On the call, obviously, like I said, you have me, Kent Yee, DXP's Chief Financial Officer. And then I think joining us today as well at some point in time will be DXP's Chief Accounting Officer, David Molero Santos, as well for the Q&A portion. Just in terms of a little bit overview of DXP, DXP Enterprises, big picture, is a B2B distributor that goes to market through three business segments: service centers, supply chain services, and innovative pumping solutions. As you can see from the slide here, 68% of what we do is service centers, which is a local presence in a local market. And I'll go in a little bit more depth later on.
Innovative Pumping Solutions, which is 16% of the sales, is where we remanufacture, fabricate, or manufacture our branded private label pumps, as well as provide water and wastewater activities and project management, etc., which has been one of our key themes here more recently, which we'll go into more depth later on, I'm sure, in the Q&A. And then lastly is our Supply Chain Services, or we manage the indirect spend on behalf of our customers, and we're typically housed within our customers' facilities. LTM for Q3, we're $1.7 billion in sales and Adjusted EBITDA of $183 million. We have over 185 locations. You can see our end market mix. This is as of the end of 2023. We are roughly 25% oil and gas, one of our key themes, as well as diversification. And we'll go on that a little bit later as well.
And then finally, just in terms of this slide, the other big takeaway is we're 95% of the U.S. We have presence in Canada, Mexico, and Dubai as well. In terms of our market approach, once again, and going in a little bit more in depth, as I said, we go to market through what we call three business segments: Service Centers, Innovative Pumping Solutions, and Supply Chain Services. What you can see on this slide, and just as the big picture takeaway, is our LTM results. So that 68% today translates into $1.2 million in sales and operating income of $168 million for Service Centers for Innovative Pumping Solutions, $286 million in sales with $47 million of operating income. And then Supply Chain Services, we have $255 million in sales with $22 million of operating income.
This gives you a nice pictorial of kind of a representation of what we do. But once again, Service Centers, the way to think about that is we have a local market presence and a local market, and we serve that market through an inside and outside sales force. Our Innovative Pumping Solutions is what we often also call our high-touch segment, where we do a lot of things from process engineering, capital project management. The other way we typically articulate it to investors is everything typically in that segment is tied to a capital budget. And then Supply Chain Services, once again, we're housing our customers' facility. It's real-time service, providing products on their indirect spend, and that's Supply Chain Services. One of the key themes that we've kind of really kind of harped on here more recently has been our diversification, our transformation story through our end markets.
You can see on this slide back in 2014, 66% of what we did was oil and gas. Today, you fast forward today, year to date through Q3, 22% of what we had is oil and gas. And as we put it, it's not that we want any less dollars of oil and gas. We wanted to add more dollars of other end markets. And so we've had a huge theme on certain end markets like water, wastewater, chemical, food and beverage, and sanitary. And so what you can see is we've been successful here over the last really 10 years, but more here more recently, a bigger push in the last five to eight, where we've kind of taken our oil and gas exposure from 66% to 22%. And once again, we want every dollar we can get in oil and gas.
It's just we added more dollars of other end markets. From a product perspective, over 60% of what we do is rotating equipment or what they call pumps. And so that's our largest product category today. Bearing and power transmission is also at 12%. Metalworking or what they call cutting tools at 12%. I mean, 9%, excuse me. Industrial supplies or catch-all category, that's at 12%. And then safety products and services, which we lean more towards the safety services, 5% of what we do. You can see our representation in the market. We're the leading North American distributor of pumps or rotating equipment, top five in terms of metalworking or cutting tools, top 10 in terms of Bearing and PT, and top 15 in terms of industrial supplies. On industrial magazines, Big 50, we're a top 20 distributor.
