debt at 3.68% plus the margin in effect under our credit facility. This rate was approximately 345 basis points above the actual LIBOR rate during the fourth quarter of 2009.

On March 15, 2010 we amended our credit facility. This amendment significantly increased the interest rates and commitment fees applicable at various ratios from the levels in effect before March 15, 2010. The amendment increased the cost of funds borrowed under our credit facility by approximately 200 basis points beginning on March 16, 2010.

During the first quarter of 2010, we reduced total long-term debt by approximately $5.3 million to $110.2 million from $115.5 million at December 31, 2009. During the first quarter of 2010, the amount available to be borrowed under our credit facility increased approximately $6.3 million to $43.6 million. On April 1, 2010 we closed on the acquisition of the business of Quadna.

On April 1, we borrowed $14.5 million to fund the $14 million cash portion of the purchase price and paid a $500,000 success fee to advisors for the acquisition. The $500,000 fee will be expensed in the second quarter.

On April 1 we also issued $10 million of convertible notes to the seller or of the Quadna business. These notes bear interest at an annual rate of 10%. On April 9, 2010 $4.5 million of these notes plus accrued interest were converted to 376,417 shares of common stock.

I'm happy to report that the tone of our business has improved from 2009. Sales per business day increased from the preceding month each month of the first quarter. Now I would like to turn the call over to David Little.

Thanks, Mac, and thanks to all of our participants on our conference call today. We see our first quarter as a turning point towards future economic cycles and growth for DXP. Growing the topline and the bottomline is certainly a whole lot more fun and rewarding for everyone.

Our focus continues to be the consolidated administrative functions for cost savings and process improvements and decentralizing customer service to capitalize on growth opportunities by being customer driven. Our management team is in place and incentive plans are in alignment with Company goals.

We have maintained investments in people and new products to position DXP for this upturn in the economy. Our growth strategies are solid and proven. It is all about the execution and the commitment by each DXP employee to provide excellent customer service.

Operational excellence by doing a day's work in a day error-free, creating supercenters, relationship building to meet customer needs, supply chain cost savings for our investors, quality modular pumping systems at a fair price; these are the qualities that will set DXP apart from our competition. We are also very pleased with the people and the results of our latest acquisition, Quadna. Jeff Wright and his team plus the DXP team are working hard together to capture all of the best practices and value of both companies.

When we look at our three segments, DXP's service centers, MRO Group, is focusing on growing supercenters. We still have 23 supercenters and 14 under construction. It's worth noting that our fourth quarter of 2009 through the first quarter of 2010, sales were up 12.13%.

Innovative pumping solutions is starting to see more activity and our investments in our new HP-Plus Pump is starting to pay off. The first quarter of 2010 compared to the fourth quarter of 2009 is virtually flat and we believe this is the bottom and we should start seeing some improvement going forward.

Supply chain services is down 5% from the fourth quarter of 2009 compared to the first quarter of 2010 and we expect this business -- we do expect this business to turn positive growth in the second quarter. We have a significant presence in the oil and gas, chemical, mining, food and beverage and general industry and we feel like these markets are all improving.

Again, I would like to thank all the participants on our conference call today. I also want to give recognition to all the DXP people for their efforts. You do make a difference. And thanks to our shareholders for their financial support and faith in DXP. We are now open for questions.

(Operator Instructions) Matt Duncan, Stephens Inc.

Congrats on a great quarter. The first question I have got, Mac, you touched on this a little bit. You said your sales got better each month throughout the quarter. I don't know if you can give us a little more clarity into what this trajectory looks like and did that trend continue into April?

April is right in line. It's flat to better than March. Each month they've gotten better.

Okay, and I don't know if you want to quantify this for us or not, but can you talk a little bit about -- I don't know if you're willing to tell us what your monthly sales run rate was in March and April, just to give us some idea sort of where the business sits today.

Well I guess as the day sales on a business day basis in January were 2,262,000. February was 2,358,000 per day. March was 2,482,000 per day. The average for the quarter was then 2,371,000 per day.

Okay, that's helpful. So there's no question things are getting better throughout the quarter. Is there any one customer group that stands out as leading that charge or has it really been across all of your customer groups that you're starting to see improvement?

It's really across the board.

Is there any that's a laggard? Are the energy guys -- are they recovering right along with everybody else or is that maybe a little bit behind?

Actually, I think the energy is right in there with them.

On the sequential decline in supply chain services, can you give us a little bit of color into what led that and why you're confident that those revenues would start growing again here in the second quarter, David?

Yes, I guess we were sort of disappointed. We thought we would turn the quarter in the first quarter. I led everybody to believe that. I felt that way.

