Q4 2023 DXP Enterprises Inc Earnings Call

Participants

Kent Yee; Senior Vice President & CFO; DXP Enterprises Inc

David Little; Chairman of the Board, President, Chief Executive Officer; DXP Enterprises Inc

Max Kane; Analyst; Stephens Inc

Presentation

Operator

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. Finally, I would like to welcome everyone to the DXP Enterprises 2023 Fourth Quarter and Fiscal Year 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to reserve your question again, press star one. I would now like to turn the conference over to Kent, the Chief Financial Officer. Please go.

Kent Yee

Thank you, Desiree, and thank you, everyone, for joining us today. This is Kent Yee, and welcome to DXP's Q4 2023 conference call to discuss our results for the fourth quarter and fiscal year ending December 31st 2023. 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 because of new information or future events or 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 the fourth quarter and fiscal 2023 performance and financial results.

David Little

Thanks, Kent, and thanks to everyone on our 2023 fourth-quarter and fiscal 2023 conference call. I am pleased to report record full year results for our key financial metrics, sales, sales per day, gross profit margins and adjusted EBITDA margins. These results demonstrate the power of our DX people, products processes to serve the needs of our customer. They also highlight the benefit of our broad and diverse exposure to different end markets and regions and our disciplined capital allocation strategy. It is my privilege to share DXP's fourth quarter and physical 2023 results with you on behalf of over 2,837 DX people. Congratulations to all our stakeholders and a special thanks to our DX people.
You can trust physical 2023 was another successful year for DXP growing sales, 13.4% to $1.7 billion. We are excited to move into fiscal 2024 with the momentum and results of 2023. One of our key long-term themes themes winning at max margins converted into improving gross profit margins by 160 basis points to 30.1%. We are transitioning our theme and to 2024 from winning at max margins to winning at max margins while maximizing operating efficiencies.
And it is an investment fiscal year 2023 was a record year in terms of sales dollars, achieving a new high sales watermark for DXP, while also achieving the physical year of 10% plus adjusted EBITDA margins, we executed on our constant goal of 10% plus sales growth and 10% EBITDA margins. And we will look to maintain that as we enter into fiscal 2024 and thus focusing on driving operating efficiencies while still growing the business. We continue to successfully execute on our end market goals of diversification and scale.
At the end of physical 2023, energy was 25% of our business followed by chemical at 10% and with water and wastewater and food and beverage at 7% each and manufacturing and general industry at 8% and 12% respectively. In other words, DXP has continued to deliver on balancing our risk from an end market perspective, and we see that in our fiscal 2023 results. And we look forward to the interplay of these markets in 2024.
Dxp's sales and operational professionals for teaming up together and winning for our customer and stakeholders. Thank you to our corporate support team for their efforts to support both internal and external customers.
And thank you, DXP, for an awesome year. Our future looks bright. In fiscal 2023. I mentioned, we contain We continue to soundly execute on diversifying end markets with a focus on water and wastewater and other industrial markets.
We also continue to execute on acquisitions, adding three great companies during the year, including Florida, valve board and and alliance pump and mechanical, also executing on our share repurchase repurchase program and refinancing our debt in the second half of 2023, cleaning up our capital structure and positioning DXP for organic and inorganic growth in 2024.
We continue to be excited about the future and delivering a differentiated customer experience, creating an engaging winning culture for DXP and investing in our business to strengthen our core capabilities and drive long-term growth.
For physical 2023, DXP's sales were 13.4% and operating income was up 41.9% compared to 2022 fiscal year 2023, and adjusted EBITDA were 1.6 billion and 174 million, respectively, with adjusted EBITDA margins of 10.38%. Our strategy has always been to combine the financial strength, talent, resources, technology and capabilities of a large company with the fast flexible entrepreneurial capabilities of our local business to deliver superior value to our customers and our suppliers while providing better growth opportunities for our DX people.
We continue to believe in this approach and look to renew our commitment to people, processes and resources and technology as we scale DXP and remain focused on doubling the size of our business over the next three to five years, while making strategic investments that match the evolution of DXP from a sales per day standpoint, DXP experience continued improvement throughout the year with Q1 averaging six points six to nine.

Operator

And gentlemen, this is the operator. We are currently having technical difficulties. Your call will resume shortly Until that time your lines will be placed on music hold.
Thank you for patients, gentlemen, this is the operator we are currently having.
Ladies and gentlemen, I would now like to turn the conference over to Kent Yee, Chief Financial Officer. Please go ahead.

