DXP's CEO Discusses Q1 2013 Results - Earnings Call Transcript

May. 1.13 | About: DXP Enterprises, (DXPE)

DXP Enterprises, Inc. (NASDAQ:DXPE)

Q1 2013 Earnings Call

May 1, 2013 5:00 pm ET

Executives

Mac McConnell – Senior Vice President, Finance, Chief Financial Officer and Secretary

David R. Little – Chairman of the Board, President and Chief Executive Officer

David C. Vinson – Senior Vice President, Innovative Pumping Solutions

Analysts

Matt Duncan – Stephens Inc.

Joe L. Mondillo – Sidoti & Co. LLC

Holden Lewis – BB&T Capital Markets

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the DXP Enterprises 2013 First Quarter Results Conference Call. During today’s presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) The conference is being recorded today, Wednesday, May 1, 2013.

At this time, I would like to turn the conference over to, Mac McConnell, Senior Vice President of Finance and Chief Financial Officer. 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 first quarter 2013 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 could differ materially.

A detailed discussion of the many factors that we believe may have a material effect on our business on an ongoing basis this contained in our SEC filings, but DXP assumes no obligation to update that information.

I will begin with a summary of DXP’s first quarter 2013 results. David Little will share his thoughts regarding the quarter’s results, then we will be happy to answer questions.

Sales for the first quarter increased 15% to $290.1 million from the first quarter of 2012. After excluding first quarter of 2013 sales of $41.1 million for businesses acquired during 2012, sales for the first quarter decreased 1.3% on a same-store sales basis. This sales decrease is primarily the result of two less business based in the 2013 first compared to the 2012 first quarter.

Sales for Supply Chain Services increased 1.9% to $38.5 million, compared to $37.8 million for the 2012 first quarter. Sales of Innovative Pumping Solutions products increased 5.3% to $41.5 million, compared to $39.4 million for the 2012 first quarter.

Sales by our Service Center segment increased 20% to $210.1 million, compared to $175.1 million of sales for the first quarter of 2012. After excluding 2013 Service Center segment sales of $41.1 million for businesses acquired during 2012, Service Center segment sales for the first quarter of 2013 decreased 3.5%from the first quarter of 2012 on a same-store sales basis. This sales decrease is primarily the result of two less business days in the 2013 first quarter compared to the 2012 first quarter.

When compared to the fourth quarter of 2012, sales for the first quarter of 2013 decreased 1%. This decrease is primarily the result on decline in sales of pump packages. First quarter 2013 sales by our Service Centers segment increased 1.3% compared to the fourth quarter of 2012. Fourth quarter 2013 sales for Supply Chain Services increased 3.2% compared to the fourth quarter of 2012.

First quarter 2013 sales of Innovative Pumping Solutions products decreased 14.2% compared to the fourth quarter of 2012. Due to the lumpy nature of fabrication of high Innovative Pumping Solution and pump packages, IPS revenues are dependent upon the timing of tender deliveries. The first quarter of 2013 IPS revenue is greater than each of the first three quarters of 2012.

Gross profit for the first quarter of 2013 increased 24.7% from the first quarter of 2012, compared to the 15% increase in sales. Gross profit as a percentage of sales increased to 30.7% in the first quarter of 2013, compared to 28.3% for the first quarter of 2012. This increase was primarily due to product mix as well as contributions made by businesses acquired in 2012 with higher gross profit margin.

Gross profit as a percentage of sales for the first quarter of 2013 increased to 30.7% from 29.9% for the fourth quarter of 2012, this increase was primarily a result of product mix and increase margins by our safety business in Canada during the first quarter. SG&A for the first quarter of 2013 increased $14.8 million or 28.8% for the first quarter of 2012, compared to the 15% sales increase. This increase was partially the result of $12.2 million of SG&A expenses associated with the acquisitions completed during 2012. As a percent of sales, SG&A increased to 22.9% from 20.4% for the first quarter of 2013.

This increase was primarily related to businesses acquired in 2012 having higher selling, general and administrative expenses as a percent of sale combined with increased health claims in the first quarter of 2013. SG&A for the first quarter of 2013 increased to $4.2 million or 6.7% from the fourth quarter of 2012, as a percentage of sales SG&A increased to 22.9% from 21.2% for the fourth quarter of 2012, primarily as a result of higher health claims which were $1.6 million greater than they were in the fourth quarter and payroll taxes which were $1.2 million higher than in the fourth quarter.

