Ladies and gentlemen, thank you for standing by, and welcome to the DXP Enterprises, Inc. 2020 First Quarter Earnings Conference Call. [Operator Instructions] 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, Cheryl. This is Kent Yee, and welcome to DXP's Q1 2020 conference call to discuss our results for the first quarter ending March 31, 2020. 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, but 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 to provide his thoughts and a summary of our first quarter.

David?.

Good morning, and thank you, Kent. Thanks to everyone for joining us today on our fiscal year 2020 first quarter conference call. Kent will take you through key financial details after my remarks and after Kent's prepared comments, we will then open for Q&A.

In light of the coronavirus and its impact to the health of our employees, customers and economy, we're going to share with you our thoughts on these items and our responses before we move into the normal format of our earnings call. .

Before I start, let me first say that our thoughts and prayers go out to all those impacted by the COVID-19 virus. This is a terrible virus and a pandemic unlike anything we have ever seen. In these unprecedented times, I want to thank each of our DXPeople for their airports income.

DXP appreciates the help of all the medical professionals and first-time responders in our various communities, and we pray for their safety and well-being as they put themselves at risk daily to serve the people of their countries worldwide and attempt to make it safer for everyone.

DXP also appreciates the support of our DXP suppliers as we navigate through our new normal together with ample supply of inventory as we were viewing fiscal year 2020 as a growth year for DXP.

Accordingly, we are in good shape with our supplier partners and experienced minor constraints, as expected with safety PPE as we adjusted inventory in these new environments. As an essential business, we felt responsible to provide excellent service to our customers, who themselves were deemed as essential.

We provided this level of service by providing products and services and assisting our customers in keeping the economy functioning the best we could during these difficult times. .

Our first priority was the health and safety of our DXPeople and supporting national efforts to stop the spread of the coronavirus. We took immediate steps in the U.S., Canada and Dubai at our facilities by working in small teams or through working rotations.

We did this so that if we needed to quarantine 1 team, we could still continue to serve our customers. Additionally, we had facilities deployed social distancing in the workplaces, frequent hand washing, sanitizing, temperature testing, quarantines, remote work habits in the situation and circumstances where we could.

We strongly encouraged our employees to not just maintain some protocol at work, but also while at home and outside the workplace. Out of DXP's 2,500-plus DXPeople, I am proud that we have had only 2 confirmed cases of the coronavirus so far.

Our second priority has been to continue to provide excellent service and support to our customers as we support various industries that keep the wheels of North America economy going. We are thankful that we had the opportunity to support and serve our customers and make a difference.

During these unusual times, DXPeople have done some amazing things for our customers to keep them safe and running as an essential business. The letters and e-mails that we have received showing appreciation and regards for our support have been truly heartwarming.

Our third priority has been to manage our balance sheet on expected lower near-term demand to remain strong and poised for an eventual recovery. I'm very proud of how our DXP team has managed and balanced these priorities in what is an unprecedented and unique environment.

All 3 priorities are critically important in order to successfully manage through the crisis while protecting our culture and continuing to build DXP for the future. .

Let me briefly review in a little more detail the actions we are taking to accomplish these priorities. To keep everyone safe in a coronavirus world, we pivoted rapidly to implement all the CDC guidelines and preventative measures. We have canceled all large meetings, gatherings and events and most air travel.

We have educated our DXPeople on the basics of social distancing and hygiene protocol and then executed these in our offices and locations. We are leveraging our supply chain to ship and replenish supplies of disinfectants, masks and hand sanitizers to our customers and employees.

With these modification policies, we're being aggressive about having DXPeople stay at home if they have symptoms or potentially exposed until it is clear they are not infected with the virus. .

We're performing our own contact tracing, and when we hear of a scenario that potentially impacts a DXP employee. Finally, all our DXPeople who have the ability and desire to work from home are doing so in order to reduce the coronavirus risk. .

Lastly, we are practicing good hygiene techniques at all of our locations, including constant cleaning of high-touch, high-traffic areas and overall facilities to all locations. Today, all locations remain open, are providing excellent service and support to our customers while ensuring the safest environment we can for our DXPeople.

In terms of demand, our sales were impacted starting in March -- mid-March. As we closed out the first quarter in light of various shelter-in-place stay-at-home orders across the United States and Canada. I am sure we will get into this in our Q&A portion, but as expected, we have seen additional declines in orders in the month of April.

Noting that our year started off strong, we have pivoted to focus on declining demand. Our plan is to be calculating and smart, using marketing intelligence to maximize profits.

