Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises Third 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] Thank you. I now turn the call over to Kent Yee, Chief Financial Officer. Ken, you may begin.

Thank you, Krista. This is Kent Yee and welcome to DXP's Q3 2023 conference call to discuss our results for the third quarter ending September 30th, 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. I will now turn the call over to David Little, our Chairman and CEO, to provide his thoughts and a summary of our third quarter performance and financial results. David?

Thanks Kent. Thanks to everyone, -- on our 2023, third quarter conference call. Kent we will take you -- Kent will take you through the key financial details after our remarks -- after my remarks. And after our prepared comments, we will open for Q&A. It is my privilege to share DXP's third quarter results with you on behalf of over 2,799 DXPeople. Congratulations to all our stakeholders and a special thank you to our DXPeople you can trust. We are pleased to see end market demand and DXP's performance continue through Q3 and remain at record levels as we move through the second half of 2023. This allows us to achieve another quarter of both solid sales growth and 10%-plus EBITDA margins. We are pleased to announce strong third quarter results with sales, operating income and earnings per share all up over the prior year. This is a great way to start the second half of Fiscal 2023. We continue to deal with the macro uncertainty and the impacts of inflation and elevated interest rates, but we remain focused on serving our customers providing products and services that help them save money consolidate their MRO spend, manage inventory, provide solutions to solve their evolving needs. Being customer-driven and growing sales profitably is our goal. We continue to focus on driving organic and acquisition growth, increasing gross profit margins and increasing productivity. Our execution has resulted in the Fiscal 2022 and 2023 top line growth and bottom-line organic and acquisition growth. That said our growth has not been as large as we would like. So we expect to add some acquisitions to our results as we close out Fiscal Year 2023 and going into Fiscal Year 2024. We continue to be excited about the future and delivering differentiated customer experiences,…

Thank you, David, and thank you to everyone for joining us for our review of our third quarter 2023 financial results. Q3 was a great quarter for DXP and our results are in line with our expectations, and reflect the positioning we were anticipating as we prepare to go into fiscal 2024. This quarter reflects our third quarter of 10%-plus adjusted EBITDA margins, strong free cash flow generation and meaningful diluted EPS growth. We are excited to report these results and we look forward to successfully closing out 2023 and starting fiscal 2024. Specifically, Q3 financial performance reflects our ability to continue to successfully navigate through the market and create value for all our stakeholders. As it pertains to our third quarter, Q3 highlights are as follows: strong year-over-year organic sales growth; lessening impacts from inflation and price increases compared to a year ago; continued gross margin strength and stability; continued year-over-year and sequential growth in the IPS energy-related backlog; consistent operating leverage leading to sustained adjusted EBITDA margins; more notably, our third quarter of 10%-plus adjusted EBITDA margins; and significant capital returned to our shareholders through our share repurchase program. Total sales for the third quarter increased 8.3% year-over-year to $419.2 million. Acquisitions that have been with DXP for less than a year contributed $3.9 million in sales during the quarter. Average daily sales for the third quarter were $6.7 million per day or essentially flat to Q2 and were up 10% versus Q3 2022. Adjusting for acquisitions, average daily sales were $6.6 million per day for the third quarter. That said, average daily sales trends during the quarter went from $6.58 million per day in July to $7.1 million per day in September, reflecting a typical quarter-end push as we closed out the third quarter and an uptick…

[Operator Instructions] Your first question comes from the line of Tommy Moll from Stephens Inc. Please go ahead. Q – Tommy Moll: Good morning. Thanks for taking my questions.

Good morning, Tommy. Q – Tommy Moll: David you used the word constructive; to describe your end markets and I wondered if we could unpack that a little bit. And I'm specifically, talking about ex-oil and gas. So more on the industrial side. How would you characterize that environment today just based on any anecdotes you can share? And how does it feel like it may have changed over the last quarter?