Interest expense for the first quarter of 2013 increased 96% from the first quarter of 2012, this increase was primarily due to the higher average outstanding debt during the period. The increased debt was incurred to acquire additional businesses during 2012, interest expense for the first quarter of 2013, declined 3.3%from the fourth quarter of 2012, primarily as a result of reducing debt during the first quarter of 2013. Total long-term debt decreased approximately $18.1 million during the first quarter of 2013.

During the first quarter of 2013, the amount available to be borrowed under our credit facility increased approximately $23.8 million to approximately $133.4 million. This increase was primarily the result of the reduction in debt combined with the effect of the increase in accounts receivable within the asset that defined by our loan agreement.

Our bank leverage ratio was 1.76:1 at March 31, 2013. At March 31, our borrowings under the credit facility had an average interest rate of approximately 1.9%. Capital expenditures for the first quarter were $2.4 million. Cash on the balance sheet at March 31, 2013, was $7.2 million. Accounts receivable and inventory balances were $189.3 million and $99.7 million, respectively, at March 31, 2013.

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

David R. Little

Thanks, Mac, and thanks to all our participants on our conference call today. I’m not happy with the fact that our 12 straight quarters of rolling the top-line and bottom-line broken by our Q1 2013 results. Despite the economy slowness, our total company’s sales on a shipment basis which would exclude percentage completion would have been up sequentially 1%, the service center segment was up 1.32%, SCS sales were up 3.24% and without the percentage completion IPS was down 3.55%, percentage completion, helps moves out revenues, when we all know that IPS can be lumpy because of the sizeable orders and the delivery of vendor shipments of major components.

When we look at the first quarter of 2012, the economy was growing pretty substantially and it was especially growing in the oil and gas sector, starting in the third quarter of 2012, the economy started to slowdown and continue to slow through the fourth quarter and as best described as choppy for the first quarter of 2013, when we try to evaluate the reasons of it in areas of industry and customer softness, we are perplexed because our customers in the same industry are headed in opposite directions, one customer is growing and charging ahead and the next customer is in a slowdown mode.

When we look at DXP sales from January started off strong for January and February finished weak and March was much better, but not as big as usual of which that contributes some of this to the early Easter. The oil and gas market is surprising soft, oil and gas prices are good, manpower and infrastructure are lacking in certain areas, rotating equipment is up quarter-to-quarter and sequentially, bearings and power transmission is down quarter-to-quarter, but up sequentially, this could be a sign that our OEM oil field business is rebounding, safety services is flat to slightly down which was good when compared to the drilling activity which is obviously down.

Our competitors, unless they are in the construction business seem to be down, so I’m not sure why we seem to be in a slow growth and down economy and our customers are best described as choppy some up, some down. Given our cautious optimism, we continue to thank our growth strategies were outperformed the market, and our theme and plans to balance the market share should result in continued sales improvement.

We have added two more super centers under construction. We continue to add inside and outside sales growth. We have a new location to be added in an underserved oil and gas market, we increase production capacity for IPS, we continue to strengthen our presence in Canada, and we have a strong balance sheet to pursue market share internally and externally.

Our bottom-line was negatively affected by two IPS jobs with low margins, healthcare claims are unusually large for the quarter, and anticipated increased corporate and personnel resulting in increased salary expense. The result in EBITDA margins was below 10%, this will be corrected in the next quarter. We’re cautiously optimistic about the economy in the second half of 2013, and we’re optimistic that we were outperformed the market.

DXP looks forward to starting a new streak of sequential quarter-to-quarter growth both top-line and bottom-line and we have growth strategies both organic and through acquisitions to meet these goals.

Not a great start for 2013, but not all that considering the economy was slower than anticipated, and expenses were unusually really high. Allow me now to focus on summarizing the activities within our three business segments, service centers, supply chain services and Innovative Pumping Solutions. DXP service center segment, from Q4 of 2012 to Q1 of 2013, the services center segment sales increased 1.32% and operating income increased 16.66%, comparing Q1 of 2012 versus Q1 of 2013 sales increased 20% and operating income increased 35%. Our Service Center leverage comes from the form of top-down commitment to sales and operational excellence, five technical product divisions, and an acquisition strategy around technical products and services.

Our customer feedback in the oil and gas industry indicate softness overall, with upstream land based drilling trends slightly down, midstream activity slightly up and downstream activity trending flat to slightly up, food and beverage and mining are maintaining a flat presence, while the general industrial market is trending flat to slightly down, while overall we are experiencing softness in our end-markets, our objective is to continue to grow by taking market share from small and medium size distribution and lack the breadth of technical products and services and technical expertise needed in this highly competitive market.

