Ladies and gentlemen, thank you for standing by, and welcome to the DXP Enterprises, Inc. 2020 First Quarter Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Kent Yee, Chief Financial Officer. Thank you. Please go ahead.

Thank you, Cheryl. This is Kent Yee, and welcome to DXP's Q1 2020 conference call to discuss our results for the first quarter ending March 31, 2020. 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, but 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 little to provide his thoughts and a summary of our first quarter. David?

Good morning, and thank you, Kent. Thanks to everyone for joining us today on our fiscal year 2020 first quarter conference call. Kent will take you through key financial details after my remarks and after Kent's prepared comments, we will then open for Q&A. In light of the coronavirus and its impact to the health of our employees, customers and economy, we're going to share with you our thoughts on these items and our responses before we move into the normal format of our earnings call. Before I start, let me first say that our thoughts and prayers go out to all those impacted by the COVID-19 virus. This is a terrible virus and a pandemic unlike anything we have ever seen. In these unprecedented times, I want to thank each of our DXPeople for their airports income. DXP appreciates the help of all the medical professionals and first-time responders in our various communities, and we pray for their safety and well-being as they put themselves at risk daily to serve the people of their countries worldwide and attempt to make it safer for everyone. DXP also appreciates the support of our DXP suppliers as we navigate through our new normal together with ample supply of inventory as we were viewing fiscal year 2020 as a growth year for DXP. Accordingly, we are in good shape with our supplier partners and experienced minor constraints, as expected with safety PPE as we adjusted inventory in these new environments. As an essential business, we felt responsible to provide excellent service to our customers, who themselves were deemed as essential. We provided this level of service by providing products and services and assisting our customers in keeping the economy functioning the best we could during these difficult times. As COVID-19 spread rapidly in…

Thank you, David, and thank you to everyone for joining us for our review of our first quarter financial results. And David and I practicing social distancing and being in different places. A little unusual, but we're working through it. Let me start by saying that our first quarter results reflect the impact of COVID-19 for about 2 weeks and does not reflect a full month of shelter-in-place or stay-at-home orders, which are fully reflected in the first month of the second quarter or April. I'm sure we'll discuss our trends during the question-and-answer portion of this call and actions we are taking, but I wanted to provide that context as we review our Q1 results. DXP's first quarter results were in line with our Q4 commentary and reflect improvements in gross margin and other areas that resulted in a strong performance for us during the first quarter. In terms of our capital structure and as an introduction to comments later on, since 2015 and 2016, we have done a lot of work around choosing the appropriate instruments to finance our corporate strategy as well as creating financial viability and ensuring liquidity and flexibility regardless of the economic environment. We believe the actions we took back in 2017 would provide us with strategic optionality so we could not just manage, but also take advantage of market cycles. In many ways, DXP's capital structure was built for times like this. And our current capital structure was put together for such a scenario. I will discuss this in more detail when reviewing the balance sheet, but let's start with a review of our income statement highlights. Total sales for the first quarter were $301 million compared to $311.2 million for the period in fiscal 2019. Sequentially, this is a 1.9% growth over…

[Operator Instructions] The first question is from Joe Mondillo of Sidoti.

Ken, David, hope you're doing well. First question, just -- 2 questions on the quarter itself. Service Center margins were -- I mean Service Center margins were a little light, so I'm wondering what was going on there? Second lowest quarter since 2016. And then on the IPS segment, margins were quite strong. You stated on the last call that maybe some of that low-margin work was actually going to flow into the first quarter. So I was surprised to see not only was it a solid quarter relative to 4Q, but it was one of your strongest quarters over the last several years.

Yes. Joe, this is Kent. You got a multitude of questions there a little bit, so I'll try to take them in order. Just in terms of the Service Centers, we did get some contraction in the Service Centers revenue-wise. And so I think part of that fed into it. Part of it is also is, there is in Q1 across the total business at DXP, but there is elevated SG&A expense in Q1. So that's partially impacting the margins, meaning bonuses and commissions that occur for fiscal year 2019 kind of roll over into the first half of the following year, in this case, our fiscal year 2020. So I think that's making their margins look lower than probably they would streamline out, if you will, kind of as they move through the year. In terms of your comment or question around Innovative Pumping Solutions and the improvement in that segment's operating income margins, what we said in Q4 was that we still had about 6 to 7 potential negative gross margin jobs, but we did not know the timing of the shipment of those jobs on a go-forward basis. And what I can share with you is none of those jobs did ship in Q1. And so we -- as a result, we did see a natural lift and an improvement in the operating income margins for IPS. And so I think that's the greater contributor there to the margins there. Had 1 or 2 of those shift in Q1, more than likely, it would have had some level of impact to the operating income margins in IPS, but they just merely didn't. And so we're monitoring that kind of as we go through the quarter. And we'll speak to it as best we can when we see it.

Okay. To follow up regarding those last comments, do you anticipate those jobs still to ship, number one? And number two, do you have any sense of timing with that?

Yes, they're still in our backlog. We're going through that now with that segment going through all the jobs and trying to be sure we understand the timing. So I don't want to misspeak at this point in time because I think what we've now got impacted with a lot of these customers is kind of their budgets in COVID. And so per our comments in our scripts, that's kind of what we're doing right now. So going into this year, we anticipated they would have shipped at some point in fiscal year 2020, and I still would have presumed that. But the specific timing, I don't have any specific facts to share at this point in time.

Okay. Understood. David, you mentioned that the IPS backlog was down 17% year-over-year? Was that correct?

That's correct. From Q1 of '19 to Q1 of 2020.

Right. Okay. So you're expecting oil and gas sectors to sort of be down 30%. Could you provide some more color relative to backlog being off 17%? Maybe you can talk about sort of order trends in April and any other thoughts on getting to that 30% level? And then also maybe in the context to 2015, '16 time period, your sales were off -- at IPS were off about 27% each of those years. And maybe you can provide some context how it feels to that downturn back then.

So the backlog being down 17% is a function of order intakes and shipments. So when you look at both of those, I think that we're forecasting that orders are going to be down 30% but, frankly, our revenues for IPS will not be down 30%. It's going to be more like 18% or 20%. So I think we had a really good recovery and it started in '17. It was really good in 18%, and we grew our IPS business. '19 actually grew on top of that. And then -- but we were in the process of the fourth quarter of '19, the oil and gas people kind of had a little shutdown there. They were conserving cash, had nothing to do with the virus. They just -- they were just, in general, seeing that maybe they were seeing there was an oversupply or the marketplace thought that. So they kind of started shutting down. So we started shipping a lot of our backlog, as Kent pointed out, some of it good and some of it bad backlog. But nonetheless, that started headed down. So I think to understand that, you have to -- and then what happened is that in the first quarter of this year, we were seeing our backlog increase. And we were anticipating a good year until mid-March, and then everything kind of got shut down. So there's a lot of moving parts there. We could -- maybe off-line give you a little better detail, but basically, that's how I see it. And well, that's how it's happening. I will say on Kent's, that there's a few jobs out there that still aren't overly profitable. Realize that with percentage completion, you kind of -- you still have work to do to finish it, but it's -- but a lot of that's behind us. So I'm not anticipating huge margin degradation, but there's some. There's some. So it was a good quarter this quarter. And going forward, there's going to be a contraction of new orders that come, but even those are going to have some pressure around margin on them and along with the few jobs that are not doing that well that are to come. So our IPS segment margins, we anticipate go down.

Okay. And last question from me, and I'll let someone else have a chance. Your cost management and sort of your cost actions, what are you exactly doing? Did you take any major across-the-board cost cuts? Could you just help us understand a little bit more? I'm not sure if there's anything to quantify, but at least talk through what you're doing to sort of soften or realign the business to the downturn overall not just oil and gas, but just your overall business.

