DXP Enterprises, Inc. Q4 2008 Earnings Call Transcript

| About: DXP Enterprises, (DXPE)

DXP Enterprises, Inc. (NASDAQ:DXPE)

Q4 2008 Earnings Call Transcript

March 10, 2009 at 5:00 pm ET

Executives

Mac McConnell - Chief Financial Officer, Senior Vice President Finance & Secretary

David R. Little - Chairman of the Board, President & Chief Executive Officer

Analysts

Matt Duncan - Stephens, Inc.

Ray Rund - Shaker Investments

Unidentified Analyst

Operator

Good morning ladies and gentlemen welcome to the DXP Enterprises Incorporated fourth quarter and end of the year results conference call. During today’s presentation all participants are in a listen only mode and following the presentation this conference will be open for the question and answer session. (Operator Instructions)

I’d like to turn the conference over to Mr. Mac McConnell, Senior Vice President of Finance. Please go ahead sir.

Mac McConnell

This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP’s fourth quarter and full year results conference call. David Little our CEO will also speak to you and answer your questions.

Before we begin I want to remind you that today’s discussion will include forward-looking statements. We want to caution you that such statements are predictions and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis is contained in our SEC filings but DXP assumes no obligation to update that information. Our fourth quarter press release is available on our website www.DXPE.com. I will begin with a summary of DXP’s fourth quarter 2008 results. David Little will share his thoughts regarding 2008 results and then we will be happy to answer your questions.

Sales for the fourth quarter increased 14.7% to $193.6 million from the fourth quarter 2007. Excluding fourth quarter 2008 sales of $18.4 million from businesses acquired in 2007 and 2008 on a same store sales basis, sales for the 2008 fourth quarter increased 3.8% from the 2007 fourth quarter. Sales for supple chain services decreased 4.7% to $37.1 million compared to 2007 fourth quarter. Sales of innovative pumping solutions products decreased 28.7% to 24.3 million. We recorded a $12 million sale of an innovative pumping solutions project in the fourth quarter of 2007 which accounted for the decline in the innovative pumping solution sales. Sales for of the MRO products by our service centers include 35.6% to $132.3 million excluding sales of acquired businesses sales of MRO products by our service centers increased by 16.8% on a same store sales basis.

Gross profit for the quarter increased 22.7% from 2007. Gross profit as a percentage of sales increased to 29.4% from 27.5% in 2007’s fourth quarter. The increase in gross profit is primarily the result of the three businesses acquired during 2008 resulting in the higher gross profits percentage and a loss for DXP.

SG&A increased 24.1% compared to the 14.7% sales increase and a 22.7% gross profit increase. Excluding the $4.7 million of SG&A expenses associated with the businesses acquired in 2007 and 2008, SG&A increased $3.8 million on the same store sales basis. This increase is primarily the result of increased priority related expenses. These expenses increased primarily as a result of increased profits which includes incentive compensation and due to hiring of more personnel for the purpose of increasing sales. As a percentage of sales SG&A increased to 25.5% from 20.8% for the fourth quarter of 2008. Majority of this increase results from the effect of sales for certain supply chain customers declining during the quarter while incurring costs to support new supply chain customers combined with the $1 million increase in expense from amortization of intangibles.

Interest expense increased 21.9% primarily as a result of increased debts incurred to fund acquisition If the dollar increased 25.6% in pre-tax income increased 18.5% compared to the fourth quarter of 2007. Net income increased 23.1%. Diluted earnings per share for the fourth quarter of 2008 increased 21% to $0.51 per share from $0.42 per share for the 2007 fourth quarter. For the full year 2008 sales increased 65.8% to $736.9 million from 2007. Excluding 2008 sales of $233.8 million from businesses acquired in 2007 and 2008 on the same stores sales basis, sales increased 13.2%. Sales for our supply chain services include 122% to $162.7 million compared to 2007. Excluding sales of acquired businesses, supply chain sales increased 2.5% for the year. Sale of innovative pumping solutions products increased 13.7% to $99 million for the year. Sales of MRO products by our service centers increase 67.2% to $475.2 million excluding sales of acquired businesses, sales of MRO products by our service centers increased to 15.7%.

Gross profit for the year increase 64.7% from 2007. Gross profit as a percentage of sales decreased to 28.1% for 2008 from 28.3% for 2007 primarily as a result of lower margins on sales by Precision which was acquired in September 2007. SG&A for 2008 increased 69.3% compared to the 65.8% increase in sales and the 64.7% increase in gross profit.

