DXP Enterprises(DXPE) - 2023 Q2 - Earnings Call Transcript

Financial Data and Key Metrics - Q2 2023 total sales increased 16.4% YoY to a record $428 million, with average daily sales of$ 6.8 million [27][38] - Adjusted EBITDA for Q2 2023 was a record $45.3 million, with margins at 10.6%, marking the second consecutive quarter of 10%+ EBITDA margins [9][17][33] - Net income for Q2 2023 was$ 19 million, with diluted EPS of $1.06, up from$ 0.74 in Q2 2022 [9] - Gross profit margins improved to 30.8%, a 245 basis point increase YoY, driven by improvements across all business segments [40][33] - The company returned $25.1 million to shareholders through share repurchases in Q2 2023 [9][35] Business Segment Performance - Service Centers grew sales by 18.85% YoY, driven by strong performance in regions like the Lyo River Valley, North Rockies, Texas Gulf Coast, and Southeast [6][8] - Supply Chain Services grew sales by 12.29% YoY, supported by a large diversified chemical customer added in Q2 2022 [6][39] - Innovative Pumping Solutions (IPS) grew sales by 9.78% YoY, with a notable increase in energy-related backlog [6][52] - Service Centers contributed 69.7% of total sales, followed by Supply Chain Services at 15.5% and IPS at 14.8% [40] Market Performance - Key end markets driving growth include energy, power, chemicals, aerospace, food and beverage, and water and wastewater [8][15][32] - The company is seeing early signs of an upcycle in the energy market, supported by energy transition trends [28][52] - Water and wastewater markets are performing well, with acquisitions like Florida Valve and Riordan Materials enhancing the platform [44][87] Strategic Direction and Industry Competition - The company plans to close 2-4 acquisitions in H2 2023, focusing on water and wastewater, rotating equipment, and other strategic areas [3][83] - The acquisition strategy aims to diversify the business while maintaining a conservative balance sheet with a target leverage ratio of 3.5x or less [3][44] - The company is investing in growth opportunities in energy, biofuels, hydrogen, carbon capture, and other emerging markets [32][81] Management Commentary on Operating Environment and Future Outlook - Management expects continued strong demand trends and operational improvements in H2 2023, supported by a robust acquisition pipeline and a well-balanced business [18][36] - The company remains focused on maintaining 10%+ EBITDA margins and driving long-term shareholder value through acquisitions and share repurchases [34][36] - Inflationary pressures are being managed effectively, with the company passing on supplier cost increases and maintaining strong gross margins [66][33] Other Important Information - The company closed two acquisitions in Q2 2023: Florida Valve and Riordan Materials, both enhancing the water and wastewater platform [44] - Total debt outstanding as of June 30, 2023, was$ 425.9 million, with $132.3 million of liquidity available [43] - CapEx for Q2 2023 was$ 1.8 million, reflecting investments in facilities and equipment [42] Q&A Session Summary Question: Average daily sales trends and M&A impact - Average daily sales were $6.8 million reported,$ 6.7 million excluding M&A impact, with monthly trends showing growth from $6.65 million in April to$ 6.9 million in June [50][62] - The company expects to maintain sequential sales growth in Q3, supported by growth in aerospace, energy, water and wastewater, and food and beverage markets [74][75] Question: Gross margin performance and price-cost dynamics - Gross margins improved to 30.8%, driven by effective management of supplier cost increases and labor costs, with no significant one-time factors impacting margins [66][33] - The company expects gross margins to remain in the 29.5%-30.5% range, supported by a favorable mix of high-margin businesses like water and wastewater [66][78] Question: Energy market dynamics and backlog trends - The company is seeing strong organic growth in IPS, with energy-related backlog increasing 6.5% sequentially in Q2 2023 [52][53] - The energy market is supported by trends in energy transition, with opportunities in hydrogen, biofuels, and carbon capture [81][82] Question: M&A pipeline and water/wastewater strategy - The company aims to close 2-4 acquisitions in H2 2023, focusing on water and wastewater, rotating equipment, and other strategic areas [83][97] - The water and wastewater platform is expected to scale to $350-$ 500 million, with current sales slightly above $100 million [100][87] - Acquisitions in this space are accretive to margins and provide growth opportunities in repair, automation, and process equipment [87][103]