I would like to answer that question, Kent, because I think it's worth noting that DXP is not -- it's not a broke company. I mean, we have the ability and always have had the ability to make money. I don't know what it looks like if sales went down 80%, and I certainly don't subscribe to that. But at some level of decline, we're able to adjust and make money. We didn't make a big deal out of that because it's just part of our DNA to know how to do that. But you have -- you also need to do it instead of just across the board, having people take a 10% pay cut or things like that, that's really unfair. What's fair is to look at the performance of each market in each location, in each geography and determine whether we need to be -- stay in the course with that one because it's in some areas that have growth markets like North Central has ag and food and beverage. Well, we're going to -- we're not whacking expenses there. But if you're in the Permian Basin and oil and gas is going down significantly, well, then we have to make adjustments. So we're doing all the normal things everybody else is doing from 401(k) and some things. But looking at facility closures, looking at a lot of different things, but it's just part of our nature that we're trying to manage to a profit profile. And so our people -- and then you have to tie that to the fact that we're a very incentive-oriented company. So if people don't make money, they don't get a bonus and their bonus is normally 2x their salary. So it's a significant amount of money that they sacrifice when profits go down. And so they're trying to maximize profits at all times. And the system works. It's worked in 2008. It's worked in '15 and '16. And it does -- and it's done in a way that's smart and sensitive to the performers versus the nonperformers.

Joe, the only other thing I'd just add there, every one of these cycles is different. And so what David is getting at is our approach has just always been very kind of calculated and intentional, and we probably maybe sometimes don't emphasize it as much because we believe it as being a smart business person. That said, this cycle, I think there's 2 big broad categories: there's the traditional, I'll call it, cost-saving areas you can go after, whether they're reductions in different things. And then there's -- because of the stimulus package and what the U.S. government offered, there are some of what I'll call cash deferrals in terms of what we see, which have free cash flow implications and pretty significant. One of them that we're taking advantage at DXP is the employer portion of social security tax. We've calculated that in terms of cash flow impact in a magnitude greater than $5 million for DXP this year. And so we're going to be taking advantage of that. And so all these cycles are unique and different. Managing your business to profitability, we believe, is status quo thinking. But the thing I would point out that's really different in this cycle is probably that the U.S. government provided some cash deferral items that we're able to take advantage of. Additionally, there's been I think a trend towards some, I'll call it, facility and rent abatements across the United States given the magnitude of this pandemic. And so we're probably no different than a lot of businesses out there that rent and lease facilities. And so where we can take advantage of those, we're taking advantage of those. And those will create some temporary cash flow deferrals that in fiscal year 2020 will benefit us once again, but eventually, it catches up with you in the future because you got to -- more than likely, you got to pay them back. So...

Your next question is from Blake Hirschman of Stephens.

I hope you're healthy and well. To start out, I guess, just kind of a big picture one. Do you think you guys are being impacted more by COVID-19 or by the drop in oil prices?

Well, I think the -- I think they're the same. If we hadn't had COVID-19, I don't think oil prices would have dropped near as drastically as they did. But we had a, let's call it, a $2 million or $3 million oversupply problem. And then COVID-19 came along and created a huge demand problem. And so they kind of go hand-in-hand. So my own with my -- my take on this, and it's just my personal opinion, is that when demand starts recovering, people start going back to work. We start driving. We start doing things more normal. That as demand picks up, so will the price of oil. And what our customers are telling us is that they need the price of oil to be $30 to $35 to be able to make money. And so at that point, we'll feel better about the fact that they're not going to go bankrupt, that they're going to be able to pay their bills and some won't make it at that level because of their debt load. But assuming they're appropriately financed and have a balance sheet accordingly, there will be some recovery there. So we see a pretty quick V-shaped recovery to the price of oil being $30 to $35, and we see that being positive. When you get there, you still, though, have a supply problem. You still -- we haven't really eliminated the supply problem with the exception that who knows how long Saudi and Russia will support a $9 million barrel a day cut. And the United States is probably cutting nonprofitable wells. And so they're cutting back some. And then, of course, we're not drilling to any great extent. So we're not increasing production and, hopefully, it's going down. So maybe some number of years to get all that supply and demand back in balance. And when we do, we'll know it's here because price of oil will be $60 or $70. That's my opinion.

Got it. That sounds good. And then if you look at the changes that you guys have made kind of cycle to cycle, is there any way that you could try to frame up expected decremental margins at different top line declines, like if sales are down 10% or if they're down 20%? Or I guess more than that, how to think about the impact to the decrementals?

Blake, this is Kent.

Are you talking gross margins or net or operating margins?

I mean, I'll take it however you want to approach it, but I was kind of referring to EBITDA or EBIT.

Okay. That's good. Go ahead, Kent.