Tommy, thanks for your question. And that's a good question. I think best described, is that we have an unusual amount of companies that are doing well and we have an unusual amount of companies that aren't doing well. I think you have people that are being affected by higher interest rates. I think we have people that aren't being affected by that. And then of course, the consumer ultimately is probably the driver of all of that. And so, it's interesting that it seems to all be balancing out. Whether aerospace is up and you exed oil and gas, but actually that's kind of been down through most of this year. And of course, we think that's going to get better. But other industrial the PMI index is saying, we're in contraction and yet my Metal Working group has been relatively flat most of the year maybe, ever so slightly down. And then when I say up and down, I'm really not talking about it being drastically up and down. I'm just talking about it being up a little bit and down a little bit. So we don't -- we're not -- there's no panicking going on over here. We have some very strong growth initiatives for to be very specific, and they are producing good results. Because they're new in nature, they don't move the needle a whole bunch. We do an extra $1 million here, and an extra $2 million here and $3 million here. But that's not offsetting that we have some customer that his business is down 10%, so he comes down. So it's really hard. It's really, why we're not overly positive or negative. I think we're not taking a positive or negative stand on anything, and we're just dealing with what hand we're…

Hi, Tommy, I'll jump in here a little bit. One thing just to tag on to David's just comments about the end markets is, sequentially $419 million I think from your estimate may be considered down. I think the one thing, we missed there is we had 63 business days in Q3 versus 64 in Q2. So if I adjust for our sales per business day, we're essentially flat to Q2, which was in line I think with directional comments once again we typically don't give guidance, but directional comments around our Q2 commentary. That said to pull that forward, I think in Q4 what we see is there's 61 business days. So you even go down an additional two. So our sales per business day continues to perform. As I outlined the trend was through the quarter $6.6 million in July, $6.3 million in August, September was $7.1 million, October $6.4 million. So if you take a blended average and do that by 61 days you can get to our macro or directional comments on where we think the business will perform in Q4. And some of that's just once again a function of the number of business days. You go into the holiday season, et cetera, some other things going in there. That said we did have an acquisition in the quarter that on a full year basis is roughly around $2 million in sales. So once again people can do the math of incorporating that. And so those would be our thoughts about how to think about going forward. I don't think we see -- to David's comments we have a balanced mix of end markets. The consumer-facing ones would probably would be the way I'd summarize it tends to probably see the ones that you have those slightly downs. And then in terms of our hardcore true industrial markets to David's point you have some that are up or down that are offsetting that are having lessening impacts from inflation, and so net the business is still growing year-over-year.

Kent, all the detail was helpful. And just to make sure I'm following correctly, your 63 business days in the third quarter steps down to 61 in the fourth quarter. And I think what I heard you say is if we calculate that daily sales rate for the third quarter across the average of the third quarter, there's no reason that shouldn't look meaningfully different in the fourth quarter. Did I hear that correctly?

That's directionally correct. Once again we had an acquisition without being too specific. But yeah. I mean that's how one of the KPIs here at DXP that we monitor that we always talk about, obviously, on the earnings calls is very simplistically at a very high level sales per business today.

Okay. And then on the margin side, third quarter in a row hitting that double-digit target. And I think, I heard you all say you don't see any reason that shouldn't continue. So I would just ask a more open-ended question. I mean first of all make sure I heard that correctly. And second of all just talk to what's supporting some of that double-digit margin performance and where do you think you head medium-term?

Yeah. I mean at the high level what starts off really supporting that is our gross margins. If you look at our gross margins over the past 1.5 years, two years, we've taken a step up by about 100 to 200 basis points call it on average. So that 29% to 30% gross profit range is the biggest driver. And then as is inherent in distribution you get SG&A leverage. And so if you're managing costs correctly, which we work pretty hard on if you get to 30% and then you've got the 20% SG&A, which has been one of David's long-term goals you get to the 10%. And so we've been able to do that. Part of that is driven by mix. Once again our water/wastewater acquisitions tend to perform at a higher level of gross margin. So does our air compressors. And then our base business we're always pushing our heritage if you will DXP business to perform in line with those businesses and get to that 30%. And we surely have some that do that and more. So those are the levers at a high level and we've been experiencing that quarter-over-quarter.

All right. Kent on interest expense, I just want to make sure I heard everything you said correctly and there's a couple of layers here. So maybe we'll start with the easier one. I think what I heard you say is forgetting about Q4 for a minute where there's some noise, but that post the refinancing on today's SOFR it's about a $16 million to $17 million a quarter expense line. Did I interpret that correctly?

Yeah, yeah. It's a floating rate. So it's a little bit of a moving target Tommy, but that's correct. If you just, kind of, with everything you know today pro forma it right at about $16 million to $17 million in interest expense a quarter for the new incremental $125 million.