Kent Yee

Thank you. Desiree, David will just hand it back to you to pick up where you left off.
Okay.

David Little

Total DXP sales for Q4 were $407 million or $6.673 million per business day. Our profits for the quarter were positively impacted by a sequential increase in gross profit margins as well as an increase in SG&A expense associated with continued investment in our business. However, in the midst of contained change in growth, our year over year earnings showed improvement and resiliency as we grew diluted earnings per share to 3.89.
Sir, again, thank you to the 2,837 DX people for your hard work and dedication and finishing the year as it's as strong as possible. It is always my pleasure to share our fourth quarter and year financial results on their behalf in terms of cash flow and liquidity.
We generated $94 million of free cash flow in fiscal 2023, which reflects DXP's focus on generating consistent cash flow on investing and the related working capital as the business continues to grow. This, combined with the flexible capital structure, put us in a position where we could keep executing on our acquisition strategy as well as returning capital to our shareholders via via opportunistic share repurchase.
As we have discussed, acquisitions have continued diversify our end market exposure and position us well through some through various economic cycles, and we are excited about 2024 and the growth we are pushing to see both organically and through organic acquisitions as we continue to have a strong pipeline of opportunities. We're excited to have three new companies join us during the year of 2023 on top of the four we completed during 2020 to Florida valve and equipment brought and and alliance pump and mechanical have been great additions to the DXP family through all of our recent acquisitions. Welcome to DXP.
We are excited to have you and it is a it is great having you as a part of DXP, the X. people have continued to find ways to deliver financial results and position us well for all our stakeholders in the face of extraordinary challenges. This is evidenced by our sales growth, improved gross profit margins, acquisitions and the overall teamwork of the DX people. We continue to build our capabilities to provide complementary set of products and services in all our markets, which makes DXP very unique in our industry and gives us more ways to help our customers win we also are consistently looking at reviewing opportunities where we can grow market share.
We continue our strategy with a relentless drive for progress that includes business and operational initiatives, which we believe will allow us to steadily improve our performance for all of our stakeholders as we go into 2024, we are excited about the opportunity ahead and the potential DXP has to continue to scale and grow within existing and new markets. Total DXP sales and physical 2023 were up 13.4% with service centers leading the way at $1.1 billion, followed by Innovative Pumping Solutions at $273 million, and then supply chain services at 260 million in terms of service centers.
The diversity of end markets and our MRO nature within Service Centers allows us to continue to remain res. zillion and continue to experience consistent top line year-over-year growth from a regional perspective, the majority of our regions continue to experience year over year growth, including the North Rockies, Alaska, Texas, Gulf Coast and South Central. Additionally, we continue to see strength in our air compressor product division, and we continue to expect that our end markets will remain constructive over the near future for that to be energy as it pertains to energy skinny.
We believe that we could be in the early stages of an upcycle supported by energy transition, which has been consistent with our recent commentary over the last three quarters in terms of IPS, our Innovative Pumping Solutions, our Q4 average IPS backlog continues to stay ahead of the physical 2022 average. Additionally, our year to date average continues exceed our long-term averages. Rps backlog going back to 2015, which we highlighted Accuray occurred for the first time in the second quarter and continue as we move into 2024 what this indicates is that we are continuing to increase our bookings. And we mentioned or as we mentioned earlier, we're likely in the front end of a good cycle on the energy related project work that we look forward to as we move into 2024.
As we maintain growth, our main focus within IPS will be managing to the demand level we have finding opportunities in all markets such as energy, biofuels, food and beverage and water and wastewater and pricing appropriately given the supply chain dynamics and the ebbs and flow of inflation. Supply Chain Services experienced an increase year over year, primarily due to new customers that we added this year. Our customer end markets contributing to SCSCS. and 2023 included energy, medical technology and food and beverage.
That said, demand for SES's services and increase is increasing because of proven technology and efficiencies that they perform for all their customers, but the sales cycle can be protracted. And we look to our SCS leaders to add new customers as we move into 2024.
Dxp's overall gross profit margins for the year were 30.1%, a 160 basis point improvement over 2022. We displayed consistent gross margin performance within our different segments throughout the year and added accretive gross profit margins through acquisitions.
As said, service centers and IPS had meaningful improved gross profit margins year over year. Overall, DXP produced adjusted EBITDA of $174.3 million or an increase of 32.4% year over year. Adjusted EBITDA as a percent of sales was 10.38% or an increase of 182 basis points compared to 2022.
In summary, we are pleased with our overall performance in 2023. We look to continue to drive improvement in our organic sales and marketing strategies, drive further sales growth through acquisitions and anticipate fiscal 2024 to be a year focused on maintaining margins while driving and laying the ground for groundwork for long-term operating efficiencies.
Overall, though, through our strategic investments and initiatives, we will remain focused on providing world-class tools, processes, training technology to deliver value to our customers and suppliers and to help our DXP people be more productive so that they can better help our customers win.
I would like to sincerely thank all of our DXP people who contains to show show up to work with their passion, commitment, teamwork and selfless service. We have a tremendous team and it is an honor to deliver value for all our stakeholders. I am pleased by our performance in fiscal 2023. I am proud of our efforts to continue to improve.
We are working well. We are growing sales in excess of the market and expect and in the near future, we expect to drive strong SG&A leverage, manage working capital and generate free cash flow if organic growth slows then free cash flow will grow and we will take advantage of the economy to grow profitably, both organically and through acquisitions.
We have grown sales on a compounded annual growth rate of over 7% since 1920 19. And we have achieved new highs in both sales and profitability. And I would like to thank all our stakeholders and especially our DX. people.
But with that, I will now turn it back to Kent to review the financials in more detail.

