Welcome to DXP Enterprises, Inc. 2021 First Quarter Earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time.

Thank you, Christian. This is Kent Yee. And welcome to DXP's Q1 2021 conference call to discuss our results for the first quarter ending March 31st, 2021. Joining me today is our Chairman and CEO, David Little. Before we get started, I want to remind you that today's call is being webcast and recorded and includes forward-looking statements. Actual results may differ materially from those contemplated by these forward-looking statements. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis are contained in our SEC filings. However, DXP assumes no obligation to update that information as a result of new information or future events. During this call, we may present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release. The press release and an accompanying investor presentation are now available on our website at ir.dxpe.com. I will now turn the call over to David to provide his thoughts and a summary of our first quarter performance and financial results.

Good morning. And thank you, Kent. And thanks to everyone for joining us today on our fiscal 2021 first quarter conference call. I will begin today with some perspective on the first quarter and our relative position today and thoughts on the remainder of 2021. Kent will then take you through the key financial details after my remarks. After his prepared comments, we will open for Q&A. Overall we had a good first quarter that highlights good execution and a number of positive trends developing across DXP, including the continued execution of our acquisition strategy to accelerate our end-market diversification efforts, continued strength in COVID resistance and end-markets, and strong free cash flow generation. Putting aside a challenging week in February from a weather perspective, we were seeing good progress in moving towards our pre-pandemic growth. We are confident that we are in the early beginnings of returning to our pre-pandemic levels and that remains our focus. Let me thank all of our DXP stakeholders, in particular all of our DXPeople for their continued hard work and grit as we turn the corner from the global pandemic and momentum gradually begins to build in our business. We are encouraged by the improvement in market conditions and remain focused on growing our business in fiscal year 2021. DXP's industrial end-markets, which is 67% of our business today, which by the way coming out of the last cycle was 51% appears to have found some legs and shows signs of positive upward movement. The ISM, PMI manufacturing index, which gives us an indication of how DXP's broad industrial markets will perform, continues to expand from January's 58.7% rating through March's 64% percentage rating. This is above the average for the last 12 months of 56.9% and looks to be a positive indicator for the year, should the trend continue and the impact from COVID continues to lessen. We are excited to see momentum on this side of our business and look forward for this to improve throughout the year. These end-markets, including food and beverage, chemicals, water and wastewater, manufacturing, and general industry should serve us well along with the continued execution of our acquisition strategy. Oil and gas is the remaining 33% of DXP, which was 49% coming out of the last cycle and is showing mixed signs of recovery with strength in the international markets. The majority of our business that is oil and gas tends to lag increases in the rig count and is tied closer to actual production or increased CapEx budgets. DXP will wait and see, but early signs point to flat to modest upticks in domestic budgets and the latest movement occurring in international CapEx spending in 2021. With regard to the broader demand recovery, underlying trends improved across the business as the quarter progressed and trends were the strongest in March. Our first quarter results reflect sequential growth and improvements in our end markets and industry indicators as discussed. Total DXP sales for Q1 increased 5.6% sequentially or were $245.6 million or $3.9 million per business day. Thank you to the 2,508 DXPeople for your hard work and dedication. This includes our recent year-end acquisitions, as this is their first quarter reporting with DXP. We are excited to have APO, Corporate Equipment, Pumping Solutions, and Total Equipment with us. They each had a great first quarter and performed in line with our expectations. Keep up the great work. And we are excited to have you as a part of our DXP family. It is always my pleasure to share your performance and financial results on your behalf. In terms of cash flow and liquidity, we generated $11.2 million of free cash flow in Q1, which continues to support our acquisition efforts. DXPeople have continued to find ways to deliver financial results and position us well for all of our stakeholders in the face of extraordinary challenges. This is evidenced by our sequential growth, closing acquisitions, and the overall teamwork of the DXPeople. We continue to build our capabilities to provide a technical set of products and services in all of our markets, which makes DXP very unique in our industry and gives us more ways to help our customers win. As we discussed during the third quarter, DXP's goal is to grow all of our markets and have a balanced end-market exposure. Our bigger opportunities and targets are food and beverage, sanitary, water and wastewater, chemicals, alternative energy, refineries, and military. Our recent acquisitions of Carter & Verplanck is another example of making strides in these directions. In terms of financial results, Service Centers led the way, followed by Supply Chain Services and then Innovative Pumping Solutions. The diversity of end-markets and the MRO nature within Service Centers allows us to continue to remain resilient and is experiencing the first time to recover. Supply Chain continues to see improvements as we expect activity to increase as we move through the year. We continue to experience the largest decline within our Innovative Pumping Solutions business segment. IPS is tied to capital budgets and the oil and gas industry. We see a stronger improvement in international cap budgets versus domestic. We continue to monitor expenses and make money on lower sales demand. In terms of the strength in the IPS backlog, we are now 20% below 2017 average backlog numbers and continue to see slower declines that are consistent with our customers cutting capital budgets. Our main focus within IPS is managing to these demand levels we have today and find opportunities in other markets such as biofuels, food and beverage, and water and wastewater. DXP's overall gross profit margins for the quarter were 29.2%, a 152 basis point improvement over Q4. This reflects continued improvement within IPS, despite sales decline, and strong gross profit margins from our recent acquisitions. Overall, DXP produced EBITDA of $13.9 million and EBITDA as a percent of sales of 5.7%, which is consistent with a declining market environment. That said, if growth begins to pick up, we should begin to experience operating leverage as we transition from market declines to growth. In summary, DXP's financial performance is not where we would like for it to be today, and our objective is to continue to improve and provide customer-driven solutions by being fast, convenient, and technical experts. We look to continue to drive improvement in our organic sales and marketing strategies and our inorganic organic growth through acquisitions in certain geographies and industries. We continue to reiterate that the pace and magnitude of recovery going forward will vary by geography, customer type, and end market. Let me conclude my remarks by saying that I am encouraged by our continued sequential improvement in sales and profitability and firmly believe that we are well positioned to continue this growth pattern into 2021. We have managed the business through uncertain times, successfully making acquisitions and producing strong free cash flow while continuing to invest in the business that will benefit our future growth. We have a tremendous team, and it is an honor to overcome the collective adversity we are all experiencing and deliver value for all of our stakeholders. With that, I will now turn it back to Kent to review the financials in more detail.

