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DXP Enterprises' (DXPE) CEO David Little on Q2 2016 Results - Earnings Call Transcript

DXP Enterprises, Inc. (NASDAQ:DXPE)

Q2 2016 Earnings Conference Call

August 9, 2016 5:00 p.m. ET

Executives

Mac McConnell - SVP Finance, CFO

David Little - President and CEO

Analysts

Matt Duncan - Stephens, Inc.

Joe Mondillo – Sidoti & Co.

David Mandell - William Blair & Co.

Ryan Mills - KeyBanc Capital Markets

Operator

Good day and welcome to the DXP Enterprises Incorporated Second Quarter Conference Call. Today's conference is being recorded.

At this time I would like to turn the conference over to Mac McConnell, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Mac McConnell

Thank you. This is Mac McConnell, CFO with DXP. Good afternoon and thank you for joining us. Welcome to DXP's second quarter results conference call. David Little, our CEO, will also speak to you and answer your questions.

Before we begin, I want to remind you that today's discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings.

I will begin with a summary of DXP's second quarter 2016 results. David Little will share his thoughts regarding the quarter's results. Then we will open the call to answer questions.

Sales for the second quarter of 2016 decreased $67.5 million or 20.8%, to $256.2 million from $323.7 million for the second quarter of 2015. After excluding second quarter 2016 sales of $6.3 million for Cortech, which was acquired on September 1, 2015, sales for the second quarter decreased $73.8 million or 22.8% on a same-store sales basis. This decrease was primarily the result of decline in sales to customers engaged in the upstream oil and gas market.

Sales by our Service Center segment in the second quarter of 2016 decreased $52.3 million or 24.4%, to $161.8 million compared to $214.1 million for sales -- of sales for the second quarter of 2015. After excluding 2016 Service Center segment sales of $6.3 million from Cortech, Service Center segment sales for the second quarter of 2016 decreased $58.6 million or 27.4% from the second quarter of 2015 on a same-store sales basis. This sales decrease is primarily the result of decreased sales of bearings, pumps, metalworking products, and safety services to customers engaged in the upstream oil and gas markets, or manufacturing equipment for the upstream oil and gas markets. The strength of the U.S. dollar also contributed approximately $1.4 million to the sales decline.

Sales of our Innovative Pumping Solutions products decreased $12.6 million or 18.8% to $54.4 million, compared to $61.9 million for the 2015 second quarter. This decrease was primarily the result of the decline in capital spending by oil and gas producers and related businesses.

Sales for Supply Chain Services decreased $2.6 million or 6.2% to $40 million, compared to $42.7 million for the 2015 second quarter. The decrease in sales is primarily related to decreased sales to customers in the oilfield services, oilfield equipment manufacturing, and trucking industries. When compared to the first quarter of 2016, sales for the second quarter of 2016 increased $2.7 million or 1%. This increase was primarily the result of increased IPS segment sales to customers engaged in the upstream oil and gas and related industries.

Second quarter 2016 sales by our Service Center segment decreased $5.7 million or 3.4% compared to the first quarter of 2016. Second quarter 2016 sales for Supply Chain Services increased $1.4 million or 3.6% compared to the first quarter of 2016. Second quarter 2016 sales of Innovative Pumping Solutions products increased $6.9 million or 14.6% compared to the first quarter of 2016.

Gross profit for the second quarter of 2016 decreased 21.6% from the second quarter of 2015, compared to the 20.8% decrease in sales. Gross profit as a percentage of sales decreased to 27.9% in the second quarter of 2016 compared to 28.2% for the second quarter of 2015. This decrease is the net of an approximately 200-basis-point increase in the gross profit percentage in our IPS segment, a 120-basis-point increase in our supply chain segment, and a 100-basis-point decline in the gross profit percentage in our Service Center segment.

The increase in the gross profit percentage for the IPS segment is primarily the result of a better mix of higher-margin jobs in the second quarter of 2016 compared to the second quarter of 2015. The decline in the gross profit percentage for our Service Center segment is primarily the result of declines in sales of higher-margin safety services and metalworking products. The gross profit percentage of the Supply Chain segment increased as a result of decreased sales of lower-margin products to oilfield service and trucking related customers.

Gross profit as a percent of sales for the second quarter of 2016 increased to 27.9% from 27.1% for the first quarter of 2016. This increase is primarily -- is primarily the net of a 15-basis-point decline in the gross profit percentage in our Service Center segment, an approximate 520-basis-point increase in the gross profit percentage in our IPS segment, and flat gross profit percentage in our supply chain segment. The decline in the gross profit percentage for our Service Center segment is primarily the result of declines in sales of higher-margin pumps, safety services, and metalworking products. The gross profit percentage for the IPS segment increased because of a better mix of jobs in the second quarter compared to the first quarter.

