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DXP Enterprises Inc. (NASDAQ:DXPE)

Q3 2010 Earnings Call

November 1, 2010 5:00 PM ET

Executives

Mac McConnell – Senior Vice President, Finance and CFO

David Little – Chief Executive Officer

Analysts

Matt Duncan – Stephens Capital Management

Joseph Mondillo – Sidoti & Company

John Cooper – BB&T Capital Markets

Operator

Good afternoon, ladies and gentlemen. Thank you for standing-by. Welcome to DXP Enterprises Inc. Third Quarter 2010 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 question. (Operator Instructions)

At this time, I’d like to turn the conference over to Mac McConnell, Senior Vice President of Finance and Chief Financial Officer. Please go ahead, sir.

Mac McConnell

Thank you. This is Mac McConnell, CFO of DXP. Good evening and thank you for joining us. Welcome to DXP's third quarter 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.

I will begin with a summary of DXP's third quarter 2010 results. David Little will share his thoughts regarding the quarter's results, then we will be happy to answer questions.

Sales for the third quarter increased 20.1% to $172.2 million from the third quarter of 2009. After excluding Quadna sales of $14.5 million, sales for the third quarter increased 10%.

Sales for Supply Chain Services decreased 5.2% to $31.9 million compared to $33.7 million for the 2009 third quarter. Sales of Innovative Pumping Solutions products increased 59.8% to $22.6 million compared to $14.1 million for the 2009 third quarter. After excluding Quadna, IPS sales of $6.8 million, IPS sales for the third quarter of 2010 increased 11.5% from the third quarter of 2009.

Sales of MRO products by our service centers increased 23.1% to $117.7 million compared to $95.6 million of sales for the third quarter of 2009. After excluding the Quadna, MRO sales of $7.7 million, MRO sales for the third quarter of 2010 increased 15.1% from the third quarter of 2009.

When compared to the second quarter of 2010, sales for the third quarter of 2010 increased 3%. Third quarter 2010 sales for Supply Chain Services increased 1.5% compared to the second quarter of 2010. Third quarter 2010 sales of Innovative Pumping Solutions products increased 20.4% compared to the second quarter of 2010.

Third quarter 2010 sales of MRO products by our service centers increased six tenths of 1% compared to the second quarter of 2010. Sales for the first nine months of 2010 increased 9.2% to $486.5 million from the first nine months of 2009. After excluding Quadna sales of $27.9 million, sales for the first nine months of 2010 increased $13.2 million or 3% from the first nine months of 2009.

Sales for Supply Chain Services decreased 7.9% to $94.8 million compared to the 2009 first nine months sales of $103 million. Sales of Innovative Pumping Solutions products increased 21.9% to $53.6 million compared to 2009 first nine months sales of $44 million. After excluding Quadna IPS sales of $13.1 million, IPS sales for the first nine months of 2010 decreased 8% from the first nine months of 2009.

Sales of MRO products by our service centers increased 13.3% to $338.1 million compared to $298.5 million of sales for the first nine months of 2009. Sales of MRO products -- after excluding Quadna MRO sales of $14.8 million, MRO sales for the first nine months of 2010 increased 8.3% from the first nine months of 2009.

Gross profit for the third quarter of 2010 increased 19.9% from the third quarter of 2009 compared to the 20.1% increase in sales. Gross profit as a percentage of sales was 28.4% for the third quarter of 2010 and the third quarter of 2009. Gross profit as a percentage of sales for the third quarter of 2010 decreased to 28.4% from 28.6% for the second quarter of 2010.

Gross profit for the first nine months of 2010 increased 8.2% from the first nine months of 2009 compared to the 9.2% increase in sales. Gross profit as a percentage of sales decreased to 28.5% from 28.8% in the first -- 2009's first nine months. This decrease in the gross profit percent is primarily the result of the effect of the economy and product mix.

