DXP Enterprises (NASDAQ:DXPE) Q2 2020 Earnings Call

0:01 Ladies and gentlemen, thank you for standing by and welcome to the DXP Enterprises, Inc. 2020 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Kent Yee, Chief Financial Officer. Thank you. Please go ahead. Thank you, Mariama. This is Kent Yee, and welcome to DXP's Q2 2020 conference call to discuss our results for the second quarter ending June 30, 2020. Joining me today is our Chairman and CEO, David Little.

0:48 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.

1:38 I will now turn the call over to David to provide his thoughts and a summary of our second quarter. Good morning and thank you. Good morning and thank you, Kent. And thanks to everyone for joining us today on our 2020 second quarter conference call. Given these unprecedented times, we are pleased with our results for the second quarter and year to date as we hit the halfway point. I am proud of our tremendous DX people as they have continued to find ways to deliver financial results for all our stakeholders in the face of extraordinary challenges related to COVID-19. Accordingly, we remain well positioned to deliver strong long-term financial performance We will position ourselves to drive sales growth and achieve our vision of excellence for our DX people, customers, suppliers, stakeholders, and communities.

2:38 I will start this call by updating you on developments since our first quarter call and discuss some of the actions we are taking to successfully navigate the rest of the year and beyond. Kent will then take you through the key financial details after my remarks. After his prepared comments, we will open for Q&A. Before I update you on developments since the first quarter, similar to our last call, I want to reiterate that our thoughts and prayers go out to all those affected by COVID-19. With the recent surge in positive cases, which we have experienced firsthand here in Texas, We are all aware that this pandemic is far from over and it is still resulting in tragic loss of life, social isolation, significant economic hardship.

3:38 As DXP, we have not escaped these many challenges and yet we feel very fortunate to be here and a part of DXP. We are a financially strong industrial leader and we are finding ways to work through and remain successful today while putting us in a position to be successful tomorrow. We also believe that we must be opportunistic and find ways to move forward with safety in mind and drive strategic growth. As I mentioned during our last call in mid-March and into April, we've quickly rallied our team around three fundamental priorities which were to maintain health and safety of our DX people, provide excellent service and support to our customers, and manage our balance sheet on an expected lower near-term demand to remain strong and poised for an eventual recovery. I am very proud of how our DXP team has managed and balanced these priorities in what continues to be an unprecedented and unique environment. Our second quarter results reflect us beginning to deliver on these priorities while finding ways to work in our new normal. The recovery and rebound that's somewhat experienced in May and part of June appears to be short-lived as cases picked up after

5:08 stay-at-home orders relaxed and businesses began returning to work. In addition to implementing the CDC guidelines, We added face covering requirements, enhanced social distancing in our locations, designed to prevent the spread of the virus while continuing to work. That said, DEXP did experience a surge in internal cases similar to what Texas experienced. Finally, we continued to limit travel, meetings, events, supplier visits, and we continued to have those people who are productive and able to work from home. In summary, we are adapting to operating safely in a COVID-19 environment while also adopting new measures that can help to prevent the spread of this virus.

6:04 In terms of business demand and COVID, our sales were impacted starting in mid-March. We experienced additional declines in orders in the months of April, May, and June, The pace of decline appears to slow during the quarter as sales per business day in April were down 12% from our Q1 average, while June was down 1% from May. In terms of our key end markets, upstream oil and gas continues to contract. The U.S. and Canada average quarterly root count is down 57% from Q1 to Q2. This primarily affects demand within our safety services division and a subset of supply chain services and other service center locations.

6:57 However, DXP's safety services also perform plant turnarounds, which have been delayed but not canceled and should be a positive over time. Midstream only gas as it relates to pipeline activity continues to execute small projects and has not canceled any large orders, but we are now getting pressure to push some projects back into physical year 2021. Additionally, the bookings or projects we are winning tend to have a smaller average order size and less gross margin. Downstream and the refinery business has seen their utilization rates from Q1 average 88% to an average of 72% in Q2.

