Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to DXP Enterprises 2022 First Quarter Earnings 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. [Operator Instructions] Kent Yee, Chief Financial Officer, you may begin your conference.

Thank you, Julianne. This is Kent Yee, and welcome to DXP's Q1 2022 Conference Call to discuss our results for the first quarter ending March 31, 2022. Joining me today is our Chairman and CEO, David Little. Before we get started, excuse me, I wanted 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 on-claim 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. I will now turn the call over to David Little, our CEO and Chairman, to provide his thoughts and a summary of our first quarter performance and financial results.

Good morning, and thank you, Kent. Thanks to everyone for joining us today on our fiscal 2022 first quarter conference call. First, let me say that following a partial recovery in 2021, we are off to a great start in 2022. I personally want to thank all our DXP stakeholders, in particular, all our DXPeople for their determination, hard work and grit as we turn the corner and momentum appears to be building in our business. With 25% organic sales growth, adjusting for the four acquisitions we did at the end of 2020 and 30% overall year-over-year sales growth in Q1, we are off to a great start this year. This is DXP's first quarter of meaningful organic growth in total sales and EBITDA, which is great to see. That said, as we get to the tail end of the COVID crisis, we are all facing new challenges that DXP is prepared to navigate. We are encouraged by the improvement in our results and remain focused on growing our business organically and inorganically in the fiscal year 2022. Although much remains uncertain, including inflationary pressures, supply chain disruptions and constraints and the geopolitical impact of Russia invasion of Ukraine, I am proud that the DXPeople effectively support their customers in this hyped environment. This is a testament to the relentless drive we have made to center our strategy around customers and to remain customer-driven experts. I will begin today with some perspective on our first quarter and thoughts on the remainder of 2022. Kent will then take you through the key financial details after my remarks. And after his prepared comments, we will open up to Q&A. Overall, we had a great first quarter that highlights good execution and a number of positive trends developing across DXP, including organic growth…

Thank you, David, and thank you to everyone for joining us for our review of our first quarter 2022 financial results. Q1 financial performance reflects our fourth quarter of sequential sales increases during this COVID cycle and the subsequent and interrelated challenges, including inflation, supply chain constraints and a war with global ramifications. Despite these challenges, DXP continues to successfully navigate through the market and has been able to execute and create value for all our stakeholders. DXP's first quarter financial results were great to see and reflect a combination of business actions we have undertaken. More specifically, Q1 takeaways are as follows: strong organic sales growth and contribution from acquisitions; meaningful organic sales increase within IPS along with another quarter increase in the IPS backlog; significant operating leverage, leading to improved adjusted EBITDA margins and continued share repurchases. Total sales for the first quarter increased 9% sequentially to [indiscernible] DXP for less than a year contributed $13.1 million in sales during the quarter. We are excited to have our two most recent acquisitions, as David mentioned, Drydon Equipment and Burlingame Engineers, who contributed in Q1 as a part of the DXP family. Subsequent to Q1, we also added Cisco Air Systems, and we look forward to their contribution in Q2 and the further margin enhancement and product and market diversification that they bring. Average daily sales for the first quarter were $5 million per day versus $4.8 million per day in Q4 2021. Adjusting for acquisitions, average daily sales were $4.8 million per day for the first quarter. That said, average daily sales trending during the quarter ramped meaningfully from $4.1 million per day in January to $5.8 million per day in March. In terms of our business segments, Innovative Pumping Solutions grew 128.3% year-over-year. Excluding acquisitions, IPS grew…

[Operator Instructions] Our first question comes from Cole Couzens from Stephens.

First question on sales. Now that we're most of the way through the second quarter here, just what kind of commentary could you offer on daily -- on how daily sales have progressed, whether that's month by month or quarter to-date, year-to-date? Any context would be helpful.

Yes. Cole, I'll take that one and just once again give the sales per business day trends going from January, and I'll pull it through kind of April, if you will. As we mentioned, January, $4.1 million per day, February $4.9 million, March $5.8 million, and then April is at $5.4 million. So once again, a meaningful ramp kind of as we move through the quarter and then a strong kind of April, if you will, at this point. And so we look forward to kind of seeing how Q2 shapes up.

Got it. That's helpful. And second, gross margin was strong in the quarter and assuming inflation continues, what is the potential for gross margins throughout 2022? And as we move into this back half, are there any factors that you point to that would drive OpEx higher or lower as we move throughout the year?