Thank you, David, and thank you to everyone for joining us for our review of our first quarter 2021 financial results. Q1 financial performance reflects our second quarter of sequential sales increase, as we move past the trough impact of COVID-19 in the third quarter of 2020. Since 2020 was such an unusual year due to the pandemic, we are primarily measuring our performance based on sequential monthly and quarterly growth. Monthly results are likely to experience normal variation and move in either a positive or negative direction based upon unforeseen events like the winter storm that hit in February. However, our overall expectation is that we will see growth versus the previous month throughout the year, which should result in a significant increase in earnings as compared to last year. Overall, DXP's first quarter results were good to see. Service Centers and Supply Chain Services led the way, growing sequentially, which we will review shortly. That said, Q1 reflects the following summary takeaways: strong first quarter sales and margin performance from recent acquisitions, gross margin improvement sequentially and year-over-year, and strong quarterly free cash flow generation. Total sales for the first quarter increased sequentially 5.6% to $245.6 million. We experienced a 15.6% and 0.5% sequential sales growth in Service Centers and Supply Chain Services, respectively. Acquisitions contributed $28.4 million in sales during the quarter. As David mentioned, we are excited to have APO/CEC, Total Equipment, and Pumping Solutions as part of the DXP family. Average daily sales for the first quarter were $3.9 million per day versus $3.8 million per day in Q4. Adjusting for acquisitions, average daily sales were $3.4 million per day for the first quarter. That said, the average daily sales trends during the quarter ramped from $3.8 million per day in January to $4.2 million per day in March, including the normalization of project work. Regions within our Service Centers business segment which experienced sequential sales growth include California, Texas, Gulf Coast, and the Southwest. Key end markets driving the sales performance include general industrial, food and beverage, mining, municipal, and specialty chemicals. Supply Chain Services performance reflects a one-time $937,000 revenue adjustment associated with one of our customers' contract pricing. Adjusting for this, sales would have grown 3.1% sequentially, which is in line with our commentary during Q3 and Q4. Unadjusted sales grew 0.5% sequentially. SCS expects activity to continue to improve as more customers open facilities along with vaccinations accelerating. Customers are also beginning to inquire if employees are vaccinated, which we see as a positive indicator. In terms of Innovative Pumping Solutions, we are monitoring the backlog as we continue to experience declines. As we discussed in Q4, we do see the start of a slow demand recovery and improvements in industry indicators. But the rebound in CapEx dollars is mainly tied to international projects at this point. Domestically, we see CapEx budgets essentially flat to slightly down from 2020. Our Q1 average backlog was down 20.4% from the 2017 average backlog and down 35% from the 2015 average backlog, but it's up 10.9% compared to the 2016 monthly average backlog. We are continuing to trend slightly above 2016 levels based upon where our backlog stands at the end of the first quarter. Again, as we always comment, we are monitoring the backlog monthly and looking for new bookings always. Turning to our gross margins. DXP's total gross margins were 29.2%, a 152 basis point improvement over Q4. Gross margins improved 48% from Q4 to Q1 within Innovative Pumping Solutions as we experienced a mix shift associated with more international projects, as well as working through several municipal water and wastewater jobs and continuing to deliver on our efforts to move past lower margin jobs and make cost improvements despite the decline in the business. Service centers also experienced a 50 basis point improvement sequentially from Q4 to Q1, while Supply Chain Services experienced a decline in gross margins that is unique and more associated with the one-time revenue adjustment mentioned in my previous comments. In terms of operating income combined, all three business segments improved 25 basis points in sequential business segment operating income margins versus Q4. Total DXP operating