7:51 While during this quarter we experienced the largest sales decline within our supply chain service business segment, we were expecting IPS business segment will suffer the largest sales impact as new capital projects are tied to capital budgets and the oil and gas industry has yet to work through and, ultimately, a demand problem. We believe this will improve when the country is further along in getting back to work. This means that DXP's IPS segment, which is CapEx dependent, is cutting expenses to make money at lower sales demand going into fiscal year 2021. We continue to see strength in gold mining, specialty polymers, bottled water, Certain recreational manufacturing, soap, food and beverage, agricultural, some chemical, medical, petrochemical, municipal, and asphalt markets.

8:55 On a segment and location basis, we are right-sizing to anticipate sales results with an anticipated bottoming in the third quarter. We are also supporting those markets that are experiencing growth. Customers continue to utilize BXP's B2B capabilities to increase their efficiencies. Our approach is to tailor each B2B experience to that customer-specific set of needs. BXP's B2B customers appreciate this approach and it is a significant differentiator. BXP's sales professionals continue to use a variety of virtual tools to contact customers, as well as they have started going back to traditional methods of entering the customer's facilities.

9:47 Customers are focused on these partners that they have an existing relationship with prior to COVID-19. We will continue to use whatever medium the customer prefers and tailor our approach to their needs. DXP is always customer focused, especially in the environment we have today. where we are listening to the customers' matters. In terms of our business segment, as I mentioned earlier, supply chain services experienced the biggest decline driven by oil and gas and transportation-related customers. Service center regions that experienced growth year over year include South Atlantic, Alaska, and South Central. Additionally, we saw growth in our California markets.

10:38 In terms of the strength and IPS backlog, we are continuing to see declines that are consistent with our customers cutting capital budgets. This is consistent with our recent commentary, and we continue to monitor and compare our quarterly average backlog to previous cycles. Specifically, our Q2 average backlog is 6% below physical year 2015. Monthly average backlog, let me repeat that. Q2's average backlog is 6% below 2015's monthly average backlog. But 60% above physical year 2016's monthly average backlog. We continue to monitor the new bookings and the impact to our total backlog. As we move into the second half of fiscal year 2020, new bookings will be key for the later part of 2020 and our fiscal year 2021 IPS outlook.

11:48 Regarding cost, we are tightly managing our business to a performance standard that results in overall company profitability. This will produce positive free cash flow. We are pleased to see more stability in gross margins since Q4 as we have continued to focus on consistent profitability within IPS and renewed emphasis on supply chain and pricing. We are avoiding discretionary travel and expenses. We have benefited from the COVID-19 related trends such as lower healthcare costs. We achieved record cash flow in the quarter driven by improved collections and accounts receivable. Our strong cash flow results in a meaningful improvement in our liquidity and a reduction in total debt.

12:40 Maintaining a strong balance sheet is critical to our strategy to invest in our capabilities through growth or acquisitions. In terms of acquisitions, our two most recent acquisitions have been in the chemical municipal Pulp and Paper, Water and Wastewater, Food and Beverage Markets, and we look to fill in our capabilities in these markets across the United States and Canada. These markets benefited from stable trends and offer a greater balance to DXP's oil and gas in markets, which today, our oil and gas in markets are 42% of our total sales. As we start fiscal year 2020, we had planned on A more robust year of acquisitions. We quickly moved to understanding the impact of COVID-19 and the direction of the economy and the resulting impact on different end markets.

13:38 And while there is still considerable amount of uncertainty in the second half of 2020 and going into 2021, we believe that certain end markets and the associated risk is manageable in the near to mid-term. Accordingly, we have made the decision to resume our acquisition discussions. We have anticipated being able to close one or two additional deals by the year end while continuing to build a backlog of excellent companies who wish to join DXP in 2021 and beyond. To summarize, I'm very proud of how our team has performed in this extraordinary environment to keep everyone healthy and safe. Thank you for joining us today.

14:53 in the short term while continuing to build and manage for the long term. The second half of the year, we are going to continue to push for finding ways to be resilient and adaptive and find growth to support our business. With that, I will now turn it back to Kent to review the financials in more detail. Thank you, David, and thank you to everyone for joining us for our review of our second quarter financial results. Overall, DXP's second quarter results were good to see, and they reflect the following. Sales demand pressures from COVID-19 and the resulting impact of various end markets, consistent gross margin performance, and particularly within IPS and supply chain services, SG&A reductions, and record quarterly free cash flow generation.