The other key theme on our strategy that a lot of people talk about is we have financial goals every year of growing 10% organically and 10% through acquisitions. What this slide here represents is a summary of our acquisition strategy, what we've done here more recently. So you can see we've done a ton of acquisitions, and you can see the product division or our region where it's focused, and you can see the theme of water and wastewater. And so this year, we've completed seven to eight. We've got a growing pipeline. We've got a significant amount of opportunity as we go into 2025. So that would be the main takeaway I'd have here. We may have some questions in the Q&A portion that we can walk through later on. This gives you a sense of our performance over the last four or five years.
Big picture went from a little bit north of $1 billion in sales in 2020 to LTM at $1.7 billion that I mentioned earlier, from a diluted EPS, $0.73 back in 2020 to $3.88 LTM through Q3. Adjusted EBITDA went from $60 million roughly to $183 million today, with EBITDA margins going from 5.9% to 10.5%. Return on investment capital correspondingly from 16% to 38%. Point being, big picture takeaway, we've really put an emphasis on growing the top line, the bottom line while driving efficiency and capital deployment, and it's been successful. This just gives you a quarterly view of some of the same metrics, and you can see through Q3, and you can see that growth on a quarterly basis.
Then the last thing I'd harp on before I pause and open it up for Q&A is we've also had an effort to increase our free cash flow efficiency. What we've also seen over the last two to three years is even in a growing market, we're producing on free cash flow conversion anywhere. I'll call it from 25%-35%. That's allowed us to keep deploying that capital into acquisitions, investments in the business, organic investments, whether that's in people, software, facilities, etc. We've really kind of done that. Now, we get the benefit of our free cash flow being a countercyclical benefit through the market. If we do cycle, we tend to throw off a huge amount of free cash flow.
So you can see in 2020, we threw off over $100 million worth of free cash flow, and we just actively manage our capital structure and then go from there. And this last slide just kind of lays out from a percentage basis what our capital allocation has been. And so you can see, hey, from a net leverage basis, we have a policy of staying 3.5x or less, which we've done. We also spend time on being sure we're delivering value to all our shareholders, both debt and equity. And in particular, we have an emphasis on our equity side by doing share repurchases and then obviously acquisitions. And with that, I'll pause and open it up for Q&A.
Great. Thanks so much, Kent Yee. We already are starting to get some questions. Afternoon, everyone. I'm Steve Ferazani, an analyst at SIDOTI & Company. I'll be moderating the Q&A portion. Just to remind everyone, if you do have questions, you press that Q&A button at the bottom of your screen, type them in, and we'll get to as many as we can with time remaining. A couple of general questions to start things off, Kent Yee. Let me just ask first, given the business model and you've grown it significantly over the last decade, explain to us the stickiness of your customer relationships. How much of that's based on reliability, service, or pricing? How sticky is that?
Yeah. You know, I think, Steve Ferazani, to answer that question, I'd start off with our largest product category, rotating equipment or pumps. We have the largest network of what we call tier I, tier II, and tier III service facilities. So what that allows and facilitates is exactly what you just mentioned, the stickiness with the customers. Because typically, customers in the rotating equipment or pump space really want to know you could also do the service and repair of those pumps. And so for us, that's where it really starts. And so we view our customers with 60% of what we do across the whole company being rotating is highly sticky. From a business model perspective, the way I'd also answer that, Steve Ferazani, is when you think about supply chain services and you're being housed within your customer's facility, there's no closer relationship.
Amazon, as we joke, believes they have a close customer relationship, but when you're really housing the customer's facility, there's nothing quicker and/or stickier than that situation, and so for us, we understand the concept of being sticky to our customers. We view that we do that through value-added repair and services. Our products, by definition, are really highly engineered, and then we try to complement that with our business model, and we think that's partially what drives our unique differentiation out there in the market.
Because you mentioned supply chain services, we know over the last couple of years, there was a great challenge in terms of manufacturers with labor availability and labor inflation costs. Has that been helpful to you? Are they looking more to hand more off than they can?
