DXP Enterprises, Inc. (NASDAQ:DXPE)
Singular Research's Annual "Best of the Uncovereds" Conference Presentation
September 4, 2008 10:30 am ET
Joe Lambert – Director of Marketing, Singular Research
Mac McConnell – SVP and CFO
Okay, it is 10:30 and we will begin our presentation at this time. My name is Joe Lambert, Director of Marketing with Singular Research and unfortunately as we have the speakers come up and present at the podium, I can’t change the caption for everybody, it looks like the name is Joe Lambert. So, anyhow bear with us on that one, a technological difficulty there. So, the caption says Joe Lambert, but I am Joe Lambert and Mac McConnell is not and he suppose will be glad to know about that.
Let me introduce DXP Enterprises and Mac McConnell in just a moment. DXP is a leading distributor of MRO products and services. It supplies a wide range of products to a diverse set of industries. The company has been rapidly both organically and through acquisitions. It recently acquired a large competitor thereby almost doubling in revenue and diversifying its customer base and increasing the geographic reach.
At this time, it is my pleasure to introduce Mac McConnell, Chief Financial Officer, DXP Enterprises.
Thank you, Joe. DXP is celebrating its 100 year anniversary in 2008. During those 100 years, we have evolved from a product-driven distributor of cost to a customer-driven broad-line distributor with a goal of providing all the industrial MROP product needs for our industrial customer. We are the leading provider to the industrial sector of MROP, which is maintenance, repair, operating and production products and services, innovative pumping solutions and supply chain services. We have extensive product knowledge of the products we sell which is we have the ability to help our customers when they know they need a pump but they don’t know which pump; they know they need bearings but they don’t know which bearing they need. So, our sales people have the expertise to help them pick the product, that product that they need as opposed to just getting it out of the catalogues.
We work with great markets, we have significant presence of oil and gas, chemical, mining, food and beverage, and general industries. We are building a national platform. We have 117 services centers straight across the country and 65 supply chain service locations. Supply chain service location is when we are inside the customers’ plant, our employees show up for work every day inside the customers’ facility for running their spare parts or maintaining a store room. With our 117 locations, we are just beginning to -- a number of our competitors have 500 locations across the United States. We have a lot of opportunity for growth. We have three regional distribution centers, six fabrication centers and our national call center that we refer to as the customer first [ph] center.
We have had great growth during the first six months of 2008. Revenue was up 111%, EBITDA was up 85% compared to the first six months a year ago. Organic sales growth for the first six months was over 22%, our five-year compounded growth rate and diluted earnings per share was up at 49%.
We have three distinct solutions that go to market to serve our customers (inaudible) service centers to sell all of our products on a local access basis with local inventories in the marketplace, if that’s what the customer needs, we are there to provide it. We also sell innovative pumping solutions and have supplied two big examples of fabricated pump packages, the top one is the (inaudible) for potable water that is going on offshore production platform, the bottom one is a series of lubrication pumps that went to utility. On the rise, we also offer supply chain services in the real life pictures of customers, typically our customers in the spare part storeroom, they are in the business of making customers, they are not in the business of running spare parts, maintenance and repair products. So, this is a real picture of one of our customers work hard [ph] with their storerooms before we took it over and the lower picture is after we took it over and organized it and brought in our purchasing assistance.
Our three customer solutions, the innovative pumping solutions, the service centre and supply chain services are all supported by the fact that we are a broad-line distributor. We are first-tier distributor for all of these products, the pumps, bearings, electrical equipment, industrial supply spaces, we also have our customer first center, our national call center where we have the expertise for all of our products that anybody, whether the customer or a service center or an innovative pumping solutions they have the expertise they need, they will call our call center and our regional distribution centers that support all of this.
Third, we are in the process of building international platforms, we will flash this map up and explain that the reason we are showing you the map is it illustrates all the opportunities we have for growth and we feel there are still a lot of dots on the map considering that a number of our competitors have close to 500 locations and we have 117 we still (inaudible) to markets with volume. We have been blessed by very good customers, our customer values are very diversified. A year ago this would have looked a little different, about half of our business has been energy related and about a third food and beverage. We have mining customers, transportation, very diversified. As we go forward (inaudible) the geographic expansion and our diversification will have an actual increase and the credits exchanged the same past year from acquisitions. These are just a few of our selective customers, our major suppliers, the pump manufacturers are the only manufacturers of safety industrial supplies.
We have a three-pronged growth strategy, we want to grow organically topline, we want to grow profitability through operations, and we want to grow through acquisitions. Our greatest opportunity for organic growth is by adding new products and new services to our existing locations sort of create super centers where we sell all of our products at all of our locations. We also have a very selective option (inaudible) stores and new markets. Typically our expansion is through acquisition, it is a good opportunity for a new market we will and have opened new stores. We continue to look for gross margin improvement with technology, discipline and accountability. We have installed a year ago some price maker software, which is an intelligent software that monitors all of our sales, learns from that information and recommends to our sales people a selling price so that we can improve our margins. In the acquisition area, we are looking for geographic expansion, we are looking for product and supplier extension, we are looking for sourcing and operational leveraging.
There are a number of organic growth strategies, one of the most important is super center concept of adding more products, and more services to our existing service centers. In the innovative pumping solutions area, we are expanding our contacts with engineering contractors around the world, to get more international business. We are developing new products for new markets. In supply chain services, we are adding staff so that we can execute close [ph] implementations on a more timely basis, we are pursuing distance agreements (inaudible) services. This rather complicated slide is attempting to show how a service center grows into a super center. Our definition of a super center is a service center that sells at least three product groups and sells at least $0.5 million a year of each product group, it is just an arbitrary amount that we came up with, with a goal of creating a super center. Our ultimate goal is that all of our locations sell virtually all of our product categories.
A few years ago, our locations were typically involved with either having a location that sold primarily pumps, locations that sold primarily bearings and a location that sold primarily safety supplies or industrial supplies. Our vision and goal was to sell all of our products at virtually all of our locations. We have realized that when you have a pump location and you want to get into the bearing business or into the safety business, the best way to do that is to go out and find the best inside and outside sales people, the experts in that product category and hire them. So, we have commissioned all of our regional managers to do that. It is basically one location at a time, it is either all people driven, you have to go find these experienced people and hire them. So, it is very difficult to predict exactly when we are going to be able to hire these people and there are times when we have hired people and then on the day they first show up for work, their existing employer has offered more money then they just stay. But we have been very successful in that we started, initiated this project about two years ago and we now have 21 super centers that have by definition sales that is at least $0.5 million a year of each product categories. We have six locations that we refer to as being under construction meaning that it has hired the people, the sales people, but they haven’t the sales level yet to qualify for super center. Once the locations add to the product line, we have hired these experienced people and we add the inventory, the local inventory, the local warehouse, they become down in the marketplace with their product and then it becomes much easier for our other sales people that used to just sell pumps to sell bearings and sell electric supplies. So, once we have established the location as (inaudible) we don’t have to necessarily hire these experienced people in, in the future because we train our own people and part of that is being known in the marketplace for having all these products. In all of this, the local super centers are supported by our regional distribution centers like the national call center and our advertising centers. A map of the geography of the location of our 21 super centers, obviously we are only 25% or 20% of the way there as we are making all 117 locations into super centers.
We have a number of operational strategies initially the whole of gross margin improvement, the product maker software (inaudible) through margins. We are constantly looking for alternative sourcing, better pricing so we can bring better value to our customers, (inaudible) technical services so they can charge more (inaudible) margins, we have created customer specific US stores where our customer/employee can go online and buy the products that are created by their employer, constantly doing cross-training, product training where all of our sales people are experts in the product they sell requires constant monitoring.
In the past, since 2005, we have completed 11 acquisitions. Our strategy is to acquire profitable industrial distribution companies that offer us either new geographic areas, new products and services or strengthen our existing offering. We want companies that are successful, that have good management, we are looking for the opportunities that find a good company that sells certain products that we can have once we buy them and grow them (inaudible) sell more products. We sometimes buy companies that have a certain products or niche or service that we can expand into other locations. We have done that in Tahiti [ph] we have done that in a lot of companies that is in the welding supplies business and they are helping us grow in the welding supply business, we have (inaudible) companies that can help us grow fast in our business. We are really an acquirer of choice. A number of our acquisition seller has come to us to identify DXE to the ones they sell to but they know that we offer opportunities for their employees that care about them. We really have a lot of acquisitions, we are really only aware of one person leaving the (inaudible) our goal is to grow these businesses until there are a lot of sellers who are interested about the employees who have come to DXE.
This is the list of our four most recent acquisitions that provide accretive cost sections. The first one is Delta Process Equipment, had revenues of approximately $103 [ph] million at the date of acquisition, they sell pumps to the municipal and investor customers in the Southeastern United States based in Louisiana. Precision Industries almost a year ago in September is the largest acquisition we have done. They had a revenue run rate of approximately $250 million. Their headquarters were in Ohama, Nebraska and they have locations that are basically stretched from house to house across the mid section of the United States. Their customer base was a little different from ours as they restarted in Texas, so we were having the energy, they started in Nebraska and they were heavy industries and agriculture. So, they had a greatly diversified customer base. They had expertise in supply chain services and this was an area where we were more than happy to grow so that added a lot of expertise. The next acquisition is Indian Fire & Safety, it was only $9 [ph] million in revenues. They sell safety supplies, primarily sell safety consulting and training services. Next one is Rocky Mtn. Supply, distributor of bearings and power transmission devices that operate in the Rocky Mountains, the six locations in Colorado. Our most recent acquisition PFI, LLC with revenues of almost $72 million, they are a distributor of nuts and bolts out of nine locations in eight states spread across the United States.
These slides do have a minor hypo announced in 2008 columns [ph] you know in the last 12 months these numbers are just for six months. So, we had dramatic growth. Our four-year compounded annual rate for revenues is 31%, EBITDA has grown compounded rates in the past four years of 63% and income has grown over 69% and earnings per share has grown over 54%.
DXE is the only provider of pumps, bearings, power transmission, hose, safety industrial supplies on a first tier [ph] basis. We are the only distributor has all these products on a first tier basis, the customer can order all these products in a single purchase order and secondary shipment and consolidated shipment. We had extensive product knowledge of the products we sell, we had great significant growth opportunities with cross-selling, in fact we are going to sell more products out of our existing facilities, we have delectable solutions for our solutions, if a customer wants just-in-time inventory, local service in their marketplace, they have our service centers if they want to move up the supply chain, they opt for system agreements, we offer supply chain services where we actually move into their operations and run their spare parts warehouse and just take over their purchasing section. We have state-of-the-art (inaudible) .
Now, we are open to questions.
Could you speak about your most recent acquisition in terms of price scale?
The question regards PFI, our most recent acquisition that was completed last week, they are a little different than we are and the rest of our company because they sell, PFI sells to distributors. Typically they will sell to the end market, the end user of the nuts and bolts, I guess they are a massive distributor, they import their products overseas and they have been doing a lot to us. One is that we are still fasteners, so they are going to improve our fastener business. So, they can help us expand our fastener business. There are also opportunities for PFI, because they are an importer that they can help us to find other products and bring in other products to alternative sourcing.
Is that accretive?
Yes, very accretive.
Just a follow-up question on acquisition, I guess model, you were speaking about the parameters in terms of the price, EBITDA margin and things like that.
I mean, we want to buy – we want to do accretive acquisitions and we want our targets to be successful buy super companies who are really not interested in turnarounds, so we have the opportunity to look at several companies with these sort of turnarounds and so we just didn’t have enough time to take that on. We are looking for (inaudible) typically in the four to six times EBITDA range, typically smaller companies that are less expensive than bigger companies where we have done a few acquisitions and the Precision with $350 million in revenues and we have now done one with almost $72 million in revenues. I think our typical fab [ph] is much smaller, more like the other ones that I – small companies. We continue to do mom and pop, it is a very fragmented industry, we continue to use the mom and pop distributors across the country. That is where we hire a lot of our people, and until we complete (inaudible) like to buy and you can bring more to them. You can bring more products, better systems, yes.
You are a US based business?
We are US based in our innovative pumping solutions. Our customers take our products all over the world. The end of these companies are still so long as they are in (inaudible) you know there are a lot of our innovative pumping solutions products are going to Africa, South America and to the Gulf of Mexico that we typically don’t have sales input to do our -- in innovative pumping solutions we have in Asia and Korea and we are typically not – we don’t have sales solutions around the world.
Could you talk about your access to financing and what level of debt you are comfortable with?
The question relates to our access to financing and the level of debt we are comfortable with, there are several ways of looking at debt. As a distributor, you have lots of inventory and lots of receivables. So, we typically have borrowed and we are still borrowing. To acquire PFI, we sort of stepped out of the normal borrowing base and based on our (inaudible) our debt now is around $175 million, the pro forma EBITDA will probably be around 3.7 times EBITDA, very briefly I think that is the highest, we don’t want to go a lot higher than that. There are things to do and I think, especially when we are borrowing based on the people and inventories there seem to be plenty of availabilities. We did not have trouble with -- for the PFI acquisition we did have our (inaudible).
Several (inaudible) for us. The $200 million facility that we now have is part of $150 million line of credit okay, we think it is currently the LIBOR plus 175. And there is a $50 million term loan and home loans as it (inaudible) 250 basis points. (inaudible).
Will it not be more attractive to acquire companies towards EBITDA or do you (inaudible)?
Part of it is we need the people. I am sorry I get the question, it is a good question, why is it more attractive to DSPs to acquire geographic growth as opposed to opening our own store? Basically it is a mature market and so where all the industrial locations – there is a new oil field, something that has happened that is creating new demand in the marketplace. So, we are basically fully covered, there is somebody who is providing that business. So, if you show up, you sort of have to compete on cost. We have to hire these people – maybe (inaudible) we acquired the lines so we think we are hiring people. We want customers we want customer relationships, it does really go with people. So our view is when we are making an acquisition, we are really hiring (inaudible) to say is we have all been growing that we might increase, create a team of people that will gladly open new locations but the cost opening a new locations, you don’t make money immediately, it takes a long time to find the people, you have to hire the people so in some ways we found that it is just easier to buy the facility as opposed to having to hiring the people. We are open to that.
Let’s get a round of applause for Mac. Thank you. I know that you might have some more questions at this time the breakout session will be in the next room, right next door and you can figure out some more questions and thank you again Mac McConnell for your presentation.
We will start in approximately two minutes with EBIX.
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