Well, I was actually thinking gross margins. That's to me where it starts. So it was a great question, David. It was a great question because -- yes, yes, good thing we clarified. In the last cycle, it was between 100 to 200 basis points, ultimately, contraction in gross margins when we kind of troughed, if you will. So I think that's the potential. Once again, I don't -- I think there's a lot of things we're doing differently around margins. I also don't think we necessarily 100% got back, if you know what I mean, Blake. And so I think that's that gives you some color and commentary there. I think EBITDA margin-wise, David and I aren't in the same room, but we've made money through all the cycles, right? And we always make EBITDA. I think the last cycle, we may have bottomed out for a quarter around 4% EBITDA margins as a trough, and so I wouldn't see us necessarily going there. But I just think just in terms of previous cycles, to put them in context, that's kind of where we've kind of troughed at because of our mindset around always making money. So ...

All right. That makes sense.

Yes. Blake, I'll be more specific for you, if you like. We're trying to, I mean, to be -- looking at April and the results we got in April. If we see Supply Chain Services down 10% and the Service Center section down 10% and IPS down 18% to 20%, that's going to give us a number. And then we feel that what we're doing to rightsize different things in the company that we can get to hang in there with sort of a 5% EBITDA margin. As you know, we get leverage going up, but we also get deleverage coming down. So...

Yes. That makes sense. All right. And then I guess it'd probably be a good time to ask for those, the monthly sales trends throughout the quarter and then into April, if you have them, Kent?

No. Absolutely, I have them. And we don't give formal guidance. I must always remind the world of that. But I think what David's comments are saying is we have internal goals and so we worked towards those goals. So in terms of the sales per business day, January was $4.3 million per day, February was $4.6 million, March was 5.2% and April was 4.2%.

Your next question comes from Joe Mondillo of Sidoti.

Just a couple of follow-up questions. First off, the corporate cost line -- well, I should first ask, do you have any -- were there any onetime cost items in the quarter itself that you would highlight?

Nothing of significance. I mean, part of what you're getting at, Joe, is kind of what was in our corporate SG&A. And some of those items, you can get true as onetime, one of them would be -- and it's probably something we should emphasize, but when we filed our 10-K, we came off our material weakness. And when you're coming off of material weakness, part of what you shoulder as a public company is you probably have increased audit and some other cost. And so some of that cost is totally 100% flowing through in our corporate SG&A in Q1, just reflecting a lot of that activity, which occurred in 2019. So audit taxes and some top stock comp expense were unusually high in Q1. The stock comp expense was unusually high, partially because we use stock as part of consideration in our Pumping Systems acquisition. And so that occurred in Q1. And so that was kind of -- additionally, legal expenses were high. Once again, that reflects 2 major buckets. One, we had the natural, what I call, normal nascent cases and scenarios that we're always working through as a larger company. And then we did have the acquisitions. And so you have some legal costs associated with that in Q1. And so some of that should decrease as we go forward. But essentially, that's partially what's driving that corporate SG&A component being up higher than normal. Additionally, once again, you have higher-than-normal items whether it's health care, insurance premiums, different things like that and costs that you shoulder in Q1. And so we flow that through corporate because we don't allocate those expenses. So once again, some of that's seasonal, but then we had a few items, which I just mentioned that were on top of that.

Okay. So last year, you averaged around $12 million a quarter. Would you anticipate that to be down just given some cost cuts? Or how do you think about that relative to the 1Q because 1Q is so high? I'm just trying to...

I mean I definitely will see it down. And so that's what I would say. I would expect it to be down in Q2 and kind of trend down as we work throughout the year. And so it should decline as we kind of move throughout the year.

Okay. Also, you mentioned -- I believe David actually mentioned something. You were cutting something by 10% at the Service Centers. I missed what you were talking about there. Could you just repeat?

Okay. First of all, I'm glad you asked that question because I rechecked my math, Blake and everybody, that really -- the 5% is too low. We're really more like 5.7% EBITDA margins that we think we can maintain. And I was talking about just, in general, just a plus or minus 10% reduction in revenues and Supply Chain and in the Service Centers and a bigger reduction in our CapEx business of IPS.

All right. And so going back to my question, I think in your prepared remarks, you were talking about the oil and gas sector. You said you expect IPS and cost to align to that 30% decline. And then you proceeded into Service Center, and you mentioned something that you're cutting something by 10%. Was it inventory? Or was it cost? I missed what you were talking about there in your prepared remarks.