Kent Yee

Thank you, David, and thank you to everyone for joining us for our Fourth Quarter and Fiscal Year 2020 Financial Results. Fiscal 2023 was a record year, a new watermark in terms of sales and gross margins.
Additionally, it is our first fiscal year of 10% plus adjusted EBITDA margins. We are excited to report these results and we look forward to moving into fiscal year 2020. Specifically fiscal year 2023 financial performance reflects our ability to continue to execute on key themes that we have been focused on over the past three to five years.
Overall, DXP's fiscal 2023 financial results were great to see and reflect the following strong year-over-year sales growth driven by service centers and Innovative Pumping Solutions on lessening impacts from inflation and price increases compared to a year ago. Continued gross margin strength and stability continued year over year and sequential growth in IPS, energy and water related backlog and activity, consistent operating leverage, leading to sustained adjusted EBITDA margins, continued execution on our acquisition strategy, completing three acquisitions and reaching the early stages of scale within water and wastewater and significant capital return to shareholders through our share repurchase program, a great high watermark year and one that will position us well for 2024 and beyond.
Total sales for the fourth quarter increased 0.2% year over year to $407 million. That said, this reflects improvement in sales per business day going from $6.655 million in Q three with 63 business days to 61 days in Q4 or $6.673 million sales per business day acquisitions that had been with DXP for less than a year contributed $2.8 million in sales during the quarter.
Total sales for DXP for fiscal 2023 were $1.7 billion, increasing 13.4% compared to fiscal 2022. For the full year, acquisitions contributed $33.1 million in sales. Average daily sales for the fourth quarter were $6.67 million per day, as previously mentioned, are close to flat to Q3 2023 and were up 1.8% versus Q4 2022. For our sales per business day of $6.55 million in Q4 2022. Average daily sales for the fiscal year 2023 were $6.6 million per day versus $5.85 million per day in fiscal 2022.
In terms of our business segments, Innovative Pumping Solutions grew 18.2% year over year. This was followed by service centers growing 13.5% year over year. And supply chain services growing 8.3% year over year.
In terms of our service centers, Regions within our Service Center business, segment, which experienced notable sales growth year over year include the North Rockies, Alaska, Texas, Gulf Coast and South Central key products and end markets continue to drive sales performance include air compressors, rotating equipment, water and wastewater, chemical, general industrial, food and beverage, transportation and energy.
Supply Chain Services performance continues to reflect the impact of the addition of new customers and specifically a large diversified chemical customer that we added in Q2 of last year and has fully ramped as of Q2, Q2 of 2023.
That said, while supply chain service experienced a decline year over year in Q3 and Q4. This is primarily due to some facility closures with existing customers as well as the Streamline inefficiencies. We brought to new customers that we added this year for fiscal 2023, Supply Chain Services grew 8.3%. And as we move into fiscal 2024, we will look for new customer additions.
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 5.2% over our Q3 average backlog, which continues to be a notable uptick uptick excuse me, compared to Q1 of this year and continues to be ahead of our 2015, 2016 and 2017 average backlog.
The conclusion continues to remain that we are trending meaningfully above 2016 and 2017 sales levels, and we are moving towards 2015 levels based upon where our backlog stands today, we have been experiencing strong organic sales growth within IPS. We experienced that in Q4 of 2023 and expect that trend to continue into 2024. In terms of our DXP water backlog, as of Q4, we are up 37 plus percent compared to the industry.
Turning to our gross margins, DXP's total gross margins were 30.1%, a 160 basis point improvement over fiscal 2022. This improvement was driven by strength in our IPS business segment, showing the greatest improvement with margins improving 349 basis points on a year-over-year comparative basis.
This was followed by a 146 basis point improvement from service centers that said from a segment mix, sales contribution, service centers contributed 68.2%, Innovative Pumping Solutions 16.3%, and supply chain services contributing 15.5% compared to last year. Ses's mix contribution was higher at 16.2%, which impacted gross margins slightly in fiscal 2022.
In terms of operating income combined, all three business segments increased 174 basis points in year-over-year business segment operating income margins for $16.3 million versus fiscal 2022. This was driven by improvements in operating income margins across all three business segments. Ips operating income margins improved 324 basis points, driven by the addition of water and wastewater acquisitions and overall improvement within the energy related IPS business.
Service center operating income margins improved 170 basis points on a comparative basis and year-over-year operating income margins, Supply Chain Services operating income margins improved 14 basis points on a year-over-year comparative basis. The improvement in service center reflects the impact of acquisitions at a higher relative operating income margin. Total DXP operating income increased 166 basis points versus fiscal 2022 to $138.7 million.
Our SG&A for the full year increased $42.3 million to $366.6 million increase reflects the growth in the business and associated incentive compensation as well as DXP investing in its people through merit pay raises as well as the addition of new personnel. Sg&a as a percent of sales decreased slightly to 21.84% versus 21.9% of sales in fiscal 2022. 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 2023 adjusted EBITDA was $174.3 million. Adjusted EBITDA margins were 10.4%. This is our first fiscal year with adjusted EBIT adjusted EBITDA margins in excess of 10%, and we will look for this to continue year over year.
