Ladies and gentlemen, welcome to the DXP Enterprise First Quarter Earnings Results Conference Call. My name is Glenn and I will be the operator for today’s call. [Operator Instructions] I will now hand you over to your host, Kent Yee, CFO of DXP Enterprise to begin. Ken, please go ahead.

Thank you, Glenn and thank you to everyone joining us this morning. This is Kent Yee and welcome to DXP’s Q1 2023 conference call to discuss our results for the first quarter ending March 31, 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 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. With that, I will now turn the call over to David Little, our Chairman and CEO, to provide his thoughts and a summary of our first quarter performance and financial results. David?

Good morning and thank you, Ken. Thanks to everyone for joining us today on our fiscal 2023 first quarter conference call. We are off to a great start in 2023. Our first quarter of 2023 is the highest quarter in the company’s history. And I am pleased to report such strong results which rotted us with a strong start to the year and a foundation to build on from here. That said, we started 2023 focused on what matters most, providing our customers with the products and services they need through exceptional service. We remain highly focused on providing the expertise that our customers have come to expect from DXP and finding ways to find them – help them manage their inventory, reduce costs, achieve their ESG objectives and successfully run their operations. Many customers especially those in the industrial, energy and utility space continue to see solid end-market demand for their products. However, we do see that those that are close to the consumer-facing industry heading into a slower demand cycle has a world of tips to understand the ripple effects of the increased risks associated with the banking sector. Regardless of uncertainty around economic environment, DXP remains committed to our overall focus of helping customer driven experts to keep their operations running and their people safe. This consistent approach has fueled our financial results. First quarter adjusted EBITDA of $43.1 million and diluted earnings per share of $0.95 was supported by year-over-year sales growth of 32.8%. Thanks to the efforts of all our DXPeople across the company. We continue to build on the positive momentum we experienced in fiscal 2022 driving further operational improvements while performing for our customers. I personally want to thank all our DXP stakeholders and particularly all our DXPeople for their determination, hard work…

Thank you, David. And thank you to everyone for joining us, for review our first quarter 2023 financial results. Q1 financial performance reflects our 10th quarter sequential sales increases, and a record high sales in DXP. DXP continues to successfully navigate through the market and has been able to execute and create value for all our stakeholders. I am excited to report that our Q1 2023 financial performance is the highest performing sales and EBITDA quarter in the company’s history. While a notable milestone we look forward to continuing to strive to meet new sales and profitability goals, and build DXP organically and through acquisitions, while increasing margins, cash flow and returns. We have been successful in transforming and diversifying DXP. But we still have progress to make. We have been successful in navigating COVID in the subsequent related supply chain and inflation pressures. We have been successful in building DXP into becoming the best solution for the industrial customer needs. And we will be successful in continuing to grow sales and earnings and becoming a distributor dedicated to the highest quality of customer service through product and service expertise. As it pertains to our first quarter, DXP’s first quarter financial results reflect a combination of business actions we have undertaken. More specifically, Q1 takeaways are as follows. Continued strong organic sales growth and contribution from acquisitions, continued impacts from inflation and price increases compared to a year ago, record service center performance marked by gross margin strength and stability. Strong sales increases within supply chain services driven by the addition of a large diversified chemical customer compared to a year ago. Continued strength within IPS with a positive outlook in terms of our backlog and consistent operating leverage leading to sustain adjusted EBITDA margins. Total sales for the first…

Thank you. [Operator Instructions] We have our first question comes from Tommy Moll from Stephens. Tommy, your line is now open.

Good morning and thank you for taking my questions.

Good morning, Tommy.

Good morning, Tommy.

I wanted to start off on revenue or daily sales really, you ended the quarter pretty strong at $7.9 million if I heard you correctly in March. And I think some of that was seasonal, there may have been some pricing increase there too, any context you could give on the exit rate would be helpful. And then do you have any visibility into how April was pacing?

Yes, and unfortunately, I don’t have any visibility into April at this point. But I can give you the trend really from – I’ll bring it forward from September last year. And then David and I can provide just some macro comments. But the actual initial flash of April I don’t quite have at this point. But so September was $6.8 million per day, October $5.9 million November $6.2 million, December $7.3 million January $5.7 million February $6.2 million, and then march $7.9 million. So you can see the trend in the macro is continuing to grow month over month. That said, I guess the big picture comments that I would provide is, as we move into the second quarter, and really kind of get deeply in the second half of the second quarter and into the third quarter, just by definition that the comps will get a little bit tougher. Just because that’s when we picked up last year that said, hey, the business is performing price increases are still coming through. As David said in his comments in my comments, they’re much more moderated at this point that they were this time last year.