SG&A for the second quarter of 2016 decreased $14.5 million or 18.8% from the second quarter of 2015. After excluding second quarter expenses from Cortech of $1.8 million, SG&A decreased by $16.3 million or 21.1% on a same-store sales basis. The majority of the decline in SG&A is a result of a $9.8 million decrease in payroll, incident compensation, payroll taxes, and 401(k) matching, due primarily to 2015 and 2016 headcount and salary reductions. Additionally, amortization expense declined $1 million and meals and entertainment, vehicle and legal expenses declined $1.3 million on a same-store sales basis.

As a percentage of sales, SG&A increased to 24.5% for the second quarter of 2016, from 23.9% for the second quarter of 2015, as a result of sales decreasing 20.8% while SG&A declined by only 18.8%. SG&A in the second quarter includes approximately $650,000 of severance related costs for employees terminated during the second quarter of 2016.

SG&A for the second quarter of 2016 decreased $18.1 million or 11.4% from the first quarter of 2016. The majority of the decline in SG&A is the result of a $6.5 million decrease in payroll, incident compensation, payroll taxes, 401(k) matching, and health claims, due primarily to 2016 headcount and salary reductions. Additionally, training, meals, travel and vehicle expenses declined. As a percentage of sales, SG&A decreased to 24.5% from 27.9% for the first quarter of 2016, as a result of sales increasing 1% while SG&A declined by 11.4%.

Corporate SG&A for the second quarter of 2016 decreased $2.5 million or 22.1% from the second quarter of 2015 and decreased $1.9 million or 17.3% from the first quarter of 2016. The year-over-year decrease in the sequential quarter-over-quarter decrease was primarily the result of reduced compensation related expenses including lower health claims.

DXP has agreed to terms of a proposed de minimis but the bank group has not completed approval of the amendment. We expect the bank amendment to be finalized by Monday, August 15, at which time we plan to file our 10-Q for the second quarter. The proposed terms provide a financial covenant holiday through and including June 30, 2017 for the consolidated leverage ratio and the fixed charge coverage ratio, increases interest rates by 175 basis points, sets the asset coverage ratio at 0.95 to 1 beginning on June 30, 2016 through March 31, 2018, schedules principal reductions in the amount of the line of credit and term loan, and changes the maturity of the credit facility to March 31, 2018.

Interest expense for the second quarter of 2016 increased 52.4% from the second quarter of 2015 and 15.9% from the first quarter of 2016. This increase was primarily due to the write-off of $600,000 of debt issuance cost during the second quarter, combined with increased interest rates. The write-off of debt issuance costs resulted from the proposed reductions and the revolving credit and term loan commitments and connections with the proposed amendment to our credit facility.

Total long-term debt decreased approximately $17.1 million during the second quarter of 2016. The decrease in debt during the quarter is primarily the result of second quarter operations. As of yesterday morning, our debt balance had decreased by approximately $9 million since June 30. DXP is generating free cash flow and paying down debt. Our bank leverage ratio was 5.94 to 1 at June 30, 2016.

At June 30, our borrowings under the credit facility were at a rate of approximately 3.72%. Under the proposed amendment, our interest rate will increase by an additional 175 basis points as a result of the amendment. If the proposed amendment were in effect today, the interest rate we would be paying would be approximately 5.5%.

Capital expenditures were approximately $1,240,000 for the quarter. Cash on the balance sheet at June 30 was $1,087,000. Accounts receivable and inventory balances were $159,000, $147,000 and $98,397,000, respectively, at June 30, 2016.

Now I would like to turn the call over to David Little.

David Little

Thanks, Mac, and thanks everyone on our conference call today.

I would like to personally thank all of our DXPeople for their creativity and resilience. I also want to thank our supplier partners for their support during these difficult economic times we are both facing over the last couple of years.

Similar to the first quarter, let me begin with a review of market conditions and then summarize our performance in today's environment and provide direction for DXP going forward. Then we will open the call for questions.

As we all remember, the first quarter was a story of two halves. During the second half of the first quarter, oil prices began to rise, removing concerns of an outright collapse. The price is well above the loads reached earlier in February. During the second quarter we experienced less volatility, even though more recently oil prices have begun to pull back to where we started at the beginning of the second quarter.

While the apparent stability was encouraging our customers, they remain cautious with capital spending and capital budgets. We will believe -- we still believe the more important criteria for our customers is stability versus the absolute price of oil. This will require several quarters of consistency before meaningful activity resumes. That said, there is activity in maintenance repair and operating side of business, as well as capital projects, and we are fighting for more than our share every day.

DXP industrial and other end-markets outside of oil and gas appear to trough in the first quarter and were stabilizing at low levels moving along the bottom. Unfortunately, we're still experiencing mixed signals, although we are optimistic that we are moving along the bottom. Overall there will be continued belt tightening and optimism varies depending upon the...


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