SG&A for the third quarter of 2010 increased $3.6 million or 10.2% from the third quarter of 2009 compared to the 20.1% sales increase. This increase is primarily the result of $2.7 million of SG&A expenses associated with Quadna. As a percentage of sales, SG&A decreased to 22.5% from 24.5% for the third quarter of 2009.

For the first nine months of 2010, SG&A increased $1.9 million or 1.7% compared to the 9.2% sales increase. This increase is primarily the result of the $5.3 million of Quadna SG&A in 2010 as a percentage of sales, SG&A decreased to 22.3% from 24.9% for the first nine months of 2009. SG&A for the first nine months of 2010 as a percentage of sales declined primarily as a result of headcount reduction implemented in the second half of 2009.

Interest expense for the third quarter of 2010 increased 15.7% from the third quarter of 2009 primarily as a result of increased interest rates. On March 15, 2010, we amended our credit facility. This amended -- this amendment significantly increased the interest rates and commitment fees applicable at various leverage ratios from the levels in effect before March 15, 2010. The amendment increased the cost of funds borrowed under our credit facility by approximately 200 basis points beginning on March 16, 2010.

The purchase price for the acquisition of the assets of Quadna on April 1, 2010 included approximately $11 million cash, $700,000 of cash acquisition expenses and $10 million in the form of convertible promissory notes bearing interest at the rate of 10%.

On April 9, 2010, $4.5 million principal amount of the convertible promissory notes were converted to common stock. On August 18, $3.7 million of the convertible promissory notes were paid using funds obtained from DXP’s credit facility and $1.8 million of the convertible promissory notes were converted to DXP common stock, meaning all o the $10 million of the convertible notes are now gone.

Despite the remaining $15 million of debt incurred with the acquisition of Quadna, total long-term debt decreased approximately $6.1 million during 2010 to $109.4 million from $115.5 million at December 31, 2009.

During the third quarter of 2010, total long-term debt declined $2.4 million from $111.8 million at June 30, 2010. $1.8million of the third quarter decline in total long-term debt resulted from the conversion of notes to common stock on August 18, 2010.

During the third quarter of 2010, the amount to be available under our credit facility increased approximately $1 million to approximately $51.5 million. Capital expenditures were approximately $500,000 for the quarter and $900,000 for the nine months.

Cash on the balance sheet at September 30th was $1.2 million. Accounts receivable and inventory were $98.8 million and $70.9 million respectively at September 30, 2010. I'm happy to report that the tone of our business has continued to improve from 2009.

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

David Little

Thanks, Mac and thanks to all of the participants on the call today. I would also like to thank all our DXP people for their continued efforts and execution of our sales and operational strategies to be customer driven and also would like to thank our customers who value our expertise at providing customer-driven solutions that helps make them more profitable.

Our focus continues to be on operational excellent programs and consolidation of the administrative functions for cost savings, process improvements, reducing working capital requirements as well as decentralizing customer service to capitalize on growth opportunities by being experts at customer-driven solutions.

Our management team for DXP service centers, Supply Chain Services and Innovative Pumping Solutions continue to be focused on growing sales, improving EBITDA margins, creating super centers, operational excellence and being experts at customer-driven solutions.

DXP service center segment, despite shortages in capital expansion projects, our DXP service center segment emerged from a positive Q3 and continues with an optimistic outlook for Q4. Our service center segment will continue to focus on creating super centers, value added repair services and a regional distribution center opportunity.

Several markets have improved, such as oil and gas, oil and gas terminals, chemical manufacturing, mining of gold, platinum, uranium and copper, food and beverage, car manufacturing, grain handling. Conversely, oil and gas production and completion, fabrication and our aggregate markets remain slow. DXP continues to invest in people, operations and sales.

All DXP acquisitions and business units combine to provide optimum expertise of market coverage, that means customer-driven solutions for our customers. DXP's whole is greater than the sum of its parts, which results in greater expertise across various markets. This enables us to take market share away from the competition and allows for maximized business opportunities and expanded service areas nationally.