Part of this intelligence is looking at the market we serve by location and geography to determine their likely demand and adjust accordingly to continue our expected profit profile. .

So let us look at some of our key end markets. Upstream oil and gas, which is tied to drilling, is contracting. The rig count is down, and this primarily affects demand within our Safety Services division. DXP Safety Services also performs plant turnarounds, which have been delayed but not canceled and should be a positive over time.

Midstream oil and gas, as it relates to pipeline activity, continues to execute small projects and has not canceled any large orders with DXP today. Downstream or the refinery business has seen their utilization rates go from 91% to 70%.

Until people start driving and flying, this market will be a break-fix market, which DXP has a strong service and repair business. DXP anticipates demand will be down 30% in these markets and will start to recover when the price of oil hits $30 to $35 per barrel. The IPS segment will suffer the largest impact as new capital projects are put on hold.

The oil and gas industry has a demand problem. I believe this will improve when the country starts going back to work. Ultimately, we will start to see demand we are accustomed to when we have a vaccination -- a vaccine. .

At this point, when demand picks up, we will then discover that we have an abundance of supply, and that will take a couple of years to fix unless everyone in the industry cuts production, which could happen. This means that DXP's IPS segment, which is CapEx dependent, is cutting expenses to make money on 30% lower demand.

The Service Centers and a small part of Supply Chain Services, supply aftermarket parts and supplies, service and repair and OEM components. As such, they have adjusted a 10% reduction in demand as it relates to this industry.

On a positive note, gold mining, specialty polymers, bottled water, water and wastewater, certain recreation manufacturers like bicycles, soap, food and beverage, agriculture and some chemical, medical, petrochemical and asphalt markets are doing well. Steel, rubber, paint, manufacturing, automotive, aerospace and most OEM markets are down.

On a segment and location basis, we are rightsizing to anticipate sales results within a -- with a small, hopefully not, recovery starting in the third quarter and beyond. DXP is not broken. And every day, we work on being more efficient and productive. We work hard to be fast, convenient and technical experts. .

Customers are utilizing DXP's B2B capabilities more and more to increase their efficiencies. Why? DXP's approach is to tailor each B2B experience to that customer's specific set of needs rather than take a shotgun approach of trying to have some online portal that is all things to all people.

Then we combine that product expertise with product expertise. DXP's B2B customers appreciate this approach, and it is a significant differentiator. Vendor-managed inventory programs are growing sales because being fast and convenient helps our customers be more efficient.

DXP sales professionals are using a variety of virtual tools to contact customers, demo new products and total troubleshoot. These include Skype, FaceTime, Zoom, Snapchat and LinkedIn. We use whatever median the customer prefers and tailor our approach to their needs. DXP is always customer-focused, even in this environment.

Especially in the environment we have today, we're listening to the customer matters. Marketing has developed videos for our customers for many reasons. The one that comes to mind is the one we use for our customers to come see our manufacturing plants of our maid in America pumps.

Now they cannot travel, so we are sending them a video of our capabilities. .

Training has always been a social learning experience. Now it still is, but with Zoom and Skype. DXPeople are doing everything possible to stay in touch with our customers, so we do not miss any opportunities. It is harder to develop relationships with new accounts with face-to-face time, but marketing and sales are working on new ideas to do so.

Now I would like to turn -- sorry, not ready for that. Now -- Okay. I'm going to discuss some of the results, and then I'm going to turn the call back over to Kent for more details. DXP's total revenue was $301 million for the first quarter of 2020.

Acquisitions contributed $5.2 million in sales during the quarter, and we are excited to have pumping systems and turbo teams a part of the DXP family. In terms of our business segments, I was pleased with the contribution from all 3 segments.

Service Centers sales were $182.6 million, followed by Innovative Pumping Solutions sales of $70 million and Supply Chain Services sales of $48.4 million. Service Center regions that experienced growth year-over-year included Southwest, North Rockies and Alaska. .

In terms of the strengths in the IPS backlog, we were up 2.6% compared to Q4 quarter averaging backlog, and down 17% versus this time last year. This is consistent with our Q4 commentary around the deceleration of our backlog off of a strong fiscal year 2018 and growth again in fiscal year 2019.

In today's environment, we remain encouraged by the strong backlog dollars; however, we are focused on customers' commitment to these projects and the relative timing of completion and delivery as well as managing the cost through the job completion.

DXP's overall gross profit margins for the first quarter were 27.9%, an 85 basis point improvement over 2019. And more importantly, 139 basis improvement over the fourth quarter. Giving our commentary around unique items and IPS jobs, this rebound was good to see.