Stimulated by the record 2012 year end continued success in Q1 of 2013, we continue to refine and strengthen our operational excellence programs, both programs are critical as we continue to have strong organic and acquisition driven growth, these programs assist our teams and transforming market share into strong earnings growth by providing our service center network with education programs and resources to capitalize market opportunities. Our excellent program reinforces culture of adding value through collaborative efforts with our customers, suppliers and product divisions we would like to formally recognize all our operational and sales excellent committees for their continued dedication and commitment to continue this improvement and success in the marketplace.

As a result of our continued growth development and success we are pleased to have National Process Equipment, Inc., as part of our DXP family, commonly referred to as Natpro. Natpro is a Canadian, Canada’s largest national distributor of pumps, compressors, services and repairs, integrated system packages and related process equipment.

We are starting our second quarter with 33 SuperCenters and planned to convert an additional 8 by the close of the fiscal year. Two new in process SuperCenter candidates were added during the first quarter and we continue to report steady progress on existing platform. The 8 in process SuperCenters projected for completion in 2013 are expected to be completed in the third and fourth quarters.

Our current in process SuperCentre pipeline is now grown to a level, collectively our investments had allowed us to take full advantage of leverage that we have created by offering an industry leading breadth of technical products and services. Our focus will remain on further strengthening our North American SuperCenter platform through the creation of super regions and SuperCenters that will provide sustainable benefits to the industrial customers looking to improve their overall production and financial performance. Supply chain services, our supply chain services grew [fairly] moderately well in the first quarter of 2013. We are seeing an increase in opportunities for MROP, supply chain solutions based on enhanced customer interest for cost saving solutions in a softening market. SCS was successful in completing the implementation of a large gas turbine refurbishing facility, where I think added revenues in Q2 helping support our top-line, SCS also showed success in securing and developing our supply chain solutions for a leading beverage companies parts division.

This solution is not only utilizing DXP’s warehouse in the United States that is also employs a partnership with Canada’s largest logistics and price warning company to lose deliver parts throughout Canada, this joint venture has resulted in viable cost savings and a reliable delivery to the end user. We are still seeing softening in markets such as oil and gas, transportation, military, defense, mining and now we are seeing general manufacturing markets begin to slow, the advantage we see in the softening market is the heightened SCS customers opportunity funnel for a cost saving solution in MROP, this can also have an impact on SCS’s existing business.

This softening was recently exemplified as it affected the SCS mining customer, and mining customers they decide to in-source their MRO base on decreased production, making it no longer feasible to outsource the customer, reallocated internal resources of boarding additional layoffs, the optimistic outlook for many customers in markets that our projections starting in Q3 of 2013. While continuing to stay cautious the outlook is encouraging moving forward.

Our SCS team continues its quest for operational sales excellence, we deliver tangible cost savings to our customers, while producing solid bottom-line results for DXP, we’re excited through our continued efforts enhancing our technology platform we have the ability to offer the low cost best service solutions for our customers.

These benefits go beyond just [procurement] warehouse transactions to the extent, and we have CMMS systems or [FID] bending on those secured portal ordering, maintenance planning and other technical areas.

Our onside full flat package SmartSource now has the technology capabilities to automate warehouse operation by providing our technological expertise through a single customized in-house source of eliminating the manual process. SmartSource provides information and services for demanding, planning and reducing transactions, inventory personnel time and [hustles].

These multiple fasted approach allows us to use maximum efficiencies and optimal control to maintain the entire supply channel. For the first quarter, we lost two sites and added one. Giving our 61 site locations, we also have 100 on-site, off-site locations.

Innovative Pumping Solutions, IPS segment financial results, sales were up over Q1 2012, sales were down from Q4 of 2012, sales can be lumpy because of manufactured lead times with major components, internal capacity and customers unable to accept deliveries due to project site delay. Profits were down because of two unusual jobs to low margins. Looking at the downstream oil and gas and mining sector, land base.

Current order placement profile continues to be in the 100,000 or less range, we anticipate a large project dollar value orders to be placed in the remaining quarters of the year. Some large projects have been delayed. It has been difficult to determine the exact cause of delays in large project order release that have been approved and quoted, feedback from the marketplace indicates the customers are behind on field and site perforation, this is due to a lack of available and experienced manpower.

Therefore there is a reluctant to place orders for improved projects since they are closer to be in caught up working infrastructure. The Eagle Ford, Permian, Marcellus, Bakken, Niobrara shale plays are continuing to provide opportunities for our modular equipment packages.