15:45 Our second quarter financial results do reflect, as I mentioned, the full impacts of the COVID-19 related sales demand pressures. as well as the effect of an unfavorable year-over-year comparison. Last year at this time, we experienced our strongest sales quarter since Q1 of 2015, which coincidentally was the last time we experienced an economic contraction. For the six-month period ended June 30, 2020, total sales were $552.4 million and operating income was $17.7 million. Diluted earnings per share was $0.42 per share. Adjusting for one-time items, which I will review later on, diluted earnings per share for the six-month period was 49 cents per share. Turning to our quarterly income statement highlights, total sales for the second quarter were $251.4 million compared to $333.3 million for the same period in fiscal 2019.

16:36 Sequentially, this is a 16.5% decline versus Q1 and a 24.6% decline compared to the second quarter of 2019. This primarily reflects the full impacts of COVID-19, as I have mentioned, and all three business segments being impacted by a minimum full month of shelter-in-place orders and the subsequent attempts at going back to work. Acquisitions contributed $4.5 million in sales during the quarter, a sequential decline of 14.2% versus the first quarter. Average daily sales for the second quarter were $4.0 million and many more. Thank you.

17:48 Regions in our Service Center business segment which experience sales growth year over year include the South Atlantic, Alaska, and South Central regions. Key end markets driving the sales performance include food and beverage, mining, municipal, and specialty chemicals. Service Center sales were down 15.7% sequentially and declined 23.1% from Q2 of last year. In terms of innovative pumping solutions, Sales were down 13.6% sequentially and 25.4% compared to Q2 of last year. As David mentioned in his comments, we are monitoring the backlog as we experience declines. As we review monthly bookings and backlog, we are comparing these data points to our fiscal year 2015 and fiscal year 2016 averages, the last time we experienced contraction in our business. Our Q2 average backlog is below the fiscal year 2015 monthly average backlog by 6%, but significantly above the fiscal 2016 monthly average backlog by 60%.

18:53 Supply chain services sales declined 23.3% sequentially and 29.1% compared to the second quarter of 2019. Supply chain services second quarter sales Performance reflects significant pullback in activity at oil and gas and transportation related customers. Additionally, SES has been dealing with customers temporary closing facilities for an extended period of time due to COVID or rationalizing some facilities altogether. Turning to our gross margins, DXP's total gross margins were 27.7%, a 12 basis point improvement over Q2 2019. This is a result of consistent performance from Q1 to Q2 within IPS and 171 basis point improvement within supply chain services.

19:43 The supply chain services improvement was the result of the loss of some lower margin accounts along with the addition of new accounts at a higher margin with a better product mix. In terms of operating income, combined all three business segments declined 153 basis points in year-over-year business segment operating income margins versus Q2 2019 and 16 basis points compared to Q1. Total DXP operating income decreased 416 basis points versus Q2 2019 to $6.8 million. Our SG&A for the quarter declined $10.1 million from Q1 with further reductions anticipated as we adjust to the current level of sales demand. We have benefited from our ability to quickly reduce SG&A levels and aggressively attack discretionary spending. We will maintain our cost discipline to weather the pandemic, but also strategically find ways to be more efficient for the long term.

20:41 We are in the process of integrating recent and legacy acquisitions, which should continue to drive further benefits. That said, we are also mindful that the contraction associated with the coronavirus will pass and from a resource and capability perspective, we want to be in a position to respond to our customer needs as we believe those who are in a position to respond today and tomorrow will gain the most market share. Turning to EBITDA, EBITDA was 12.6 million in Q2 versus 28.7 million in Q2 of 2019 and 17.8 million in Q1. EBITDA margins were 5% versus 8.6% in Q2 of 2019. Adjusting for other non-cash unique and one-time items, EBITDA for the quarter was 15 million or 6% of sales.

21:31 In terms of EPS, our net income for Q2 2020 was 2.2 million. Our earnings per diluted share for Q2 2020 was 12 cents versus 31 cents in Q1 and 73 cents in Q2 2019. Adjusting for one-time items, including legal, integration, and severance costs, diluted earnings per share for Q2 would have been 17 cents per share. Turning to the balance sheet and cash flow, in terms of working capital, our working capital was 192.3 million at the end of the quarter. This amounted to 16.4% of our last 12-month sales and a 51.2 million reduction from Q1. This reflects a 300 basis point improvement versus Q1 and drives us closer to our historical averages.

22:20 The improvement in working capital is primarily the result of improved collections with our average accounts receivable days experiencing an eight-day reduction from Q1 to Q2 or a 39.3 million impact. I would like to personally thank our accounts receivable team and their leadership for driving these improvements. In terms of cash, We had 78.7 million in cash on the balance sheet at June 30. This is an increase of 45.9 million compared to Q1 and 24.4 million since Q4. Cash provided by operations was a quarterly record 63.4 million. While we would have preferred this milestone would have been reached due to sales growth versus decline, we will continue to reiterate the strong cash flow model we have and the benefits when paired with the appropriate capital structure and Working Capital Management.

23:13 This resulted in another quarterly record of 61.6 million in free cash flow for the quarter and we anticipate this to continue as we move to the second half of the year, which typically are stronger cash flow quarters. As they say, cash is king. In terms of CapEx, CapEx in the second quarter was 1.9 million or 0.8% of second quarter sales. Compared to the second quarter of 2019, CapEx dollars are down 4.4 million are 69.7%. CapEx during the quarter reflects our ability to control capital investment and the minimal maintenance needs of our business. Moving to the second half of the year, capital expenditures will continue to decline on a year-over-year basis. Return on invested capital, or ROIC, at the end of the second quarter was 18%.

24:03 At June 30, our fixed charge coverage ratio was 2.9 to 1, and our secured leverage ratio was 2.4 to 1. Total debt outstanding at June 30 was $228.1 million, which reflects $15 million in optional prepayments made during the second quarter. As I mentioned during our Q1 earnings call, our capital structure was built to match our strategy and ensure flexibility through different cycles. Additionally, it was parent acquisition capital, which are long-term assets with a long-term financial instrument, a term loan B. As a reminder, we have no new No near-term maturities as our ABL matures in August 2022 and our term loan B matures in August of 2023. In terms of liquidity, as of this call, we remain undrawn on our ABL and have over $209.7 million in liquidity. Similar to after Q1, we have made an optional $10 million prepayment on our term loan B to further strengthen our balance sheet.

24:59 David's comments cover the fact that we will opportunistically look to close one to two acquisitions before year-end. Coming into the year, we had a very robust pipeline and we were on track to achieve our goal of 10% growth through acquisitions. While we did not close any transactions in Q2, our pipeline remains deep and our commitment is steadfast to execute our M&A strategy and build upon the strong growth we have historically demonstrated via acquisitions. We are looking forward to eventually bringing on new DXP people who will make the DXP team stronger, expand our in-market mix, and support further performance and growth. In summary, our priority from a balance sheet perspective is to emphasize and maximize our financial strength and flexibility during these uncertain times without sacrificing long-term growth or market opportunities and position us to be opportunistic when any growth opportunities arise. Collectively, we have to find a way to move forward safely and position DXP to win today and tomorrow.

25:58 I will now turn the call over for questions. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from Joseph Mondillo with Sadati & Co. Your line is open. Hi, Kent and David. Hope you guys are doing well. Hey, Joe. How are you? Doing well. I was wondering, Kent, can we start with the monthly sales per day just to get a sense of how this weird quarter has progressed? Yeah, sure, absolutely. And what I'll do, Joe, is I'll just really go back to March and then kind of pull it forward and give you a flash even for July.

26:55 Sales per business day starting in March were $5,152,000. April was 4,128,000. May was 3,942,000. June was 3,903,000. And then July flash is 3,234,000. 5.2, 4.1. 3,234,000. 3.2 million. and so I'm just trying to do the math really quickly. Down 17% from June, yeah.

27:40 Yeah, so it looks like you're, I mean, I have, if I have the correct historical data, it looks like you're down 25 to 35% in June and July. From a year-over-year perspective? Year-over-year, on a year-over-year perspective, yeah. Yeah. And so maybe we can dive into that a little deeper. Where is the weakness coming from relative to, I guess, the main two segments, which are service center and IPS? It looks like the year-over-year declines are the worst thus far in July.

28:25 Could you just talk about how you're seeing things regarding those trends? Sure, Joe. I'd like to answer that question. There's really three data points that are important, and we've got them all grafted out and et cetera. And one of them is the backlog. The other one is what are shipments and invoicing. And then the other one, often not looked at much, is bookings. What Kent just gave you was the shipments and invoicing and the sales for each of those periods, and that's still declining.

29:14 The booking story is a little different. For the service center segment, bookings hit what appears to hopefully be a bottom in June, and July actually went up. even though invoicing went down and therefore and backlog is kind of level. So on service centers, we're looking at service centers and really everything is for the year, this year, not compared to last year. Last year was obviously a much better year and we all hope that this year would have been a better year.

30:00 For this year, just looking at it, things are trending down a little, but they're not big numbers. And so, in my opinion, sales will continue to trend down just slightly as we go through the third quarter, but hopefully our bookings continue to trend up. which will mean that our backlog will start to level out and climb a little bit. So service centers looks good. And of course that is just the MRO piece. That's the maintenance, repair, and operating and OEM piece of our business and by far the largest.

30:55 You mentioned supply... IPS. IPS is the capital project side of the business. Backlog is trending down. Invoicing is trending down. And bookings seems to have found a bottom, but it's found a bottom at a very low point. So that's to give you an idea, you know, our backlog is around $84 million. and our bookings actually had an uptick also in July. But that went from $4 million bookings in June to $6 million bookings in July. And of course, both of those numbers are way down.

31:48 OK. Good caller. I really appreciate that. Gives us a good viewpoint into the back half of the year. I guess relative to the backlog comments, and maybe we can sort of focus on IPS, you mentioned in your prepared remarks that backlog is, I guess, comparable. You said 6% below 2015 and about 60% above 2016. So it looks like your sales, especially at IPS, are looking more like 20, as far as the outlook for the back half of the year anyways, are looking more like 2016.

32:37 So could you maybe sort of help us understand how bad IPS could get maybe in the back half of the year, however you want to compare it relative to 2016 or however you want to talk about it? Yeah, so that's right. And just a refresher, I think everybody knows this. 15 was the start of a down cycle, and 16 got worse, and then 17 was a bit of a recovery, and 18 was a much bigger recovery, and 19 was up some more, and then now we're back on a down cycle. So when we look at IPS compared...

33:25 to 16, as you pointed out. I somewhat agree that it's going to be like 16. And if I'm correct, and I think I am, if we took impairments and other things out of there that are not cash transactions, IPS can stay profitable all through the cycle. It has to downsize, and it does produce less CapEx projects, but they haven't gone away. We still have a healthy backlog, and so IPS will have declining sales for some period of time until things turn around, but it will be able to manage to stay profitable.

34:23 Okay, great. So I guess the last question, I'll let someone else have a shot at it. Regarding sort of just your cost management, just broadly speaking, how much, first off, how much temporary cost did you take out in the second quarter or maybe, I don't know, government benefits or anything like that that you saw in the second quarter that are not going to reoccur in the third quarter? And then I guess secondly, just broadly, can you talk about what you're doing with cost management? Should we expect more in a broad level in the second half? Are you taking out anything permanent?

35:09 Maybe you can just address all those topics on cost. Sure. First of all, I heard a couple companies have certain benefits. I don't know if they're tax benefits or what. Well, we have over 500 employees and we're public. Anyway, we haven't gotten any benefits. Yeah, Congress hadn't seen fit to give us any money. But we would like to take some. You know, the only thing we're really struggling with that's a loss is safety services. And safety services is tied to drilling and turnarounds. And so the turnarounds have been put off, and so they haven't had any turnarounds. and the drilling activity is way down.

36:20 So that business has just had declines in revenues that are beyond its ability to cut expenses or not. So that said, the rest of the business is performing pretty good considering the losses that that's generated. So I guess Ken, I don't know if you want to address the specifics. I don't know if you have those kinds of numbers. I don't think in terms of those kinds of numbers. What I think of is that I have a location. It's in Midland, Texas, the heart of Permian Basin.

37:10 I used to do some number. I'm I'm not going to give my competitors numbers exactly, but some number, and now they're doing half as much, but that half as much, they're still making money. So we managed the business to a performance standard that says, hey, your contributed margin, we get that you used to make X, and now probably the best you can do is make 8% of sales of a much smaller number. But that's what you're expected to do. And so our people, you know, they know how to do this. And so they're going through the process of making that happen.

38:02 And when they do that, and then our corporate SG&A is 5%, well then, you know, we make money. So that's what we do. We do. We do it by every location. And if a location just can't stay profitable, then the consideration is to close it down. Or if we think it's just temporary and things are going to come back for them, specific to them and their market, then we'll let them keep kicking for a while. Kent, you want to add anything to that? Yeah, no, the only thing I'd add to that, Joe, is I think you were getting at, you know, are there any kind of one-time kind of cost reductions in Q2 because that reflects the full brunt of COVID. And all I would say is we, to David's early comments, you know, we don't really necessarily approach it that way.

39:05 Yes, there is the employer portion of Social Security, which we're deferring from a cash perspective, but that's more so cash management. and that doesn't really feed through the financials the way you would think it would. Everything else in our speak is for the most part hard cost savings or reflect kind of the demand that we're seeing and the outlook that we're seeing. And so, yes, bonuses are down. Yes, we've put in some actions that we normally do. and a depressed economic environment but those aren't necessarily quote unquote one time in nature. They're a result of us just kind of how we manage philosophically and think about the business until we return to growth. And so, you know, we've run rate taken out over, you know, $28 million worth of costs out of, $28 million of 2019 costs out of the business and so that's happening in real time and so You know, we'll continue to make money as we move through the cycle.

40:15 That's always our goal. But as David ended his comments with is those markets where we see growth, which there are some, you know, we'll allow those people to invest and grow the business. Okay, perfect. Well, thanks for taking my questions. You bet, Jeff. There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Hey, one second, one second. Joe, you may have some more questions. If the other party's not going to ask any questions, that's fine. But Joe, if you have some more, go ahead and read that up.

41:02 We don't want to cut you short. Am I, can you hear me? Yes, we can. Okay. All right. I wasn't sure if I was still live or not. Yeah, so I did have a couple other questions. I wanted to ask about the supply chain segment. It was lower than I was looking for, but not a total shock to me because I'm guessing some clients and customers are just trying to shed some costs in what has been a very challenging quarter for certainly some types of companies. Could you just talk about what you saw in the quarter and sort of what your outlook there at that segment is?

41:48 Joe, I thank you for asking that question because it's kind of unique. What happened to supply chain services, normally they're going to have a dip that's kind of just based on what the customer is going to buy a little less. And so they normally don't go down very much. Historically, that's always been the case. In this particular case, we actually had customers that closed or shuttered facilities. And so all the volume that we would get from that particular facility just totally went away 100%.

42:33 that said all the expenses for servicing that facility went away 100%. So consequently, the sales, there's not a real big leverage point here, that the sales went down, whatever they went down, 20%, then our profitability dollars went down 20%, but as a percent of existing sales, They're able to maintain that because of what I said. Both sales and expenses all went away because they closed that facility. Also, on top of that, the facilities that typically get closed and the reason for it is they're not great performing facilities.

43:22 If they're not great performing for the customer, then they're probably not performing that well for us either. So a lot of what the sales went away, but they weren't making that much money for us anyway. And so it wasn't a big dent to our bottom line. So I really want to make that point because I think when you look at the numbers, the top line did go down significantly and the bottom line didn't go down as much. Okay. It must have been a pretty big customer as far as the top line, but I guess as far as the profits. Yeah, it was an aerospace company that manufactured airplanes. So, I mean, we don't need any airplanes right now.

44:16 So, in the second quarter... Is the second quarter, is that a good run rate then, I suppose? So when I look at my other chart that I talked about that has the three points on it, it looks like on bookings that June was their low point. No, I'm sorry, May. May was their low point, and June went up. and July was flat. So we're thinking that they've seen the bottom and that the third quarter will be a little better.

45:04 Not a lot, but a little. Joe, the only thing I'd add to David's comments that we are subject to in this segment, which is pretty unique, is When you're in the service centers in IPS, we control our own facilities, meaning opening. And as long as we're getting orders, we're working to service our customers. When you're on the supply chain services side, we are a little bit subject to the whims of our customers because a lot of times we're in their facilities. And I only point that out because if there's one thing the pandemic has taught us about supply chain services is that if they want to take a certain approaches in terms to safety, closing their facilities. We're totally subject to that. And so that's a little bit also with what JJ, who runs that segment, is dealing with on a day-to-day, kind of in a real-time basis.

45:58 So when you have these flare-ups in cities and municipalities where we have locations, you don't know how these different companies are going to respond. Gotcha. I also wanted to ask about just the inventory management through the downturn here. Your inventory at the end of the quarter was still up year-over-year. What are your thoughts on that, and how are you thinking about inventory management through the back half? Yeah, that's perceptive. I'll ask that same question. I asked that same question. I said, what are y'all doing over there? But anyway, the answer is it's coming.

46:48 It hasn't trended down yet. It's only been, you know, we really weren't until, you know, we were into April before we made adjustments to inventory, and in April we made adjustments. So they just haven't really shown up yet. But the second half of the year, inventory levels should come down. Okay, and I guess last question that I have just regarding M&A, you mentioned the 10% target, and I know this is just sort of a general sort of goal that you have on an annual basis, but 10% is pretty sizable, so I'm just wondering sort of what your thirst is for size of acquisitions.

47:38 You mentioned one or two by the end of the year, so I'm just Curious on what you're thinking regarding capacity related to the balance sheet. Yeah, Joe, this is Kent. You know, I think, you know, we're in discussions with one or two, believe it or not, companies where they have actually experienced growth in this market. And so, you know, the quick answer is, you know, with the amount of cash we have on our balance sheet, from a credit agreement perspective, we only get credit for and so every dollar over $30 million we have to ask ourselves from a capital allocation perspective is it more appropriate use to pay down debt or in this instance can we buy growth if it makes sense meaning pro forma for the transaction leverages and compliance and from a diligence and business perspective we think their business is going to grow if all those things are true Then, Joe, effectively, we have really more than likely, depending on how you structure the transaction, we probably have delevered the business slightly from a credit agreement perspective.

48:48 And so, you know, those are some broad comments I'd give. I'd say in terms of average transaction size, I think the comment more so in our scripts were indicating that coming into the year, we had a pipeline that looked like we were going to achieve our 10% growth through acquisitions. and so it's we're not signaling necessarily that hey we've got you know 10% growth in the pipeline today. I think what we're more so signaling is that we want to we're returning to those discussions because we're starting to understand the impacts of COVID better and there are some exceptions to the rule in areas where we're finding pockets of growth and so if we can acquire those businesses they're falling in our average transaction size I'll call it which is call it typically 25 million or less and so but you know there's a lot of things that have to be met for us to do those transactions but I think it's we're returning to discussions we had a robust pipeline we are seeing some businesses that are holding in this environment, and if we have an opportunity to pick them up, we're going to try our best.

50:05 And what is the general leverage threshold? Leverage today from a credit agreement perspective for total DXP is 2.4 times. Historically, to answer your latter question, we've We've typically kind of peaked out at around 3 1⁄2 times. Now, our outside covenant is at 4 1⁄2 times from a credit agreement perspective. And so, once again, we're monitoring this real-time. And so, you know, some of it's math in real-time, depending upon where DXP's base, total DXP's business is from a trailing EBITDA perspective and where we think it's going to go going forward, and then also subsequently with the acquisitions.

50:50 But once again... Not to get in the weeds here in the details, but we don't get credit for any dollars over $30 million worth of cash on a balance sheet from a credit agreement perspective. There's multiple things we can do with that. And today, as of today, for example, we have $96 million worth of cash on the balance sheet. And so that's a significant amount of cash. Obviously, in Q2, we optionally prepaid $15 million. Here more recently, we're going to pay down $10 million, paying down $10 million in real time. But that still leaves us with, call it, north of $80-plus million worth of cash. So once again, if we're finding... businesses that are growing or stable with EBITDA and we're stable, the math does work in certain scenarios.

51:41 Okay, great. Well, I appreciate you taking my questions today and good luck with the back half of the year. Thank you, Joe. Appreciate it. Take care. There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.