Good morning, ladies and gentlemen. Thank you for standing by. My name is Erica, and I will be the conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises, Inc. 2023 Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] I now turn the call over to Kent Yee, CFO.

Thank you, Erica, and thank you to everyone for joining us today. This is Kent Yee and welcome to DXP's Q2 2023 conference call to discuss our results for the second quarter ending June 30, 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 -- 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. 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 2023 second quarter conference call. We are pleased to see end market demand and DXP's performance continue through Q2 and remain at record levels through the first half of 2023. This allows us to achieve another quarter of both solid sales growth and 10% EBITDA margins. Overall, we had a great second quarter and strong first half of 2023. We are establishing new highs for DXP and look forward to the second half of 2023. The first half of 2023 highlight solid execution and continued positive demand trends supported by our ability to grow organically and navigate the dynamic supply chain and pricing environment. We continue to execute our acquisition strategy to continue to grow our DXP water and wastewater platform adding Florida valve and Riordan Materials during the quarter. We continue to execute on our goals to diversify DXP's business while maintaining our commitment to foundational end markets like energy that have been and will always be a part of DXP. This is DXP's second quarter of adjusted EBITDA margins in excess of 10%, which is great to see, and we look forward to maintaining this profitability momentum. This speaks to our relentless drive. We have to center our strategy around our customers, remain customer-driven experts, while creating a win-win for all our stakeholders. We remain highly focused on providing the expertise our customers have come to expect from DXP by providing more efficient solutions, reduce costs and achieving their ESG objectives. This consistent approach has fueled our financial results. Second quarter adjusted EBITDA of $45.3 million and diluted earnings per share of $1.06 was supported by year-over-year sales growth of 16.4%. Thanks to our efforts of all our DXP people across the…

Thank you, David and thank you to everyone for joining us for our review of our second quarter 2023 financial results. The first half of 2023 continues to highlight our strong year-over-year sales performance and two quarters of 10% plus adjusted EBITDA margins. We are excited to report these results and we look forward to the second half of 2023. Specifically, Q2 financial performance reflects our 11th quarter of sequential sales increases and another record high sales watermark for DXP. DXP continues to successfully navigate through the market and has been able to execute and create value for all our stakeholders. We have been successful in transforming and diversifying DXP, but we still have progress to make. As it pertains to our second quarter, Q2 takeaways are as follows: strong organic sales growth and contribution from acquisitions, continued impacts from inflation or price increases compared to a year ago albeit at a slower pace, continued record service center performance marked by gross margin, strength and stability, notable year-over-year and sequential growth in IPS with a positive outlook in terms of our backlog and energy activity, strong sales increases within SES, driven by the addition of a large diversified chemical customer compared to a year ago, although plateauing during Q2, consistent operating leverage leading to sustained adjusted EBITDA margins and significant capital return to shareholders through our share repurchase program. Total sales for the second quarter increased 16.4% year-over-year and 0.9% sequentially to a record $428 million. Acquisitions that have been with DXP for less than a year contributed $7.3 million in sales during the quarter. Average daily sales for the second quarter were $6.8 million per day versus $6.6 million per day in Q1 2023 and $5.8 million per day in Q2 2022. Adjusting for acquisitions, average daily sales were…

[Operator Instructions] Our first question comes from the line of Tommy Moll from Stephens Inc. Tommy, go ahead.

Good morning, and thank you for taking my questions.

Good morning Tommy.

I wanted to start on some of the average daily sales insight. You provided first I just want to make sure I heard correctly. So, it's $6.8 million reported that would be $6.7 million excluding the M&A impact. Did I hear that correctly?

Yes, that's correct Tommy.

Okay. And then Kent you provided some of the monthly insight. Can you just run through the months again? And were those on an as-reported basis, or were those excluding the M&A as well?

That includes acquisitions. But what I'll do is I'll walk you through the trend in the quarter and give you a flash a draft flash for July. So, April was 6.65%, May 6.5%, June 6.91%, and then July 6.57%.

Thank you. That's helpful.

Yes. And so our year-to-date average -- I'd just add a little further insight there Tommy. Our year-to-date average is averaging about 6.6%. And so hopefully that gives you a little bit of insight to kind of the trends in DXP.

Yes. And then the $428 million you reported for the quarter I think it was the 11th consecutive of sequential sales increase. Based on that July trend and everything today would your best guess be that Q3 could be up again sequentially from that 428 million, or is there another factor you'd point us to were flat or even a down sequential might be more realistic at this point?