The Hershey -- which amounts to $1 million per month is complete and so we don't really have any business that is falling off the books so to speak. We are implementing (inaudible) good air and we are implementing that and that is growing. The Coca-Cola bottling side, we are adding that and that is growing. Two new deals, Revlon and (inaudible) is a couple of new deals we have. But the main thing is we feel like that -- just like the general economy we feel is getting better, we feel like our customers are purchasing more.

So they're not purchasing less. They are all adding people and getting back to work which should be incremental business with existing accounts. And then along with these new accounts and then plus the fact that we don't have any significant business falling off of the books, we really felt like we turn the corner in the first quarter but it's going to be the same quarter.

David, I guess if I've got my math right here, it looks like you would've been up sequentially if not for the impact of winding down Hershey.

Well, I'm not sure how much Hershey was still left in the first quarter and I don't really have a good answer for that. Again like I said, I was surprised. This really kind of has turned out that way. I will say that March was significantly better than January and February.

That's helpful. On Quanda, last conference call you guys weren't in a position yet to really talk about numbers for Quadna. I don't know if now maybe you can give us sort of some general sense for what the outlook is for that business that you acquired.

I know in the press release when it was finalized, you gave us an idea of what revenues were there last year. Can you talk about sort of what that Quanda business is seeing in its end markets and how you would expect it to perform this year?

I can talk about the markets. Phoenix is tied to real estate and so -- and municipal and it was pretty soft in 2009. They're seeing some comeback of that business (inaudible) great but still nonetheless, starting to grow from where it was.

And then the other piece of business to have is mines. Copper mines are again not quite where they would like for them to be. I forget the measurement, but it's $4 for something. It's probably not a tonne or something; but anyways, $4 is the magical number.

As we've approached over $3.50, things are getting better in the copper mining business. And then lastly, oil and gas, we are just real excited about their capabilities to put together modular pumping systems just like we do and they have a much stronger backlog and much stronger bookings relative to their size and so that business is doing really well.

Okay and then the last thing I've got is just a small item. I noticed on your cash flow statement in the press release, there is a $1.4 million positive impact from proceeds from the sale of businesses. What was that?

That was the sale of the assets of Lucky Electric which basically made up our Electrical Contractors segment.

Okay, all right. Well, guys, congrats again on the good quarter.

Joe Mondillo, Sidoti & Co.

I was wondering if you could touch on the gross margins. You said that it came down sequentially just due to the product mix, but just could you go into a little more detail there and how should we think about that going forward?

The gross profit margins were down from a year ago. They are actually up from the third and fourth quarters, really not that different from the second quarter.

Okay. The fourth quarter had a couple of one-time expense (multiple speakers)

(multiple speakers) but it's above -- the third quarter was 28.4% and for the first quarter of 2010, it was 28.5%. So it's not -- we don't see it as a real adjustment in the trend.

Okay, so do you expect to sort of keep around this 28.5% or how are you looking at that going forward?

We're certainly working to try to increase it. We have a very big initiative to increase the margins of the Precision Legacy service centers. We feel like they are pricing themselves too cheap in the marketplace.

We are looking at tools, [acorn], etc.; pricing tools to help accomplish that in a more scientific way than just; okay, guys; raise your price. Because we want to be fair to our customers and fair to ourselves. So it's an initiative and something we would definitely like to see improve.

How about pricing? The ISM came out today and the pricing in (inaudible) was just 78 I think. What is your pricing environment?

Well our suppliers' prices are going up and so then the key is for us to be able to pass those onto our customers, which we historically don't have really problems doing. I think it was pretty difficult in 2009 to do that.

So sometimes we weren't successful. But typically we are and typically I would think that most people do feel that commodity prices are going up and then interest rates will eventually have to go up. And so I think passing on price increases is not really a big issue today.

Okay and then on the IPS side of the business, could you just go into a little more color on what you're seeing there, how your order trends are doing and what your backlog is in that business?

The backlog is actually pretty flat and we think that's a good sign. Our quoting activity is way up and of course, we don't need a lot of practice quoting things. We would like them to turn in orders.

But I think -- and then we are encouraged big time by Quadna's backlog and activity they are having on shore. A lot of our stuff are longer-term projects. They are offshore, they can be overseas and I think we have had a lull of activity. But we see a lot of signs of people pushing forward with projects, especially projects that are oil related more so than gas.

Have your orders began to start to pick up?

The backlog is just up slightly.

There are no further questions in the queue. Ladies and gentlemen, this does conclude the DXP Enterprises, Inc. 2010 first-quarter results conference call. Thank you for your participation and you may now disconnect.