Our Q4 MROP growth plans include expanding the Southeastern area of the United States through new service center operations. Our new region will improve our access in Georgia and will create new markets in Alabama, South Carolina and Florida.

This will allow for DXP's customer-driven solutions to reach previously under served industries in the Southeastern United States such as poultry, mining, lumber, pulp and paper, OEM and general manufacturing. The expansion is the result of a successful recruitment of an experienced regional management team, local professionals with industry expertise and close customer relationships.

Our south Atlantic region is being engineered around extensive site selection, service center openings, vendor partnerships designed to ensure that the total DXP value proposition including supply chain solutions reaches these new markets. This increased coverage in addition to moderate growth within these industries sets the stage for significant opportunity for our organic sales growth in Q4 and beyond.

As DXP continues to expand its service capabilities from a local statewide level to a national one, the president of DXP super centers will grow. During 2010 and beyond, DXP will continue to invest in super centers. We're pleased to report that our south central, regional management team has successfully upgraded our Dallas service center to super center status in Q3.

This conversion marks the fourth super center in that region. The end of the Q4 2010 will allow for opening of one additional DXP super center with more completion scheduled for Q1 and Q2 of 2011.

We presently now have 24 super centers, 12 under construction and we had 113 service centers, which we consolidated three of these stores into existing service centers so we presently have 110 service centers. We will be adding two service centers in Tampa, Florida and Macon, Georgia in the fourth quarter.

Supply Chain Services, we had a modest increase in revenues during Q3 when compared to Q2. We implemented two on-site stores for Dallas in fluid power technologies. Q4, we currently under weighs the implementation of two on-site store solutions Revlon and Standard Register. Q4, one new on-site procurement model is also scheduled for completion with Monaco Coach.

We are currently renegotiating a few agreements where our expectations were too high and we’ve been successful in doing that. We also feel that we’re going to have some potential pre-sites, we’re going to have potential labor strikes and Q4 has a number of reduced days because of the holidays. But we feel like, overall, we expect the added revenue brought in from new sites to offset the potential negative financial impact of unforeseen strikes and reduced number of days in Q4. We are protecting a flat fourth quarter and are optimistic that new revenues will begin to positively impact Q1 of 2011.

Our increased revenue strategy includes four points. Leverage existing account relationships, utilizing the number of service center professionals and their relationships. We use our service centers to bring us leads, customer referrals, utilize our supplier relationship and their potential candidates.

We have hired a very experienced BP of business development and he was the founder of precision supply chain program, was added to our team to help accomplish these core strategies.

Operationally, we're focused on operational excellence plan. This brings us the mentality of making sure we do a day's work in a day, continuing to be a driving force, expect to see company-wide improvement on programs further developed, ensuring we meet customer expectations, meeting contractual commitments, allows for the execution of our four strategies by demonstrating our commitment with measurable results and the performance of KPIs.

We've also successfully implemented supply chain solutions power program in three locations. This is where we serviced and track, repair warranties. We increase revenue by capturing all of the service from our repair business from rotating equipment being tracked. We increase margins from a service proposition and we pass along cost savings to our customers.

Innovative Pumping Solutions. Innovative Pumping Solutions is doing much better and from a market prospective, we contribute this mostly to the fact that we have higher oil prices. Onshore is doing really well. Offshore is doing okay based on smaller stuff and services.

The moratorium as we all know has been lifted. We also know that we can't get any drilling permits because of the regulations around safety has not been written yet. We do see that activity offshore is in the planning stages and people are wanting to produce more. So there is activity.

Our HP-Plus is continuing to make positive results and IPS is positive about the rest of this year and we see improvements in 2011. DXP is in a growth mode. We’re hiring new talent, we’re opening new stores, we’re expanding our SCS sales expertise, we're planning a new distribution center in Atlanta to support the east coast.

