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Edited Transcript of DXPE earnings conference call or presentation 31-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 DXP Enterprises Inc Earnings Call

Houston Apr 22, 2017 (Thomson StreetEvents) -- Edited Transcript of DXP Enterprises Inc earnings conference call or presentation Friday, March 31, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David R. Little

DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc.

* Mac McConnell

DXP Enterprises, Inc. - CFO, SVP of Finance and Secretary

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Conference Call Participants

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* Charles Matthew Duncan

Stephens Inc., Research Division - MD

* Joseph Mondillo

Sidoti & Company, LLC - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the DXP Enterprise's Fourth Quarter Year End Conference Call. Today's conference is being recorded. 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.

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Mac McConnell, DXP Enterprises, Inc. - CFO, SVP of Finance and Secretary [2]

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Thank you. This is Mac McConnell, CFO of DXP. Good morning and thank you for joining us. Welcome to DXP's Fourth 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 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 is contained in our SEC filings, but DXP assumes no obligation to update that information.

I will begin with a summary of DXP's fourth quarter 2016 results. David Little will share his thoughts regarding the quarter's results. And then we will be happy to answer questions.

Sales for the fourth quarter of 2016 decreased 20.2% to $222.3 million from $278.7 million for the fourth quarter of 2015. After excluding fourth quarter 2015 sales of $7.1 million for Vertex, which was sold on October 1, 2016, sales for the fourth quarter decreased $49.2 million or 18.1% on a same-store sales basis. This decrease was primarily the result of declines in sales to customers engaged in the upstream and midstream oil and gas industry or manufacturing equipment for the oil and gas industry.

Sales by our Service Centers segment in the fourth quarter of 2016 decreased $47.7 million or 25.5% to $139.7 million compared to $187.4 million of sales for the fourth quarter of 2015. After excluding 2015 Service Centers segment sales of $7.1 million for Vertex, Service Centers segment sales for the fourth quarter of 2016 decreased $40.6 million or 22.5% from the fourth quarter of 2015 on a same-store sales basis. This sales decrease is primarily the result of decreased sales of bearings, rotating equipment, metal working products and safety services to customers engaged in the upstream and midstream oil and gas market or manufacturing equipment for the oil and gas market.

Sales of Innovative Pumping Solutions products decreased $6.7 million or 12.8% to $45.5 million compared to $52.2 million for the 2015 fourth quarter. This decrease was primarily the result of the decline in capital spending by oil and gas producers and related businesses.

Sales for Supply Chain Services decreased $2 million or 5.1% to $37.1 million compared to $39.1 million for the 2015 fourth quarter. The decrease in sales is primarily related to decreased sales to customers in the oil field service and oil field equipment manufacturing and truck manufacturing industries.

When compared to the third quarter of 2016, sales for the fourth quarter of 2016 decreased $7.7 million or 3.4%. Excluding $7.1 million of third quarter 2016 sales of Vertex on a same-store sales basis, sales for the fourth quarter declined $700,000 or 0.3% from the third quarter. This decrease is primarily the result of the fourth quarter containing 3, or 4.7%, fewer business days than the third quarter.

Fourth quarter of 2016 sales by our Service Centers segment decreased $12.4 million or 8.1% compared to the third quarter of 2016. Excluding sales of Vertex on a same-store sales basis, Service Centers segment sales declined 3.7% from the third quarter of 2016, primarily as a result of 4.7% fewer business days.

Fourth quarter 2016 sales for Supply Chain Services decreased $1.1 million or 2.7% compared to the third quarter.

Fourth quarter 2016 sales of Innovative Pumping Solutions increased $5.7 million or 14.3% compared to the third quarter of 2016.

Gross profit as a percentage of sales for the fourth quarter of 2016 decreased by approximately 40 basis points from the fourth quarter of 2015. On a same-store sales basis, gross profit as a percentage of sales increased by approximately 10 basis points. This increase is primarily the result of the approximate 540 basis point increase in gross profit percentage for the IPS segment combined with a 115 basis point increase in the gross profit percentage for the Supply Chain Services segment, partially offset by a 135 basis point decline for the Service Centers segment.

The 540 basis point increase from the fourth quarter of '15 and the gross profit percentage for the IPS segment is primarily the result of the unusually low gross profit percentage experienced during the fourth quarter of 2015. The fourth quarter gross profit percentage for Supply Chain Services segment increased 115 basis points, primarily as a result of decreased sales of lower margin products to oil and gas and truck manufacturing customers.