In the Rocky Mountains and North Dakota regions, we continue to be successful with our production equipment design [lackiness] with modular housing units, majority of the issues are being shift to the Bakken and then Niobrara shale play. We feel that the Eagle Ford and Niobrara, the Bakken, shale plays there’s been a reduction in activity as it relates to pursuing production that is dry gas or gas that has a high content of producing water. If the gas has high distilled value or oil content these projects are being pursued.

In the Middle East, we are actively involved in opportunities for our modular packages in this geographic region, we have received orders that will be shift to this geographic region in 2013. The Gulf of Mexico, this market has not moved forward as we haven’t expected in Q1 as it relates to projects, projects are put in play in 2012, are still onboard at present time. At present we were unable to determine from customers the exact cause or reason for the delays in moving forward, we remain confident this sector will result in substantial opportunities in the future.

Offshore Africa, there has been no change from our report at the end of Q4 most of the equipments for these projects is slated to be purchased in 2013 and 2014, based on our relationship with end users, the E&C’s and existing presence in production arena with DXP’s product offering. We remain confident in our ability to get the opportunity to provide modular packages on these projects.

Midstream we see the quoting activity in this sector related to oil and gas pipeline opportunity is rating up high. In this sector, equipment delivery is important, and many opportunities can be realized when DXP and our manufacturers have the ability to provide acceptable deliveries.

Working with our major manufacturers to commit and hold critical deliveries will be a key component of new equipment requirements. The long lead time for our API high energy equipment has a negative effect on getting orders for this type of equipment, the majority of the time, the customer requirements are for the shorter lead times than currently being quoted.

We feel our remanufactured product offerings in HP-Plus product lines will continue to provide opportunities in this area based on DXP’s ability to provide quality products and favorable deliveries as we control the entire process of providing pump product and packaging.

Our HP Plus product line continues to gain traction in this sector, we have new successful in placing a significant amount of HP-Plus units in the Permian basin, the Eagle Ford, Marcellus pipeline applications we have expanded this product offering to provide product applications designed for the use of modular lack units.

This product allows very much shorter delivery, more cost effective solution than a plunger pump or a high energy split case application. DXP has the product line to offer the customers an option to all of these product categories. API high energy remanufactured API high energy, Plunger pump and HP-Plus.

Q2 outlook, based on major equipment lead times and the customers’ ability to prepare their field size in order to accept our modular equipment, it will be difficult to keep revenues from slipping. Production pumps, Snyder facility continues to operate a capacity in this business unit continues to take advantage of expanded capabilities in electrical controls programming, troubleshooting and insulation staff. This has provided the opportunity for increased revenue in this area.

HP-Plus continues to gain traction, midstream is strong, live projects are in excess of $80 million, our backlog is consistent at $60 million plus. This said, order placements are being delayed and customers are delaying shipments of our equipment, for this reason our outlook is great long-term, was choppy for the short-term.

An update on our acquisitions, in the first quarter of 2013 we did not complete any acquisitions. However, subsequent to the quarter closed, we completed the acquisition of National Process Equipment Inc. Natpro acquisition closed on Tuesday April 16, 2013 and we will start financial reporting in Q2 of 2013. Acquisitions completed in 2012 contributed $41.5 million in sales in Q1 of 2013. 2012 acquisitions included Mid-Continent, Aledco, Force, Pump & Power, Industrial Paramedic Services Houston, (inaudible).

Highlights from our recent Natpro acquisition include the following. Natpro is Canada’s largest national distributor of pumps, service and repairs, integrated system packages, compressors and related process equipment. The last 12 month sales on adjusted EBITDA and acquisition were $69 million and $5 million respectively. They have eight locations in Canada, six service centres, two fabrication centres and one sales office, established DXP as a leading rotating equipment provider in North America. We have a dominant number one market share. We’re excited to have Natpro as part of our DXP family. Natpro is another exciting edition to DXP in our recent growth in Canada gaining a national pump distributor in Canada is critical to our North American expansion plan. We are especially enthusiastic to now offer a complete North America offering of rotating equipment.

Since Q4 of 2011, we have completed 10 acquisitions, DXP’s acquisitions are focused on adding scale and geographic reach to our product division as well as establishing DXP’s business presence across North America. Overall, we are pleased with the acquisitions we have completed since Q4 of 2011, and we remain excited about our pipeline. We continue to see opportunities in the United States and Canada, during the reminder of 2013, we anticipate closing three additional acquisitions through the year.

In conclusion, I believe that DXP people are performing the best they can given the economic environment, battling for market share, and what I would best describe as a choppy marketplace has this challenges. I believe DXP people are up to challenge and I look forward to a rewarding year.

We’re now open for questions. Thank you

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of Matt Duncan with Stephens. Please go ahead.

Matt Duncan – Stephens Inc.

Good afternoon, guys.

Unidentified Company Representative

Hey, Matt.

Matt Duncan – Stephens Inc.

This first question I’ve got is really just about the trends that you’re seeing in the business. Can you talk, you mentioned that January was a little lower, February is down, I think it was a little better, known as sales per selling day and then maybe March was better than that, what have you seen into April, in that regard?

Unidentified Company Representative

Well, first of all, I think we had a fantastic January, by the way and especially for our January start of the year, when every company in the world is trying to get everything they can out of the previous year. So and then February was good, but it closed soft and then March was up substantially, but maybe not as substantially as we had hoped and then I would say April has been okay.

Matt Duncan – Stephens Inc.

Okay, Mac is there any way that you can quantify the impact of the timing of the Easter holiday, I know you guys take Good Friday off and that would have been one of the fewer selling that you had, this year versus last, but is there anyway to sort of quantify in dollar terms, what the timing of Easter may have done to your revenues this year versus last, and shouldn’t that be a tailwind here in April?

Mac McConnell

I mean, average sales per day were like $4.7 million for the quarter so that would be the easy math.

Matt Duncan – Stephens Inc.

But given that it was the last selling day of the quarter, would that not result and maybe it’s having a bigger impact in just the average day.

Mac McConnell

Well, if we move to the extent that people took [broadly] and thirsty they were getting ready for a long Easter holiday and as we know Easter it’s a time for family travel so, I would think it couldn’t have held.

Matt Duncan – Stephens Inc.

Okay, and then David moving onto the innovative pumping solutions business, it sounds like you are expecting a little bit of a sequential decline there again 2Q versus 1Q, is there anyway to quantify, how much you think it might be down and then it also sounds like you would expect that to bounce back in the back half of the year, it’s been that sort of a fairway to look at the shape of the year there?

Unidentified Company Representative

I think, our second quarter will be flat with our first quarter and then I were a little concerned about what the economy is doing and why the customers seems to be reluctant to release orders for projects that have been approved. And so I think we have good color on second quarter and probably most of the third quarter. It’s that we’re a little concerned going forward. So all that could change, I mean we did – last quarter we talked about an order in the shale in Alaska of the coast that’s been on hold because of permitting. We expected to get that order in the first quarter we didn’t. We got a $1 million order for some HP-Plus units we got couple million dollar order that I believe lets going into Africa or maybe somewhere. That happened long time, there is large orders that see minimum in the Gulf Coast, but they haven’t released him yet and they really thought that they would. So I think we’re a little more concerned about the reverse where business should be okay next quarter and it may or may not tail off towards the end of the year.

Matt Duncan – Stephens Inc.

Okay, but just too early to really tell. It depends on these projects that are in the holding pattern get released or not.

Unidentified Company Representative

Exactly.

Matt Duncan – Stephens Inc.

Okay. And then moving on to the Natpro acquisition, you talked about that a little bit, but I’m hoping maybe you could talk more about the strategy there. Obviously before this deal if I remember correctly through Austin and Belgium you guys only had two locations up in Canada, certainly you can add six more service centres. You’ve got a little bigger footprint, but relatively small but you can add some products to, those guys are a pump distributor, but given that you have a large safety services business in Canada, is there any plan to go in there, and add some safety products to that to Natpro footprint, to try and sell those to the customers that are, or customers of HSE and IPS up there?

David R. Little

I think no, I think the answer for that is no. I think that said, we don’t really have the logistics spot down at this point for sales, safety, supply. We have and so we are safety service company up there and so, services were sold a little different than what our super centers typically do. That said there is some really nice synergies, we are ecstatic about our Natpro is only been in the fabrication, IPS type business for the last couple of years and are still ramping up, and so we think there is best practices there, we think there is things we can do to make them more competitive with our purchasing power of valves and type and things along those lines, so we are really, really pleased with that.

And then we know that our bearing business, those in pumps and so there is opportunities along those lines, so there is some nice things that we can do to make Natpro’s gross margins go up and so we are excited about that, they are they have, we are excited about them learning to leverage their national print, footprint a little better they are from the East Coast to the West Coast and they’ve got it all covered. And there is some product lines that we can work on together us obtaining something they have and we obtaining something they have through authorization of that manufacturing, just shipping out of our territory or stuff like that. I don’t want to give anybody that impression because we’re not going to do that, but getting authorized in each others territories. So, there is plenty of opportunity within the rotating equipment division that we’re excited about.

Matt Duncan – Stephens Inc.

Okay.

David C. Vinson

We’d now go on to other products.

Matt Duncan – Stephens Inc.

Okay. And a last thing for me and I’ll hop back in queue, the SG&A cost obviously jump quite a bit sequentially you may mentioned that there is, Mac, there is a couple of things going on with healthcare cost and payroll taxes, but it also sounds like maybe there was some headcount addition, David you made the comment that you were below at 10% EBITDA margin this quarter but you are going to fix that in the 2Q, should we take that to mean that you are looking at some fixed cost reductions to help in that regard or do you think it’s really just a matter of leveraging a higher sales number?

David C. Vinson

That’s a matter of leveraging a higher sales number, I think we add the expense in sales comps after the fact, so I think we will slowdown our growth machine appropriately, but we went into thanking, we knew that the fourth quarter was soft and we knew that the first quarter was going to be soft as well what we didn’t know was really, was the softness that was coming out of the oil field and we didn’t know that the softness would be quite as severe as that ended up being. So I think our headcount, which you know, I got a number somewhere is easily up 40 people or something like, that is – its not that we’re going to cut back issues that will slowdown the growth of our headcount to be more appropriate what the economy give us.

Matt Duncan – Stephens Inc.

Okay, thanks for all the color.

Operator

Thank you. Your next question is from the line of Joe Mondillo with Sidoti & Company. Please go ahead.

Joe L. Mondillo – Sidoti & Co. LLC

Good afternoon, guys.

David R. Little

Hi, Joe.

Mac McConnell

Hi, Joe.

Joe L. Mondillo – Sidoti & Co. LLC

In terms of – I missed when you talked about the IPS profitability and margins, I was wondering if you could just go over that again and if you expect that margin to bounce back going forward?

Mac McConnell

Yeah, IPS had a couple of jobs, we made lower margins than we expected to make or that typically quote at, one of the particular reason for it and this is just one of those things that happen, so that’s unusual, so we do see margins coming back, we are not trying to cut price to get business, there is plenty of business that we just get the customer to let it release it.

Joe L. Mondillo – Sidoti & Co. LLC

Okay, sort of looking going forward are we sort of thinking maybe you high teens, but may be a little under that 20% rate that we saw in the fourth quarter?

Mac McConnell

I am trying to [rework] on my operating income number here, so I got operating income of IPS in this 20% to 19% range and I think we should there are many reasons to expect that to be lower.

Joe L. Mondillo – Sidoti & Co. LLC

Okay.

Unidentified Company Representative

And somewhere between 18.5 and 20.

Unidentified Company Representative

Back to the – and I will get close to the tone factor the 2012 operating income levels.

Joe L. Mondillo – Sidoti & Co. LLC

Okay, and just could you understand what’s going on IPS and seems like there is certainly a slowdown, what does the backlog look like at the end of the first quarter compared to the end of the fourth quarter, it is sort of flattish and that is why going forward, you sort of thinking a flat second quarter, and then hopefully, we see improvement in the back half.

Unidentified Company Representative

Yeah we I think in the fourth quarter we said, we had 60 plus backlog, and at the end of the first quarter, we saw a 60 plus backlog.

Joe L. Mondillo – Sidoti & Co. LLC

Okay and then in terms of the pieces of that business you go over a lot of different sort of pieces geographically right now. Could you talk about what sort of driving the major part of that business right now is it mostly a U.S. upstream oil and gas, and then you’re expecting that Middle East comes in, Africa comes in, the Gulf of Mexico comes in or you seeing benefits from all those pieces currently?

Unidentified Company Representative

Well the emerging markets is always part of our plan, but it’s restricted basically to the major oil companies, but customer takes us there, we’re not, we don’t have salesmen in the Mid East or anything like that. So to Chevron or shale somebody says look DXP is our preferred supplier of modular equipment and then we want them to do the work. So that we get pulled there. So it’s a matter where the major oil companies have projects that will drive those sales in those areas. So, and that’s what we call our Gulf of Mexico and offshore industry group of people headed up by Tom Atkinson and group of a people they call them engineering contractors in the major oil accounts.

The on land stuff is really done mostly by our service centers and the pump salesman they have in those areas and that’s driven by these shale plays and the infrastructure, it’s not drilling, we’re not typically on the drilling side, we’re on the production side. So, we’re on the small gathering facility in a field or a bigger gathering facility or a terminal or something like that and that’s mostly described is midstream and that infrastructure is very solid, even though drilling rig count has been down, it’s been down for a while.