Capital projects and the oil & gas are increasing. We're taking market share away from the mom and pops who have had to cut back while we were investing. We are back on the acquisition trail. We feel that market is improving slightly but a slight increase in the top line normally gives us the 5% increase on the bottom line. The very important point. So just give me a little growth.

Again, thanks for listening today. Thanks for everybody on the call. We are now open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Matt Duncan with Stephens Capitals Management. Please go ahead.

Matt Duncan – Stephens Capitals Management

Good afternoon, guys.

David Little

Hey, Matt.

Matt Duncan – Stephens Capitals Management

The first question I've got for you, David, I want to talk a little bit more about the southeast expansion. So what product type will this be based around, more bearings and PTs, more pops. What's the sort of product that you're going to enter that market with?

David Little

It's going to be the talent that we acquired has got a very strong bearing in power transmission background. But it's our intent to include industrial supplies and some ancillary pump products.

Matt Duncan – Stephens Capitals Management

Okay. And then, do you know what the cost would be in the fourth quarter of adding these two locations?

David Little

Well, we're going to -- actually there is a business plan and I do not know that. I do know they've already sold $1 million worth of products so far. So I'm pretty positive about the fact that our costs versus profit equation won't last very long.

We're really excited about these people. And there is a plan and I just -- I can't remember what those numbers are, but to give you a whole scope of the plan, we're adding -- we're actually taking a old precision location in Atlanta and we're combining that with some new talent and a new location along with the location in Macon, Georgia and Tampa, Florida.

And we're also going to be adding somewhere close to 50,000 square feet of regional distribution space. Our east coast folks have suffered from not having a really good supply channel to them, to their customers. And so we're pretty excited about the expansion and we're already seeing some positive results but at this point all we have really done is hired about eight people.

Matt Duncan – Stephens Capitals Management

But David, the state that you have got to set aside to be the regional BP, you said it’s about 50,000 square feet to start. Is it going to be easily expandable as you continue to build out the foot print in the southeast?

David Little

Yeah. There's more -- it’s a good time to be leasing space. Let's just put it that way. Atlanta has pretty much got a gluten of space. They overbuilt pretty bad and so the rates are a lot cheaper and there's plenty of space. It's in a building that's 200,000 or 300,000 square feet.

Matt Duncan – Stephens Capitals Management

Okay.

David Little

But I will say, just to discuss this because I think it's an interesting point about our strategy, is when we look at the map and we get with UPS and we look at ground as a way of moving product around because a lot of stuff we have is heavy. We really think we're going to be better suited to having eight to nine 50,000 square feet facilities located across the United States then having four 200,000 or 300,000 square foot facilities.

So that's our thinking right now and our thinking is that Houston's, okay, that Omaha is a good location, Atlanta has popped up, if you would -- if you want to be in Atlanta, so we're not going to build any of these things based on where we would -- where they might service the most of our existing customers. We're going to build them in a place where they help us serve the whole United States geography.

Matt Duncan – Stephens Capitals Management

I know it's probably still early to have a finalized plan for 2011 but with this philosophy of adding square footage in 2011, do you have any idea of what your CapEx needs may be next year?

David Little

They'll be -- again, we rent the building. So we're not going to buy any buildings. And the equipment associated will be probably in the $2 million to $3 million range which -- that's kind of doubling what we normally do.

Matt Duncan – Stephens Capitals Management

Okay. By shifting gears for a second looking over at innovative pumping solution, this is the first quarter since 3Q '08 if I'm looking at this correctly that you guys have had organic growth there. It sounds like it's probably more land driven as opposed to offshore, would that be fair?

David Little

That's fair.

Matt Duncan – Stephens Capitals Management

I mean, do you think you can continue putting up sequentially growth off of this number or was there any thing of size in this quarter that helped or this may be a new base line for that segment to grow off of?

David Little

We're not -- by nature, you've been around as long as me. That seems like us, but anyway, back to the point is we did have offshore. We're likely to have a $5 million to $12 million job. Onshore, you don't see those jobs to begin with and so and then offshore because of the moratorium, there's more repair work and enhancement work being done. We're doing stuff offshore but we just don't see any big projects.