income adjusting for the Q4 impairment expense decreased 82 basis points versus Q4 to $6.2 million. Service centers operating income margins increased 92 basis points from Q4, resulting in $22.1 million in operating income. Excluding acquisitions, operating income margins increased 63 basis points sequentially. Innovative Pumping Solutions operating income margins declined 332 basis points sequentially, which primarily reflects higher SG&A costs as we continue to rightsize our cost structure to demand, as well as some fixed cost absorption. Supply Chain Services experienced a 251 basis points decline in operating income margins primarily associated with the aforementioned one-time revenue adjustment associated with contract pricing. Our SG&A for the first quarter increased to $65.4 million from Q4. This was primarily driven by the payout of commissions and bonuses associated with 2020 normal seasonal payroll taxes and first of the year items. Additionally, this also reflects transaction costs and other legal items. Similar to our comments in Q4, we are mindful that the contraction associated with the coronavirus is passing, and with accelerated distribution of vaccines, we are positioning DXP to respond to increased customer needs as we believe those who are in a position to respond today and tomorrow will gain the most market share. Turning to EBITDA. Q1 adjusted EBITDA was $13.9 million. Adjusted EBITDA margins were 5.7%. As we move through the COVID rebound, we should experience operating leverage as David mentioned as long as we drive organic growth and maintain gross margins. In terms of tax, our effective tax rate continues to have a lot of noise this quarter similar to what happened in Q4. In Q1, DXP booked a significant reserve associated with the Texas R&D tax credits based upon the increased risk of challenge by the state. Going forward, if DXP continues to rebound, we expect a normalized effective tax rate between 23% to 25%. In terms of EPS, our net income for Q1 was $411,000. Our earnings per share for the first quarter was $0.02 per diluted share. Our recent acquisitions were accretive to gross margins, operating income, and ultimately to earnings. Turning to the balance sheet and cash flow. In terms of working capital, our working capital increased $2.4 million from Q4 to $161 million. As a percentage of sales, this amounted to 16.9%. This primarily reflects an increase in accounts receivable and inventory. In terms of cash, we had $127.5 million in cash on the balance sheet at March 31. This is an increase of $10 million compared to Q4. Regarding CapEx, CapEx in the first quarter was $680,000, or an increase of $538,000 from Q4 run rate levels, reflecting our ability to control capital investment and the minimal maintenance needs of our business. Turning to free cash flow. We generated solid operating cash flow during the first quarter producing $10.6 million in cash from operating activities and $11.2 million in free cash flow. This includes a $1.3 million cash inflow from the sale of assets. Return on invested capital or ROIC for the first quarter was 17%. At March 31, our fixed charge coverage ratio was 3.7:1 and our secured leverage ratio was 2.8:1. Total debt outstanding at March 31 was $329.2 million, which reflects the refinancing of our Term loan B and our first quarter of amortization. The refinancing reset our covenants and provides additional flexibility as we move forward. As a reminder, the new Term Loan B matures in 2027. In terms of liquidity, we remain undrawn on our ABL and have over $258.6 million in liquidity consisting of cash and the undrawn ABL. In terms of acquisitions, earlier this week subsequent to the quarter-end, we closed on our acquisition of Carter & Verplanck and we anticipate closing another acquisition by the end of Q2 or early in Q3. Carter & Verplanck provides us with a platform to continue to expand our water and wastewater capabilities. Headquartered in Tampa, they ended Q1 with $4.2 million in sales. Our acquisition strategy continues to create value for DXP as evidenced by the strong quarter we had from year-end acquisitions, and we look forward to CVI's contribution in Q2. Our pipeline remains strong and is expanding in different end markets. More importantly, the talent at the companies joining DXP is very high and brings expertise and valuable experience to our growing company. With that, we'll now turn the call over for questions.

