Thank you for standing by. My name is Novi and I will be your conference operator today. At this time, I would like to welcome everyone to the DXP Enterprises, Inc. Third Quarter 2024 Earnings Release and Conference Call. [Operator Instructions] I would now like to turn the call over to Kent Yee, Chief Financial Officer. Please go ahead.

Thank you, Novi, and thank you, everyone. This is Kent Yee and welcome to DXP’s Q3 2024 conference call to discuss our results for the third quarter ending September 30, 2024. 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, and thanks to everyone on our 2024 third quarter conference call. Kent will take you through the key financial details 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 2,989 DXPeople. Congratulations to all our stakeholders and a special thank to you and our DXPeople you can trust. We are pleased to see end market demand and DXP’s performance continue through Q3. We remain at record levels as we move into the last quarter of 2024. 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 2024. We remain focused on serving our customers and providing products and services that help them save money, consolidate their MRO spend, manage inventory and provide solutions to solve their revolving 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 fiscal 2023 and 2024 top line and bottom line growth, both organically and through acquisitions. That said, our growth strategies are working, and our acquisition pipeline should add to our results as we close out fiscal 2024 and going into fiscal 2025. We continue to be excited about the future and delivering a differentiated customer experience, creating an engaging winning culture for DXP, and investing in our business to strengthen our core capabilities and drive long-term growth. Year-to-date through September 30, total sales were up 4.7% and…

Thank you, David, and thank you to everyone for joining us for our review of the third quarter 2024 financial results. Q3 financial performance reflects DXP’s ability to continue to successfully navigate through the market and execute and create value for all our stakeholders. Our third quarter results also reflect another record sales water work along with a new all-time high in adjusted EBITDA margins. As it pertains specifically to our third quarter, DXP’s third quarter financial results reflect solid sales growth within IPS and continued strength within the energy and water bookings and backlog, along with an accelerating contribution from DXP Water. Year-to-date in-line service center performance, marked by gross margin strength and stability and a pickup in sales performance from Q2 to Q3, continued contribution from acquisitions, along with closing an additional acquisition during the third quarter and closing two subsequent to the quarter or bringing the total completed year-to-date to seven acquisitions and consistent operating leverage leading to sustained adjusted EBITDA margins. Total sales for the third quarter increased 6% sequentially to a record $472.9 million, acquisitions that have been with DXP for less than a year, contributed $28.5 million in sales during the quarter. Average daily sales for the third quarter were $7.39 million per day versus $6.96 million per day in Q2 and $6.66 million per day in Q3 2023. Adjusting for acquisitions, average daily organic sales were $6.94 million per day for the third quarter of 2024 versus $6.59 million per day during the third quarter of 2023. That said, the average daily sales trend during the quarter went from $6.62 million per day in July to $8.77 million per day in September, reflecting a quarter-end push and benefit from acquisitions as we closed out the third quarter. In terms of our business segments,…

[Operator Instructions] Your first question comes from the line of Tommy Moll with Stephens. Please go ahead.

Good morning and thanks for taking my questions.

Good morning.

On the acquisition front, I want to make sure I heard you correctly, Kent. So there were five year-to-date through when you closed the books third quarter, then I guess there were two more for a total of seven in October? And then I think I heard you say another two more either by year-end or by first quarter end?

Yes, Tommy, I’ll walk you through that, and thank you for joining us today. We closed five as of the end of Q3. And then subsequent to the quarter end, just this past Friday, meaning November 1, we closed an additional two acquisitions. So that brings us to seven year-to-date. And we’ll be putting out a press release in the next 24 to 36 hours regarding those. And then my comments in the script also pointed to that, obviously, we still got a strong pipeline, and we anticipate closing another two, if you will, before the end of Q1 of next year.

Got it. And anything you can share at this point on the two that you closed, first the month, even just in terms of end markets or any other contours that you can share now?

Yes. What I would share today on the call is – they were both more typical in the smaller size of our acquisition program. One was another water wastewater acquisition in the Nebraska market. So we’re excited to get a little bit of a foothold in Nebraska. And then the other one was a vacuum pump acquisition in California, so continuing to grow our California region, but it’s on the vacuum pump side, which means there’s more end market diversification. So everything from semiconductors, food and beverage, pharmaceuticals, etcetera.

So if we roll it all together, I’m going to pivot just to the fourth quarter here, which is always tricky from a revenue standpoint to try to have a view on. But if you just – if you include some of the benefits of the acquisitions that you announced and you look at the $473 million you did in the third quarter, does it feel like maybe flat, up or down quarter-over-quarter into Q4, inclusive of the acquisitions that you have announced, that obviously, we haven’t seen how big they are yet, but just trying to roll all that together to set an expectation?

Yes, No and I get it. We don’t formally provide guidance, but we have our KPIs, including sales per business day. I think, Tommy, the way to think about it as we go is, yes, there is fewer days as we head into [Technical Difficulty] and so I think everybody has got to factor that in. That said, let me walk you through the sales per business day trend. And then if you have a follow-up, we can go from there. But I always think that as a broad KPI kind of directionally kind of – can point people in a certain direction. And then David may have some comments. But if you start off and just let’s just go back to May and then I will pull it forward. May, we were at $6.43 million per day. June, $7.63 million per day. July, $6.62 million per day. August, $6.89 million per day. September, $8.77 million per day. And in October, we have got $6.99 million per day. So, that’s kind of the sales per business day trend. But once again, we will have fewer days and you get step between the days after those holidays as well practically, so.

And then I would just add that historically, the fourth quarter is a little softer. And I am not sure that, I guess from our perspective, bookings are still really strong. Our backlog is strong, but I am not necessarily thinking what we will ship or recognize as revenue in the fourth quarter, we will – I think it will be a little soft.

And Kent, I appreciate the monthly cadence progression you provided there. Just to confirm, those are all on an as-reported basis, so that would be inclusive of whatever acquisitions had closed during those months?

Yes. And then two more recent ones are once again on the smaller end, we will have more detail when we put the press releases out. But call it, combined together less than $10 million in sales for those two on an annual basis, so.

Okay. That’s very helpful. And just in terms of the days for Q4, do you know what you are dialing in this year? Should it be fairly similar number of selling days as in the past?

Yes. I think we are coming in at around – once again, just 61% to 62%, just practically I think at 62%, but how the holidays fall on…

Oh, yes. Okay. Thank you unpacking that. That’s helpful. David, you commented on the margins, which were again in the double-digit range in Q3, and I think you – I heard you say let’s do it again here in Q4. So, I just want to make sure I heard that correctly that there isn’t any kind of reason that should not be the case again in Q4 and also just get your latest and greatest on that performance. You have been solidly in the double digits for a number of quarters now. There are some acquisition benefits in there, but if there is any kind of operating tailwinds otherwise, you want to call out, please do? Thank you.

Sure. And I assume you are talking about EBITDA margins.

Yes, adjusted EBITDA.

Yes, adjusted EBITDA. Yes, I – we are not – if you noticed, SG&A was probably as a percent of sales was a little high. And so we are – I think it’s important to note that we are not trying to manage the business to maximize profits at the expense of sales and that – in quite the opposite, we have a lot of bets on the table to grow sales. And some of those are working out really nicely, as you can see, and then some of them are a little slower and taking bigger investments. So, I think that that’s good news. The good news is that we are managing the business for growth and not trying to cut every little nickel and dime of expense out. So, I don’t think there is any real headwind that will make expenses go down. And I don’t think there is any reason to think that EBITDA margins are going to go down either. Some of the EBITDA margin growth has been in the water and wastewater area, which is a real focal point of what we are trying to do and our traditional pump business. So, we continue to want to grow those two things. So, the acquisitions we are doing are very accretive on EBITDA margins. And so we are excited about that. And so I am like, okay, guys, let’s keep up the good work and let’s do it again.

Thank you, David. This one is probably for Kent. Just to unpack some of the refinancing you did there in October, Kent. Your gross debt will be up or is up, I guess now, but then the cost of that debt was reduced, I think by 100 basis points. So, are you able to help us dial in what you are thinking just for interest expense here in the fourth quarter? And then to the extent there is a lot of noise in that number with one-time fees that are going to fall away, can you just calibrate us on what run rate would look like in the current SOFR environment?

Yes. No, absolutely, Tommy. I think the absolute run rate interest expense you are seeing even with the incremental, the punch line will be roughly the same. We are running around, I will call it, $15.5 million to $16 million a quarter. And I don’t think that will change. The benefit we got obviously was the 100 basis points reduction as well as the dry powder ride, and that’s really to fuel our acquisition activity. And so I think that’s the way to think about it if you are thinking about just in terms of how it impacts the P&L. Yes, they will be the one-time. We have to go through the analysis. We haven’t completed it yet, where you look at the existing issuance cost and some of it you are right through. And obviously, we will be clear about that in Q4, but we haven’t necessarily gone through that 100%. But I think the point you are getting at is you want to know kind of the run rate interest costs and I think the $15.5 million to $16 million is fair. Keep in mind, the facility still amortizes 1% per year. So, as time goes on, we will be paying down the facility at 1% per year. And so if that answers your question, Tommy, that’s I think how we think about it. It was favorable market conditions and with our pipeline and then kind of with one of the acquisitions we did earlier this year, being pretty significant and a contributor in this quarter, it felt right to just re-prime if you will, the balance sheet and going to 2025, putting us a position to do something similar, so.

Sure. And on that front, Kent, with regards to capital deployment, did I hear you correctly say that seller expectations currently appear reasonable? I realize that’s not specific to any particular deal. But just in general, did I hear you provide that characterization?

Yes, I think that’s fair, right. I think sellers in general understood where we were and still are relatively speaking in a higher interest rate environment. And so valuations, I think from what we see have been fair and reasonable and our pipeline continues to reflect that. And so we don’t feel like we are having to be too aggressive, obviously. But the businesses that are growing and are highly strategic in many ways to DXP, we are willing to push the valuation pendulum a little bit more. But all-in-all, I think we are still buying on a blended average across all our deals, where we have always historically been and what we have communicated to the market, so.

Last one for me. David, if you look back over the last handful of years, you have been at this capital deployment program for some time where you are diversifying your end markets, signing pockets of faster growth, higher margin, etcetera, etcetera. Closed a number of deals this year, more in the pipeline, one topic that doesn’t often get discussed is whether there may ever be a point in the future where you would be a seller of any part of your portfolio. So, if you just play it forward and you keep shaping the portfolio as you have been now for some time, do you ever look up and there is a situation where a piece it would make sense to pry out of the portfolio or if the answer is too early to tell, that’s fine too. I just – I was reflecting on the execution here over multiple years and the business today looks a lot different than it has in prior cycles, so I figure it is worth an ask?

Well, I appreciate you making that comment, and I appreciate you recognize the diversification that we have been doing and so I feel really good about that, and I feel really good about the fact that we are not going to have any big downturns or anything like that, that are hard on this. So, I feel really strong about DXP and where it is today. That said, I think you asked a very good question, one that we consider at most Board meetings, and that is that are there some pieces that really don’t fit the new direction or maybe they don’t fit the right financial matrix either that we are trying to accomplish. And so the answer to your question is, yes. And again, I think where we land is that these – everything we are doing makes pretty decent money. And so it’s not like we are trying to sell something that’s just a dog over here, and so we don’t have any dogs. If we do, they are all really nice dogs. But anyway, the point besides my joke is that it’s a consideration. And then because they are all performing to what they feel like they could do and it’s going well. It’s just a timing issue. It’s when do we think is the appropriate time to maximize selling something. And I will be the first to admit that selling something has not been in my portfolio. It’s not what David Little is all about of, I don’t – I can’t remember selling something, so I am going to acquire and then I would try to make it as pretty as I can. But there is some – as we have gotten much, much bigger, there are thoughts around that.

Thank you, Dave.

Yes. Tommy, the only thing I would add there is, yes, obviously, from a fiduciary perspective, we look at it, but we are known in the marketplace as a buy and hold guy. And so we look at things from a fiduciary perspective, but we take it seriously because when sellers sell to us, that’s part of the attraction of DXP, right. We are not like our competitors out there and we are not slipping every day. And so I just round out David’s comments with that. It’s – we appreciate the question, but it’s a delicate walk because one of the big differences for DXP in the marketplace is we are not private equity. We are not a lot of things. And so we take pride in that. So, I would just kind of add that ending touch there a little bit.

Yes. Noted, and I appreciate the insight from you both, and I will turn it back.

I will now turn the call back over to David Little, Chairman and CEO, for closing remarks.

And first, Tommy, I would just ask if there is anything else you would like to ask. We appreciate you and the things you do to cover us. If there is not, then thanks everybody for joining us today. Thanks to all our DXP people out there. Thanks to all the acquisitions that we have done and those people that are joining our DXP team. I think they learn to appreciate DXP and how we operate. And we are all about growth, we are not about trying to whack expenses and take everybody – just trying to maximize the last penny. That’s not our style. I do appreciate Kent making a point that we are not a portfolio company buying and selling things. Typically, I think I will say again on a longer term answer to what I was asking – answering and that was that as we get bigger and bigger and bigger and move forward in a direction that’s very positive, then is there some things that may need to be looked at. So, with that said, again thank you all of the DXP people for all you do. And let’s finish the year strong and off into 2025. Here we go. Thanks.

Ladies and gentlemen, that concludes today’s call. Thank you all for joining. You may now disconnect.