Even 2011 what we see coming, I think I looked at a whole list of iffy jobs or more. And there wasn’t’ any of them that were really much bigger than $2.5 million. So we're just not seeing the big, big stuff that's out there but there's a lot of small stuff so to answer your first question is, yeah, we think this is a baseline. I think we could build off of this.

We're real excited about the onshore activity. The acquisition of Quadna, what it brings to the onshore activity plus what we're already doing and then if onshore -- offshore comes back in a bigger way quicker than we think than that would be another plus.

Matt Duncan – Stephens Capitals Management

Okay. And on the super center side, you said you guys had added one this quarter, sounded like that was Dallas that converted over. How long has that particular location sort of been under construction? And do you feel like you're starting to get more attraction with this super center conversion process and a recovering economy and maybe we could see -- I know you said one is how many you converted in the 3Q, one more in the 4Q and that bump up to maybe two or three locations a quarter next year?

David Little

Well, am I going to have a slight improvement or a big improvement in the economy would be my question, because I think your question is unfair, because I think its probably been at least 18 months since Dallas started down the path, they are trying to be a SuperCenter and it became a SuperCenter, I just like that was unfair to ask a question on the fact we just came off over recession.

So, again we will build these things quicker, if the economy is giving us something if we are having to just fight it out and take market share away from all the modern pops that’s going to be a, we can do that. And we’ve proven that we can do that but that’s a slower process.

Matt Duncan – Stephens Capital Management

I obviously understand the economy made it difficult to conversion of locations over. So, it sound likes the people that you needed has been there for a while, they just needed a healthier economy to make the kind of progress they were looking for.

David Little

True.

Matt Duncan – Stephens Capital Management

Okay. I think the last thing I’ve got and I’ll jump back in queue is on the acquisition front. Sounds like you guys maybe have some things in your side, which you mentioned that you’re seeing some things out there right now, if I am doing my math right your leverage ratio is down to 2.6 times on trailing EBITDA at this point.

So do you feel like you got the ability to go do what you want to do from an acquisition perspective at this point and are other things out there that are interesting, you maybe getting close too?

David Little

Yeah. On all those questions but I will explain more, we have -- we’re being pretty tough about trying to structure these deals where we actually do get him to take a little bit of stock and a little bit kind of normally talk and maybe 20% to 50% of the price in terms of taking our stock. It accomplishes than I’ve kind of gotten away from earn outs, earn outs have been a pain and they’ve held me back and they’re tough on integration and stuff like that.

Especially, when you’re hiring somebody that’s going to stay on, I want them -- they have some skin in the gain. And so that’s kind of the structure that we’re kind of looking at now or it’s cash, it’s a bank debt along with the stock. And they were only paying four, five times EBITDA.

So subsequently the bank is pretty happy to loan us some more money, especially if there are only we’re something under the 2.5% thresholds. So it’s kind of a -- it’s a combination that’s working for us right now and people are thinking that DXP is sort of stock price was at low point. And then it’s going to go bigger and better and all that kind of good stuff. So we have a lot of interest.

Matt Duncan – Stephens Capital Management

Okay. And I assume that there is probably a smaller acquisition target maybe revenue is below 50 million, it’s going to be willing to take stock, is that probably fair?

David Little

Yeah. I know that’s a really good point, Matt, exactly that, yeah if we had to go out and through we’re going to buy a much, much larger company owned by an investment banking borrower some like that, they’re not going to want DXP stock. And so, we would have to go out and raise the equity, but we’re not looking at those right now. What we are looking at is like you said something under 50 million.

Matt Duncan – Stephens Capital Management

Okay. Thanks David. Appreciate it. Nice quarter.

David Little

Thank you.

Operator

Thank you. (Operator Instructions) Next question is from the line of Joe Mondillo with Sidoti & Company. Please go ahead.