SG&A for 2008 includes $6.4 million of amortization of intangibles compared with $2.7 million of amortization of intangibles in 2007. Excluding the $48.9 million of SG&A expenses associated with businesses acquired in 2007 and 2008, SG&A increased $16.1 million. This increase is primarily the result of increased federal related expenses. These expenses increased partially as a result of increased profits which include incentive compensation of hiring more sales people for the purpose of increasing sales.

As a percentage of sales SG&A increased to 21.5% from 21.1% for 2007. This increase is the result of the $3.7 million increase in the amortization of intangibles. Interest expense increased 83% primarily as a result of increased debt to fund acquisitions. Total long term debt including current portion increased $62.4 million during 2008 primarily as a result of the acquisitions of Rocky Mountain Supply in the first quarter of 2008, PFI in the third quarter of 2008 and Falcon in the fourth quarter of 2008.

Total long term debt including the current portion increased by less than $74 million we spent on acquisition in 2008. Long term debt including current portion at December 31, 2008 was $168.6 million.

Working capital increased $37.6 million as of December 31, 2008 compared to December 31, 2007. Availability under our bank lines of credit increased $19.8 million as of December 31, 2008 compared to December 31, 2007 primarily as a result of increase accounts receivable and inventory which allow us to borrow more under the asset test. At December 31, 2008 we have $37 million available to be borrowed under the most restrictive covenant of our credit facilities.

During the fourth quarter of 2008, we reduced long term debt including the current portion by $5.6 million despite spending approximately $4 million on acquisition. In connection with the current economic environment and this part of our ongoing goal, we are working to reduce debt as we go forward in 2009.

EBITDA increased 59.7% during the year and pretax income increased 46.3% compared to 2007. Net income increased 49.2%. Diluted earnings per share for 2008 increased 39% to a $1.89 from a $1.36 for 2007.

Now, I would like to turn the call over to David Little.

David R. Little

Thanks Mac and thanks to all you guys on conference call today. I also want to give a big thanks to our DXP people for the dedication and their accomplishments, our customers who have supported us and believe in our strategy to reduce our total cost of ownership of being experts, our suppliers who make quality products at competitive prices and our shareholders who have supported our top line growth of 65.76%, bottom line growth of 49.24%, and EBITDA growth of 59.69%.

Year 2008 had its disappointments as Precision and Vertex Distribution did not perform as we have expected yet we still had a good year. Okay, 2008 was great. In fact, since 2002 every year has been significantly better than the previous year but what is our plan for 2009?

We recognize the 2009 and most of our existing markets will consume less of our services than products. So to have a great 2009 we must find new markets, sell more in different products and services to our existing customers and find new customers, in other words take market share which we are good at based on our growth rate a little last six years.

We are looking at 2009 as a great opportunity to gain market share because our growth strategies will be even more desirable to our customers and easier to execute because of weaker competition.

Let us revisit these growth strategies and look at why we feel stay we will work better in a down economy.

First let us review innovative pumping solutions, IPS and Vertex Distribution as both will gain market share this year but sales will be down. Vertex Distribution has experienced a significant decline in volume and a decline in commodity prices. Lead times have also declined from countries like China that have shorter deliveries. Sales have declined and this combination has resulted in increased inventory levels. This is obviously not good for cash flow.

The good news is our goal for this Company, Vertex, is to increase our service levels. The number one customer complaint in two different surveys is that their fill rate is only 60%. Increased fill rates should increase market share. We will maintain these fill rates and reduce inventory by putting them on our excellent inventory management system which should be completed by the end of April.

Our goal is to decrease our inventory levels and an increase fill rate resulting to an increase cash flow and increased market share gain. Innovative pumping solutions, IPS, they perform pump repair services and fabrication of pumping systems, which are capital projects related to the gas pipeline industry, utilities, refineries and oil and gas production.

Capital projects were down, which is evident by our backlog which is now like 15 million versus 35 million a year ago. IPS is quoting large jobs for major oil companies everyday and the shop is down to one shift but they are staying busy on smaller everyday business.

The real bright spot is the repair in service business which is picking up. Their backlog has also stabilized and could increase as some of the large projects we are working on with major oil companies’ turn into orders. We are planning; however, for these two entities to be down 20% on the top line and 30% on the bottom line. As oil prices seem to have stabilized and projects are currently on hold could be turned loose, our outside could be better than our plant. Plus I believe we will be stronger as we focus more on additional markets, for example, the utilities and refineries for repairs and new pumping systems for new power plants.