Your first question is from Tommy Moll. Your line is open.

Good morning and thanks for taking my questions.

Hey, good morning, Tommy. How are you?

Doing great. Doing great. How are you all?

Good.

Well, you gave some helpful commentary just to unpack the varying trends across the segments for the first quarter plus some of the one-time items that you highlighted. So, I think we're good in terms of the first quarter. I'm curious if there's anything you could point to for maybe how April looked or how you think about the progression as we go forward. You called out, I think, a pretty strong exit rate for March. But really at a segment-by-segment level you're seeing some widely varying trends. Is there anything you could do to help us understand how those may move differently would be very helpful. Thank you.

Yes, no worries. Tommy, I will go through the sales per business day, and then David can comment on the differences between Service Centers, IPS, and Supply Chain. Just to provide some context for everyone on the call, during the quarter, we did some normalization this year because we have a significant accounting entry at the end of the quarter that needed to be adjusted to better view the trends. Sales per business day were $3.8 million in January, $3.6 million in February, and $4.2 million in March, with early estimates for April showing $4.6 million. The cadence is strong. However, we're noticing some differences in the recovery rates among Service Centers, IPS, and Supply Chain. David, if you want to share your thoughts on this...

Sure. Yes, Tommy, it's important to mention that the Supply Chain Services experienced a significant sales adjustment, amounting to over $900,000. When we factor that back in, they actually achieved sequential growth, which is a positive sign. Last year, they faced challenges with oil and gas accounts that were significantly impacted, along with airline accounts that closed some facilities. These were the major challenges. On the other hand, food and beverage accounts performed well, although they were generally the factors that contributed to the decline. We're seeing a modest recovery in oil and gas accounts as they begin to ramp up operations again, which is encouraging. Their existing accounts are performing well, and we lost accounts last year that will be easier to rebuild. The sequential shift from the fourth quarter to the first quarter is not very pronounced, but there is a slight increase. The Service Centers, particularly in maintenance, repair, and operations, have rebounded well as businesses have returned to work, which is a positive development for us. However, the main concern lies with IPS. To clarify, while our branches may sell capital projects, we classify those under IPS to provide a clearer view of our capital expenditure business versus our maintenance and repair operation business. Therefore, IPS strictly reflects capital expenditures. Unfortunately, oil and gas trends have led to budget cuts last year, and it appears they will maintain similar budgets this year. The general sentiment seems to be that while they appreciate the current oil prices, they are hesitant to increase capital budgets due to concerns about the long-term outlook. This applies to the United States, though we are seeing somewhat more positive activity internationally. It's important to note that while the IPS business won't cease entirely, it is facing a decline. We can adapt to a lower volume and still remain profitable, but it won't be at the level we have experienced in the past.

The only other thing I would add is that in our California West region, we are particularly excited about some upcoming water wastewater projects within the IPS segment. While the primary focus is on oil and gas, there are additional end markets in that IPS category.

Okay. Yes. Thank you, both. That's extremely helpful. Let's talk about maybe your own supply chain. There's a lot of commentary around cost inflation and this is probably more on the MRO side of your business. To what extent are you seeing that in your own supplier base? And what are some of the price/cost kind of dynamics that you've managed or plan to manage the rest of this year?

We don’t sell lumber, so we won't be dealing with that. Fortunately, we are experiencing some price increases, more than we have in the past, with some numbers reaching high levels. A significant increase would be around 10%, while a more typical rise would be between 4% to 5%. We are also facing delivery issues and shortages. All of this leads me to believe that inflation is on the horizon. Additionally, with more people returning to work and unemployment falling, we are feeling pressure for wage increases. It's worth mentioning that some inflation around 4% or 5% wouldn't be detrimental; in fact, it could be beneficial for us in distribution. As long as we can pass those increases onto customers, which we typically can with the right documentation showing how costs have risen, we will adjust prices accordingly. I’d like to highlight that our Supply Chain Services experiences a bit of a delay in raising prices, leading to some gross profit margin pressure. This is in contrast to situations where someone needs something immediately, allowing us to provide a new price right away.

Yes. That’s helpful. Thank you.

But I think we're dealing with all of that fine. You saw our inventory levels go back up some. We're trying to adjust to what we hope is much better volumes and these shortages. The only one we hadn't been able to fix was the same one that the auto industry has and that's these computer chips from China. We actually use those in our pump side. There are sensors that we use for understanding the operation and temperatures and stuff like that. So those have been impossible to get.

Yes. Let's move down the P&L here to your SG&A. So over the last 12 months, you've definitely taken some out of the model in response to the events we've all lived through. But now as you're at a point where potentially the rest of this year looks pretty good, or at least better than recent quarters, you may be in a position where some of that cost comes back. So what's the philosophy there? I mean, you guys are pretty disciplined on costs generally. So as your revenue potentially heads back higher, is there a rough maybe relationship on how much fixed cost for every unit of sales you add back, or how do you manage that, now that hopefully you're headed the right direction for a while?

So I'm kind of glad you asked that question. I don't think we manage that process like we normally would, because we felt like that COVID-19 pandemic was an event and it would have a start and a stop. I don't know that necessarily there will really be a stop, but we felt like there was. So we didn't rationalize productivity to the sales volume that we were getting. We kind of in my opinion held on to our talent and our DXPeople. They're not easy to come by or not easy to train up. And so, we didn't really make employee reduction stuff a priority. And so therefore, I think as you see us expand and grow the top line, you should see leverage on the bottom line. And so, I'd like to think that EBITDA could pretty easily get back to 8%. Our goal is 10% and we've been at 10%, but that's when times are really good. So I'm not targeting 10% anytime really soon, but something more on the line of 8% is appropriate. And so, since we're already doing a pretty good job on gross profit margins, 29-point-something percent is pretty good for us. 30% would be perfect, but I'll take 29-something. SG&A as a percent of sales is really too high for where we're at. But like I said, we took that on because we wanted to be in a position to recover fast. And so, we hope we got that right.

Yes. Last question from me more from a strategic standpoint. Good to see continued progress on the tuck-in acquisition side. It sounds like at least one more you've got good visibility on. I'm curious in terms of the pipeline, what other context you could give us? How you think the rest of the year may progress? There's a potential tax law change in the works that may have an impact there. But what does the appetite and pipeline look like?

Yes, Tommy, you’re exactly right about your earlier comments. We have one opportunity with high visibility that we hope to finalize before the end of this quarter or early Q3. Regarding the broader market dynamics, there are numerous opportunities we are pursuing. Your last point is also valid. I’ve had recent discussions about how the momentum of tax law changes might play out. We witnessed something similar at the end of 2020, and we may see a repeat as this topic gains political traction. Potential tax changes often drive some level of transaction activity, and we could experience this later in the year, particularly for entrepreneurs eager to adapt. Our pipeline is already strong, but it could pick up even more as we approach year-end.

Capital gains going up.

Yes, capital gains are increasing along with those factors.

Tommy, just to clarify, we are focusing on specific geographies and industries as we determine the direction for DXP. We have a preference for water and wastewater as well as food and beverage sectors. Additionally, we are interested in industrial or municipal areas, not just regions related to gas, especially where we currently lack business presence. This is the direction we are considering, so we are being quite selective.

From a multiple perspective, Tommy, I think also maybe what you've been getting at, multiples, there's some pressure on the upside. You've got more private equity guys in the sandbox. And you've got sellers' expectations that don't match the profile of their business. And what I mean by that is, a lot of these businesses we look at are closer to lifestyle businesses and they don't necessarily have an aggressive growth plan, yet they want a growth multiple. And so, some of it is also matching up with what David said, the markets and geographies with obviously the right valuation. We try to be disciplined. And so, that way we're creating the value we'd like to create out there.

That’s all very helpful. Thank you, both. Thanks for the time today. I’ll turn it back.

Okay.

And I'm showing no further questions at this time. This does conclude our Q&A session. Thank you for participating in today's earnings conference call and have a great day.