Albeit, we will need to monitor these as we move through depressed demand environment as a result of the COVID-19 and demand-side dynamics as it pertains to oil and gas. .

SG&A for the first quarter increased $3.7 million versus Q1 of 2019. SG&A was a percent of sales increased 200 basis points, going from 22.3% in Q1 2019 to 24.3% in 2020. SG&A reflects the fact that we started the year strong and now have pivoted to decrease expenses with decreasing revenues.

DXP's overall operating income margin of 3.6% or $10.9 million, which includes corporate expenses and amortization. This will impact -- this was impacted by normal seasonally high, high items including commissions and bonuses associated with 2019 as well as payroll taxes and other first-of-year items. Service Centers' operating income margin was 9.3%.

IPS operating income margins of 14.9% and Supply Chain Services operating income margins of 7.8%. Overall, DXP produced EBITDA of $17.8 million versus $21.1 million in 2019. EBITDA as a percent of sales was 5.9% versus 6.8% in 2019. .

To summarize, I'm very proud of how our team has performed in these extraordinary environment to keep everyone healthy and safe, serve to support our customers, manage our business to lower near-term demand and take care of each other along the way.

As a leading distributor of highly engineered products and services, we believe that DXP remains well positioned to support our customers and navigate this challenging period for the benefit of all stakeholders.

We are closely monitoring the trends and adjusting as necessary to perform in this short term, and we'll continue to build and manage for the long term. .

With that, I'll turn this back to Kent. .

Thank you, David, and thank you to everyone for joining us for our review of our first quarter financial results. And David and I practicing social distancing and being in different places. A little unusual, but we're working through it.

Let me start by saying that our first quarter results reflect the impact of COVID-19 for about 2 weeks and does not reflect a full month of shelter-in-place or stay-at-home orders, which are fully reflected in the first month of the second quarter or April.

I'm sure we'll discuss our trends during the question-and-answer portion of this call and actions we are taking, but I wanted to provide that context as we review our Q1 results.

DXP's first quarter results were in line with our Q4 commentary and reflect improvements in gross margin and other areas that resulted in a strong performance for us during the first quarter. .

In terms of our capital structure and as an introduction to comments later on, since 2015 and 2016, we have done a lot of work around choosing the appropriate instruments to finance our corporate strategy as well as creating financial viability and ensuring liquidity and flexibility regardless of the economic environment.

We believe the actions we took back in 2017 would provide us with strategic optionality so we could not just manage, but also take advantage of market cycles. In many ways, DXP's capital structure was built for times like this. And our current capital structure was put together for such a scenario.

I will discuss this in more detail when reviewing the balance sheet, but let's start with a review of our income statement highlights. .

Total sales for the first quarter were $301 million compared to $311.2 million for the period in fiscal 2019. Sequentially, this is a 1.9% growth over Q4 and a 3.3% decline compared to the first quarter of 2019.

As we discussed in Q4, this primarily reflects a deceleration in activity within Innovative Pumping Solutions, but also now reflects early impacts of COVID-19 within the Service Centers and Supply Chain Services segments. The first quarter performance also includes the acquisitions of Pumping Systems, Inc.

and Turbo Machinery Repair, which we closed on January 1 and February 1, 2020, respectively. Combined, they contributed $5.2 million in sales during the quarter. As David mentioned, we are excited to have them as part of the DXP and we look forward to integrating and making them a part of the DXP family.

Average daily sales for the first quarter were $4.7 million per day versus $4.9 million per day in Q1 2019. Adjusting for acquisitions, average daily sales were $4.6 million per day. .

Regions within our Service Center segment, which experienced sales growth on a year-over-year basis include the Southwest, North Rockies and Alaska regions. Sales for the Service Centers were essentially flat like sequentially and declined $3.6 million from Q1 of last year.

As David mentioned in his comments, our IPS segment increased backlog from Q4 to Q1 by $2.6 million -- 2.6%, excuse me, or $3 million, but is down 17.1% from this time period last year at $24.4 million. IPS sales for the quarter increased $4.3 million sequentially and declined $4.7 million compared to this time last year.

Our main focus as it pertains to IPS is managing the backlog and scaling our facilities for go-forward levels of demand. Everyone is seeing that capital budgets have been significantly reduced and capital commitments are being reviewed based upon individual company circumstances and financial wherewithal.

As such, at DXP, we are reviewing orders and customer commitments to these projects, the expected timing or anticipated delivery and the associated cost to completion. Supply Chain Services grew sales $1 million sequentially and declined $1.9 million versus Q1 last year.

With the impending coronavirus, Supply Chain Services is dealing with customers either temporarily closing or for an extended period of time closing facilities and then reopening. As such, we are impacted by our customers' decision as whether to keep their facilities open or closed. .

Turning to our gross margins. DXP's total gross margins were 27.9%, an 85 basis point improvement over Q1 2019. Additionally, this reflects 139 basis point improvement over Q4. This is a result of improvement within IPS and the removal of the impact of projects that lost gross profit dollars in Q4.

In terms of operating income, combined, all 3 business segments improved 74 basis points in year-over-year business segment operating income margins versus Q1 2019 and 258 basis points compared to Q4. Total DXP operating income decreased 113 basis points versus Q1 2019 to $10.9 million.

This was primarily driven by corporate SG&A and the payout of commissions and bonuses associated with fiscal year 2019, normal seasonal payroll taxes and first-of-year-items as well as higher than normal legal audit and an increase in sales tax audit accruals. .

Turning to EBITDA. EBITDA was $17.8 million in Q1 versus $21.1 million in Q1 2019 and $13.4 million in Q4. EBITDA margins were 5.9% versus 6.8% in Q1 of 2019. In terms of earnings per share, our net income for Q1 2020 was $5.7 million. Our earnings per diluted share for Q1 2020 was $0.31 versus $0.12 in Q4 and $0.40 in Q1 2019.

Turning to the balance sheet and cash flow. In terms of working capital, our working capital was $243.5 million at the end of the quarter. This amounted to 19.4% of our last 12-month sales.

This is above our historical average but reflects a seasonal nature of working on projects, investing in the associated working capital and project-related jobs within IPS as well as the impact of lower sales on a year-over-year basis.

As I mentioned earlier, we are focused on reviewing orders and customer commitments to these projects, the expected timing or anticipated delivery and the associated cost to completion. Cost and estimated profits increased $3.3 million from Q4, but is down from Q1 of last year by $2.4 million. Inventory is up $3.6 million from Q4 as well.

This reflects DXP carrying higher levels in anticipation of supporting revenue growth in fiscal year 2020. We anticipate inventory levels to decline as we operate in this new environment, and we have a focus on collecting and covering costs on existing projects until completion, as I've mentioned several times.

In terms of cash, we had $32.8 million in cash on the balance sheet at March 31. This is an increase of $2.1 million compared to March 31, 2019. Cash used in operations was lower by $3.7 million in Q1 of this year versus Q1 of last year or was a use of $1.6 million versus a use of $5.3 million last year. .

As a reminder, we typically have negative cash flow from operations in the first quarter and positive cash flow from operations in the second through third and fourth quarter. In terms of CapEx, CapEx in the first quarter was $3.2 million or 1.1% of first quarter sales. Compared to the first quarter of 2019, CapEx dollars are up $923,000.

CapEx during the quarter reflects growth investments we made in fiscal year 2019 and the completion of items tied to these projects that we started last year. As we move forward, capital expenditures will decline on a year-over-year basis, as we discussed in Q4, and we have very little maintenance CapEx needs for the business. .

Return on invested capital, or ROIC, at the end of the first quarter was 21%. In terms of our capital structure, the 2 main covenants that we have include a fixed charge coverage ratio under our ABL and a secured leverage ratio calculation under the term Loan B agreement.

At March 31, our fixed charge coverage ratio was 3.0:1.0, and our secured leverage ratio was 2.2:1.0. Total debt outstanding at March 31 was $243.75 million. As I mentioned at the beginning of this call, our capital structure was built to match our strategy and ensure financial flexibility through different cycles.

Additionally, was pairing acquisition capital, which are long-term assets with a long-term financial instrument, a term loan B. We have no near-term maturities with our ABL maturing in August 2022 and our term loan B maturing in August of 2023.

In March, we proactively took steps to enhance our liquidity and capital availability by expanding our ABL facility from $85 million to $135 million. As of this call, we are undrawn on our ABL and have over $190 million in liquidity, $59 million in cash and $132 million in ABL availability. .

That said, given our cash flow profile and the fact that we typically release working capital and produce a significant amount of free cash flow in the first year of a down cycle, we plan to proactively pay down debt as appropriate. After Q1, we made an optional $10 million prepayment on our term loan B to further strengthen our balance sheet.

We believe this measure, combined with the actions we have taken to reduce our operating expenses and limited capital expenditures, give us liquidity and financial strength to manage through these unusual and challenging times. .

We have a senior leadership team that has experiencing -- that has experienced managing through multiple cycles, including 2008, 2015 and 2016, and we have the capital structure flexibility and knowledge to get us through a lower demand environment. .

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.

We have seen down cycles and emerged in the past, and we will do it again as we manage through this cycle. .

And at this point, David and I will now turn the call over for questions. .

[Operator Instructions] The first question is from Joe Mondillo of Sidoti. .

Ken, David, hope you're doing well. First question, just -- 2 questions on the quarter itself. Service Center margins were -- I mean Service Center margins were a little light, so I'm wondering what was going on there? Second lowest quarter since 2016. And then on the IPS segment, margins were quite strong.

You stated on the last call that maybe some of that low-margin work was actually going to flow into the first quarter. So I was surprised to see not only was it a solid quarter relative to 4Q, but it was one of your strongest quarters over the last several years. .

Yes. Joe, this is Kent. You got a multitude of questions there a little bit, so I'll try to take them in order. Just in terms of the Service Centers, we did get some contraction in the Service Centers revenue-wise. And so I think part of that fed into it.

Part of it is also is, there is in Q1 across the total business at DXP, but there is elevated SG&A expense in Q1. So that's partially impacting the margins, meaning bonuses and commissions that occur for fiscal year 2019 kind of roll over into the first half of the following year, in this case, our fiscal year 2020.

So I think that's making their margins look lower than probably they would streamline out, if you will, kind of as they move through the year.

In terms of your comment or question around Innovative Pumping Solutions and the improvement in that segment's operating income margins, what we said in Q4 was that we still had about 6 to 7 potential negative gross margin jobs, but we did not know the timing of the shipment of those jobs on a go-forward basis.

And what I can share with you is none of those jobs did ship in Q1. And so we -- as a result, we did see a natural lift and an improvement in the operating income margins for IPS. And so I think that's the greater contributor there to the margins there.

Had 1 or 2 of those shift in Q1, more than likely, it would have had some level of impact to the operating income margins in IPS, but they just merely didn't. And so we're monitoring that kind of as we go through the quarter. And we'll speak to it as best we can when we see it. .

Okay.

To follow up regarding those last comments, do you anticipate those jobs still to ship, number one? And number two, do you have any sense of timing with that?.

Yes, they're still in our backlog. We're going through that now with that segment going through all the jobs and trying to be sure we understand the timing. So I don't want to misspeak at this point in time because I think what we've now got impacted with a lot of these customers is kind of their budgets in COVID.

And so per our comments in our scripts, that's kind of what we're doing right now. So going into this year, we anticipated they would have shipped at some point in fiscal year 2020, and I still would have presumed that. But the specific timing, I don't have any specific facts to share at this point in time. .

Okay. Understood.

David, you mentioned that the IPS backlog was down 17% year-over-year? Was that correct?.

That's correct. From Q1 of '19 to Q1 of 2020. .

Right. Okay. So you're expecting oil and gas sectors to sort of be down 30%.

Could you provide some more color relative to backlog being off 17%? Maybe you can talk about sort of order trends in April and any other thoughts on getting to that 30% level? And then also maybe in the context to 2015, '16 time period, your sales were off -- at IPS were off about 27% each of those years.

And maybe you can provide some context how it feels to that downturn back then. .

So the backlog being down 17% is a function of order intakes and shipments. So when you look at both of those, I think that we're forecasting that orders are going to be down 30% but, frankly, our revenues for IPS will not be down 30%. It's going to be more like 18% or 20%. So I think we had a really good recovery and it started in '17.

It was really good in 18%, and we grew our IPS business. '19 actually grew on top of that. And then -- but we were in the process of the fourth quarter of '19, the oil and gas people kind of had a little shutdown there. They were conserving cash, had nothing to do with the virus.

They just -- they were just, in general, seeing that maybe they were seeing there was an oversupply or the marketplace thought that. So they kind of started shutting down. So we started shipping a lot of our backlog, as Kent pointed out, some of it good and some of it bad backlog. But nonetheless, that started headed down. .

So I think to understand that, you have to -- and then what happened is that in the first quarter of this year, we were seeing our backlog increase. And we were anticipating a good year until mid-March, and then everything kind of got shut down. So there's a lot of moving parts there.

We could -- maybe off-line give you a little better detail, but basically, that's how I see it. And well, that's how it's happening. I will say on Kent's, that there's a few jobs out there that still aren't overly profitable.

Realize that with percentage completion, you kind of -- you still have work to do to finish it, but it's -- but a lot of that's behind us. So I'm not anticipating huge margin degradation, but there's some. There's some. So it was a good quarter this quarter.

And going forward, there's going to be a contraction of new orders that come, but even those are going to have some pressure around margin on them and along with the few jobs that are not doing that well that are to come. So our IPS segment margins, we anticipate go down. .

Okay. And last question from me, and I'll let someone else have a chance.

Your cost management and sort of your cost actions, what are you exactly doing? Did you take any major across-the-board cost cuts? Could you just help us understand a little bit more? I'm not sure if there's anything to quantify, but at least talk through what you're doing to sort of soften or realign the business to the downturn overall not just oil and gas, but just your overall business.

.

I would like to answer that question, Kent, because I think it's worth noting that DXP is not -- it's not a broke company. I mean, we have the ability and always have had the ability to make money. I don't know what it looks like if sales went down 80%, and I certainly don't subscribe to that.

But at some level of decline, we're able to adjust and make money. We didn't make a big deal out of that because it's just part of our DNA to know how to do that. But you have -- you also need to do it instead of just across the board, having people take a 10% pay cut or things like that, that's really unfair.

What's fair is to look at the performance of each market in each location, in each geography and determine whether we need to be -- stay in the course with that one because it's in some areas that have growth markets like North Central has ag and food and beverage. Well, we're going to -- we're not whacking expenses there.

But if you're in the Permian Basin and oil and gas is going down significantly, well, then we have to make adjustments. So we're doing all the normal things everybody else is doing from 401(k) and some things.

But looking at facility closures, looking at a lot of different things, but it's just part of our nature that we're trying to manage to a profit profile. And so our people -- and then you have to tie that to the fact that we're a very incentive-oriented company.

So if people don't make money, they don't get a bonus and their bonus is normally 2x their salary. So it's a significant amount of money that they sacrifice when profits go down. And so they're trying to maximize profits at all times. And the system works. It's worked in 2008. It's worked in '15 and '16.

And it does -- and it's done in a way that's smart and sensitive to the performers versus the nonperformers. .

there's the traditional, I'll call it, cost-saving areas you can go after, whether they're reductions in different things. And then there's -- because of the stimulus package and what the U.S. government offered, there are some of what I'll call cash deferrals in terms of what we see, which have free cash flow implications and pretty significant. .

One of them that we're taking advantage at DXP is the employer portion of social security tax. We've calculated that in terms of cash flow impact in a magnitude greater than $5 million for DXP this year. And so we're going to be taking advantage of that. And so all these cycles are unique and different.

Managing your business to profitability, we believe, is status quo thinking. But the thing I would point out that's really different in this cycle is probably that the U.S. government provided some cash deferral items that we're able to take advantage of.

Additionally, there's been I think a trend towards some, I'll call it, facility and rent abatements across the United States given the magnitude of this pandemic. And so we're probably no different than a lot of businesses out there that rent and lease facilities. And so where we can take advantage of those, we're taking advantage of those.

And those will create some temporary cash flow deferrals that in fiscal year 2020 will benefit us once again, but eventually, it catches up with you in the future because you got to -- more than likely, you got to pay them back. So... .

Your next question is from Blake Hirschman of Stephens. .

I hope you're healthy and well. To start out, I guess, just kind of a big picture one.

Do you think you guys are being impacted more by COVID-19 or by the drop in oil prices?.

Well, I think the -- I think they're the same. If we hadn't had COVID-19, I don't think oil prices would have dropped near as drastically as they did. But we had a, let's call it, a $2 million or $3 million oversupply problem. And then COVID-19 came along and created a huge demand problem. And so they kind of go hand-in-hand.

So my own with my -- my take on this, and it's just my personal opinion, is that when demand starts recovering, people start going back to work. We start driving. We start doing things more normal. That as demand picks up, so will the price of oil.

And what our customers are telling us is that they need the price of oil to be $30 to $35 to be able to make money. And so at that point, we'll feel better about the fact that they're not going to go bankrupt, that they're going to be able to pay their bills and some won't make it at that level because of their debt load.

But assuming they're appropriately financed and have a balance sheet accordingly, there will be some recovery there. So we see a pretty quick V-shaped recovery to the price of oil being $30 to $35, and we see that being positive. When you get there, you still, though, have a supply problem.

You still -- we haven't really eliminated the supply problem with the exception that who knows how long Saudi and Russia will support a $9 million barrel a day cut. And the United States is probably cutting nonprofitable wells. And so they're cutting back some. And then, of course, we're not drilling to any great extent.

So we're not increasing production and, hopefully, it's going down. So maybe some number of years to get all that supply and demand back in balance. And when we do, we'll know it's here because price of oil will be $60 or $70. That's my opinion. .

Got it. That sounds good.

And then if you look at the changes that you guys have made kind of cycle to cycle, is there any way that you could try to frame up expected decremental margins at different top line declines, like if sales are down 10% or if they're down 20%? Or I guess more than that, how to think about the impact to the decrementals?.

Blake, this is Kent. .

Are you talking gross margins or net or operating margins?.

I mean, I'll take it however you want to approach it, but I was kind of referring to EBITDA or EBIT. .

Okay. That's good. Go ahead, Kent. .

Well, I was actually thinking gross margins. That's to me where it starts. So it was a great question, David. It was a great question because -- yes, yes, good thing we clarified. In the last cycle, it was between 100 to 200 basis points, ultimately, contraction in gross margins when we kind of troughed, if you will. So I think that's the potential.

Once again, I don't -- I think there's a lot of things we're doing differently around margins. I also don't think we necessarily 100% got back, if you know what I mean, Blake. And so I think that's that gives you some color and commentary there.

I think EBITDA margin-wise, David and I aren't in the same room, but we've made money through all the cycles, right? And we always make EBITDA. I think the last cycle, we may have bottomed out for a quarter around 4% EBITDA margins as a trough, and so I wouldn't see us necessarily going there.

But I just think just in terms of previous cycles, to put them in context, that's kind of where we've kind of troughed at because of our mindset around always making money. So ... .

All right. That makes sense. .

Yes. Blake, I'll be more specific for you, if you like. We're trying to, I mean, to be -- looking at April and the results we got in April. If we see Supply Chain Services down 10% and the Service Center section down 10% and IPS down 18% to 20%, that's going to give us a number.

And then we feel that what we're doing to rightsize different things in the company that we can get to hang in there with sort of a 5% EBITDA margin. As you know, we get leverage going up, but we also get deleverage coming down. So... .

Yes. That makes sense. All right.

And then I guess it'd probably be a good time to ask for those, the monthly sales trends throughout the quarter and then into April, if you have them, Kent?.

No. Absolutely, I have them. And we don't give formal guidance. I must always remind the world of that. But I think what David's comments are saying is we have internal goals and so we worked towards those goals. So in terms of the sales per business day, January was $4.3 million per day, February was $4.6 million, March was 5.2% and April was 4.2%. .

Your next question comes from Joe Mondillo of Sidoti. .

Just a couple of follow-up questions.

First off, the corporate cost line -- well, I should first ask, do you have any -- were there any onetime cost items in the quarter itself that you would highlight?.

Nothing of significance. I mean, part of what you're getting at, Joe, is kind of what was in our corporate SG&A. And some of those items, you can get true as onetime, one of them would be -- and it's probably something we should emphasize, but when we filed our 10-K, we came off our material weakness.

And when you're coming off of material weakness, part of what you shoulder as a public company is you probably have increased audit and some other cost. And so some of that cost is totally 100% flowing through in our corporate SG&A in Q1, just reflecting a lot of that activity, which occurred in 2019.

So audit taxes and some top stock comp expense were unusually high in Q1. The stock comp expense was unusually high, partially because we use stock as part of consideration in our Pumping Systems acquisition. And so that occurred in Q1. And so that was kind of -- additionally, legal expenses were high. Once again, that reflects 2 major buckets.

One, we had the natural, what I call, normal nascent cases and scenarios that we're always working through as a larger company. And then we did have the acquisitions. And so you have some legal costs associated with that in Q1. And so some of that should decrease as we go forward.

But essentially, that's partially what's driving that corporate SG&A component being up higher than normal. Additionally, once again, you have higher-than-normal items whether it's health care, insurance premiums, different things like that and costs that you shoulder in Q1.

And so we flow that through corporate because we don't allocate those expenses. So once again, some of that's seasonal, but then we had a few items, which I just mentioned that were on top of that. .

Okay. So last year, you averaged around $12 million a quarter. Would you anticipate that to be down just given some cost cuts? Or how do you think about that relative to the 1Q because 1Q is so high? I'm just trying to... .

I mean I definitely will see it down. And so that's what I would say. I would expect it to be down in Q2 and kind of trend down as we work throughout the year. And so it should decline as we kind of move throughout the year. .

Okay. Also, you mentioned -- I believe David actually mentioned something. You were cutting something by 10% at the Service Centers. I missed what you were talking about there.

Could you just repeat?.

Okay. First of all, I'm glad you asked that question because I rechecked my math, Blake and everybody, that really -- the 5% is too low. We're really more like 5.7% EBITDA margins that we think we can maintain.

And I was talking about just, in general, just a plus or minus 10% reduction in revenues and Supply Chain and in the Service Centers and a bigger reduction in our CapEx business of IPS. .

All right. And so going back to my question, I think in your prepared remarks, you were talking about the oil and gas sector. You said you expect IPS and cost to align to that 30% decline. And then you proceeded into Service Center, and you mentioned something that you're cutting something by 10%.

Was it inventory? Or was it cost? I missed what you were talking about there in your prepared remarks. .

I'm looking. .

All right. And then another item I should just mention, I was wondering if you could also repeat the end markets that you're actually -- either you described them as doing well or actually growing. You mentioned a few that are actually doing better than others. .

So after I talked about the IPS segment showing 30% lower demand. And again, let me reiterate the fact that we have backlog that prop-up sales, not forever, but -- so anyway, I was talking about 30% being the go-forward number.

From that sentence, that next sentence, I was talking about the Service Centers and a small part of -- and the part of Supply Chain Services that are in the aftermarket service and repair and OEM. As such, they have adjusted to a 10% reduction in demand as it relates to this industry.

When I talk about the markets, again, this may -- I wouldn't go buy a bunch of stock necessarily in each of these, but for us and what the results we're getting is I mentioned that gold mining, gold is up.

And so our friends in Alaska are doing really good with gold mining; the petrochemical industry that produces special polymers is doing well; bottled water; water and wastewater; municipal; certain recreational manufacturing like bicycling and cardiacs and things people can kind of do and isolate themselves. Those things are good.

Soap; food and beverage; agriculture; other chemical; medical, of course; petrochemical; asphalt that's used on -- for the government using making roads and stuff; are all doing well. .

Okay. Is there any way for you to define sort of how much that bucket makes up of the total company? I don't know if you have that sort of estimate and... .

Yes, we do. I don't have it in front of me. Kent, I don't know if you do either. But in general, still pretty true to form is that oil and gas, which is not all rig count stuff. We're not a rope, dope and soap company. We sell to upstream, midstream, and I'll talk about the midstream still doing okay.

And downstream and how I think the downstream is going to bounce back pretty quick once people start driving again because refineries make gasoline. So all of 3 of those, though, add up to about 50% of our DXP business. And then the other 50% is all these other markets, all these other general industries, all these other things.

And I think that's lost in the equation sometimes when we're grouped with a peer group of DNOW and MRC. .

Your next question is from Blake Hirschman of Stephens. .

I just have a few more.

I was wondering, how big has like safety-related PP&E, that kind of stuff, what percentage is that of your mix? And have you seen any kind of benefit from what everyone else seems to be saying is a nice surge in the demand for that kind of stuff?.

Yes. I knew someone might ask that question. So Kent and I looked that up? It's only about 1% of our business. So it's not a giant number. And it's up, but it's not 3x.

What happened with this -- to people like us that aren't quite as bigger players as maybe a Fastenal or an Amazon or somebody like that is our suppliers kind of rationed us to what we normally sell. And so it wasn't -- it was good, but it wasn't. It didn't move the needle really. .

Yes. Yes. All right. That makes sense.

And then lastly, on the capital allocation front, I'm just trying to get a sense for -- I mean, I expect that you guys will probably stay pretty defensive in the near-term just with how uncertain everything is, but at what point would you have the confidence to get more offensive and look to maybe try to pick off some deals on the cheap or for what I would expect it would probably be a lower asking price than what you would have heard a few weeks or months ago.

.

Yes. So Blake, on the first part of your question there, I'm glad you emphasized that. So on the defensive side, I don't know if people picked up on my comments, but our debt at 03/31 was $243 million, and we're going to make an optional $10 million prepayment.

As of today, we're sitting on close to almost $60 million worth of cash on our balance sheet. So we're going to do that from a defensive perspective. And so after that, we would have $233 million roughly or so of debt on the balance sheet. And so that's defensive. You're 100% correct on your second question.

When do we turn offensive, and we totally are of that mindset. Going into this, we had 7 to 8 discussions going surrounding acquisitions. And so I think you heard it in both David and I's comments that we believe there's going to be opportunities here, and we want to be in a position to take advantage of those opportunities.

We think that's the advantage of the flexibility of this capital structure. We can do both offensive and defensive moves. And we will pivot as soon as we see clarity on when we know there's a bottom, you never want to catch a falling knife.

And then also when you have a good feel of kind of what the status quo will be going forward for the business you're going to buy. And then presuming you can get to an agreement on valuation, the way I'd put it is we're always fair buyers regardless of the market, but there would need to be adjustment based upon current results.

So anyways, we wholeheartedly are thinking that way, and we're positioning ourselves to act in that fashion. .

There are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect..