Good morning. My name is [Chantal] [ph], and I will be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises, Inc. 2022 Second Quarter Earnings Conference Call. As a reminder, today’s conference call is being recorded. 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. Kent Yee, Chief Financial Officer, you may begin your conference.

Thank you, [Chantal] [ph]. This is Kent Yee, and welcome to DXP's Q2 2022 Conference Call to discuss our results for the second quarter ending June 30, 2022. Joining me today is our Chairman and CEO, David Little. Before we get started, 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-going 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 Chairman and CEO, to provide his thoughts and a summary of our second quarter performance and financial results.

Good morning, and thank you, Kent. Thanks to everyone for joining us today on our fiscal 2022 second quarter conference call. I will begin today with some perspective on our second quarter and our performance through the first half of 2022 and finish with some thoughts on the remainder of the year. Kent will then take you through the key financial details for after my remarks and after his prepared statements we will open for Q&A. Overall, we had a great second quarter, a strong first half of 2022. We are close to reaching new highs for DXP and look forward to pushing through the second half of 2022. Thank you to all our DXPeople for their hard work dedication and resilience. The first half of 2022 highlights good execution, positive demand trends supported by our ability to navigate the inflationary and challenging supply chain environment. We continue to execute of our acquisition strategy to accelerate our end market diversification efforts, adding Cisco Air Systems during the quarter. We are excited on our goals to diversify the business, while maintaining our commitment to foundational end markets like energy that have always been a part of DXP. We are beginning to see good progress and we are confident that we are near the early beginnings of exceeding pre- pandemic organic sales levels. This is DXP's second quarter of meaningful organic growth and the total sales and EBITDA, which is great to see. This is a testament to the relentless drive we have made to center our strategy around our customers and to remain customer driven experts. Overall, our balanced end market mix broad product portfolio and good geographic coverage offered us multiple avenues to grow and more ways to create value for our customers and suppliers, while providing important resilience in…

Thank you, David, and thank you to everyone for joining us for a review of our second quarter 2022 financial results. Q2 financial performance reflects our seventh quarter of sequential sales increases during this COVID cycle, and the subsequent and interrelated challenges, including inflation, supply chain constraints, and a warm ramifications. Despite these challenges, DXP continues to successfully navigate through the market and has been able to execute and create value for all stakeholders. I am personally excited for our performance given our Q2 2022 financial performance is the highest performing sales quarter since I've been CFO and the fourth highest sales performance in DXP's history. We look forward to pushing through our current levels and establishing new highs as we move to the second half of the year. DXP's second quarter financial results were great to see and reflect the combination of business actions we have undertaken. More specifically, Q2 takeaways are as follows: continued strong organic sales growth and contribution from acquisitions fueled by inflation and DXP's ability to manage price, consistent and strong service center performance marked by gross margin stability, meaningful sales increase within SCS along with another quarter increase in the IPS backlog and significant operating leverage leading to sustained adjusted EBITDA margins. That said, while we are encouraged with the progress, we are far from satisfied. On the growth front, we are seeing historically high contribution from realized price in-light of the inflationary environment and so we will expect more growth in the second half of 2022 and we are focused on capturing it. On the profitability front, operating margins are improving, but we strive for consistent margin expansion before we declare victory. Total sales for the second quarter increased 15.2% sequentially to 367.8 million. Acquisitions that have been with DXP for less than…

[Operator Instructions] Our first question comes from Tommy Moll with Stephens. Your line is open.

Good morning and thanks for taking my questions.

Hey, good morning, Tommy.

Good morning.

I wanted to start on the daily sales trends, and Kent, maybe first just to level set, I think you said June was at 6.5 million a day, and that that reflected an improvement in activity through the months of 2Q. Just to clarify, that number is inclusive of acquisitions and then to the extent you can give us any insight on your July trends that would be appreciated as well?

Yes. No, no, absolutely, Tommy. And just to paint a little fuller picture, we're accustomed to seeing a quarter-end push whether it's the first quarter meaning in the month of March or in June. So, really my comments were reflecting that we saw the typical quarter and push in June that we're accustomed to seeing. In terms of the trends through the quarter, like I said, really I'll step back to March. March, we were at 5.8 million per day. And then April, we were at 5.5 million per day. In May, we were at 5.4 million per day. And then in June, we're at 6.5 million per day. And as you said, that's inclusive of all acquisitions. And then in July, we're at 5.5 million per day.

Sure. Yes, that's helpful. Thank you. Let's just walk down the P&L here on gross margins. You both anticipated my question, which was just to walk through the step down sequentially from first quarter to second quarter and it sounds like a lot or maybe all of that was on a larger contribution from SCS. Maybe on a like-for-like basis, I know you don’t give gross margin by segment, but maybe you can even talk qualitatively. Were there any other factors tailwinds or headwinds to gross margin in the quarter or was it really just that mix? And then as we think about Q2 to Q3, anyway you could frame that continued mix impact, flush headwind or any other driver you'd call out would be helpful?

Yes, Tommy. The quick answer, and I'm sure David will ask some comments, but the quick answer is, it does just reflect primarily mix. There was – we mentioned there was a significant customer of an IPS once again, the net profitability is in-line with what we're accustomed, but from a gross margin perspective, that contributed as well, but that all flows under supply chain services. So, it really was a [Technical Difficulty] shift. And so, that's kind of what impacted the gross margin line in Q2. That said, that will probably continue to influence us in Q3 and likely in Q4 because the customer is still ramping and we expect future good performance from supply chain services.

To drill down into [indiscernible] really, but IPS, you know, their orders are long-term. So, we were in a buyers' market a year ago, and so we still have some lower margin jobs going through IPS. That's kind of filtering its way out as we speak. So, you could have a little bit of improvement there. And then SCS again has some fixed contract pricing, which is pretty minor. We really try really hard not to get into those and we do a pretty good job, but there is a little bit of that, but I'm going to agree with Kent that we're really not anticipating getting 100 basis points back tomorrow. So, that is what it is.

Yeah. Appreciate the insight there, David. On SG&A, you did show significant leverage first quarter into second quarter. So, any additional commentary, you can give there would be helpful? And then kind of the same series of questions here. As you think about Q2 to Q3, do you expect you'll get another good round of SG&A leverage there or how do you think about that trend?

So, again, details, SCS, this new contract that they have, has a lower gross profit profile, which Kent mentioned, but it also has a lower SG&A profile. And so, that's where that's showing up I think mostly and if you notice that Supply Chain Services operating margins were pretty much the same. So, we have a little dip in GP and we have a corresponding dip in SG&A and so they make profit margins are about the same?

Yes. Tommy, the only macro comment I would add is, DXP is no different than I think what everybody's experiencing in this environment, which is, we're all experienced in some people inflation and we saw some of that and we've seen some of that in Q1 and Q2, but I think we'll get – start to get the full bore of that as we move in into the second half of the year, you know into, I think that could obviously feed through a little bit of the SG&A line, but as long as we get the sales growth that we've been getting, we'll get that operating leverage that we're accustomed to getting, but as time goes on, that eventually catches up with you, all things being the same and assuming you get that sales growth, you're fine. But we're all experiencing those people pressures.

So, let's pivot to a higher level strategic conversation here on capital allocation. I heard a couple of things mentioned. One on M&A, it sounds like pipeline is robust and you're soft circling one or two deals through the end of this year. You also mentioned the repurchased that you'd continue to deploy that authorization opportunistically? If we think about the most likely path forward in this macro environment, is it really that? So, opportunistic repo, but really more focused on as many accretive tuck-in deals as you can find or could you pivot another direction and maybe go with a larger repurchase cadence and/or potential for larger, maybe transformative, maybe not transformative, but larger let's say chunkier deals? I'm just trying to understand the most likely path forward and if we should discern any potential shift in strategy coming from today's comments?

Yes, Tommy, I don't necessarily – I'll just piggyback on your last comment there. I don't know if there's necessarily a shift. I think at least since I've been CFO, I've always tried to posture us in having all the tools available to the CFO office, if you will. And so, whether that's raising equity, I'll go the other extreme to repurchasing shares. And so, I think the messaging is intended to signal that, hey, if we're trading depressed at 7x to 8x, we can only get deals at 10x well. There starts to become a decision where maybe we just go ahead and buy ourselves because we know, if you will, where we're at, in terms of rebound and recovery and we feel good about that. That said, acquisitions have been key to our diversification efforts and key to bouncing off. I'll call it, the suppressed earnings, a comment I used a couple of quarters back. And so, I think we just continually iterate on that and we wanted to communicate that and particularly in this market where you've got a lot of sentiment out there that could be otherwise. And so, I think that was the intent of the messaging.

That's helpful.

I’m going to – Tommy, I would just like to borrow your time and give a small lecture, I'd appreciate it. Back in 2014, from a supply infrastructure basis, all of the oil and gas companies that were in that market, MRC, DNOW, people like that were all peaked in 2014. From that time, 2015 was declined and we had a small recovery back in 2018, and half of 2019. And then oil and gas really started declining before COVID ever hit, then COVID hit and that made it even worse. During that time, DXP has shift resource capital. You're talking about capital, and I feel responsible and I deal with capital. That's what I do, and during that time, we have – we didn't shut down operations in Odessa or Houston or the [indiscernible] or Pennsylvania. I mean, we didn't shut down locations that were in the oil and gas business, but those businesses didn't and grow. And so, we want to be a growth company. We want to be 10 billion. Okay. And I seem to have been locked somewhere between 1.5 and 1 and I’m determined to get out of it. So, we shifted gears into other markets and used resources that we might have used in oil and gas, and we didn't buy any more oil and gas companies. We didn't stop trying to sell into those markets, but those markets just were not good markets. Again, when you look at MRC and DNOW, which I hate being compared to, but they're oil and gas companies, and back in 2014 DNOW was a $3 billion company and today it's fought back and then maybe it's getting close to [2] [ph]. MRC was a $4 billion company and it's fought back to get close to [3] [ph].…

Well, David, I guess, I appreciate the comments and I'll limit myself to just one follow-up pulling [some themes] [ph] together. On the pathway, I think you threw out a $10 billion number. Whatever the pathway is towards and forgetting for the moment the relative multiples, which can present an issue as you just discussed, but does the law of large numbers eventually catch up to you where you can have strong organic growth and tuck-in deals, but but the pace at which you grow that top line to the end goal isn't quick enough? So, the net is your average deal size would tick-up significantly. Is that something that…?

Yes, I think that's a good point. Yes. Yes. No, we're always – well, first of all, you have – you've not been around as long as I have. I'm not sure anybody has, but anyway, we have stated goals and strategies around specifically in a perfect world, we would grow 10% organically, 10% inorganically, and do 10% EBITDA. Okay. That's what we subscribe and try to do every year and that model works without me having to go get equity or do anything. I can fund that amount of equity, and of capital. And so our capital structure is, now, given within a year, if we were going to air, I wish it was always the organic. It didn't do 10, we did 20, that's always the most profitable business we do. But if it's only 5, and maybe we do 15 inorganic, well then we're okay with that too. So, I think that we have – and then we have discipline around – we don't just buy anything. We're buying things that fit with what we're trying to do and that is to have technical products and services. And so – and there's a big movement around growing the technical service side of our business a little more than we've done in the past too. So, I guess and by the way and then I think what you were asking was that to get to $10 billion we're not going to do that by buying our own stock back. Okay. That's not going to happen. But maybe we give up on the $10 billion goal and buy our stock back if the marketplace isn't going to let me get there.

Thanks David for the insight. I appreciate it. I'll turn it back. That's all from me.

[Operator Instructions] We have reached the end of the question-and-answer session. This concludes today's conference call. You may now disconnect.

Thank you.