The fourth quarter gross profit percentage for the Service Centers segment decreased approximately 135 basis points on a same-store sales basis from the fourth quarter of 2015, primarily as a result of lower gross profit margins on Safety Services.

Gross profit as a percentage of sales for the fourth quarter of 2016 decreased approximately 50 basis points from the third quarter of 2016. This decrease is primarily the result of the sale of Vertex, which had gross profit percentages higher than the DXP average. On a same-store sales basis, gross profit as a percentage of sales for the fourth quarter of 2016 was flat compared to the third quarter of 2016.

SG&A for the fourth quarter of 2016 decreased $18.5 million or 25.8% from the fourth quarter of 2015. After excluding fourth quarter 2015 expenses for Vertex of $2.1 million, SG&A decreased $16.4 million or 23.6% on a same-store sales basis. The decline in SG&A is primarily the result of cost control measures, including headcount reductions. As a percentage of sales, the fourth quarter of 2016 expense decreased approximately 180 basis points to 23.8% from 25.6% from the prior corresponding period because of the cost reductions.

SG&A for the fourth quarter of 2016 decreased $5.9 million or 10% from the third quarter of 2016. After excluding third quarter expenses for Vertex of $1.9 million, SG&A decreased $3.9 million or 6.9%. This decline in SG&A is a result of the continued cost control measures.

As a percentage of sales, SG&A decreased approximately 100 basis points -- I'm sorry, decreased approximately 170 basis points from the third quarter of 2016 because sales declined 3.4% and SG&A declined 10%.

Corporate SG&A for the fourth quarter of 2016 decreased $4 million or 38.3% from the fourth quarter of 2015 and decreased $3.1 million or 32.5% from the third quarter of 2016. This year-over-year decrease is primarily the result of reduced salaries, health claims and bad debt expense. The sequential decrease is primarily the result of reduced health claims and bad debt expense.

Health claims were 1 -- were lower -- fourth quarter health claims were approximately $1,750,000 less than third quarter health claims and $1 million less than 2014 health claims. The bad debt expense in the fourth quarter was approximately $2 million less than the third quarter and the fourth quarter of 2015 as -- primarily as a result of us being aggressive on recording for bad debt expense during -- all during 2016, which turned out to be -- the results were better than we had forecast.

Interest expense for the fourth quarter of 2016 increased 27.7% from the fourth quarter of 2015 due to increased interest rates. Interest expense for the fourth quarter of 2016 declined 10.9% from the third quarter of 2016, primarily as a result of paying down debt during the fourth quarter with $45.9 million of proceeds from sales of common stock and $31.5 million of net proceeds from the sale of Vertex during the fourth quarter of 2016.

Total long-term debt decreased approximately $93.6 million during the fourth quarter of 2016. Fourth quarter free cash flow was $10.9 million. Fourth quarter EBITDA for bank purposes was $22.5 million. Our bank leverage ratio was 3.78:1 at December 31, '16.

At December 31, 2016, our borrowings under the credit facility were at a rate of approximately 5.89%, which since year-end, has increased to approximately 5.99% today.

At December 31, 2016, total outstanding debt was $225.7 million. Availability under the most restrictive covenant of the credit facility was $37.3 million. As of yesterday, our debt was approximately $4 million greater than the year-end balance.

It is very typical during the first quarter that our debt increases because of payroll taxes starting over. Property taxes in Texas are due in the first quarter and we pay most of our insurance premiums for the year during the first quarter of the year.

Capital expenditures were approximately $1 million for the quarter. Cash on the balance sheet at December 31, 2016 was $1.6 million. Net cash provided by operating activities was $12.9 million for the fourth quarter of 2016. The accounts receivable balance was $148.9 million. The inventory balance was $83.7 million.

I would like to point out that the issuance of 2.5 million shares occurred on October 31, 2016. 1/3 of those shares were not included in the fourth quarter diluted shares of 17,411,000. Therefore, the first quarter of 2017 weighted average shares should be at least 800,000 shares greater than fourth quarter share count.

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

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [3]

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Thanks, Mac. And thanks to everyone on our conference call today.

Let me begin this discussion by thanking all of our DXPeople for maintaining a collective focus and resiliency as we continue to work through the protracted downturn in oil and gas and in our industrial markets. During this time of -- during this time last year, we did not anticipate a further retraction in the market at the levels we experienced in fiscal year 2016. As such, for the past 2 years, we have operated in the midst of a prolonged oil and gas and industrial recession. DXP has executed well during this time and performed ahead of the market relative to other oil and gas distributors and competitors with like end market exposure.