I'm looking.

All right. And then another item I should just mention, I was wondering if you could also repeat the end markets that you're actually -- either you described them as doing well or actually growing. You mentioned a few that are actually doing better than others.

So after I talked about the IPS segment showing 30% lower demand. And again, let me reiterate the fact that we have backlog that prop-up sales, not forever, but -- so anyway, I was talking about 30% being the go-forward number. From that sentence, that next sentence, I was talking about the Service Centers and a small part of -- and the part of Supply Chain Services that are in the aftermarket service and repair and OEM. As such, they have adjusted to a 10% reduction in demand as it relates to this industry. When I talk about the markets, again, this may -- I wouldn't go buy a bunch of stock necessarily in each of these, but for us and what the results we're getting is I mentioned that gold mining, gold is up. And so our friends in Alaska are doing really good with gold mining; the petrochemical industry that produces special polymers is doing well; bottled water; water and wastewater; municipal; certain recreational manufacturing like bicycling and cardiacs and things people can kind of do and isolate themselves. Those things are good. Soap; food and beverage; agriculture; other chemical; medical, of course; petrochemical; asphalt that's used on -- for the government using making roads and stuff; are all doing well.

Okay. Is there any way for you to define sort of how much that bucket makes up of the total company? I don't know if you have that sort of estimate and...

Yes, we do. I don't have it in front of me. Kent, I don't know if you do either. But in general, still pretty true to form is that oil and gas, which is not all rig count stuff. We're not a rope, dope and soap company. We sell to upstream, midstream, and I'll talk about the midstream still doing okay. And downstream and how I think the downstream is going to bounce back pretty quick once people start driving again because refineries make gasoline. So all of 3 of those, though, add up to about 50% of our DXP business. And then the other 50% is all these other markets, all these other general industries, all these other things. And I think that's lost in the equation sometimes when we're grouped with a peer group of DNOW and MRC.

Your next question is from Blake Hirschman of Stephens.

I just have a few more. I was wondering, how big has like safety-related PP&E, that kind of stuff, what percentage is that of your mix? And have you seen any kind of benefit from what everyone else seems to be saying is a nice surge in the demand for that kind of stuff?

Yes. I knew someone might ask that question. So Kent and I looked that up? It's only about 1% of our business. So it's not a giant number. And it's up, but it's not 3x. What happened with this -- to people like us that aren't quite as bigger players as maybe a Fastenal or an Amazon or somebody like that is our suppliers kind of rationed us to what we normally sell. And so it wasn't -- it was good, but it wasn't. It didn't move the needle really.

Yes. Yes. All right. That makes sense. And then lastly, on the capital allocation front, I'm just trying to get a sense for -- I mean, I expect that you guys will probably stay pretty defensive in the near-term just with how uncertain everything is, but at what point would you have the confidence to get more offensive and look to maybe try to pick off some deals on the cheap or for what I would expect it would probably be a lower asking price than what you would have heard a few weeks or months ago.

Yes. So Blake, on the first part of your question there, I'm glad you emphasized that. So on the defensive side, I don't know if people picked up on my comments, but our debt at 03/31 was $243 million, and we're going to make an optional $10 million prepayment. As of today, we're sitting on close to almost $60 million worth of cash on our balance sheet. So we're going to do that from a defensive perspective. And so after that, we would have $233 million roughly or so of debt on the balance sheet. And so that's defensive. You're 100% correct on your second question. When do we turn offensive, and we totally are of that mindset. Going into this, we had 7 to 8 discussions going surrounding acquisitions. And so I think you heard it in both David and I's comments that we believe there's going to be opportunities here, and we want to be in a position to take advantage of those opportunities. We think that's the advantage of the flexibility of this capital structure. We can do both offensive and defensive moves. And we will pivot as soon as we see clarity on when we know there's a bottom, you never want to catch a falling knife. And then also when you have a good feel of kind of what the status quo will be going forward for the business you're going to buy. And then presuming you can get to an agreement on valuation, the way I'd put it is we're always fair buyers regardless of the market, but there would need to be adjustment based upon current results. So anyways, we wholeheartedly are thinking that way, and we're positioning ourselves to act in that fashion.

There are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect.