DXP Enterprises(DXPE)2024-11-05 19:29Financial Data and Key Metrics - Total sales for Q3 2024 increased by 12.8% year-over-year to $472.9 million, with adjusted EBITDA of $52.4 million, up 19.1% year-over-year [8][19] - Year-to-date sales through September 30 increased by 4.7%, with adjusted EBITDA up 6.5% [7] - Gross profit margins improved by 94 basis points to 30.9% in Q3 2024 compared to Q3 2023 [17] - Operating income margin was 8.4% in Q3 2024, a slight decline of 18 basis points compared to Q3 2023 [18] - Earnings per diluted share for Q3 2024 was $1.27, up from $0.93 in Q3 2023 [37] Business Segment Performance - Innovative Pumping Solutions (IPS): Sales grew 52.3% year-over-year to $89.8 million, driven by strong performance in energy and water-related projects [8][9] - Service Centers: Sales increased 7.6% year-over-year to $316.8 million, with operating income margins of 14.6% [8][19] - Supply Chain Services (SCS): Sales grew 0.7% year-over-year to $66.2 million, with operating income margins of 8.4% [8][19] - DXP Water now represents 45% of IPS sales, up from 31% in the previous year [9] Market Performance - Energy-related backlog grew 39.1% sequentially in Q3 2024, with significant project wins expected to impact revenue in Q1 or Q2 of 2025 [27] - Water and wastewater-related backlog also showed strong growth, driven by both organic and acquisition-related additions [28] - Regional growth was observed in North Central, North Texas, South Rockies, Southwest, and Canadian rotating equipment markets [13] Strategic Direction and Industry Competition - The company is focused on driving organic and acquisition growth, improving gross profit margins, and increasing productivity [6] - DXP is diversifying its business to reduce cyclicality, with a strong emphasis on water and wastewater projects, which now represent a significant portion of IPS sales [9][10] - The company has closed seven acquisitions year-to-date, with plans to close at least two more by the end of Q1 2025 [44] Management Commentary on Operating Environment and Future Outlook - Management remains optimistic about the future, citing strong demand in end markets and a robust acquisition pipeline [6][20] - The company expects to maintain double-digit EBITDA margins and continue growing sales above market rates [20][22] - DXP is investing in technology and processes to improve efficiency and support long-term growth [17] Other Important Information - The company has remediated all material weaknesses in its financial controls as of Q3 2024 [45] - DXP repurchased $5 million worth of shares in Q3 and has a new $85 million share repurchase program in place [44] - Free cash flow for Q3 was $24.4 million, down from $38.3 million in Q3 2023, primarily due to investments in project work [41] Q&A Session Summary Question: Acquisition Pipeline and Recent Deals - The company closed five acquisitions by the end of Q3 and two more in October, bringing the total to seven year-to-date [47] - Two additional acquisitions are expected to close by the end of Q1 2025 [47] - Recent acquisitions include a water wastewater business in Nebraska and a vacuum pump business in California [48] Question: Q4 Revenue Expectations - Management expects Q4 revenue to be softer historically, with fewer billing days due to holidays [51] - Sales per business day trend shows variability, with September reaching $8.77 million per day, but October dropping to $6.99 million per day [50] Question: EBITDA Margins and Operating Tailwinds - Adjusted EBITDA margins are expected to remain in the double digits, supported by growth in water and wastewater projects and accretive acquisitions [55] - SG&A expenses are expected to remain elevated as the company invests in growth initiatives [55] Question: Debt Refinancing and Interest Expense - The company reduced borrowing costs by 100 basis points in October, with run-rate interest expense expected to remain around $15.5 million to $16 million per quarter [57] Question: Portfolio Diversification and Potential Divestitures - Management is open to divesting parts of the portfolio that no longer align with the company's strategic direction, though no immediate plans are in place [60][62] Question: Capital Allocation and Seller Expectations - Seller valuations remain reasonable, and the company continues to focus on strategic acquisitions that align with its growth objectives [58]