Okay. And then 4Q, which will be a little bit trickier there was a $12.4 million item and a $12 million to $13 million item. Can we just go back over those again?

Yeah. Essentially you have -- you already for lack of better words expense and pay for it but due to the accounting you have unamortized debt issuance costs that you write off as part of a new facility and a new transaction. So we'll write that off and flush that through the P&L if you will in Q4 and then we'll capitalize a new $12 million to $13 million worth of debt issuance costs associated with the new facility or the new $550 million raised here just recently. So that's essentially what will go on. The P&L impacts once again that people will see is just the write-off of the debt issuance costs and then you'll start to see obviously the new pro forma interest kick in, in Q4. So those are the two things you'll really see in the P&L.

Okay. And if you think about the consolidated interest expense line for Q4, what does it all add up to?

Well, once again also the missing piece which once again as we do in today's environment, we are managing cash. Meaning, hey, we do get some interest income on our cash that offsets that $16 million to $17 million, but that's -- there's a daily movement there a little bit. So, net you could get down to $15.5 million at the lower end of that forecast of interest expense is what I would tell you just in terms of what's rolling through the P&L.

And that's for Q4 or for the run rate?

Yeah, for Q4. Once again, the facility also amortizes. If you go past Q4, Tommy, 1% per year in terms of principal reduction. So, you're effectively lowering that ultimate interest over time. Not to get into the details of that math here on the phone. But I think, in Q4 what you would expect to see is the $16 million to $17 million in interest expense. And then as you go forward, every quarter, the combination of debt amortization of the 1% per year or 0.25% every quarter plus kind of some interest income associated with the cash on the balance sheet will offset that. And so, it will peak probably in Q4, Q1 and then it will just lessen as we go out.

Okay. Let's see. On a couple of strategic items for you guys. M&A, I think I heard maybe four to five more deals, you've got soft circled for Q4, Q1. What can you tell us about that pipeline, particularly in terms of just size of the deals you're considering at this point and what seller expectations look like in this rate and economic environment?

So, we actually have letters of intent in place. So we're just actively working through due diligence on those and that's why we said a minimum of four to five by the end of Q1. The timing once again, the calendar is a little bit tough at this time of the year. You have holidays and different things. So we're kind of working through that being sure we're being prudent from a due diligence standpoint. But we're anticipating potentially some here as we close out the year. And obviously, if we don't hit that timeline, we'll close them out in the first quarter. So, just to give you some color there. Just in terms of kind of overall expectations from a valuation standpoint, I mean, hey we still continue to find good deals at good multiples. I mean, our average purchase multiple has always been seven times or less. And so we're still finding those opportunities out there in the marketplace. The themes in terms of the types of acquisitions water/wastewater continues to be a big theme. We do have some just industrial kind of I'll call it rotating equipment product in our repair and services. And so, those are also one of our themes. That's what Alliance Pumping & Mechanical was closer to and did add some water/wastewater things there, but also just some general rotating equipment repair type stuff. So those are the themes we're seeing. And so we're kind of excited to work through those and we'll be excited to kind of report those when we get those closed.

Last question for me, on oil and gas. There have been some large transactions announced for some of the players in that industry to consolidate. And I just wonder from a strategic perspective, is there anything that that signals positive or negative to you for your business in that end market?

Well, I think it's potentially negative. I think these big companies had their own budgets, their own people doing projects. We participate in those projects. And when you put the two of them together, assuming if they're doing it and they're just going to move forward with the same total budget, then that would be great. If they do it and they're wanting to consolidate and try to become more efficient, well then I think those budgets could possibly be cut. And so therefore, there's going to be good activity and of course, it's all about how much of -- we don't get 100% of anybody's budget. So still, we don't feel like that IPS our Innovative Pumping Solutions group is pretty positive about a combination of alternative type fuels that are more environmentally friendly and the traditional stuff and both of those things are happening as we speak. And so in some ways, they feel like things are continuing to improve for them and I feel that way. But specific to the mergers you're talking about, they take some budget out of play.

Appreciate all the insight today. That’s all I had.

[Operator Instructions] We have no further questions in our queue at this time. And this does conclude today's conference call. Thank you for your participation and you may now disconnect.