Earnings Call Transcript - DXPE Q4 2024

Operator, Operator

Thank you for joining us. My name is Eric, and I will be your conference operator today. I would like to welcome everyone to the DXP Enterprises Fourth Quarter 2024 Earnings Release Conference Call. I will now turn the call over to Kent Yee, Chief Financial Officer. Please proceed.

Kent Yee, CFO

Thank you, Eric, and thank you, everyone. This is Kent, and welcome to DXP's Q4 2024 Conference Call to discuss our results for the fourth quarter and fiscal year ending December 31, 2024. 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 risk 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 because 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 Little, our Chairman and CEO, to provide his thoughts and a summary of our fourth quarter and fiscal 2024 performance and financial results. David?

David Little, Chairman and CEO

Thank you for joining our conference call regarding the fourth quarter and fiscal year 2024. I am happy to announce that we've achieved another record year in key financial metrics, including sales per business day, gross profit margins, and adjusted EBITDA margin. These results underscore the effectiveness of our team, products, and processes in meeting customer demands. They also reflect the advantages of our diverse market exposure and our disciplined approach to capital allocation. It is my honor to present DXP's fourth quarter and fiscal year 2024 results on behalf of our over 3,028 employees. Congratulations to all of our stakeholders, and a special thanks to our dedicated team. Fiscal 2024 was another successful year for DXP, with sales increasing by 7.4% to reach $1.8 billion. We are looking forward to fiscal 2025 with the ongoing momentum from our results. DXP also recorded a significant improvement in both margins and gross profit, with gross profit margins rising by 77 basis points to 30.9%. The accomplishments of fiscal 2024 centered around winning and improving margins while also focusing on operational efficiencies and investments. We achieved these results by maintaining or boosting margins across our business segments and completing seven acquisitions during the year. Fiscal 2024 set a new sales record and marked the second consecutive fiscal year of more than 10% adjusted EBITDA margins. We remain committed to achieving our market diversification and scale objectives. By the end of fiscal 2024, oil and gas represented 23% of our business, with other significant industries such as water and wastewater at 10%, food and beverage and manufacturing at 7%, and general industry at 13%. This balance in our end market risk has been evident over the past two years, particularly in 2024, and we are eager to see how these markets interact in 2025. I extend my gratitude to our sales and operational teams for their collaboration in driving success for our customers and stakeholders. Thanks also to our corporate support team for their assistance in supporting our customers. Our outlook remains positive. In fiscal 2024, we focused on diversifying our end markets, especially in water and wastewater, while continuing to make strategic acquisitions, adding seven excellent companies, including Hennessy Mechanical Seal. We also advanced our share repurchase program and refinanced our debt in the latter half of 2024, positioning DXP for both organic and inorganic growth in 2025. We are excited about the future and committed to enhancing customer experiences, fostering a winning culture, and investing in our core operations to facilitate long-term growth. For fiscal 2024, total sales were up 7.4%, and operating income saw a boost of 4.8% compared to 2023. Our sales and adjusted EBITDA figures reached $1.8 billion and $191 million respectively, resulting in adjusted EBITDA margins of 10.62%. Our strategy has focused on uniting the strength, talent, and technology of a large enterprise with the agility of local businesses to deliver exceptional value to our customers and suppliers while creating growth opportunities for our employees. We remain committed to this approach and are dedicated to further developing our people, processes, resources, and technology as we expand DXP and aim to double our business size in the next 3 to 5 years with strategic investments that align with DXP's evolution. Sales per business day have improved throughout the year, rising from an average of $6.55 million in Q1 to $7.595 million in Q4. Our quarterly profits benefited from a sequential increase in gross margins, although we also experienced an uptick in SG&A expenses due to ongoing investments in the business. Despite the continual changes and growth, our year-over-year earnings displayed resilience, with an increase in diluted earnings per share. I sincerely thank the 3,028 employees for your dedication and for ending the year on a strong note. It is always a pleasure to share our financial results with you. In terms of cash flow and liquidity, we generated $77 million in free cash flow in fiscal 2024, reflecting DXP's commitment to consistent cash generation while investing in working capital as our business grows. This, coupled with our flexible capital structure, allows us to execute our acquisition strategy while returning capital to our shareholders through opportunistic share repurchases. As discussed, our acquisitions have enhanced our market diversification and positioned us favorably through various economic conditions. We are enthusiastic about the growth potential in 2025, both organically and through acquisitions, and we have a strong pipeline of opportunities. During 2024, we welcomed seven new companies, in addition to three acquisitions made in fiscal 2023. All of these acquisitions have strengthened the DXP family. To our new acquisitions, we extend a warm welcome and look forward to supporting your growth within DXP. Our employees have consistently found ways to deliver strong financial results, despite facing considerable challenges, as evident from our sales growth, improved gross profit margins, and successful teamwork. We are committed to building our capabilities to provide complementary products and services across all our markets, which sets DXP apart in the industry and gives us more opportunities to help our customers succeed. We are always seeking opportunities to grow our market share, complementing our strategy with a relentless drive for progress, which includes business and operational initiatives that we believe will enhance our performance for our stakeholders. As we move into 2025, we are optimistic about the opportunities ahead and the potential for DXP to expand within existing and new markets. Total DXP sales for fiscal 2024 increased by 7.4%, with Innovative Pumping Solutions leading the charge with a 47.7% year-over-year growth to $323 million, followed by Service Centers’ growth of 1.9% to $1.2 billion and Supply Chain Services at $256.4 million. Regarding IPS, we have two main categories tied to capital projects: DXP's traditional energy-related work and DXP's Water. In fiscal 2024, DXP Water accounted for 44% of IPS sales, up from 32% the previous year. We have seen increases in both margins and operating income for this segment. The backlog for DXP Water continues to expand, both organically and through acquisitions, including four acquisitions added this year. Our energy-related bookings and backlog reflect resilience, remaining above long-term averages. Our average energy backlog in Q4 has consistently outperformed DXP's average since 2017. Additionally, our year-to-date average continues to surpass long-term average IPS backlog levels dating back to 2015, a trend highlighted earlier this year. This suggests that bookings are strong, and we are optimistic about how this will affect our revenue from both energy and water projects as we progress through 2025. In maintaining our growth, our primary focus within IPS will be to manage demand, seek out opportunities in energy, biofuels, food and beverage, water and wastewater markets, and price effectively amidst supply chain fluctuations and inflation dynamics. In our Service Centers, the variety of end markets, multi-product approach, and MRO nature help us maintain resilience and achieve year-over-year growth in fiscal 2024. Regions showing growth include North Central, South Rockies, and Southwest, along with our Canadian rotating equipment business. We anticipate favorable conditions in our end markets in the near future. We have also observed positive momentum in our U.S. Safety Services and metalworking product divisions. Supply Chain Services saw a slight year-over-year decrease, mainly due to customer facility closures and minor declines across energy-related sites. However, SCS has invested in developing a customer care model that allows clients to benefit from DXP's remote technology without requiring permanent on-site presence. This approach enables us to extend SCS's technology to smaller accounts and enhance business relationships. SCS is committed to growing our industrial customer base with improved marketing and lead generation strategies. As we enter fiscal 2025, we anticipate increased demand for SCS services thanks to the proven efficiency of our technology. DXP achieved gross profit margins of 30.9% for the year, reflecting a 77 basis point improvement over 2023, showcasing consistent performance across segments throughout the year, bolstered by acquisitions that enhanced gross profit margins. Meanwhile, Service Centers saw a significant year-over-year improvement in gross margins, while IPS contributed 18% of total sales in 2024 compared to 13% in 2023. Overall, DXP produced adjusted EBITDA of $191.3 million, a 9.8% increase from the previous year, translating to adjusted EBITDA as a percentage of sales at 10.62%, an increase of 24 basis points compared to 2023. In summary, we are satisfied with our overall performance in 2024 and aim to improve our organic sales and marketing strategies, further driving sales growth through acquisitions. We expect fiscal 2025 to focus on maintaining margins while establishing long-term operational efficiencies. Through our strategic investments and initiatives, we will focus on providing world-class tools, processes, training, and technology to create value for our customers and suppliers, enabling our employees to enhance productivity and assist our customers effectively. I wish to genuinely thank all our employees for their passion, dedication, teamwork, and selfless service. We have an outstanding team, and it is an honor to deliver value to all our stakeholders. I am proud of our fiscal 2024 performance and our continuous improvement efforts. We are outpacing the market in sales growth and expect to maintain this momentum in the near future. We plan to optimize SG&A, manage working capital, and generate free cash flow. Should organic sales slow, we will use that opportunity to grow profitability through acquisitions. DXP is well-prepared to navigate inflation, as we effectively pass on any increases to our customers. Our sales have increased at an annual growth rate of over 15.7% since 2020, achieving new highs in both revenue and profitability. I want to extend my gratitude to our stakeholders, especially our dedicated team. With that, I will now turn the call back to Kent Yee.

