DXP Enterprises, Inc. (DXPE) Q1 2025 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises First Quarter 2025 Earnings Release. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the conference over to Kent Yee, Chief Financial Officer. Kent, you may begin.

Thank you, Krista. This is Kent Yee and welcome to DXP's Q1 2025 conference call to discuss our results for the first quarter ending March 31, 2025. 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 and 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 first quarter performance and financial results. David?

Good morning, and thank you, Kent. And thank you to everyone for joining us today on our fiscal 2025 first quarter conference call. Thank you for joining us this morning and thank you to all the DX people for your hard work. We are off to a great start in 2025. We remain highly focused on providing the expertise our customers have come to expect from DXP and finding ways to help them manage their supply channel, increase their uptime, increase productivity and successfully run their business. DXP remains committed to our overall focus on being customer driven experts that keep their operations running and their people safe. This consistent approach has fueled our financial results. First quarter adjusted EBITDA of $52.5 million and adjusted diluted earnings per share of $1.26 was supported by year-over-year sales growth of 15.5% and sequential sales growth of 1.2%. Thanks to the efforts of all our DX people across the company, we continue to build on the positive financial results of fiscal 2024, driving further operational improvements while performing for our customers. I personally want to thank all our DXP stakeholders, in particular all our DX people for their determination and hard work as we continue to grow and improve the business. We remain focused on building trust and making a difference with our customers and our communities with a customer-first approach. We are encouraged by our results and remain focused on growing our business organically and inorganically in fiscal year 2025. I will begin today with some perspective on our first quarter and thoughts on the remainder of 2025. Kent will then take you through the key financial details after my remarks. And after his prepared comments, we will open for Q&A. Overall, we are pleased with our fiscal quarter results. Our first quarter highlights good execution and a number of normalized trends across DXP with a lot of effort now focused on capturing additional market share. During the first quarter of 2025, we experienced organic growth of 11.1% year-over-year as well as acquisitions contributing $31.1 million in sales. With continued execution of our acquisition strategy to accelerate our end market diversification efforts. We closed one acquisition in the first quarter, Arroyo Process Equipment. To our new DX people, welcome to DXP and it is great to have you as a part of our DXP family. That said, we are building a more resilient, diversified business that can generate solid performance in uncertain markets. And as we discussed last year, we believe you are seeing the continued evidence of this efforts in Q1 as micro volatility and uncertainty begins to rise specifically around tariffs, which I will address later on my comments. DXP's broad-based industrial end market, which are 77% of our business today, continue to show resilience primarily due to the diversification of end markets and in DXP's case, continued growth in demand or market share gains. ISM and PMI Manufacturing Index, which has – which gives us an indication of how DXP's broad industrial market will perform, moved from 50.9 reading in January to a 49.0 reading in March. This trend is technically moving from growth to slight contraction, especially with a reading in April of 48.7. That said, we continue to believe in today's inflationary environment that this slight contraction will get offset by price increases moving through the supply channel. In DXP's case, continued demand in line with expected historical average growth. We continue to monitor as we move through 2025. Oil and gas, which is the remaining 23% of DXP has shown consistent demand through 2024 and the early parts of 2025. We anticipate some growth primarily driven by large projects which we mentioned back in 2024. Given the geopolitical circumstances and the overall relative volatility in prices. Most of our business, which is oil and gas is tied closer to actual production or increase in capital budgets. We continue to experience pickup in sales activity in Q1, which reflects an increase in the backlog we continue to see. Regarding the broader demand, underlying trends remain consistent in the first quarter and trends were the strongest in March as is typical with our sales per business day going from 6.9 million per day in January to 8.1 million per day in March. Total DXP sales Q1 increased 15.5% year-over-year and 1.2% sequentially or were $476.6 million or an average of $7.6 