Our next strategy of Supply Chain Services, which is now called Precision Supply Chain Services should perform excellent in this down economy. Customers are looking to save money and Precision Supply Chain Services can guarantee cost savings for these customers. We are willing to outsource procurement services.

The only small problem is that existing SCS customers are currently buying less. This means we need to add new customers and market share faster than as our old customers’ contract and we have plans to do this. We have $55 billion of new business to implement with more to come and we expect booking additional revenues from this by approximately $33 million, minus existing customer contraction or less consumption give us growth of $26 million for a increase of 16% this year. In the third quarter, SCS had 66 locations and in the fourth quarter, we have 71 locations and that is growing.

Please note that we have combined DXP supply chain services into precisions much larger supply chain services group which DXP has now branded we combined entity, precision supply chain services under the leadership of Chris Circo. The combination makes us much stronger and reduces our overall cost structure. At the same time precision supply chain services were created, we moved all the precision service centers to DXP by putting them in our original structure.

In addition, we created three new regions, East Coast, West Coast and North Central. All of the regions now report to John Jeffrey, Senior Vice President of Sales and myself wearing the hat of Senior Vice President of Operation. Everyone is charging ahead and agree with the logic that precision was much better closing and tilling large deals through their supply chain services and DXP is better at running service centers and creating Super Centers.

The next steps are to eliminate inefficiencies in the back office which will happen as we put everyone on the same computer system. This project is in progress as it relates to precision service centers being first. Our next strategy, DXP Super Centers continues to grow and take market share away from our smaller competitors. In the third quarter, we had 119 service centers and in the fourth quarter, we have 121. Having experts from a large group of product categories and a local service center is efficient and provide cost savings for our customers because we can offer them one invoice, one shipment/delivery, one stop shopping plus product expertise and helping them apply the product directly.

We feel very strongly about our ability to improve precisions service centers profitability. There are several centers have a great group of customer service people that need to better understand their value to the customer. They have the higher service per diem. We are all working hard to get the high margin part accomplished. High service, high margins and be worthy is our model of building Super Centers.

In the third quarter, we had 21 and in the fourth quarter, we have 23. In the third quarter, we had 10 service centers under construction. Of those 10, two are now Super Centers and in the fourth quarter, we added four more to the list for a total of 12 service centers under construction. Service centers grew organically 15.74% last year during a marginal economic year. We currently were not hitting all cylinders. It was our goal this year that we could capture new market share faster than existing customers were buying less and grew approximately 2%.

Through January, we were down 11% year-over-year and we have gone to Plan B. February has shown some improvements and March should be better giving us what we think though is the bottom and an upward trend. Plan B is to reduce the number of what I call bet. I want us to grow so we always have bet from the table, just not its meaning. DXP is highly incentive driven company so everyone takes a pay cut based on performance. We have reduced our people count by 70. We have reduced work hours and eliminated base salary increases. We are still hiring DXP people in geographical areas that are growing especially with precision and supply chain services for new agreements and customers. Gross profits are holding and we expect improvement at the precision service center level.

Overall, January was the bottom and February and March are the trend. It looks like that we can expect to be less than 20% down for the year. I am now done and open for questions.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Matt Duncan - Stephens, Inc.

Matt Duncan - Stephens, Inc.

First question, I got David, I want to make sure I got clarification on that last thing you just said when you said would be down 20% for the year, were you talking earnings or revenue?

David Little

Okay.

Matt Duncan - Stephens, Inc.

So, you are talking both?

David Little

Okay, both.

Matt Duncan - Stephens, Inc.

Okay, that total sales could be down 20%?

David Little

Yes.

Matt Duncan - Stephens, Inc.

Is that organic or is that the whole company?

David Little

No, that would be…

Matt Duncan - Stephens, Inc.

I am just trying to make sure I got this right because you were talking about growth and supply chain services, you were talking about IPS being down 20% top line and it sounds like you were talking about service centers when you include the impact of Super Centers being kind of flattish to up so I am trying to get how we get to that point.

David Little

Well, basically, I am going to understand your question. We will about sales first. IPS, we think that will be going down 20%. Vertex by the way happens to really be in by the IPS group so that is 20% there. We expect supply chain services to be up 16% and we expect the service center part to be down approximately 11% and all that going to add up expect with 11% is the year-over-year calculation and so assuming January at the bottom and February is trending up and March is trending up which is a good thing, we still have to overcome that we had a pretty substantial growth here.

Matt Duncan - Stephens, Inc.

And David when you say February and March are better than January and January was down 11, are you talking about 11 in number or the growth of the change in revenue? So, if January was down 11%, what was the year-over-year change in February?

David Little

Well, first of all, sales for January on a total basis are about the same as January of the year ago.

Matt Duncan - Stephens, Inc.

Okay.

David Little

But you have to understand that included in that is Vertex and included in that is I guess, the Company we had not talked much about is Falcon which is a little pump acquisition that we did. So, when I talked about it, when I talked about the service centers being down 11% year-over-year, I am talking about the MRO piece and I did not tell you per say what innovative pumping solution was down and what supply chain services was up or down so I did not give you the whole picture but the big disconnect I think is that we are kind of giving you a number that we think is worse case and then we are also giving you a number of we kind of start where we were in January but each month, we had what did we grow I will say is when we found the top line growth with 65.76%. So, we have got to keep pretty close track to that or we are going to be down.

Matt Duncan - Stephens, Inc.

I just want to make sure I am hearing you correctly. Total company sales including the full year impact of Vertex when you add it for five months last year and you got it, well four and a half months last year and you got it for 12 months this year, total company sales could still be down 20% or is that organic and not total or is there something that I am not hearing correctly?

David Little

I may have to check my numbers but when I looked at it, that has went out.

Matt Duncan - Stephens, Inc.

Okay, I just want to make sure that we get this right. So what you guys are thinking 2009 could look like and maybe if we take step back and instead of looking at the total number, maybe we need to refocus on what you are saying each piece can do and so IPS is down 20%, Vertex down 20% from what they did last year as the standalone company but not what they did for DXP and then supply chain service is up…

David Little

That is right.

Matt Duncan - Stephens, Inc.

Sixteen percent, I mean what do you say your expectation is for service centers for the ful year of 2009 just for the center piece, flat?

David Little

Well, no. I think…

Matt Duncan - Stephens, Inc.

Okay, sorry. Service center, you said down 11%.

David Little

Right, exactly.

Matt Duncan - Stephens, Inc.

And that takes into account the impact of new Super Centers, David?

David Little

One of the things I think we are getting a little mixed up. I am getting a little mixed up on is that we do a pretty detailed budgeting job and one of the things we do is you are right, we put Vertex in there as if it was there for the whole year. So, they did $60 somewhat million and we think they are going to be down 20%. So, that may be distorting my number a little bit.

Matt Duncan - Stephens, Inc.

Okay, so then I do not need to look at the whole company could be down 20% because your number assumed that Vertex was there all year and it was not, right?

David Little

Right.

Matt Duncan - Stephens, Inc.

Okay, I just want to make sure I got that right and then…

David Little

That number came from multiple extrapolating. I thought your comment was if January is the bottom and we stay the same then we could be 10% or 20% for the year. Is that what you were saying?

Matt Duncan - Stephens, Inc.

Yes, Vertex had been a part of your Company for the whole year of 2008.

David Little

Right.

Matt Duncan - Stephens, Inc.

Okay. Moving on then. Mac, I just want to make sure I heard the couple of the numbers correctly for the fourth quarter since a lot of the fourth quarter I sought in the press release, the innovative pumping solution you said was down 28.7% to $24.3 million. Maybe if you could run through those numbers again really quick because we did not get all that when you went to it the first time

Mac McConnell

[Residual] supply chain services was down 40 basis points year-over-year so [$47.1 million] for the fourth quarter of 2008.

Matt Duncan - Stephens, Inc.

Okay, [ $37.1.]

Mac McConnell

The innovative pumping solution was $24.3 million which is down 28.7% from a year ago, but year ago in the fourth quarter, we have that $112 million drop.

Matt Duncan - Stephens, Inc.

Right, yes I got that.

Mac McConnell

MRO was $132.2 million, up 35.6% from…

Matt Duncan - Stephens, Inc.

Okay, I just want to make sure I have those right and now, looking at Vertex; number one, what was their sales for the quarter and number two, was it accretive or dilutive to earnings?

Mac McConnell

The earnings were essentially breakeven with less than $0.01 of accretion. Sales for the quarter were $14 million.

Matt Duncan - Stephens, Inc.

Okay, on those $14.0 million.

Mac McConnell

That was $13.97.

Matt Duncan - Stephens, Inc.

Alright, fair enough. On the Super Centers, you said you got 23 of those today. Maybe David if you could give us a little bit of insight to how that conversion process is going. Are you guys having easy or harder times finding sales guys right now? You got 23, 14, or 12 under construction today. If you were to take a guess at the end of 2009, how many Super Centers DXP will have? What would you guess that number might be?

David Little

Well, I would like to think, there is two things going on. One is I will call them bets and what I mean by that is we really do not want to have more than 12 or so plus or minus couple under construction any one time because it is going to be a big drain on expenses for some period of time so if we converted all of those and then had another 14 or 12 under construction, I would be happy with that.

Matt Duncan - Stephens, Inc.

Okay, so kind of at the end of the year you are having 35 and 12 go under construction. Alright, that is helpful. And then last thing here and I will jump back in queue, Mac, can you give us the cash and debt balances as of the end of the year and then talk about so what is your planned uses of cash are for 2009?

Mac McConnell

Cash balance was $5 million, sort of thing, $5.7 million. Total debt including the current portion was $168.6 million.

Matt Duncan - Stephens, Inc.

Okay the planned uses of cash during 2009, was that just cutting down debt?

Mac McConnell

I guess if business is going slow, then I would assume receivables and inventory will go down and so instead of typically receivables and inventory are going up, we will be collecting those and paying down debt.

Operator

Your next question comes from the line of Ray Rund - Shaker Investments.

Ray Rund - Shaker Investments

Yes, I had a lot of my questions answered in that. I am just wondering, can you give us any sort of a sense of what your plan is for the year in terms of debt reduction looking out? You said that was going to be a priority.

Mac McConnell

We are an inventory-receivable intensive company as a distributor.

Ray Rund - Shaker Investments

Great.

Mac McConnell

So, the more business goes down, the more inventory and receivables are reduced and the more we pay down debt and if the business increases then when they get paid down, there is much debt. We are going to be investing in inventory receivables to support growth.

Ray Rund - Shaker Investments

Okay.

Mac McConnell

So, there is not, our focus is on if our business is going down, our focus is on reducing debt.

Ray Rund - Shaker Investments

Alright. In terms of your gross profit margin, you had pretty good increase in the quarter. Do you think you will be able to maintain that level overall or are you seeing a lot of pressure from your customers in terms of pricing pressure?

Mac McConnell

We have had very few suppliers reduced their cost to us and we had actually push back on some that have tried to increase. So, we really just had zero that have increased their product costs this year also and yes, we are having some pushback from certain industries on pricing and to the extent that we go back to our vendors and we are able to negotiate better pricing. We pass on those savings to the extent that we think our suppliers just not going to do it then we do not.

So, there is a lot of, what to say, there is customer pushback and the commodity prices are down or so therefore, they want a price reduction. But typically they really kind of understand that we are the distributor and we make a spread between what the manufacturer charges us and what we will charge them and so we are not giving up any of that spread.

Ray Rund - Shaker Investments

So, you think you will be able to hold your gross margins in the same range that they have been?

Mac McConnell

It is actually, you might hope that as we got some control of these precision service centers that we actually can get their margins up. So, to the extent we can hold everybody else's margins and get them up, we could see some incremental that we have $800 million Company and their service centers are about $150 million. So, if we got their margins up 1%, we would be happy. That is pretty diluted across the whole Company.

Ray Rund - Shaker Investments

Alright, last question. Can you give us any guidance on your tax rate going forward?

Mac McConnell

I would say that 39%, 39% to 40%. They might get a little higher.

Operator

(Operator's instruction) You have a follow up question from the line of Matt Duncan - Stephens, Inc.

Matt Duncan - Stephens, Inc.

Just want to look at margins for a second if we could back to the question about gross margins, 29.4 kind of stands out as quite a bit higher than normal. I am sure a lot of that is the impact in Vertex and there are higher gross margins on your business. When we are thinking about modeling 2009, you want us to use a gross margin that high or would it be safer using a number below that?

David Little

What is it last year, 28.1?

Mac McConnell

Yes, 28.1.

David Little

Which is down to 28.3?

Matt Duncan - Stephens, Inc.

Yes, but you had Vertex for a full quarter in the fourth quarter so it is different than the rest of the year.

Mac McConnell

I would say 29 to 29.5.

Matt Duncan - Stephens, Inc.

Okay, 29.5 to 29 and then if I look SG&A as the percent of sales, perhaps I could tell you what, let us just look at the hard number. It was $43.6 million. That is up about $4 million from the September quarter, how much of that increase is a number one of full quarter of SG&A from Vertex and number two, the full quarter of amortization from Vertex. If we put those two pieces together, how much of that increase is explained by I guess the whole Vertex for a whole quarter?

Mac McConnell

We should add Falcon into that equation too.

Matt Duncan - Stephens, Inc.

Sure.

Mac McConnell

And it is…

Matt Duncan - Stephens, Inc.

When was Falcon actually acquired, David?

David Little

December 1st.

Matt Duncan - Stephens, Inc.

Okay, and what are their annual revenues?

Mac McConnell

About 10 to 12.

Matt Duncan - Stephens, Inc.

Okay, and do you expect it to be accretive in 2009?

Mac McConnell

Yes.

Matt Duncan - Stephens, Inc.

Alright.

Mac McConnell

If that came up with the fourth quarter SG&A, $4.7 million of it was acquisitions.

Matt Duncan - Stephens, Inc.

And that is, well, is that 4.7 the difference from the piece of Vertex you had in the September quarter? I am trying to figure out how much of the increase for the September to December was a full quarter Vertex and the addition of Falcon just so I can get back to kind of..?

Mac McConnell

Okay, so you are comparing, I missed that you are comparing third quarter with the fourth quarter.

Matt Duncan - Stephens, Inc.

And if maybe, the easier way to ask this is this $43.6 million a new base to use going forward? I mean it sounds like your revenues are going to be down in the first quarter from what they were in the fourth quarter. Do you feel like you will be able to get your SG&A expenses down as well and I am just trying to figure out sort of how we need to, I will have a better picture now what we will do with gross margins but as far as SG&A, is $43.5 million sort of a new quarterly base that will move around depending on revenue, the main copies to that and was there anything one time in nature in the SG&A expenses in the fourth quarter?

Mac McConnell

Particularly. Okay, there might be a little.

Matt Duncan - Stephens, Inc.

Okay, so that is the new base to use and then obviously it is going to move around. Were there some variable costs in there that is dependent upon your sales level?

Mac McConnell

The new SG&A for Vertex third quarter is by about $3 million.

Matt Duncan - Stephens, Inc.

Okay, you probably only had a million to that in the September quarter because you only had it really for the month of September, right?

Mac McConnell

Correct.

Matt Duncan - Stephens, Inc.

Okay.

Mac McConnell

In Falcon, it is less than $200,000 with SG&A.

Matt Duncan - Stephens, Inc.

Okay, so then…

Mac McConnell

Per month.

Matt Duncan - Stephens, Inc.

Okay, so the difference between the third and fourth quarter that is explained by acquisition, if I am hearing you correctly, is a little over $2 million.

Mac McConnell

Yes.

Matt Duncan - Stephens, Inc.

Okay, that is helpful.

Mac McConnell

Well, in math, as you know we are very incentive per unit extremely so to the extent the sales are down and profits are down somewhat and there is compensation expense that comes out.

Matt Duncan - Stephens, Inc.

Okay, and then just a last thing, I want to try one more time to kind of make sure we got the sales being clarified, 2009 versus 2008, if you look at the $736.9 million that you did in 2008, you are clearly not expecting that number to be down 20% because you got a full year Vertex versus the year before and when I say expecting, I mean in your worse case analysis. If I look at that number, how much, in the worse case analysis that you referred to that included the full year Vertex?

Mac McConnell

What was your quote for the worse case analysis?

David Little

That was based on January.

Matt Duncan - Stephens, Inc.

I just want to make sure I am hearing you correctly, on what your expectation is for your 2009 regiment.

Mac McConnell

I heard what David said was if you take January and multiply it by 12, we can be down worse case 20%. Is that what you..?

Matt Duncan - Stephens, Inc.

So, with the dollar number that you have in the month of January, was that…

Mac McConnell

There was no dollar in acquisition because we have not done any in January.

Matt Duncan - Stephens, Inc.

Okay, but you have made acquisitions, right?

Mac McConnell

Not in January.

Matt Duncan - Stephens, Inc.

Okay, I got you. I think the dollar number…

Mac McConnell

No acquisitions. They are all there.

Matt Duncan - Stephens, Inc.

Okay, it is making a lot more sense now. But as you said, February was better than January and March is looking like it is better than February.

Mac McConnell

Right.

Matt Duncan - Stephens, Inc.

Okay, so if 20% is the worse case and maybe you do not want to answer this but what are your same stores realistic case is for your revenue? Is it sort of a down 5% organic and down a little bit total sort of more realistic or is that still too aggressive? What sort of the baseline that we ought to be thinking off not the worse case?

David Little

I think there is not a lot of clarity on what is happening in the economy. We kind of told you if you multiply January by 12 and we told you that February and a little bit of March so far look a little better so it looks better than that.

Matt Duncan - Stephens, Inc.

Yes. Okay, alright. I think I got this.

Operator

Your next question comes from the line of [James].

Unidentified Analyst

There is definitely some issues with regards to the revenue build as we comp Vertex albeit at a lower level for the balance the first half of 2009 and through September. You add the new Falcon acquisition and you suggest that the underlying MRO piece was up in double digit organically. It definitely seems like the underlying revenue number is something slightly higher 2009 versus 2008 regardless of any sort of organic decline. Taking that a step further for averaging Vertex, I do not know $10 million to $12 million a quarter, that is added year-over-year for the first half at higher gross margins and again you have another kind of $4 million to $5 million from the Falcon business. I just wanted to help clarify what Matt was trying to hammer home the fact that if you kind of blend the three key items of the model together, we are still seeing something at the midpoint say at the low end when your January number comes, if your January number potentially comes to fruition. We are looking at a $55 or so in low end and frankly flattish with some margins degradation in the model that is closer to two and that would assume then that the largest pieces of your business articulated by share gains, etc at lest stabilize.

So, I think that the true total Company guidance by my kind of my revenue math assuming obviously that Vertex is added for the first half and we do not see any incremental margin depreciation. We are kind of looking in the $750 million or so range because in 2009, in my model, I already had a negative 20 in the IPS business so understanding that it is a lumpy situation but helped up by the repair and replacement piece of the business and it still gets us somewhere kind of in that mid range $50 to $2. I mean, is that a fair way to look at it? Just kind of help us out with regards, because you did have some nice growth in some of your MRO businesses suggested. So, let us break that out again because we have to assume that obviously Vertex in the first half is completely added versus the first half of 2008 excluding any non-cash type items, correct?

David Little

The question is all about whether or not Vertex is going to be accretive?

Unidentified Analyst

No, the question, accretive to sales.

David Little

Oh, they are going to have of sales.

Unidentified Analyst

Right, exactly so you sit there and you suggest your basically worse case type revenue number for the full year and then from our vantage point, we still have to add basically eight months Vertex to 2009 versus 2008 and then we have another $10 million or $12 million from the Falcon deal and you have some level of flat, up, slightly down trailing your core for supply side business. So, just help me out with the sales number.

Mac McConnell

Well, I think what we have said is that that our January sales…

Unidentified Analyst

But if you do the math given all the little pieces that you articulated what occurred in January, you kind of, it is the math work.

Mac McConnell

If we can assume that every month that we have the same volume that we had previously, then our sales will be the same. In other words, they will be the same in January.

Unidentified Analyst

Right.

Mac McConnell

So, they are probably going to be the same in February. So…

Unidentified Analyst

In terms of absolute dollars.

Mac McConnell

Yes, absolute dollars.

Unidentified Analyst

Right, exactly. That is, I mean, the organic push and ticks are different conversations.

Mac McConnell

Correct.

Unidentified Analyst

Okay, fair enough. It is clear now.

David Little

Yes, I think it is unrealistic to think that as sales are again 736 whatever that number was, that we have more into this producing that 736 so our bottom line is not going to be this good.

Unidentified Analyst

Of course.

David Little

It has got to be.

Unidentified Analyst

The 736, to put it plainly that you reported in the 2008 period, excludes approximately call it $35 million from the Vertex acquisition and another $12 million from the Falcon acquisition. I understand the underlying cost structure that you have added underneath those sales but I was just wanting to clear up the fact that we will still be solidly over $750 million regardless of some cyclic organic variations that you have seen in your core business.

David Little

That is very possible.

Unidentified Analyst

Okay, good.

Operator

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you for your participation and at this time, you may disconnect. Have a nice day.

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