I would say my quick answer and reaction would be yes, Steve Ferazani. I think we've seen more, I would say, quoting going on in that business with our outside sales team on the supply chain services side. I think we mentioned it on our Q3 call. We are hoping some of those will translate into wins as we go into 2025 or in the first- half of 2025. It is a long sales cycle, right? So you're typically, and I think you're implying it, Steve Ferazani, but you're typically competing against either occasionally some competitors, but more importantly, you're usually competing against them making the decision, do they outsource something and let their employees go, or do they go with a DXP solution? And so that, by definition, just makes a longer sales cycle and a more delicate decision, for lack of better words, and understandably so.
But we do believe we can drive savings because we are a first-tier sourcer of a lot of products, and so we believe we can do it, but it's not the quickest decision for a lot of our customers. But to your point, we do see it. We do see that we've got a lot of opportunities on the table that we're excited about, and we hope to see some of those translate into wins in 2025.
Excellent. Let me take the first question because it's somewhat on the similar vein. The question about how much automation is driving the industrial value chain. How important has automation been for you and your sector?
Yeah, and we probably, frankly, Steve Ferazani, to be honest, probably don't do enough justice in talking about it. But obviously, technology, AI, automation, all those things are big trends within every industry, and our industry is no different. What I would say is when it comes to our particular product suite and our largest one, rotating equipment or pumps, there's a lot of equipment monitoring, a lot of different things that are happening on pumps and Bearing and PT products, etc., in the devices that our customers are using. And we try to complement those through automation. That is part of one of our organic sales strategies: how do we take on more automation. Once again, we probably just don't do as much talking about it as some others or some of our competitors out there, if you will, but we are focused on it here at DXP.
We see it as a trend, and we don't want to be behind the curve, for lack of better words. We're not sure we're leading the curve, but we don't want to be behind.
Of course. Getting a lot of questions about M&A, as you would expect, given the seven deals you've completed over the last year or so. Can you just talk about what you're looking for in an acquisition target, geography versus product line versus etc.?
Yeah. No, so what I would say there, Steve Ferazani, is, first of all, at our size today, DXP has most of all the products we want. There's occasionally, sometimes, product line additions or enhancements that we do because we're not as big. But frankly, at our size today, almost close to $2 billion in revenue, whether it's rotating equipment, whether it's bearing and PT or metalworking, we've got most of the lines out there across those key product categories. So that said, a lot of times what we're doing is we're putting holes in the map, if you will, and/or increasing scale in certain geographies and capabilities. And so we're able to find these acquisitions. Average acquisition size from a revenue perspective for us is $25 million-$35 million in revenue. We're able to get them efficiently from a multiple perspective.
I think that's been very important here more recently in the high interest rate environment as a strategic buyer. I think it tipped the curve in our favor, frankly, because a lot of our private equity peers had a lot more leverage on their balance sheet, frankly. And so they were spending more time de-risking and deleveraging their balance sheet than finding other opportunities. And we were in the position of where we've been able to find opportunities, find them at reasonable multiples, and win those in a less competitive environment from that perspective. And we see that continuing over the short to medium- term. We get the optimism given the backdrop of the U.S. politically from a business standpoint is increasing, and that may create an environment where private equity enters more, but interest rates are still up. They're still higher than they've been.
And so we still tend to believe that, okay, hey, we're going to have the opportunities. We also know, broadly speaking, distribution is highly fragmented, and it always has been. And so we just think we're in a golden era of opportunities, and we spend more time filtering to be sure we're finding the right ones. And that starts with our products. It starts with our business segments. It starts with capabilities or enhancements geographically. It starts with us opportunistically sometimes choosing end markets. Our diversification story is a part of that. We've always been in the municipal water, wastewater. We pivoted, really started back around 2017, 2018 to say, okay, how do we get more of these opportunities for DXP? We see it as a part of DXP today, but we now need to really scale it.
And that's obviously what we've started to do, and we've done pretty successfully here more recently. So point being is I think sometimes we decide to scale our pivot towards these profit pools, as I call them, that exist within DXP and try to enhance them more for the benefit of all our stakeholders and our shareholders.
You talk a little bit, and you have that one slide. I don't know if we saw that as you went through the presentation, just how much you've diversified over the last 10 years. You were very much more of an oil and gas name 10 years ago. That's not the case now. Do you think the market gets that yet?
I think the market's starting to get it, Steve Ferazani. I think that's been the slow evolution of DXP. I think historically, people have been around our name. They've known us as one being headquartered in Houston, Texas. So by definition, you know you got some oil and gas exposure. Historically, over a third of our business came from the Gulf Coast region. That's since changed. And so point being, I think, is you're spot on, Steve Ferazani. I think a lot of people have thought of us more as this distributor who was more a way to play the oil and gas commodity without the direct exposure, right? And not that we're not, but we're much less of that today, obviously going from 66%-22% and frankly pro forma probably by the end of the year closer to 20%.
And so once again, I always like to emphasize when I'm making those comments that we still are trying to chase every oil and gas dollar we can get. Hey, we are based in Houston, Texas. So we appreciate energy that is a depleting resource and that there's products and services that need to be had. But we also have learned over the years and been through a lot of cycles, in particular our CEO. And we realized, okay, hey, if we can diversify our end markets and look at those profit pools, as I mentioned earlier within DXP and enhance the end markets, we're going to be less cyclical from an investor perspective. We can manage the cycles very easily. And it's also going to more than likely increase profitability as it's done here because there's just other profit pools out there.
We have a couple of questions on the impressive improvement you've made in the profit margins. Let me split it into a couple of questions. One is, is the growth more from size or efficiency or both? And the other question is, how much of the driver is the fact that IPS seems to be a higher margin business for you that might be growing faster?
Yeah, I guess I would say all the above, right? I think, yes, size has helped, right? And what I mean by that, if you look at, choose whatever timeframe you want for DXP, if you look at the core DXP, let's say 2014, let's take the slide that's up, right? We've obviously added scale and size to that, and we've been able to, as they say in distribution, if you grow 2%, you can accept two to three times falls to the bottom line. It's very amenable business to it. So I think some of it's just been size. I think some of it has been our ability to acquire businesses that are more profitable than that base DXP business, which is less oil and gas, once again, to be candid about it. Water, wastewater, we tend to see higher gross margins and thus higher EBITDA margins.
That's been accretive to us from that perspective. Some of the food and beverage and chemical, they have been more profitable for us from a business perspective from those businesses we've acquired. I think also we've had a focus on trying to be efficient. As I tell people, going through the last cycle we went through, we developed a huge muscle around being sure we were managing cost effectively, maybe too strong at certain points in time. What that's allowed to do is drive margins and drive certain things. We're pivoting and trying to be sure we're expending the same amount of energy on growing the business, which we have here more recently. We still got a long way to go. I think it's come from everything you mentioned and some of the other things I mentioned.
But I think as we grow, that's the challenge. How do we keep it up and keep going?
Is there room? I mean, that's what the investors wrote, right? Do you have more to go?
Yes, absolutely. Once again, we believe our goal is still to double the business every four to five years, right? The low numbers make it more challenging, and the mix may be different. We say 10% organically, 10% through acquisitions, right? Here more recently, we've emphasized acquisitions, and that's what I try to tell people. Sometimes we'll toggle more than the other. We're also an industry, I got to be honest, that benefits from inflation. So as long as there's inflation out there, we're getting price increases and we're passing those through. We do pay attention to the price versus volume gain, and we're really focused on being sure we're getting those volume gains because it makes it that much easier if you've got inflation and you got the strategies, then you're going to get that 10% organically.
And then the acquisitions, like I said, there's a robust amount of acquisitions out there. We're chasing them, and so we're going through them as efficiently and effectively as we can. And so that's kind of what our strategy has been, and we're continuing to execute on it.
I'll pull back for a second because we have a general question here in terms of how much of your product is third-party distribution versus what you're doing internally. I know on the IPS side, there's a lot of fabrication. If you could sort of break that down for us.
Yeah. So the way to think about it is our own branded private label products are probably 12%-15% of sales at most, at max. And so everything else has truly been at that point third-party. Once again, we got our high-touch segment in IPS. So yes, while you're using either your own product or other third-party products, you're also doing a lot of assembling, fabricating, manufacturing. And so that you've got your labor, I guess is my point, that is obviously your own labor and the expertise we've built over the, we're a 100-year-old business. So we've got a lot of application expertise when it comes to building LACT units and different things and fabricating. You've got a lot of domain knowledge that's just been built up over the years.
From a pure product perspective, our own branded private label products are probably, I'll call it, 12% or less of DXP sales.
Okay. How are supply chain challenges today? In the oil and gas side, when we talk to the compression guys, they're still waitin 9 months -12 months for CAT engines. Do you have any components where you see particular issues, or has that mainly been resolved over the last couple of years?
I would say it's mainly been resolved, right? Obviously, during COVID, is what you're referring to, Steve Ferazani. There were supply chain issues. The way we articulated that is we saw some unique things in our overall macro backlog and our backlog within IPS. We still see our backlog growing, but we don't see the delays in terms of delivery times as much. I think spotty here and there it happens, but in the aggregate, we don't tend to see those delays as we did in COVID, which you really saw a lot of delays for a variety of reasons, as we all know, so.
You've certainly been a significant contributor to some consolidation, but as you noted, there's still plenty of smaller guys out there. How constructive is your sector in terms of you talked about being able to pass along inflationary prices? Is your sector as constructive in these areas as you would hope it would be?
Yeah, I think for us, it's been constructive. I mean, I think, once again, COVID put the mettle to the test because you started seeing multiple, I'll call it double-digit increases, and there was a point in time where we wondered, would the customers still continue to take those increases? The quick answer was yes, so I think today when we see increases, we see them more on the cadence of what we are accustomed to, some more on an annual basis, sometimes a little bit quarterly, but then, too, you see those price increases, I'll call it as little as 2% to as high as maybe 5%. That's in the more normal such type of ranges you would expect.
And so once again, similar to supply chain issues, I think the world in the moment has cured itself from the extreme inflationary pressures we went through a year and a half, two years ago. But once again, our industry has been very friendly towards it. We were able to pass those through, and it was, for lack of better words, really a non-issue for us at DXP. Outside that helped us kind of grow organically, if you will. But once again, we were monitoring always not just the price, but also the volume gains because we want to ensure we're really growing the business, so.
Okay. Now here's the question everybody at our conference is getting, so I have to give it to you as well. New administration, obviously there's a lot of talk around tariffs. Any impact on your business? How do you manage all the talk? And then what will end up being? We don't know what the final decisions will be.
Yeah, yeah. And I'll take that twofold, and I'll just answer the tariffs real quick. I think, hey, nothing significant that would impact DXP. We do do some, I'll call it sourcing, obviously, and particularly on some of our branded private label products and different things like that. Not a lot from Asia, by the way, at this point, some from Asia, but we're really more global, truly in sourcing. So one, we've got to wait to see how all the tariffs play out on different countries, but nothing significant from our perspective. Then two is, yes, the current administration obviously has the view and the tenet of a more business-friendly administration. And so we see the optimism out there and the sense of optimism out there. And so we're happy to live in that type of environment.
I think, obviously, I think also in our former largest end market, our oil and gas or energy end market, right? We know there's been some comments made. That said, we don't expect an extreme difference from where we're at today. What we really saw through the last cycle was a turn towards more capital efficiency when it came to the oil and gas end markets and capital allocation efficiency from a lot of our customers. We don't think that goes away just because there's more optimism. We think a lot of the companies as well as investors are focused on their return on capital. We think that's kind of been more permanent in its place. The optimism is great. We hope budgets increase. We're seeing some of that in the early commentary.
This is the time of the year where you see it. So we do see that. So that gives us even more optimism in terms of IPS. But the reality is we don't think the actual execution of the day-to-day will change too much from where we've been, right? We just think the sentiment will have a different tone.
I know you talk about being now sort of a national pump platform. Does size matter a lot in that area?
I think so in terms of the service and repair capabilities, right? Your customers, we do on the organic sales side in terms of growing organically. We have an initiative where we're focused on national accounts and being sure we're servicing those customers that are more regional or national. And when we do that, we think that on the rotating equipment side, hey, having those tier one, tier two, and tier three service and repair capabilities as well as having that bigger footprint really puts you in a unique position where not a lot of our peers can, frankly. And so we do think it's a differential. We do think it makes a difference.
I mean, if you're a customer is national, I'm assuming they don't want to be dealing with five, six different suppliers who might operate differently. The equipment might work differently.
We think that's where the world's moving towards. We still do sometimes see some regional, I'll call it dynamics and local dynamics, right? We do believe it's partially a relationship business B2B distribution. But on the other hand, we see over time, right? We've got a big view of the world, in particular with our CEO who's been around the business a long time, that the trend is more and more towards, okay, hey, can we find providers who can service you not just in Texas, but can service you in Florida, can service you, in particular, those larger companies who have multiple facilities. It makes the decision a lot easier, so.
Great. We have a couple of minutes left, but I do want to touch on the balance sheet, where you'd be willing to go with leverage for the right acquisitions and just how you're thinking about capital allocation, having completed seven deals this year.
Yeah. Hey, it's an iterative dialogue as I tell people. Our policy is, hey, on a net leverage basis, we don't want to typically stretch beyond 3.5 , 3.4 is what I'll say if we're really pushing it. And we haven't been there recently. Today, we're at 2.5 x. We've effectively managed the business. Now, some of that's come through the growth of our EBITDA, right? Because the absolute debt dollars have grown. But point being is we feel comfortable. And what I tell people is the way I kind of look at through the cycle, if you will. Everybody asked me that question, but a long time ago, I think people thought through cycle EBITDA just because, and I'll go to a certain char`t, was that $60 million EBITDA. They're thinking that's still the low of DXP.
And I go, no, we've diversified the end markets. We've transformed the business. We're pro forma $200 million worth of EBITDA. If there's a cycle, quote unquote, I don't think it goes back to $60 million. I don't think it goes back to $70 million. Does it go to $127 million? I don't know. Does it go to $150 million? I don't know. But point being is I know I'm going to spit off during COVID, I spit off $100 million worth of free cash flow. I know now I'm going to spit off close to almost $200 million free cash flow. So my true net debt, point being, is really closer to $400 million or so. And so when I look at that and I say, okay, I'm $100-$150 through cycle EBITDA, possibly, potentially, hey, I'm comfortable where I live. But that's the iterative nature of it.
We're constantly looking at it and monitoring it, and we're balancing it. Point being is, hey, we're going to always be conservative around our capital structure from my perspective. I am an ex-capital markets guy who grew up in the leveraged finance world. So I look at it constantly, and we're not going to put shareholders at risk. As I always joke, the debt markets won't let me take on so much leverage, but let my private equity peers take on much more. I think I'm plenty comfortable.
Appreciate your willingness to answer questions as we jumped all over the place over the last few minutes. Appreciate your candid answers to all of them. We have just a little bit of time left. Kent Yee, any closing thoughts you want to leave with investors?
No, I think we think momentum is still building at DXP. I'll harken to one of your questions, basically on the outlook. I think we feel good at where we're at. During our Q3 earnings call, we mentioned our backlog continues to grow. That's what we continue to see as we get close to closing out Q4 here. So we're excited. The acquisition pipeline is still pretty robust, and so we got to execute upon all these things. But I think we feel good going into 2025. And so we're excited to close out 2024 and then see what the new year brings us.
Fantastic. Kent Yee, Chief Financial Officer at DXP Enterprises. Thanks so much, and hope everybody found this as informative a half hour as I did. Thanks, everyone. Thanks, Kent Yee.
Thank you.