Joseph Mondillo – Sidoti & Company

Good afternoon guys.

David Little

Hi Joe.

Mac McConnell

Hi Joe.

Joseph Mondillo – Sidoti & Company

First question, in David I believe prepared remarks he mentioned sort of an outlook for the fourth quarter saying that you’re expecting a flat fourth quarter, is that on an EPS basis?

David Little

I was actually making that comment as it related to Supply Chain Services, which was roughly 20% of our business. And so actually we feel like that the service center segment in the IPS, the IPS will probably be flat also, its 10% of our business.

There are some things that could make that better, but we’re not accounting of them and but the service center side of the business, our guys are projecting that it should be up slightly. So, if everybody is flat and they’re up will then both the top-line and the bottom line should be up.

Joseph Mondillo – Sidoti & Company

Okay. Next question I just wanted to address was on the gross margin side of the business, what is your historical relationship with your vendors in terms of rebates, how is that trended recently and should we expect any benefits because you should be getting rebates on service center side of the business?

David Little

Well Mac, you want to...

Mac McConnell

I’ll do it. Now again part of it is rate – rebate, the bigger share of rebates only come from bearings and bearings are 30 – 30 or so percent of our business. So, it may not be a big of a factor compared to another competitor that’s primarily bearings and PT distributor. We accrue an estimate of rebates, so there shouldn’t necessarily be a – in our fourth quarter or something jump because we got rebates.

David Little

Okay. Lastly well – lastly I would say though that we are performing pretty well and so it’s not going to be – we are not going to be buying ahead or doing anything crazy just to get a few rebates. We feel like most of them that we are going to meet the criteria to get our normal rebates.

Joseph Mondillo – Sidoti & Company

Okay. On IPS side, I know you spoke to briefly or somewhat on – could you just address what kind of backlog you have there and how that has trended from I guess the second quarter or the third quarter?

David Little

Yeah its -- its not anything well, but its trending up then we don’t normally give back what numbers, but its – but our backlogs is up.

Joseph Mondillo – Sidoti & Company

Okay. So your orders are improving on that side of the business?

David Little

I think, yeah.

Joseph Mondillo – Sidoti & Company

Okay. And then just in terms of the expansion on the service center side of the business, when was the last time you opened new service centers?

David Little

We opened a – all before – well, maybe some during 2008, before we knew that the world was coming to an end, was -- we opened up Minot a little before that when the shale play and….

Mac McConnell

Masport.

David Little

I don’t know we opened up very successfully.

Joseph Mondillo – Sidoti & Company

So the last time was like 2008.

David Little

It’s actually unusual that we opened new locations.

Joseph Mondillo – Sidoti & Company

It is.

David Little

In 10 years, we probably haven’t opened five new locations.

Joseph Mondillo – Sidoti & Company

Okay.

David Little

Yeah.

Joseph Mondillo – Sidoti & Company

And you spoke to the fact that you are expecting to continue to open some in 2011, do you have a certain number out there that you’re looking at?

Mac McConnell

To fully develop what we would like to do and – what we’ll call the Southeast, it would be a total of six to eight stores.

Joseph Mondillo – Sidoti & Company

Okay.

Mac McConnell

We will open it in more – in essence opening up 2.5 for enhancing more than...

Joseph Mondillo – Sidoti & Company

Okay. And per service center just estimate how much does it cost to open up one service center?

David Little

Well, it’s not that expensive from a capital point of view. We’re going to put up $150,000 on forklifts and trucks and excess. So a couple of hundred thousand dollars from a capital point of view. The real expense is people and so to me it’s a function of that we put in several hundred thousand dollars worth of people and how fast that they start producing income that offset that expense and when we did again than I won’t say Grand Prairie, but that is small. But it made money in...

Mac McConnell

Cleburne.

David Little

Cleburne.