Adjusted EBITDA margins increased 182 basis points or $47.5 million. This reflects the fixed cost SG&A leverage we experienced as we grow sales. This translated into 2.8 times operating leverage in terms of our EPS, our net income for fiscal 2023 was $68.8 million. Our earnings per diluted share for fiscal 2023 was $3.89 per share versus $2.47 per share last year.
Adjusting for one-time or noncash items associated with our $550 million refinancing during Q4 and other items. Our earnings per diluted share for fiscal 2023 was $4.9 per share. Our adjusted diluted EPS in Q4 was $1.12 per share normalizing our effective tax rate for the Q4 pickup through throughout 2023, diluted EPS would have been $0.69 per share for the fourth quarter.
Turning to the balance sheet and cash flow.
In terms of working capital, our working capital decreased $7.4 million from December of 2020 to EUR272.1 million as a percentage of sales, this amounted to 16.2%, which is below the 18.9% compared to this time last year.
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 up our Q3 2022 a high of 19.9% of LTM sales. We do anticipate further acquisitions. So as we move into fiscal 2024, this could 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 $173.1 million in cash on the balance sheet as of December 31st, this is an increase of $127.1 million compared to the end of Q4 2022 and an increase of $149.9 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 repo repriced our Term Loan B, which now has a maturity of October 2030.
We successfully repriced the new term loan A. Term Loan B, reducing our borrowing cost by 50 basis points to silver plus for 75 versus oh four plus five 25, while also raising an incremental $125 million in capital to support our acquisition and investments program over the next nine to 12 months.
In terms of CapEx, CapEx for fiscal 2023 was $12.3 million versus $4.9 million in fiscal 2022. This increase reflects reinvestment in some of our facilities and equipment on behalf of our employees. As we move forward, we will continue to invest in the business as we focus on growth and 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 of fiscal 2023 we had cash flow from op operations of $42.4 million and 106.2 million, respectively, for fiscal 2023. This translated into $94 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 throughout the year, and we continue to experience these investments as we did in 2023. But we have put a closer eye on managing this as we move through the cycles.
Return on invested capital or ROIC for fiscal 2023 was 38% and continues to be above our cost of capital and is reflecting our improved profitability levels and efficient working capital management. And as of December 31st, our fixed charge coverage ratio was 2.69 to one, and our secured leverage ratio was 2.1 to 1 with the covenant EBITDA for fiscal 2023 of $178.4 million. Total debt outstanding on December 31st was $548.6 million.
In terms of liquidity, as of December 31, we were undrawn on our ABL with $2.9 million in letters of credit outstanding was $132.1 million of availability and liquidity of 3.5 $0.3 million, including $173.1 million in cash, which some of it has already been used to finance the purchases of Hennessy Cathy and Pro sale, which we closed subsequent to the fourth quarter. We are excited to have them and they will start reporting with us during the first quarter of 2024.
In terms of acquisitions, DXP's acquisition pipeline continues to grow and the market continues to present compelling opportunities looking forward, we expect this to continue through fiscal 2024, and we look forward to closing a minimum of a one to three additional acquisitions by the middle of 2024.
In terms of capital allocation, we repurchased or returned $54.7 million to shareholders via our share repurchase program in fiscal 2023. Our totaled 1.7 million shares of DXP stock.
The last item I briefly want to touch upon is the outstanding progress we have made with our accounting and finance team during this year. We invested heavily in growing our finance and accounting department by hiring a new CEO, a new Director of Technical Accounting, then additional assistant controllers.
This has allowed us to continue on the path of continuous improvement, which this year is expressing itself in the remediation of two material weaknesses, positioned us to remediate the risk in fiscal year 2024. As I mentioned back in 2021, we started the transition to PWC.
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 PDVSA, our enhanced team and the entirety of DXP as we are scaling and real-time organically and through acquisitions.
In summary, we are pleased with our fiscal 2023 performance, we achieved record adjusted earnings performance at $4.9 per share, and our cash flow from operations also accelerated with further rooms with further room for improvement, higher earnings, improved working capital efficiency delivered a 54% free cash flow conversion to EBITDA on 13.5% sales growth.
These achievements contributed to our remarkable annual return on invested capital of 38%, demonstrating gains from our strategic initiatives as well as our disciplined approach to capital allocation and our acquisition strategy heading into 2024, we refreshed our balance sheet, which allowed us to continue to invest in the business, both again, both organically excuse me and through acquisitions through the cycle, while also returning capital to our shareholders, an exciting time to be a part of DXP.
We are excited about the future and we will keep our eyes focused on those things we can control and what is ahead of us, what it is, what is in front of us is always bigger than what is behind us and the best is always ahead and we look forward to a successful 2024.
I will now turn the call over for your questions.