And is there any just general rules of thumb, you could provide even directionally just the typical seasonality March to April, April to May, May to June? Even qualitatively, is there anything you could do to frame what a typical cadence might look like?

Obviously, you’re going into the summer months. So the real – you have less holidays, just in terms of actual business days between, April, I’ll call it in June 30. But then as you go into Q3, you start having July 4 in the holidays, if that kind of helps directionally. So the second quarter tends to be a full set of business days, I guess, is my point. And so, we would expect our second quarter. From a context standpoint, big picture tends to be always a pretty consistently strong quarter, but those have been my comments, David, I don’t know if you have any.

Well, as we know, Canada, goes through deep thawing every year. So that’s happened normally at the first of the year here and then it builds from there. And I would say, in general, just the number of days in the month, because both supply chain services is just a daily transactional MRO type business and then our service centers, which sell everything we do, but still a good portion of what they do is just maintenance repair and operating day-to-day transactions. So really from there, it’s just the number of days and minus the number of holidays and things like that. So I don’t think there is much seasonality in general, besides maybe Canada, which is not a big portion of what we do.

Yes, I am just looking at the history back to the last few years and it does look like pretty consistently, if you just think about consolidated revenue in the second quarter, pretty consistently trends above first quarter, and maybe some of that is, to your point, David, just the number of selling days, maybe seasonality. But is that a fair characterization, would you say?

Yes, I don’t really think we have much seasonality besides Canada.

Tommy, just to give some more quantitative comments, April last year was 5.5 million per day, May was 5.4 million in 2022. So if you just look at our average daily sales where we have been obviously, for Q4 and Q1 we are all things being equal, obviously, we are still running significantly ahead of that Q4, once again, at 6.5 million for average Q4 and then obviously, here Q1 6.6 million, 6.7 million, so…

Yes. And if my notes are correct, it looks like last March was 5.8, is that right or if you don’t have it in front of you, we can circle back?

Yes, 5.9 million if you round out, yes.

Okay. Alright. That’s helpful. You mentioned the large chemical customer, which has been in focus for sometime now. I think it was 16.5 million in the quarter and you’ve scaled pretty quickly there. Is there any context you can give us just in terms of where you are in that ramp? Is it – have you kind of achieved your run-rate with that particular customer or would you say you are still in a scaling phase? Is this specific to a project or a series of projects that ultimately kind of roll off or just anything you can do to help us with the cost of that relationship with?

Yes, sure, sure, yes. The customer has multiple locations and it’s a big, big project in terms of integrating our systems and putting our people in and running has to do with supply chain services. So we are taking over their purchasing and inventory management, and etcetera. So as what takes time is just to implement each location. So, we may be able to do two or three at the same time, but we can’t do eight or however many so. So, the implementation process takes time to, so we are not really seeing full revenue generation until all the sites are implemented. That said, I think by the end of the second quarter, we should be there. So, we are starting to – the increases are not as substantial going forward and ultimately we kind of get there. And then our job really is to reduce their span not to increase it so. So, we do – unfortunately do a good job of that. But so then it kind of trends down, I guess. So, you got to find another big deal. Here we go.

Move into profitability, the double digit EBITDA margin in the quarter, I am not sure if that margin rate was a record, but probably close to it, as you move forward…?

Well, I hit 11.

11, one, that we are headed there.

Yes, exactly. You probably – you haven’t asked yet. But what do – do you remember what our 10-10 and 10 is? I will answer the question. I am trying to be unfair, but is 10% organic growth, 10% EBITDA and 10% inorganic. And so, we are really all over that. And so that’s, so we are happy with that. We are happy with 10%.

Yes. I am just thinking as you move forward from here, was there anything in particular in one quarter that was maybe a favorable or an unfavorable item worth calling out, or if there is not, then is it a reasonable assumption that you can continue to step up from here, provided the business continues to grow?

That will – I will answer this, because I think we go back to, we have got new auditors, real professional auditors. In terms of price PwC, we had a little bit of cleanup to do in the fourth quarter of 2022. And so our margins were not reflective of what we typically do on a day-to-day basis, because of a few years of cleanup. And so I think that understated margins in the fourth quarter, so don’t read too much into that. And then the first quarter our goal to hit 10% EBITDA and to pay our people well, is go hand-in-hand. And to get there, we have got to be pretty close to 30%, gross profit margins. So, 30% is kind of always our target, we hit 29.5%. And I feel really, really good about that. And, I don’t really see any reason for that not to be there. I mean what can swing that a little bit is our innovative pumping solutions, those capital projects, if they are really, really big. And then we have some added costs within per se, or something like that some of those margins can bring down that. So, the mix can get us a bit, but not it should be all over 29%.

Yes. In terms of the cash flow for the quarter, I am just looking back historically, there may be a 1Q somewhere there where you did more than $20 plus million of free cash flow, but it’s been a while, certainly. So, if you think about the working capital dynamics this year, is there anything squarely where moving forward, there is maybe a notable investment, incremental investment in working capital or release or just anything you could point to there would be helpful.

Yes. And so a couple of comments there, Tommy, just about free cash flow. Obviously, just the increased earnings kind of contributed to some of that $22 million of free cash flow. Additionally, we did during the quarter, have a notable reduction in our DSO days, that worked to our favor in the magnitude of $9 million or so. The things that kind of not necessarily headwinds, but the things where we are investing in the business, where we are different than other distributors is we have the project or capital side of our business, right. And that’s on the energy side, and even here more recently, also on our water and wastewater side. So, if we get a big capital project, where end point is we are going to invest in that, right, and hopefully, from David and I’s perspective, it’s at the right margin in those things and we are not so putting ourselves in a position where we are a bank too much. But because those capital projects have certain time gestation to them, right. Some of them are, a project that can be going on for 6 months, 9 months, 12 months, etcetera. So, those are the things we can anticipate because we are always encouraging our sales guys and our folks to get those wins. But – and those require working capital investments, but all things being equal, if we are growing at what I will call a reasonable or sustainable growth rate, we are distributor net at the end of the day. And so we are going to produce free cash flow, right. I think last year, what people saw is we were ramping up on the project side, both the energy and the water, wastewater, and we are making those investments in some of that. And some of those projects are shipping and delivering and we are collecting on those and so some of that’s what you see here towards the back end of last year and here in the first quarter. And so that’s really the swing in our free cash flow.

So Tommy, I will look at four things, just from my own perspective, I will look at working capital. So, I will look at, what did we grew the business 30%. And so what did – what did receivables do and so that we have to make an investment in receivables. From year end to the first quarter, we didn’t mean it that like Kent already said, our collection days were really good. Then I will look at inventory. And so that was up a little bit, but basically pretty flat. And then that cost in excess of billings, that’s the project stuff. That’s the stuff where we have incurred cost for the customer paying for it and we try to manage that. Again, we try to get progress billings payments on that. And so we will see that number jumped up, and of course, that’s the good thing. So, they have business, these projects, etcetera. But they require some working capital. And then the last is just CapEx, just equipment type CapEx was really normal, very, very small for us.

Last question for me on just capital allocation, you talk to robust M&A pipeline, and then also touched on the repurchase authorization. And the two are not necessarily being mutually exclusive. I am just curious for any additional context, you can provide there on how hard you think you might lean in on M&A this year, or if there is any chunky deals in the pipeline. And then also, just on the repurchase side, just what’s the current state of thinking on that front? Thank you.

And I will jump in on acquisitions. And then David may have some comments on the broader share repurchase. But from acquisition standpoint, we still have a full pipeline, as I have suggested, kind of obviously, here more recently, everyone can pick up on that, we have done more water and wastewater. And the average transaction size there has been a little bit smaller than our historical average of around $25 million to $35 million in revenue. So, we see that continuing, if you will, over the short to medium-term here in 2023, there still continues to be opportunities. We like water and wastewater, obviously. And we are able to get at them at reasonable valuations. And so we will continue to do that. Obviously – and then I will hand it over to David, we juxtapose that. We don’t tend to think of them as mutually exclusive, as you said, Tommy. And so we are aware of our valuation out there in the public markets in conjunction with that acquisition program. And so, we firmly believe that the market continues to devalue DXP versus value it properly given our results and our performance and our efforts. And so both David and the Board feel it’s more than appropriate to kind of take advantage of those opportunities, so.

Yes, I think that our acquisition program and the valuations have come down, and in terms of what we are paying and so that makes that piece pretty attractive. And so that’s – and we are trying to grow the business and we are trying to create value. And then the other question though is if we can buy DXP back for the shareholders and that’s at an attractive value, well, then we are going to do that also.

Those are all the questions I had, I appreciate the time and I will turn it back.

Thank you, Tommy.

Thank you, Tommy. [Operator Instructions] We have no further questions on the line. Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.