million per business day for the first quarter. Thank you to the 3,138 DX people for your hard work and dedication. In terms of Q1 financial results, innovative pumping solutions led the way, growing sales 38.5% year-over-year followed by service centers growing 13.4% year-over-year and then supply chain services also grew 2.1% year-over-year. In terms of IPS or innovative pumping solutions, both our energy and DXP water continue to perform. Our energy business performed in line with previous year’s performance, starting off the year slowly from a project perspective and is anticipated to ramp as we approach Q2 through Q4. Our DXP water platform continues to grow sequentially with Q1 of 2025 coming in as the 10th consecutive quarter of sequential sales growth. Our Q1 average IPS energy backlog continues to stay ahead of all averages going back to 2015 and is at an all-time high. Our start to 2025 had meaningful bookings in the months of January and March and this continues to signal that we should have strong energy project revenue over the next nine to 15 months. We are continuing to get bookings from both energy and water project work and we feel we are comfortable delivering strong sales performance in 2025. Service centers keeps essential customers running with MROP, maintenance, repair, operating and production, products and services necessary for the customer to stay in business. The diversity of end markets and our MRO nature within service centers allows us to continue to experience balanced sales growth through the first quarter and achieve a new sales watermark for our Service Center segment. Regions that experience notable sequential as well as year-over-year sales growth included Alaska, North Central, Texas, Gulf Coast, additionally, our air compressor and metalworking and Canadian rotating equipment experienced sequential and year-over-year sales growth from a product and geographic perspective. Supply chain services increased 1.3% sequentially and grew 2.1% year-over-year. We want to always remind everyone that SCS goal is always to make our customers more efficient and streamline their spend. That said, demand for SCS services is increasing because of the proven technology and efficiency they perform for all of their industrial customers. But the sales cycle can be protracted as we look to our SCS leaders to add new customers as we move forward in 2025. Regarding capital allocation, we continue to make strategic investments to fuel and diversify DXP through acquisitions and organically, while opportunistically purchasing shares by balancing these two approaches are pursuing both, we are driving long-term value for our shareholders. In today’s environment, we will remain consistent with these goals with a mind towards preserving DXP’s liquidity and strength regardless of the market condition. Let me conclude my remarks by saying DXP is well positioned, we continue to make progress with our growth strategy and our commitments to customers are stronger than ever. We are complementing these efforts with a focus on improving efficiencies, while making strategic investments in the business. We are driving growth and improvements at DXP and we look forward to navigating and working through fiscal 2025. While the external environment remains unpredictable, we are working closely with our suppliers and channel partners to understand the full impact that announced tariffs will have on our business. It is clear to DXP that there will be winners and losers. The investment we have made in the past and understanding of our key product categories and other information pricing knowledge positions DXP to effectively navigate the tariff situation. The key question here will be what happens to demand because of higher tariffs? As we move forward, we remain committed to ensuring transparency with our customers, offering market relevant pricing while targeting price cost neutrality as tariffs evolve. Distributors benefit from inflationary environments and depending on the depth and duration of the tariff uncertainty, it may play out that way. But the situation remains highly unpredictable and the impacts on demand are unknown at this time. In any case, we expect to play a key role in helping our customers navigate these current challenges and I am confident in our team’s ability to remain agile in this dynamic environment. We are appreciative of our end markets and product diversification as we recognize that different markets will be more choppy than others as they digest this policy shift. But we remain cautiously optimistic that both our customer base and our relationships with them will be better positioned in the long run once we get a more complete understanding of where things will settle out in Washington. Finally, I would like to thank our DX people for a great quarter and a positive start to the beginning of 2025. We are excited for what is next. Thanks. With that, I will now turn it over to Kent to review the financial results in more detail.

Thank you, David. And thank you to everyone for joining us for our review of our first quarter 2025 financial results. Q1 financial performance reflects DXP’s ability to continually to successfully navigate through the market and execute and create value for all our stakeholders. We will also be successful in navigating the current market volatility surrounding tariffs and trade. As it pertains to our first quarter, DXP’s first quarter financial results reflect record service center sales performance, establishing a new high water mark at $327 million. Remarkable year-over-year sales growth within IPS growing 38.5% year-over-year driven by strength within DXP Water, continued gross margin strength and stability with a year-over-year improvement of 151 basis points to 31.5%. Continued execution of our acquisition strategy, completing the purchase of Arroyo Process Equipment and consistent operating leverage leading to sustained adjusted EBITDA margins north of our 10% plus goal. Total sales for the first quarter increased 15.5% year-over-year at 1.2% sequentially to $476.6 million. Acquisitions that have been with DXP for less than a year contributed $31.1 million in sales during the quarter. Average daily sales for the first quarter were $7.6 million per day versus $7.6 million per day in Q4 of 2024 and $6.6 million per day in Q1 of 2024. Adjusting for acquisitions, average daily sales were $7.1 million per day for the first quarter of 2025 versus $6.4 million per day during the first quarter of 2024. That said, the average daily sales trend during the quarter went from $6.8 million per day in January to $8.1 million per day in March, reflecting a typical quarter end push as we closed out the first quarter. In terms of our business segments and on a year-over-year basis, Innovative Pumping Solutions grew 38.5%. This was followed by Service Centers growing 13.4% and Supply Chain Services growing 2.1% year-over-year. In terms of our Service Centers sales grew 5.2% sequentially and 13.4% year-over-year as previously mentioned. Regions that experienced sequential as well as year-over-year sales growth include Alaska, North Central and the Texas Gulf Coast. From a product and geographic perspective, our air compressor, Canadian rotating equipment and metalworking divisions also experienced sequential and year-over-year sales growth. From a segment operating income perspective, we have had four consecutive quarters of 14% or greater and we will look for this to continue as we still believe there are regions that can enhance or become more consistent in their operating income margins. In terms of Innovative Pumping Solutions, we continue to experience increases in both the energy and DXP Water backlog. Our native or DXB Energy business continues to get bookings and is following the normal cadence of starting the year slowly with an anticipated improvement or stronger sales performance in Q2 through Q4. Our Q1 energy related average backlog grew 5.5% over our Q4 average backlog and continues to be ahead of all our averages. That said, we do have a large project in our backlog. Excluding this project, our backlog is up 7.6% from Q4. The conclusion continues to remain that we are trending meaningfully above all notable sales levels and our backlog continues to grow even excluding the impacts of unique or large projects. Our DXP Water platform experienced our 10th consecutive quarter of sequential sales growth and we look for this to continue as we move through 2025. We also see strength in our IPS Water backlog as it continues to grow due to a combination of organic and acquisition additions. Supply Chain Services performance primarily reflects a 1.3% increase sequentially and grew 2.1% year-over-year. As David mentioned, we will look for new customer additions as we move through 2025. Demand for SCS services is increasing as customers look for efficiency and we anticipate some nice wins starting to show in 2025. Turning to our gross margins, DXP's total gross margins were 31.5%, 151 basis point improvement over Q1 of 2024. This improvement is attributed to consistency in margins within service centers and innovative pumping solutions and the contribution from acquisitions at a higher overall relative gross margin versus our base DXP business. That said, from a segment mixed sales contribution, Service Centers contributed 68.6%, Supply Chain Services 13.3%. and Innovative Pumping Solutions was 18.1%, which continues to elevate DXP's gross margins. In terms of operating income combined, all three business segments increased 111 basis points year-over-year and 6 basis points sequentially in the business segment operating income margins. This was driven by improvements in operating income margins across all three segments year-over-year and sequentially by improvements within SCS and Service Centers. Total DXP operating income was $40.5 million in Q1 of 2025. Our SG&A for the quarter increased $15 million from Q1 2024 and a $0.5 million from Q4 of 2024 to $109.8 million. The increase reflects normal seasonal amounts in terms of payroll taxes, insurance and other administrative items as well as the growth in the business and associated incentive compensation. SG&A as a percentage of sales increased 7 basis points year-over-year to 23% of sales. Turning to EBITDA, Q1 2025 adjusted EBITDA was $52.5 million. Adjusted EBITDA margins were 11%. It is worth noting that this is slightly above our recent 10% plus trends amidst our normal financial seasonality associated with higher payroll taxes, insurance and associated items. Additionally, it reflects some unique one-time items associated with acquisitions and excess legal expenses. We continue to expect to benefit from the fixed cost SG&A leverage we experience as we grow sales and anticipate there is still an upside as we move through fiscal 2025. In terms of EPS, our net income for Q1 was $20.6 million. Our earnings per diluted share for Q1 2025 was $1.25 per share versus $0.67 per share last year. Conservatively adjusting for some of the one-time items, earnings per diluted share for Q1 2025 was $1.26 per share. Turning to the balance sheet and cash flow. In terms of working capital, our working capital increased $34.3 million from December to $325.3 million. As a percentage of sales this amounted to 17.4%. This is a notable uptick from where we have been, but remains around our historical averages. This reflects an uptick in receivables, which I will touch on later, and a $15.5 million decrease in other current liabilities. In terms of cash, we had $114.3 million in cash on the balance sheet as of March 31. This is a decrease of $34 million compared to the end of Q4 and reflects the acquisition of Arroyo, investments in facilities and equipment and software and tax payments that were deferred in 2024. In terms of CapEx, CapEx in the first quarter was $19.9 million or an increase of $10.5 million compared to Q4 2024. This reflects the purchase of a facility in conjunction with the Arroyo purchase, the continued investment in our facilities and equipment and overall improvements and investment in software and other equipment. As we have discussed, we have continued to make meaningful investments in the business as we grow, as you begin to see this taper as we approach the back half of 2025. That said, a majority of our CapEx is growth oriented and controllable. These investments should drive improvement and efficiency on behalf of our DXP employees. Excuse me. Turning to free cash flow. Cash flow from operations was $3 million in Q1 of this year versus Q1 of last year was $27 million. This is due to growth in accounts receivable as well as our DSO days going from 68.7 days to 70 days along with the growth of the business compared to a year ago. This also includes tax payments which were deferred from Q2 of last year due to storms that were paid in Q1 of this year. Adjusting for these one time or unique payments, cash flow from operating activities would have been $21.9 million or in line with Q1 2024. That said, we continue investing in projects and experienced the uptick in receivables during Q1 which I previously mentioned. As we move through 2025, this should balance out and we should turn free cash flow positive. We continue to focus on tightly managing this aspect of our business from a cash flow perspective and look to align billings with the investments. As a reminder, we typically have negative cash flow from operations in the first quarter and positive cash flow from operations in the second through the fourth quarter. Return on invested capital or ROIC at the end of the first quarter was 36.8% and is consistent with DXP driving margins, operating leverage and improving our run rate EBITDA. As of March 31, our fixed charge coverage ratio was 1.9 to 1 and our secured leverage ratio was 2.5 to 1 with a covenant EBITDA for the last 12 months of $212.8 million. Total debt outstanding on March 31 was $647.3 million. In terms of liquidity as of the first quarter, we were undrawn on our ABL with $26.1 million in letters of credits with $108.9 million in availability and liquidity of $223.2 million, including $114.3 million in cash. DXP is poised to execute our acquisition strategy when anticipating closing another acquisition before the quarter end. In terms of acquisitions, we closed one acquisition during the quarter, Arroyo Process Equipment. We look forward to them fully reporting with us for the second quarter of 2025. Arroyo provides DXP with a leading rotating equipment, product and service provider in Florida. Welcome to DXP-Arroyo. DXP's acquisition pipeline continues to remain active and the market continues to present compelling opportunities. As we discussed during the Q4 earnings call, we anticipate closing two to three acquisitions before mid-year and we have closed two deals year-to-date and we have another two under letter of intent and plan on closing another acquisition before the second quarter ends, bringing that to a total of three acquisitions by the end of the second quarter. That said, we are stressing sustainable performance with our acquisitions and remain comfortable with our ability to execute on our pipeline. In summary, our resilient and critical MRO and supply chain solutions, combined with our project capabilities and exposure to the sustainable secular trends including water and wastewater, various energy markets, will drive our future sales and profitability. We are excited about the future. We look forward with great confidence to a future of sustained growth and market outperformance. I will now turn the call over for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Zach Marriott with Stephens. Please go ahead.

