DXP Enterprises(DXPE) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Total sales for fiscal 2023 increased by 13.4% to $1.7 billion, with Service Centers leading at$ 1.1 billion, followed by Innovative Pumping Solutions at $273 million and Supply Chain Services at$ 260 million [3][23] - Operating income increased by 166 basis points to $138.7 million compared to fiscal 2022 [5] - Adjusted EBITDA for fiscal 2023 was$ 174.3 million, a 32.4% increase year-over-year, with adjusted EBITDA margins at 10.38%, up 182 basis points [20][28] - Gross profit margins improved by 160 basis points to 30.1% in fiscal 2023, driven by strength in the Innovative Pumping Solutions segment [20][64] - Net income for fiscal 2023 was $68.8 million, with diluted earnings per share at$ 3.89, or $4.9 when adjusted for one-time items [66] Business Segment Performance - Service Centers grew 13.5% year-over-year, driven by diverse end markets and MRO nature, with notable growth in regions like North Rockies, Alaska, Texas Gulf Coast, and South Central [3][50] - Innovative Pumping Solutions (IPS) grew 18.2% year-over-year, with a 349 basis point improvement in gross margins and a 324 basis point improvement in operating income margins [24][64][65] - Supply Chain Services grew 8.3% year-over-year, with operating income margins improving by 14 basis points, though it experienced a decline in Q3 and Q4 [5][24][25] Market Performance - Energy accounted for 25% of the business, followed by chemical at 10%, water and wastewater at 7%, food and beverage at 7%, manufacturing at 8%, and general industry at 12% [37] - The IPS backlog for energy and water-related projects continued to grow, with Q4 energy-related backlog up 5.2% over Q3 and 37% above industry levels [18][26][51] - Regional growth was strong in North Rockies, Alaska, Texas Gulf Coast, and South Central, with air compressors and rotating equipment driving sales [43][50] Strategic Direction and Industry Competition - The company aims to double its size over the next three to five years through strategic investments, acquisitions, and operational efficiencies [14][17] - DXP completed three acquisitions in 2023 (Florida Valve & Equipment, Riordan, and Alliance Pump Mechanical) and expects to close one to three more by mid-2024 [16][56] - The company is focusing on diversifying end markets, particularly in water and wastewater, and leveraging its acquisition strategy to scale in existing and new markets [17][38] Management Commentary on Operating Environment and Future Outlook - Management highlighted the resilience of the business model, with strong organic growth and a focus on driving operating efficiencies while growing the business [11][12] - The company expects to benefit from the early stages of an energy upcycle, supported by energy transition trends [80] - DXP is committed to maintaining 10%+ sales growth and 10%+ adjusted EBITDA margins, with a focus on managing working capital and generating free cash flow [36][21] Other Important Information - The company refinanced its Term Loan B in Q4 2023, reducing borrowing costs by 50 basis points and raising$ 125 million in capital for acquisitions and investments [67] - Free cash flow for fiscal 2023 was $94 million, with a 54% conversion rate to EBITDA, reflecting strong cash flow generation and working capital management [30][57] - DXP returned$ 54.7 million to shareholders through share repurchases in fiscal 2023, buying back 1.7 million shares [56] Q&A Session Summary Question: Can you provide color on quarter-to-date trends for daily sales, including recent acquisitions? - Sales per business day in October were $6.392 million, November$ 6.553 million, December $7.125 million, January$ 5.9 million, and February $6.37 million, with January up 4.5% and February up 2.5% year-over-year [59] - Q1 2024 will have 63 business days, three fewer than March 2023 [60] Question: How are you thinking about Q1 adjusted EBITDA margins progressing versus Q4 2023? - EBITDA margins are influenced by business mix, with a goal of maintaining 10%+ margins, assuming all businesses perform as expected [73]