Mac McConnell

Yeah. Cleburne, right. Cleburne made money in four months, but it was an all patch play. It was a lot of activity our customers wanted us to be there. It was very exciting. Minot, to 12 months so its just and it can depend.

Joseph Mondillo – Sidoti & Company

Okay. So few hundred thousand upfront cost and then the labor.

David Little

Right.

Joseph Mondillo – Sidoti & Company

Okay. And then Mac, could you just give me the operating cash flow and CapEx for the quarter, if you have that?

Mac McConnell

I can give you the CapEx. CapEx was $500,000 for the quarter and our operating cash flow, you’re talking about EBITDA or?

Joseph Mondillo – Sidoti & Company

I’m sorry. Yeah. EBITDA is fine.

Mac McConnell

Okay.

Joseph Mondillo – Sidoti & Company

Actually, I think that was in the press release, if you don’t have the full operating cash flow with the working cash flow, working capital?

Mac McConnell

We haven’t filed our 10-Q. We didn’t disclose it for that.

Joseph Mondillo – Sidoti & Company

Okay. That’s fine.

Mac McConnell

They were somewhat being reduced, so if I gave you the number I have today if possible that could change if I don’t expect it.

Joseph Mondillo – Sidoti & Company

Okay. Sure. All right. I think that’s about it. Thanks a lot.

David Little

Thank you.

Operator

Thank you. Our next question is from the line of Holden Lewis with BB&T Capital Markets. Please go ahead.

John Cooper– BB&T Capital Markets

Thank you. Good afternoon. This is John Cooper on for Holden. Just kind of looking a little bit at the SCS segment, I know you guys kind of had mentioned that you’re renegotiating your agreements and something like that and it doesn’t really look like there is too much progress going on there. Are we kind of losing some business there or how is kind of the visibility looking there and what are you kind of expecting that tick up in improve?

David Little

I think -- we had a management chain in Supply Chain Services. So, first thing that John Jeffery did who has been with DXP for a long time was to go out and visit all the customers, review all the contracts and look at – and have frank discussions about where we were performing, where we weren’t performing. If we weren’t performing was it because the expectations were too high, etcetera and so we – we haven’t lost any business and our first goal is to make profit, to do everything possible not to lose any business. So that’s been transpiring.

Then at the same time we have a – we’ve hired a new guy but we have three other existing outside sales guys that are out being discrete trying to come up with deals, not to mention that the old philosophy of Supply Chain Services was that, we didn’t want the service center people involved.

The new philosophy is we do want them involved and we want, we especially want their – as on here is the street telling us look X, Y, Z customers looking at a different supply chain solution and we want to hear about it. Because, in the past if you’re going to include that guy, will they need didn’t tell you about it, because he was going to lose some business supply.

So we’re trying to get the tunnel full. We have with new implementations. We have some implementation come in. We’ve been winning a few contracts here lately. And so I think the business needed to have a turnaround first and I think that sort of happened and I think we’re – I think everybody is on the same team or by their own same page and their and they’re pretty fired-up about what they can do.

John Cooper– BB&T Capital Markets

Okay. So basically you kind of going to transition now and I mean is like 2011, Q1 2011 kind of like the base point where everything seems to be shifted right and you’ve got things in the right direction?

David Little

I think we’re already in the right direction. And I think we’ve already hit our base line, I think – I think it’s we’re expecting things to go-forward and I think we would have felt that in that fourth quarter had it not been for possibility of three strikes. And the fact that it’s just – its just a holiday season than a lot of these manufactures kind of will shutdown and clean things up and they’ll introduce things that this typically aren’t good for that business.

John Cooper– BB&T Capital Markets

Right. And are there any I guess dates or benchmarks to look at for these potential strikes?

David Little

No. Just – just that they’re supposed to happen in the fourth quarter.

John Cooper– BB&T Capital Markets

Okay.

John Cooper– BB&T Capital Markets

And is there – and like have a duration or anything like that as far as setting down there anything?