So your first question, Cole, there around gross margins, a couple of comments. A lot of our recent acquisitions have strong gross margins, meaning north of 30%. So that's kind of what's contributed there. Yes, there's been an inflation and we benefit on the base business, and I think a lot of the margin enhancement we're seeing on a more sustainable go-forward basis as a result of the acquisitions. And so we feel good about kind of their contribution, if you will. Your next question just around kind of operating leverage in the business, typical in distribution you get that on the upswing where you can grow kind of 5%, 10% and 2x or 3x or more -- you can get that operating leverage. Once again, in this quarter, we got 3.4x operating leverage, meaning dividing your EBITDA growth and sales growth, if you will. And so we expect that as we kind of move through the cycle, and I don't know if David has any thoughts, but that's what we expect to see as long as we've got some meaningful sales growth.

So Cole, I would add on the gross profit side of the equation that the challenge is to pass on supplier and labor costs going up. They are going up. They're going up pretty significantly with inflation and stuff. So the challenge is to pass those on, and we're normally pretty good at that. And I don't see any reason why we wouldn't continue to be good at it. We were good at it in the first quarter here. And I would just say from a customer point of view, they're expecting it. So it's not -- there's not a lot of pushback.

Awesome. Great color there. Just one last quick one from me on M&A. First off, congrats on the Cisco acquisition. And on that point, outside of the attractive margins and end market diversification, is there any other rationale that you'd point out that went into the decision? And -- or any details related to price if you're able to go there would be helpful.

So I think that we've -- we earlier back in 2020, bought two companies, one's Total Equipment and the other one's APO. And both of those businesses had air -- compressed air components to it, they were both in the rotating equipment business, but they were also in pumps and stuff, but they also had a compressed air component. And in the process of digesting those two companies, we learned a lot about compressed air, and it can be a very clean, nice, environmentally friendly type business that doesn't relate to oil and gas or anything. And so -- and very profitable. So we've targeted compressed air, and you should see us purchasing more companies in the compressed air business, and we like that. We equally like water and wastewater. And so we're trying to buy those. And so those are kind of the two areas -- main areas that we're targeting for acquisitions is to build up a pretty national presence on those two marketplaces.

Cole, your other question was related, I guess, you used the word pricing. So I'm going to take that as multiples out in the marketplace. It's a pretty robust M&A market in general out there. I guess from our capital allocation standpoint, we're always balancing it in today's environment and kind of where we've built our capital allocation model is, hey, we look at yes, where the multiples are in the market. But also we have a share repurchase program, and we have some other things out there. And kind of with, I'll call it, the suppressed earnings that are starting to release with DXP, share repurchases are on the table. A lot of things are on the table for DXP. And so we're always balancing that, but we won't -- we're pretty disciplined, I guess, is the point around kind of the price we're going to pay for acquisitions in today's market given the relative valuation of DXP as well.

And really one more thought is both of these companies or most of -- all of them that we've been buying of late have had five-year track records of growing their business through each year, COVID, no COVID, oil and gas being ugly, et cetera. And so that was part of our diversification part of our strategy around having businesses that are less cyclical.

[Operator Instructions]

And Cole, if you have other questions, feel free to ask us.

[Operator Instructions] We have no further questions in queue. I'd like to turn the call back over to David Little for any closing remarks.

Yes. Thank you. Just thanks, everybody, for who are listening in today. We have just one analyst and we thank Cole for your participation. Just in closing, I think it's an interesting story of DXP looking at ESG, sustainability, et cetera, and all those things are important. And so we're on top of that. The main focus to me is that our people are looking at different ways of helping our customer, be environmentally friendly from biofuels to carbon capture, et cetera. And so that's pretty exciting. But in addition to that, as we just mentioned, these last acquisitions are targeted around some markets that are less cyclical. We've been in the water and wastewater business, but we're now pushing it even more and so -- and trying to grow it into a bigger piece of what DXP does. And in compressed air, likewise, we've been in that business, but it hasn't been a real big focus of ours. And so both of those things are making DXP different than it's been in the past, and I think it's a neat story, and I thank everybody for their efforts, all our stakeholders for helping us move in a real positive direction. So thank you, and you all have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.