I'll take that one Tommy. The yes we want to keep our streak alive. And we're working hard. We have a lot of growth strategies to do so even though I think there's no question that the Fed is using interest rates to slow the economy down and we see that in certain markets. And then we see growth in certain markets. So, it kind of depends on the mix of all that but aerospace and energy and certainly water and wastewater and food and beverage those are markets that are growing for us. And so we're working really, really hard to I guess overcome some of the other markets that are slowing down a little bit. And so -- but I think when you put it all together our goal and optimism is that we'll keep the streak alive even though I don't consider a small percentage of growth to be a negative. I consider if we do -- as an example I think if we do 1% growth in the third quarter, well then that will be 12% growth year-over-year, so we'll certainly be happy with that.

Fair enough.

And Tom the only thing I would add to it is and you asked it at the front end of just the sales per business day is our pipeline -- acquisition pipeline still remains in place. And so if we get one or two done in the quarter just dependent upon the timing, we could -- that would fit with David's comments and those are always additive, but if that gives you some more insight.

Yes, that's helpful. Thank you. On margins second quarter in a row above 10% for EBITDA. Peeling back the layers, you got a pretty big tailwind on the gross margin side just under 31% for the quarter which is the highest in a long time. So, I wondered if we could talk to the gross margin performance. What can you tell us about the price cost dynamic and the inflationary cycle? And then at the same time, is there any M&A or mix impact worth calling out as well on that gross margin performance?

Yes sure. There's certainly -- our goal is to do 30%, so to exceed that slightly is a real plus for us and we're certainly happy to get that. And then when we look at what makes that happen, we do go to mix and our certain of our businesses are higher gross profit-oriented than others. As an example Supply Chain Services has a very low growth, I mean it's like 20% but their SG&A is 10%. So they still make a 10% or greater, well slightly below that operating income margin, but an EBITDA margin of 10. So they contribute and then of course, their investment on working capital is, they don't have a lot of inventory and stuff like that the customer keeps all that. So we're happy with the returns we get with supply chain services. I don't want to mislead anybody about that because we're certainly very happy about it. But it does if that's a bigger portion of what we're doing going forward within gross margins will come down because they operate on very low gross margins but very low expenses also. Then other water and wastewater has high gross profit margins because they have. this is a long explanation but I'm going to give it to you I think it would be helpful. They have a lot of jobs that they do on commissions. And so actually in that sense their gross profit margin on those types of jobs is 100%. So that is helpful. Now they do an awful lot of resale too, and those margins are healthy also. Innovative Funding Solutions is kind of a three bids and a buy. You're doing a big project $1 million projects and so they get into competitive situations. So they're not -- their margins aren't as low as supply chain services, but they're lower than the service center margins. And so again, if the more that grows as a percentage of our MRO center service will then -- then that can pull back on margins also. But that's what I'm talking about is there is a blend of margins. And of course, the blend works out to 30-plus or gold's 30% overall. That seems to be achievable and we don't see anything. There's no onetime anything out there or anything of any significance that would drive that down besides mix and some products sometimes. So I'm very, very pleased with our people's ability to pass on inflation and supplier cost and labor costs and et cetera. So we're pleased with those results and we tend to think that that they're going to hang around there, whether it's 29.5% or 30.5% makes no difference to me really. I mean it makes a difference in the sense it's better. But I'd be happy with either one of those numbers.

Yeah. I want to talk about M&A in depth before we hit that topic. Let's address the oil and gas end market dynamics. I mean you're looking at crude back into the mid-80s that are. So what observations would you have for us about the underlying trends there?

So I'll study that pretty hard. And so here's what I know. And of course, there's a lot I don't know. But here's what I know. I know that the drilling we do nowadays is with lateral lines going from 1 mile to 2 miles, that the efficiencies of each well drilled is much greater. So we can have less rigs and still be producing more oil or gas. So this is on the drilling side. And of course, we're not tied to drilling. We are tied to production. So that is, is kind of one factor. The other factor is that we started off with 9,000 DUCs drilled uncompleted wells, and that's down to 4,000 and something. I'm not giving you exact numbers so don't hold me to that. But in that range and so that's also not needing new drilling to produce more production. So that's helpful, too. That said, in the last part of the equation is that oil and gas is a completing resource. So they have to produce more to just keep even and so we are kind of at the rate we're at right now today we're kind of staying even. It's been 11.9% to 12.3%. So it's kind of been in that range probably 12.2 million barrels a day, as we speak. So -- that's kind of how that works. It's good for us kind of midstream the equipment that's on the well-site the gathering system and et cetera. So, we see activity in that -- where we play as being very strong. And then, when we mentioned energy, we have to talk about other sources of energy. And so we're playing in those markets likewise. And so we're doing hydrogen projects. We're doing corn ethanol. We're playing in a lot of the other markets that are designed around energy, even the service and repair wind mills and things like that. But we're not in solar panels. And we certainly don't manufacture wind turbines, but we do work on them. So I think when we think of energy, we think of this balance between that we're going to renewable fuels and we're playing in that, and then, we'll never quite get it right. So there may not be enough oil and gas that renewable can take over. So when that happens then oil and gas prices are going to go up and then everybody will get dynamic around that. So it's a moving ball. So what I'm not here thinking, I know everything. If I did really make a lot of money, but I don't have a perfect answer, but those are some of the factors that we're looking at. And they are all pointing to the fact that we think that that renewables and oil and gas are both needed to do more to serve the world with energy. And so we think that the coming year or years' is going to be a strong market.