The infrastructure backlog is still there and the companies are having trouble, because a lot of these plays are in places they don’t have big populations, so and it’s certainly of technical people, so there is kind of this backlog of building this infrastructure. So, we’re referring to the fact that the production facility is on the drawing board and it hasn’t been started, because there about behind on their site preparation. And so, they are delaying our shipments to those projects, but that’s going to be strong for quite a long time.

Joe L. Mondillo – Sidoti & Co. LLC

Okay. So, even if we don’t see a rebound in drilling or the rig count, you still expect at least a year out of strength in that infrastructure part of the of the market?

David R. Little

Yes, more than a year actually, yes.

Joe L. Mondillo – Sidoti & Co. LLC

Okay.

David R. Little

And by the way, I mean, somewhat they still on the fact, I said drilling down, I mean, so its down from 2,000 rigs to 1,700 rigs, there is still 1,700 rigs punched holes out there, so it’s not like the business, it’s not like they’re not building new fields or developing new fields, they are, it’s just that of slower pace than it was a year and half ago or two years ago.

Joe L. Mondillo – Sidoti & Co. LLC

Okay, and then just to jump on the SG&A just one last time, as a percent of sales is obviously going up last few quarters, and it seems like you are sort of working, I mean, service centers, organic growth is sort of flat to down this past quarter, IPS seems like it’s going to be flat into the second quarter, it doesn’t seem like we’re going to see the volume improvement substantially anyways until at least sort of the back half of the year. So are we expecting sort of that SG&A as a percent of sales to not sort of tick down until that back after the year.

Mac McConnell

I think what we said was we had some unusually high items that we hope will not reoccur and that was in healthcare, payroll taxes and high growth rate of our payroll. So…

Joe L. Mondillo – Sidoti & Co. LLC

But if your headcount is flat when those costs still remain?

David R. Little

Yes it will, yes and no, I mean we don’t – the healthcare is claim, so I mean, it’s actually…

Mac McConnell

Yeah, I mean the claims between first quarter and increase from the fourth quarter by 76%, and we didn’t miss out any more people.

Joe L. Mondillo – Sidoti & Co. LLC

Okay.

David R. Little

We’re self insured, so w are paying the claims.

Joe L. Mondillo – Sidoti & Co. LLC

Okay, okay.

David R. Little

And so that’s way it’s not like where we got a insurance policy over here and it’s just per person kind of deal.

Mac McConnell

And the payroll taxes compared to a year ago went up substantially as compared to the fourth quarter, it’s normal there are a lot payroll taxes that are based on lower dollars of income and they go down as you go through the year.

Joe L. Mondillo – Sidoti & Co. LLC

Okay got you, so that sort of $3 million may become maybe cut in half or

David R. Little

I hope so

Joe L. Mondillo – Sidoti & Co. LLC

Okay.

Mac McConnell

Yes, we certainly hope so.

Joe L. Mondillo – Sidoti & Co. LLC

Okay, I’ll hop back in queue, thanks a lot guys.

David R. Little

Bye.

Operator

(Operator Instructions) And our next question is from the line of Holden Lewis with BB&T. Please go ahead.

Holden Lewis – BB&T Capital Markets

Thank you. Good afternoon.

David R. Little

Hi, Hold.

Holden Lewis – BB&T Capital Markets

The gross margin tough quarter of this gross margin did very, very well, yeah I guess you kind of slide in perhaps a little bit of mix, I thought maybe give a little color, Jerzy acquisition there is something else kind of in the mix that we should be aware of, but I was also curious about the pricing software, it seems like that receive some credit for margin improvement in Q4, but you didn’t really state it in Q1, and I’m curious if its, how sustainable this 30.5 to 31 gross margin is, it might trend lower going forward.

David R. Little

Yeah. I’ll start with answering some of it, I mean our margin was higher in the fourth quarter also, and that somewhat coming form the acquisitions that have occurred during 2012, and then addition in Q1 we found that our safety service businesses that we bought in Canada, they’re selling labor and selling equipment rental. And so, when their revenues go up which they did in the first quarter compared to the fourth quarter, their gross profit margin also goes up. And so, some of that if, since the first quarter is their best, it can be their best quarter. There could be a seasonal factor to gross profit that we haven’t experience before. And so, if their sales were to go down in the second quarter with the spring thaw, then their gross profit margin also would be expect to go down with it.

And then lastly, I’ll speak to P2. Our compliance to P2 is up over last three quarters, our improvement is almost 1% a quarter. But we have to discount that and only 10% to 15% of our business at this point is being run through P2. So, our next phase is to get a bigger chunk of our business. But we’re just now attacking sort of the smaller accounts in the (inaudible).