Question and Answer Session

Operator

The floor is now open for your questions. (Operator Instructions)
Max Kane, Stephens Inc.

Max Kane

Good afternoon. Thank you for taking my questions.

David Little

Good afternoon, Max, I'm doing fine. What about yourself?

Max Kane

Good, good. Yes, the first question I have is on can you provide any color on quarter-to-date trends for daily sales, including recent acquisitions, if that's possible?

Kent Yee

Yes, no, absolutely. What I'll do is I'll call now and walk back through Q4 and then bring you through February, which we have a flash just in terms of through February.
So in terms of our sales per business day, in October that was 6.392 and November 6.553 and then in December, 7.1 to 5 million in January for severance of 5.9 to $5 million and then in February, $6.37 million. What I'd note there matches off our January First Interstate is up 4.5% year over year. And then our February flash is up 2.5% year over year on a comparative.
Yes.

Max Kane

Got you.
Thank you for the color on that. And I'm wondering the number of selling days you're assuming for?

Kent Yee

1Q And we will have 63 actually business days in the Q1, which is one day lead experts on what we had in 2023. And probably Of note, in March of last year, we had 23 business days. And this year we'll have 20 business days. So three less business days Got you. And then yes, just last question from me on how you're thinking about 1Q adjusted EBITDA margins progressing versus 4Q 23 and in our EBITDA margins today, partially are a reflection of mix, meaning at a very high level service centers versus IPS versus supply chain.
And then as you kind of narrow down from there, some of our more recent themes of water, wastewater and air compressors dependent upon that mix contribution kind of impacts our EBITDA margins today. So all that to say is that, you know, our goal is always 10% plus. And we feel like we've got the appropriate mix today, assuming all businesses are performing to kind of achieve that. But it is influenced a little bit by the mix and the different contributions.

Max Kane

Got it. Thanks for the color, and I'll go ahead and turn it back.

Operator

There are no further questions at this time. Mr. David Little, I turn the call back over to you.

David Little

Yes, thanks. I would I'd like to conclude by thanking our sales team thinking our inside sales team in skiing operations, thinking accounting, thanking everybody everybody contributed to a what I consider a really solid great year in and as it's really appreciated, we're doing a lot of really good things for our customers and a lot of the growth initiatives that I think are helping.
We look forward to 2024 and onward and upward. So I think thank you, everybody, and thanks all are DX people and thank all our stakeholders out there. We'll see you guys next time.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.