Moving on to M&A, I think I heard you guys mention something in the realm of two to four deals you hope to close by the end of the year. Any insight you can give us on what that pipeline looks like? Are we talking tuck-ins or maybe something larger or whatever insights you can provide though, I recognize it's delicate given these are still in the pipeline, but anything you can provide is helpful.

Yeah. Just some high-level comments there Tommy, one, I'd like to always signal that hey the M&A markets seem to be strong and there's plenty of opportunities there for DXP. Secondly, and more specifically to our pipeline the two to four, they continue to play on our major themes of water and wastewater, rotating equipment broadly speaking as well just as a product category. And then, more importantly, valuations are in line with our expectations. And so, for us getting the 2% to 4% seems more than reasonable. If they're in the water and wastewater space, obviously they're accretive to our margins both gross margins as well as EBITDA margins -- and if they're in the rotating equipment space by the way they're typically accretive to our gross margins and our EBITDA margins. And so we're excited point, being about our pipeline and what we see there spending a lot of time being more selective to be candid, because of the fullness of the pipeline. And so we feel good. Some of them are more tuck-ins in terms of size and then others in aggregate could be closer to around our average acquisition size. So, our average acquisition size being anywhere between $25 million to $35 million in sales from acquisition standpoint. So we'll see which ones get across the finish line before year end, but we also feel good about going into 2024 to be candid. So...

You mentioned water wastewater a couple of times there can and -- this is the last theme I wanted to make sure we hit on today, but it's clearly been an emphasis in terms of inorganic capital allocation and the deals you've done in the last couple of years. You mentioned that it tends to be margin accretive…

Yes.

Which I presume is one of the reasons you're attracted to it, but maybe even at a higher level refreshes on the strategy for building out that platform what you like about the structure of that market. And then if you look back at the progress you've made and the platform you have today how would you characterize it in terms of scale and how much more scale do you hope to add going forward? Thank you.

Yes. And maybe I'll just hit that and then I'll let David chime in on the big picture strategy around water wastewater. But we've always viewed it as a platform that we could scale up between a $350 million to $500 million at least platform. And so just to give you a sense of scale today we are a little bit north of $100 million. And then what I would also say and then I'll let this be a segue to David is we've always played in the water wastewater platform. It's just something we didn't necessarily historically make the intentful decision as we are in today's market decide to grow via acquisition. And so --and I'll use that just as a segue to David to explain to you why. But we really like it. And as you picked up on it's accretive to our margins on a variety of fronts. David?

So specifically it's not a -- it's not really a cyclical business. It's -- people eat and go the bathroom and do all the stuff that they do. And so we need water. We need clean water. We need to dispose of waste. We need to do all these things in – and then –and so the market and the infrastructure that's gotten kind of old and there's a lot of repair and replacement activity that's going on. And so that's really driving this particular part of the industry upward. So the other parts to explain it correctly too I can't mention it, but we're a pump company. We represent pumps that go into industrial and utility type businesses. So being pump people, we understand the technical side of pumps. We understand the repair and service of pumps. So water we've played in that via pumps. And so we're trying to -- so we understand that aspect of the product. When we look at adding things to that product we look at not only more repair, but we also look at some valves that are specific to that industry. We look at automation and that's specific to that industry. And so there's kind of -- we're building this platform that takes these five legs to the stool so to speak and that's the pump, the valve, the repair, the automation. And then the last one is a little new for us but it's process equipment. And so it's equipment. So we're certainly used to that, but it's -- it also has some chemical aspects to it and stuff like that. So all those other three legs valves and process equipment and automation are a little newer to us. And so that's a great growth opportunity to the people that were in municipal, but they were just doing pumps. And so it's -- this has been a really exciting time and growth strategy that not only are we acquiring people across the United States that are in this business but we are actually bringing things to them to help them grow their business really might not have been a great growth company in the past. So the market is better. What we bring to them is better. And then the customer finally he likes somebody that can bring more than just one offering to hand. So the fact that you can bring pumps and you can bring the process equipment and then you can service it and you can install it et cetera is very exciting.

We'll look forward to continuing to follow the progress there and for today's purposes that's all I have. So I'll turn it back.

Thank you, Tom.

[Operator Instructions]

Erica, I think that's all the questions today.

I was just giving you a moment. But -- ladies and gentlemen, thank you. That concludes our call today. Thank you for joining us.

Thank you.

Thank you.