Holden Lewis – BB&T Capital Markets

So, when you say it has improved to 100 basis points, you’re talking about your margins on that 10% to 15% throughout the 100 basis points or company wide, they’re up a 100 basis points because of?

David C. Vinson

No, 100 basis points of that 10% to 15%.

Holden Lewis – BB&T Capital Markets

For that 10% to 15%, okay. It’s really only getting, okay.

David C. Vinson

Yeah, we’re only getting, yeah, like 15 basis points though.

Holden Lewis – BB&T Capital Markets

All right.

David C. Vinson

…overall margin enhancement.

Holden Lewis – BB&T Capital Markets

So, that gross margin is probably seasonally inflated, do you have a sense of where that goes, sort of in the – sort of balance of the year, as you are getting better feel for steady in business, give a sense of where that goes for the rest of the year?

Unidentified Company Representative

Well actually like 30%, I can’t promise. There is always just my target, forever in fact, this year it’s going to go down a little bit because of the safety services, there is no question about it.

Holden Lewis – BB&T Capital Markets

Got it. And those safety services are in the MRO business, I mean traditionally you have seen the MRO margin increased from Q1 to Q2, but I guess that typical pattern might, might not occur here?

Unidentified Company Representative

I want to give you, the magnitude of that – let’s say HSE and the Paramedic business up here will have, that’s $125 million worth of MRO business on a yearly basis, so we are talking about a quarter where it goes down. So I think you’ve got to take some percentage of that, so let’s say, it goes down a couple of percentage points, so and the quarter of that would be.

Unidentified Company Representative

50-50 business I think.

Unidentified Company Representative

Yeah, its not just a killer, we are talking about.

Holden Lewis – BB&T Capital Markets

Got it, okay. And then you touched on some nice sort of boundaries around Natpro, what was the accretion that you are expecting in 2013?

Unidentified Company Representative

It’s like $0.01 a quarter, at macros it depends what we do with it, if we can get all these synergies expand our pump business then we’ll get more, but right now it’s sort of that stuff.

David C. Vinson

We don’t limit it, it’s about a penny a quarter or $0.03 to $0.05.

Holden Lewis – BB&T Capital Markets

Okay. All right, fair enough. And then yeah, I guess that’s all I have. Thanks guys.

David C. Vinson

Thank you Holden.

Mac McConnell

Matt?

Operator

Our next question is from a follow up from the line of Matt Duncan with Stephens, please go ahead.

Matt Duncan – Stephens Inc

Is there anyway to quantify the Mac you gave us the acquired sales number in the quarter, do you know how much they added altogether to earnings in the quarter?

Mac McConnell

Okay.

Matt Duncan – Stephens Inc

Just sort of what the collective EPS accretion would be?

Mac McConnell

Okay, yeah, I’ve got that, I want to find it.

Matt Duncan – Stephens Inc

While you are at that David, maybe if you can, you said that you expect to close probably three more deals here in 2013, most of the ones you’ve been doing more recently have been anywhere from sort of call it $6 million to $8 million of revenue year all the way up to the HSD deal which was a little bit bigger than usual, but the sweet spot seems to be kind of $10 million in sales to call it $50 million or all three of those probably going to fall in that type of size range? Are there any bigger ones in there?

Mac McConnell

$10 million to $15 million.

Matt Duncan – Stephens Inc

$10 million to $15 million in annual revenues each?

Mac McConnell

Yeah.

Matt Duncan – Stephens Inc

Okay. So, these are smaller transaction that’s you are looking at right now.

David R. Little

Right. And then back to the EPS accretion.

Unidentified Company Representative

Well I give you this is my math include interest on the acquisitions, and increased amortization of interest in our debt issuance cost that came because of the acquisitions.

Matt Duncan – Stephens Inc

Sure.

Unidentified Company Representative.

And other things during the quarter they added a $1.9 million of somewhere between $1.8 million to $1.9 million of pretax income.

Matt Duncan – Stephens Inc

Of pretax okay, okay. And the same tax rate, I would assume would apply to those that are applied in the rest of this business.

Unidentified Company Representative

Yeah. Yes, because it’s the matter of U.S. and Canada normally.

Matt Duncan – Stephens Inc

Okay. So that looks it’s about a combined $0.08 of EPS accretion okay. Thanks.

Operator

Thank you, ladies and gentlemen. There are no further questions at this time. That does conclude our conference for today. Thank you very much for your participation and at this time, you may now disconnect. Have a great day.

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DXP Enterprises (DXPE): Q1 EPS of $0.87 misses by $0.08. Revenue of $290.1M (+15% Y/Y) misses by $24.17M. (PR)