David Little

Yeah. You got a better crystal ball than I do.

John Cooper– BB&T Capital Markets

Sure.

David Little

I don’t know how most of the things work.

John Cooper– BB&T Capital Markets

All right. And then just kind of on IPS a little bit, it looks like typically IPS is seen Q4 up sequentially from Q3, it’s kind of where we’ve seen over the last couple of years anyway beside last year obviously and it looks like a majority of the increase in Q3 was more of the acquired revenues, is there any reason to suspect that we’re not going to see that typical seasonal bump up again in Q4?

Mac McConnell

IPS second quarter to second -- third quarter to second question, our sales grew 20% that had acquired revenues or in there for both periods.

John Cooper– BB&T Capital Markets

Right. Moving from Q3 into Q4, typically Q4 is been – generally been stronger than Q3 and I guess you said you’re kind of looking at it to be flattish. Is there any reason to not think that it could be – could improve off of Q3?

Mac McConnell

We’ll, there is certainly – there is really no reason I know for Q4 to be better than Q3. It used to be that it was better, because we went on to percentage completion and so we had this completed contract thing and we would and everybody would want to get it shipped and done before the end of the year.

And so our fourth quarter would be bigger for leverage, but we’ve been on percentage completion out for at least a couple of years. So, I am not -- there really isn’t any real reason that Q4 should be lower or higher.

John Cooper– BB&T Capital Markets

Okay.

Mac McConnell

Not from a market perspective.

John Cooper– BB&T Capital Markets

All right. Okay. I think that’s all I’ve got for now. I’ll jump back in queue. Thanks, guys.

Mac McConnell

All right. Thank you.

Operator

Thank you. Our next question is a follow-up from the line of Matt Duncan, Stephens Capital Management. Please go ahead.

Matt Duncan – Stephens Capital Management

Hey, guys. I just want to clarify something, David what you were saying about the fourth quarter on sales and earnings being up sequentially, you went through the three different pieces. I understand the revenue side, I just want to make sure on the earnings side that you are accounting for the extra cost associated with the people you brought on board in the Southeast. Taking that into account you would still think there were slight sales improvement at the service centers, would earnings still be up?

David Little

Yeah.

Matt Duncan – Stephens Capital Management

Okay. So, you guys are looking for a little bit of margin improvement on the base business in the 4Q then?

David Little

Well, I am really looking for selling expense to go a little bit on dollars, but I would expect that might go down a little bit as a percent.

Matt Duncan – Stephens Capital Management

Okay. Okay. I just want to make sure I have that right. And then I guess the last thing and I think you’ve talked about this a little bit but in terms of sort of the hand you’re being dealt currently by the economy, it sounds like you’re continuing to see underlying improvement in your business. And I would guess at this point at inventory restocking is largely over so you’re probably seeing true demand from your end customers.

What customer groups do you think will lead the growth going forward based on what you are seeing today and you gave us some insight into what you saw in the quarter but what end markets are the strongest for you on a go forward basis do you think?

David Little

I feel pretty strong about all the commodity, people that being oil and gas, gold, platinum, nickel, copper all the commodity folks are blowing in Downing in trend that produce more. All the some other markets, food and beverage and et cetera they’re just – they are good markets but they’re not going to just lead the way.

The chemical market, again, refineries are not doing well but the chemical markets because of the fact that gas prices are so low are doing really well. And then all your grain handling stuff, again, making oil out of corn and stuff like that they’re doing well. Things along housing industries are bad, things that relate to that I think that might be why the aggregate markets down. We talk about oil and gas transport, is been good.

Matt Duncan – Stephens Capital Management

Okay. All right. That’s helpful. I just kind of want some insights when or where the growth will come from going forward. I appreciate it. Thanks, David

David Little

Sure.

Operator

Thank you. Ladies and gentlemen, this does conclude the DXP Enterprises Inc. third quarter 2010 results conference call. Thank you very much for your participation and you may now disconnect.

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