Good morning, and thank you for taking my questions.

Good morning, Zach.

Good morning, Zach.

Is there any color you can share on daily sales trends by month for both Q1 and Q2 thus far?

Yes, absolutely, Zach. And as I typically do, I'll back up to Q4 of last year and then I'll bring it forward through April is what we have at this point a flash of April. So in October, we were at 7.2 million per day, November 7.5 million per day, December 8.1 million per day, January 6.8 million per day, February 7.8 million per day, March 8.1 million per day, and then April 7.8 million per day.

Great. Much appreciated there. And then, is there anything that should drive a meaningful margin difference, whether up or down, when comparing Q1 with Q2?

No. No.

Okay, got it.

Once again our mix has shifted, Zach. Call it really over the last year or so. But as it pertains to Q1 versus Q2, there wouldn't be anything substantive that would cause a differ from where we're at today.

Makes sense. And then just one more quick one is, are you seeing any signs of things slowing down with all the tariff and macro uncertainty?

Well, that's the multimillion dollar question. The tariffs we're working really hard to take care of our customers and to minimize tariffs and minimize price increases as much as we can. And because we're a – in my opinion, a manufacturer of pumps and a distributor of major brand pumps, we have a lot of knowledge around that area. And so we – when we also understand where somebody might be wanting to charge a whole bunch on tariffs and so we can lead them to other alternate products, et cetera. And so we're always trying to take care of them. But at the end of the day, we're not in the business of eating tariffs. So we're passing them all on. That said, your question, it's a good one, is, well, do we have an effect on demand? And at this point, we would have to absolutely say, no, we're not seeing any effect on demand. Maybe a little more effect of stalling a little bit around the fact is, where's Washington going to end up? I think we're all expecting to have tariffs. 145% tariffs sounds a little excessive. So I think people are maybe stalling a bit. But we haven't seen any projects canceled or our activity is good, our backlog's good, our bookings are good. So at this point, we're not feeling much.

Great. Thanks for the color and I'll turn it back.

We have no further questions at this time. David Little?

Yes. Let me ask Zach if he wants to rethink and ask some more questions. We only have one person covering us, so, Zach, do you have anything else you want to fire away at it? We don't want to cut you short.

Zach, your line is now open.

I'm all good. Appreciate it.

Okay, well, I will close and thank you. I think it's – I think I'd like to make a few additional points. One is, DXP manufactures pumps, and we have parts made really all over the, all over the country. So we understand tariffs specifically because of that. And then we represent major brands of other additional pumps. And so we understand the complexity of their supply channel and where they might be able to just, say, move tariffs from China to India or Mexico or Korea, wherever they need to do. So we kind of understand what everybody's going through to minimize tariffs to the best of their abilities. And so I think we're really good at helping our customers to minimize the cost of all this. And we're also good at calling people out on the fact that maybe they're just using tariffs as an excuse to have a big price increase. So I want to make sure that you all understand that. And then I think that it's important that we sort of understand the fact that DXP is operating like a growth company. We don't do acquisitions just for the fun of it. We do acquisitions to diversify our markets, to grow our geography, to grow our capabilities, and we do acquisitions to grow. These acquisitions are not random. They go through a lot of scrutiny to make sure they're going to fit with what our customers base wants to have us participating in and value adds that we can bring to them, et cetera. And then around those also let me say that we're pleased as we diversified our markets by focusing acquisitions that are have just not been oil and gas as an example, but also that they're highly profitable. So our 10% organic growth and the strategies around that and the fact that we used to do 10%, 10% EBITDA used to be our gold and now we're doing 11. So now I have a 10, 11 and 10 with 10 being the inorganic piece of that gold is pretty significant for us. And so we don't see any reason not to maintain 11 and possibly grow that over time as we do. And so there's also a attitude around, I call them bets, but they're investments where the regions and all the way down to the service center level are encouraged to make bets to grow the business. We're not trying to just sit here and be good at what we do and let the economy dictate how we do. So that's important to us. And so you might see from time to time where we took all our free cash flow and spent it doing something. And so that shouldn't be an unusual event. We're not trying to go backwards in distribution. As you know, if your sales are declining and everything, well, then receivables go down, inventory goes down, et cetera. And you generate a lot of cash flow, but eventually you go out of business too. That's not our goal and we're trying to grow the business. So and then lastly, I meant to say this earlier was we don't really have any fixed pricing agreements. So we don't have anything that dictates that we're going to eat margin. So we're not here to eat margin. We're here to help our customers and we're going to but we're not here to lower. And you asked the question back about, about if our margins going to go up or down. Well, I don't they're not. And as the last resort is we're going to pass those price increases on and we feel justified to do so because of A, we didn't create tariffs but B, we're tried everything we could to get them a product or provide a service that cost effective way. So with that I'd like to continue to thank all our DXP people that have heard that speech before and as they execute that. So anyway, thanks a bunch. And we really, really had a great start of the year and we have no reason to believe at this point that anything's going to be different. We're going to continue to grow. So thank you very much.

This concludes today's conference call. Thank you for your participation. And you may now disconnect.