Kent Yee, CFO

Thank you, David, and thank you to everyone for joining us for our review of our fourth quarter and fiscal year 2024 financial results. Fiscal 2024 was another record year and a new watermark in terms of sales and gross margins. Additionally, as our second fiscal year of 10% plus adjusted EBITDA margins, we are excited to report these results, and we look forward to moving into fiscal 2025. Specifically, fiscal year 2024 financial performance reflects our ability to continue to execute on key themes that we have been focused on over the past 3 to 5 years. Overall, DXP's fiscal 2024 financial results reflect the following: Strong year-over-year sales growth driven by Innovative Pumping Solutions and acquisitions; continued gross margin strength and stability; consistent operating leverage leading to sustained adjusted EBITDA margins, more notably our second year of 10%-plus adjusted EBITDA margins; continued execution on our acquisition strategy, completing seven acquisitions; and DXP Water crossing the $100 million-plus sales mark; successfully refinancing and repricing our term loan B, including raising an incremental $105 million and reducing interest costs by 100 basis points; and continued capital return to shareholders through our share repurchase program. Total sales for the fourth quarter increased 15.7% year-over-year to $470.9 million. That said, this reflects improvement in sales per business day going from $7.39 million in Q3 with 64 business days to 62 days in Q4 or $7.595 million sales per day in Q4. Acquisitions that have been with DXP for less than a year contributed $34.8 million in sales during the quarter. Total sales for DXP for fiscal year 2024 were $1.8 billion, increasing 7.4% compared to fiscal 2023. For the full year, acquisitions contributed $98.5 million in sales. Average daily sales for the fourth quarter were $7.595 million per day, as previously mentioned, or up 2.8% compared to Q3 2024 and were up 13.8% versus Q4 of 2023 or our sales per business day of $6.67 million in Q4 of 2023. Average daily sales for fiscal year 2024 were $7.123 million per day versus $6.61 million per day in fiscal 2023, a 7% increase. In terms of our business segments, Innovative Pumping Solutions grew 47.7% year-over-year. This was followed by Service Centers growing 1.9% year-over-year and Supply Chain Services slightly declining at 1.5% year-over-year. In terms of Innovative Pumping Solutions, we continue to experience increases in the energy and water-related backlog. Our Q4 energy-related average backlog grew 17.5% over our Q3 average backlog, which continues to be a notable uptick compared to Q1 of this year and continues to be ahead of our 2015, 2016, and 2017 average backlog. It is worth noting that our energy backlog includes a significant project win that is currently estimated to meaningfully impact our sales performance in Q1 or Q2 of 2025. Adjusting for this project, our energy backlog grew 8.7% sequentially. That said, the conclusion continues to remain that we are trending meaningfully above all historical sales levels and we are moving towards 2014 sales levels based upon where our backlog stands today. We also see strength in our IPS Water backlog as it continues to grow due to a combination of organic and acquisition additions. In terms of our DXP Water backlog, as of Q4, we are up 108% compared to Q4 of last year. Adjusting for recent acquisitions, the DXP Water backlog is up 39.5% organically. We have been experiencing strong organic sales growth within IPS and expect that trend to continue in 2025. In terms of our Service Centers, regions within our Service Center business segment, which experienced notable sales growth year-over-year, include the South Rockies, North Central, and the Southwest. Additionally, we saw notable strength year-over-year in our Canadian rotating equipment and U.S. safety services businesses. Key products and end markets continue to drive sales performance also include rotating equipment, water and wastewater, food and beverage, and energy. Supply Chain Services performance reflects the impact of some facility closures with our customers and declines across our energy-related SCS customers as well as the streamlining and efficiencies we brought to our new customers that we have added over the last couple of years. As we move into fiscal 2025, we will look for new customer additions and a return to sales growth. Turning to our gross margins. DXP's total gross margins were 30.87%, a 77 basis point improvement over fiscal year 2023. This improvement was driven by strength in our Service Center business segment, showing the greatest improvement in margins improving 83 basis points on a year-over-year comparative basis. This was followed by a 114 basis point improvement from Supply Chain Services. That said, from a segment mix sales contribution, Service Centers contributed 67.9%; Innovative Pumping Solutions, 17.9%; and Supply Chain Services was 14.2%. Compared to last year, IPS mix contribution was higher at 17.9% in 2024, which impacted margins positively versus 2023. In terms of operating income, combined all three business segments, increased 27 basis points in year-over-year business segment operating income margins or $18.8 million versus fiscal 2023. This was primarily driven by improvements in operating income margins across Innovative Pumping Solutions and Supply Chain Services business segments. IPS operating income margins improved 57 basis points driven by the addition of Water and Wastewater acquisitions and overall improvement within the energy-related IPS business. Supply Chain Services operating income margins improved 21 basis points on a year-over-year comparative basis. Total DXP operating income increased $6.7 million versus fiscal 2023 to $145.4 million. Our SG&A for the full year increased $44.3 million from fiscal 2023 to $410.9 million. The increase reflects the growth in the business, including acquisitions and associated incentive compensation as well as DXP investing in its people through merit and pay raises as well as the addition of new personnel. SG&A as a percentage of sales increased slightly to 22.8% versus 21.8% of sales in fiscal 2023. We still anticipate that DXP will benefit from the leverage inherent in the business despite increased operating dollars supporting our growth and the impacts of acquisitions. Turning to EBITDA. Fiscal 2024 adjusted EBITDA was $191.3 million. Adjusted EBITDA margins were 10.6%. This is our second fiscal year with adjusted EBITDA margins in excess of 10%, and we will look for this to continue in fiscal 2025. Year-over-year adjusted EBITDA margins increased 24 basis points or $17 million. This reflects the fixed cost SG&A leverage we experienced as we grow sales. This translated into 1.3x operating leverage. In terms of EPS, our net income for fiscal 2024 was $70.5 million. Our earnings per diluted share for fiscal 2024 was $4.22 per share versus $3.89 per share last year. Adjusting for one-time or non-cash items associated with our $650 million refinancing during Q4 and other items, our earnings per diluted share for fiscal 2024 was $4.51 per share. Our adjusted diluted EPS in Q4 was $1.38 per share. Turning to the balance sheet and cash flow. In terms of working capital, our working capital increased $20.9 million from December of 2023 to $296.3 million. As a percentage of sales, this amounted to 16.4%, which is in the lower half of our targeted range of 15% to 20% of sales. At this point, we have moved in line with our historical averages or ranges in terms of investing in working capital and we have moved off our Q3 2022 high point of 19.9% of LTM sales. We do anticipate further acquisitions as we move into fiscal 2025. This could cause us to move upwards, albeit we are focused on managing working capital as efficiently as possible as we scale and grow. In terms of cash, we had $148.3 million in cash on the balance sheet as of December 31. This is a decrease of $24.8 million compared to the end of Q4 2023 and an increase of $113.3 million since September. This reflects the refinancing of our existing term loan B in the fourth quarter and the strong cash flow generation we experienced during the fourth quarter, which we will touch upon later in my comments. As it pertains to our Term Loan B, as a reminder, during the fourth quarter, we announced that we refinanced and repriced our Term Loan B, which maintains our maturity at October 2030. We successfully repriced the new Term Loan B, reducing our borrowing cost by 100 basis points to SOFR plus 3.75 versus SOFR plus 4.75 while also raising the incremental $105 million in capital to support our acquisition and investments program over the next 9 to 12 months. In terms of CapEx, CapEx for fiscal 2024 was $25.1 million versus $12.3 million in fiscal 2023. This increase reflects reinvestment in some of our facilities and equipment, software, and related investments to drive improvement and efficiencies on behalf of our employees. As we move forward, we will continue to invest in the business as we focus on growth. Turning to free cash flow. We generated solid operating cash flow during the fourth quarter as we did during the first and third quarter. During Q4 and for fiscal 2024, we had cash flow from operations of $32.1 million and $106.2 million, respectively. For fiscal 2024, this translated into $77.1 million in free cash flow. While we continue to make improvements in our free cash flow when we are growing, DXP tends to make significant investments in inventory and project work in our facilities, equipment, and software, similar to what we did in 2023. That said, a majority of our CapEx is growth-oriented and controllable, and we have the ability to pivot if necessary. Return on invested capital or ROIC for fiscal 2024 was 39% and continues to be above our cost of capital and it is reflecting our improved profitability levels and efficient working capital management. As of December 31, our fixed charge coverage ratio was 1.7:1, and our secured leverage ratio was 2.43:1 with a covenant EBITDA for fiscal 2024 of $206.2 million. Total debt outstanding on December 31 was $648.9 million. In terms of liquidity, as of December 31, we were undrawn on our ABL with $9.4 million in letters of credit with $125.6 million of availability and liquidity of $273.9 million, including $148.3 million in cash, which some of it has already been used to finance the purchase of a royal process equipment, which we closed subsequent to the fourth quarter. We are excited to have them, and they will start reporting with us for the first quarter of 2025. Welcome to DXP. DXP's acquisition pipeline continues to grow and the market continues to present compelling opportunities. Looking forward, we expect this to continue through fiscal 2025, and we look forward to closing a minimum of 1 to 3 additional acquisitions by the middle of 2025. In terms of capital allocation, we repurchased a return $28.8 million to shareholders via our share repurchase program in fiscal 2024 or a total of 566,000 shares of DXP stock. The last item that I want to briefly touch upon is the outstanding progress we have made with our accounting and finance team. As I mentioned last year, we have invested heavily in growing our finance and accounting department. This has allowed us to continue the path of continuous improvement, which this year is expressing itself in full remediation of all material weaknesses. Progress is never a straight line and we are staying nimble as we continue to grow. We are at an inflection point, and I'm excited to work with PwC, our enhanced team and the entire of DXP as we are scaling in real time organically and through acquisitions. In summary, we are pleased with our fiscal 2024 performance. We achieved record adjusted earnings performance at $4.51 per share, higher earnings and improved working capital efficiency delivered a 40% free cash flow conversion to EBITDA of 7.4% sales growth. These achievements contributed to a remarkable annual ROIC of 39%, demonstrating gains from our strategic initiatives as well as our disciplined approach to capital allocation and our acquisition strategy. Heading into 2025, we refreshed our balance sheet, which allows us to continue to invest in the business, both organically and through acquisitions while also returning capital to our shareholders, an exciting time to be a part of DXP. We are excited about the future. We will keep our eyes focused on those things we can control and what is ahead of us. What is in front of us is always bigger than what is behind us and the best is always ahead. We look forward to a successful fiscal 2025. I will now turn the call over for questions.

Operator, Operator

Your first question comes from the line of Zach Marriott with Stephens.

Unknown Analyst, Analyst

Is there any color you can share on daily sales trends by month for both Q4 and so far into Q1?

David Little, Chairman and CEO

Yes. No, absolutely, Zach. Starting back in Q4 in October, if you will, sales per business day was $7.2 million, $7.5 million, and then $8.1 million for December. And then starting off here in 2025, sales per business day for January and February were $6.8 million per day in January and then $7.8 million per day in February.

Unknown Analyst, Analyst

Great. And then also for margins quarter-over-quarter. How are those trending? And are there any noteworthy factors in March that may change that trajectory?

Kent Yee, CFO

I don't think we have full visibility into our margins at this point in time for Q1 necessarily. But I think what you're getting at, Zach, is from Q3 to Q4, our gross margins went up pretty significantly. And I think that's just a continued function of mix. Overall, once again, our water, wastewater acquisitions tend to be at an overall higher gross as well as EBITDA margins, and with us at the end of the year closing out some of the acquisitions and then performing with us longer, they started to contribute in a higher fashion. So I think that's what you saw going from Q3 to Q4. And obviously, going into Q1, we would like for that to continue. But we also have some, once again, always some strong initiatives in driving sales dollars, if you will, that impact mix on our base businesses.

David Little, Chairman and CEO

I want to jump in and add just a little bit. Our goals have been to get to 10% EBITDA margins. We were told that would make a big difference in the valuation of our company. And so we hit that. And so now we've changed our goal to 11%. People are their pays in alignment with those goals. And so they obviously make more if they hit them than if they don't. And so we're really pleased with the progress we've made throughout the year, and we look forward to continue to improve.

Operator, Operator

I will now turn the call back over to David Little, Chairman and CEO, for closing remarks. Please go ahead.

David Little, Chairman and CEO

Thank you, Eric. This year, our peer group saw no growth, with most experiencing a decline. I am working to transition our focus away from the oil and gas sector. We have successfully sold a significant number of pumps and equipment to this market, but we are also working to reduce its share of our overall business. Our efforts are directed towards diversifying our market presence, and we are seeing positive outcomes from that strategy. We are also focused on improving our gross profit margins while ensuring fairness to our customers. We are heavily investing in driving scale and efficiency, and we anticipate improvements as we progress. I believe our goal of reaching 11% EBITDA margins is very achievable in the near future. However, potential challenges could arise if tariffs or other factors slow the economy down, which would affect sales. So far, we haven't observed any downturns, although there is uncertainty regarding tariffs and inflation. I want to emphasize that moderate inflation is beneficial for us as it boosts our sales and elevates the value of our inventory, without pressuring our margins. This is generally favorable. Naturally, we need to accommodate pay raises for our team and manage increased costs appropriately. Fortunately, we have successfully navigated inflation throughout my tenure. We feel optimistic about our position. I want to acknowledge our DXPeople for their hard work on various projects in addition to their regular duties. Their efforts are greatly appreciated, especially from a stakeholder perspective, of which I am a significant part. In conclusion, I would like to thank everyone. If the stock price is low, I plan to buy back shares; if it’s high, I will celebrate. Thank you all, and have a great day.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.