DXP has stayed focused on providing our existing customers with excellent service as well as creating new customer relations and opportunities. We have also worked hard with our suppliers to bring purchase cost down and stabilized our gross margins despite the challenging pricing environment. Overall, from 2015 to 2016, DXP's gross profit margins only declined 71 basis points.

We will discuss later on, but this has been a significant win as we have fought against the downturn.

We leaned out DXP with a heavy focus on productivity and profitability throughout the organization. DXP's performance in fiscal 2015 and 2016 is a testament to the hard work of all our DXP people and teams. We have been leaner, sharper and nimble to provide laser focus on being customer-driven.

Our customers -- our sales objectives remain the same within our Service Centers and IPS business segments. Continue to cross-sell multiple product divisions and capability, increase geographic reach and industry presence, capture additional fabrication work on capital projects, target downstream Safety Service turnaround opportunity and continue to aggressively sell to existing and hunt new customers to capture more market share.

Our operational objective is summed up in one word: speed. Fast deliveries, first to serve, easy to do business with and quality products and services.

Within our SCS business segment, we are continuing to target customers that want to have cost savings in their MROP spend. As -- we are pleased as a team with our efforts in today's market environment, and we are beginning to light -- see light at the end of tunnel. We believe we are taking market share particularly in pumps and metal working and our financial results will show gains as we move forward.

During the first half of 2016, oil prices continued to decline, reaching a bottom around the mid-20s in early February. This resulted in further declines in our customers' operating and capital spending decisions as they focused on preserving and managing cash. This behavior by our customers continued through the second quarter and reached a low in early July.

Sustained oil -- low oil prices, along with a relative U.S. -- strong U.S. dollar and its negative impact on export demand continued to be a drag on manufacturing activity impacting the industrial side of DXP as well. During the second half of 2016, oil prices slowly began to rise along with the rig count, moving concerns of an outright collapse.

We -- with prices well above the lows reached earlier in February and the rig count slowly rising, market conditions started to firm along the bottom. DXP's actions during the first half on the SG&A side began to take hold and we focused on shoring up the balance sheet with a combination of free cash flow generation and capital raising.

That said, oil and gas, which is 40% of DXP's business today, has found the bottom. DXP's industrial other end markets outside of oil and gas is [60]% of our business today, which also has found a bottom and show signs of positive upward movement.

In terms of market conditions, while our oil and gas conditions remained difficult through the quarter, we experienced a better-than-expected November and December and oil prices took a jump from the mid-40s to the low 50s, beginning the week of Thanksgiving. Additionally, rig count experienced the largest monthly increase in December. That said, we historically and typically assume anywhere between 6 to 9 months between rig ramp to production impact. This was pointed out more recently in Goldman Sachs' research report. With a fair amount of DXP's oil and gas exposure tied to late upstream to midstream activity, we believe we are moving along the bottom and have not yet experienced growth or increases that will materialize.

In terms of DXP's industrial markets, the ISM PMI manufacturing index continued to expand from October a 52% rating through December a 54.5% rating, and frankly, has continued into physical (sic - fiscal) year 2017. This trend is an improvement over physical (sic - fiscal) year 2015.

This creates an interesting time for our industrial end market exposure as order volumes are clearly still down, as evidenced by DXP Service Centers results. However, there has been market improvement and optimism, and optimism, we believe, is being driven by the U.S. presidential election and a change to a more pro-business administration. Further, several factors are driving the optimism, including the potential of increased infrastructure spending, lower corporate tax rates and a reduced regulatory environment.

As we look at our financial performance, the fourth quarter reflects flat sales as compared to the third quarter and a continued softness in our end markets. DXP's physical (sic - fiscal) 2016 sales were $962 million or a 22.9% decline over physical (sic - fiscal) 2015. Acquisitions continued to contribute positively. Physical year (sic - fiscal) 2016, we added $15.1 million in sales. Cortech and Tool Supply have been great additions to the DXP team.

Supply Chain Services sales declined 7%, while Service Centers declined 25% and Innovative Pumping Solutions declined 27%. Service Centers sales were $621 million. Innovative Pumping Solutions sales were $187.1 million. And Supply Chain Services sales were $154 million.

The Service Centers sales decrease was primarily driven by declines in all of our product divisions, consistent with our oil and gas and industrial end market exposure. Innovative Pumping Solutions sales decrease was primarily driven by continued softness in our API business and more engineered modular process systems or what we call IFS. Our order intake for this year remained flat, speaking of 2016.

A majority of customers continue to tightly manage budgets, limit project opportunities, and those that are available are competitive, which continues to provide margin pressures. During the year, we were able to increase gross profit margins within Supply Chain Services by 146 basis points. While Service Centers and IPS gross profit margins experienced downward pressure by 90 basis points and 99 basis points, respectively.

DXP's overall gross profit margins decreased 71 basis points versus fiscal 2015. This was primarily a result of pricing pressure on jobs and unabsorbed manufacturing overhead for individual orders for the IPS segment and product mix within the Service Centers. This was offset by an increase in Supply Chain Services' gross margins, which were driven by higher margin product mix within Supply Chain Services.

SG&A for the physical (sic - fiscal) 2016 declined $58.3 million or 19.2% of physical (sic - fiscal) 2015. The decline in SG&A is the continued results of actions we discussed during the first quarter of 2016 and reflect our efforts to optimize the business. We continue to benefit from a decrease in payroll with incentive compensation and other expenses moving along with headcount and salary reductions.

At the end of physical (sic - fiscal) 2016, DXP had approximately 2,453 full-time employees. Again, I would like to thank -- take this moment to thank all of our DXP employees who are with us. They have done a great job making DXP a success. The cut decisions we made this year were made for the team we have in place today, and they have done a remarkable job of creating customer following that is unmatched.

Service Centers operating income of 7.7%, while IPS and Supply Chain Services operating incomes were 5.3% and 9% -- and 10%, respectively. DXP Supply Chain Services saw the operating income line increase 142 basis points year-over-year. This is mainly due to the increase in gross profit, reflecting our efforts to increase our product scope with more value-added solutions for our customers and continued push for operational excellence, applying technology in order to drive cost out of the supply chain.

DXP's overall income margin was 2% or $19.3 million, which included -- which includes corporate expense and amortization.

Earnings per diluted share for physical (sic - fiscal) 2016 was $0.49 compared to a loss of $2.68 per share in physical (sic - fiscal) 2015, which included impairment expenses and the B27 working capital expense.

Earnings per diluted share in physical (sic fiscal) 2016 include the gain of sale of Vertex. Adjusting for the gain, diluted earnings per share for physical (sic - fiscal) 2016 was $0.13.

Overall, DXP produced EBITDA of $56.8 million, including the gain on sale of Vertex and free cash flow of over $44 million. As a reminder, historically, our free cash flow has a seasonal low in Q1 and improves during the year.

In Q1 of 2016, we had a usage of $9.4 million, driven by the unexpected decline in the business and working capital working against us. In Q2 and Q3, we produced $17.7 million, $24 million in free cash flow, respectively. And in Q4, we produced $10.9 million in free cash.

During the fourth quarter, we also sold Vertex for $31.5 million. Additionally, during the physical (sic - fiscal) 2016, we raised a total of $52.2 million from the issuance of common stock in September and October. The proceeds from Vertex and the issuance of stock were used to pay down debt and meet our debt obligations associated with [DX] current credit facility.

While we do not make a habit of providing quarter or full year guidance, our view regarding physical (sic - fiscal) 2017 still remains cautiously optimistic. For the past 2 years, DXP's operated in the midst of a prolonged recession in oil and gas and the industrial sector. We have executed well, worked from a playbook that leverages the experience and talent of our team.

This has led us to outperform other peers with like end market exposure and allows us to confidently emphasize the fact that we have a business and a model that is resilient and customer-driven. We have remained focused on providing our customers with exceptional service as well as creating new customer relationships. We have used this period to retool and refocus the company, positioning DXP well for the eventual upturn in the market.

Going forward, we remain encouraged with the flattening of our business. DXP's strategic direction and cost reduction initiatives will position DXP competitively for the next up cycle. We continue to build our Rotating Equipment footprint and capabilities which we will leverage across North America.

Balanced growth, which includes organic initiatives, sales alignment, complementary acquisitions is still key to our strategy and growth. This will allow us to continue to double our business during the next up cycle and provide unmatched capabilities that focus on serving our customers.

So with that, we're now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take the first question from Matt Duncan with Stephens.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [2]

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So first thing I've got is just trying to dig in a little bit here on business trends. How did the business trend through the fourth quarter and here into the first quarter maybe on a monthly sales basis? And David, as you guys talk to customers, sort of how are you feeling about that trend line going forward?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [3]

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So was there 2 parts to that question? How we trended through '16? And then how do our customers feel about going forward?

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [4]

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Well, just the monthly sales through the quarter, and then I guess, you probably got...

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [5]

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Oh, for this quarter. Oh, monthly sales for this quarter.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [6]

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In January and February, then also sort of how you're feeling about the trend line going forward after what we've already seen in the past?

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Mac McConnell, DXP Enterprises, Inc. - CFO, SVP of Finance and Secretary [7]

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The sales per day for October were $3,481,000 per day in October, $3,627,000 -- I'm sorry, $3,626,000 in November and $3,855,000 in December. Then January of 2017 dropped down to $3,395,000 per day and February picked up to $3,828,000 per day.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [8]

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Okay. And then obviously, you guys haven't closed March yet, and the last day can be a very important day to how the quarter -- how the month closes out. But just looking at the -- at how activity levels have been through the month, would you expect it to -- assuming you get kind of a normal close out day, is March looking like it's probably up from February?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [9]

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It certainly is from a dollar perspective. From a per day, there a lot of days of March, and 23 to be exact. So I'm thinking that might be more like flat with February. We started out -- it was interesting, we started March out with a big bang, and it looked like things were really kind of rocking along. And then, really, the last couple of weeks have been a little softer, really.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [10]

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What do you think is causing that, David? Is it this drop in oil prices...

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [11]

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Well, see, I hate to think our sales follows the stock market. But it all seem to be relating to that impression, I guess. But no, I haven't dug in deep enough to know the real answer to that. Because it could have been -- it could be capital projects that just didn't close in March and are going to happen in April and things like that. So I think the general -- our general trend and our thinking is that things are improving. Backlogs are improving slightly. Sales continue to look like they're improving slightly. And so I wish I could go back to my romantic 10% days, but it doesn't -- at this point, it doesn't look like it's that strong. And part of that, again, is we're going to trail the rig count. So I think there are things and projects -- we feel really good about quoting activity. We feel really good about -- we feel good about the year, we do.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [12]

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Okay. David, on IPS, when you look at the backlog trend there, order intake and just order inquiries, how does it feel like that business is trending going forward?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [13]

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It's trending up slightly. I'm not --.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [14]

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So on a quarterly basis, up slightly from what you just reported, is the way to think about that, then?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [15]

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Right.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [16]

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Okay. All right. And then next up, on the debt situation, Mac, can you talk about -- it sounds like from your commentary that you may have a new debt structure in place. I think the press release said in the near future. How soon do you hope to have that done?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [17]

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Well, I'm going to answer that question. It's -- we're looking at 2 or 3 different options. And some are cheaper and don't give us as much flexibility, and some are a little more expensive and give us flexibility. And we're trying to -- all of them look better if we can establish an uptrend. So if we can get March trending up and December -- I mean, the fourth quarter was pretty flat with the third quarter, which was good. And then the first quarter trending up. And it looks like the world's going to trend up, well then, things get a little cheaper. And so we're not -- we're working on it. And I think we could probably pull the trigger when we want to. But we're wanting to be as smart as we can.

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Charles Matthew Duncan, Stephens Inc., Research Division - MD [18]

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Okay. And then last thing, and I'll hop back in queue, just on SG&A expenses. Mac, if I heard you correctly, it sounds like there's maybe $3 million of benefit in the quarter, give or take, that probably doesn't carry forward. So you reported $53 million of SG&A cost this quarter. Is a baseline of $56 million kind of a better place for us to be thinking that obviously trends up with revenue growth?

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Mac McConnell, DXP Enterprises, Inc. - CFO, SVP of Finance and Secretary [19]

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I think so. I mean, the health claims were down. For several years, our health claims have been running really high. But just because they're down 1 quarter, doesn't mean they're going to stay down. So they may come right back to where they were before. And then the bad debt expense, we were just more aggressive at accruing during 2016 because, I mean, all the headlines of bankruptcies of energy companies, and the result was we didn't need as much as we accrued. So that -- yes, that was kind of a one-time adjustment.

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Operator [20]

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(Operator Instructions) We'll go to Joe Mondillo with Sidoti & Company.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [21]

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The backlog at IPS, I imagine that's still down year-over-year?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [22]

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It -- 2016 -- 12/31/2016 was getting -- was down from 2015 even though it has been -- it's kind of been climbing ever since around October.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [23]

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Okay. So it is starting to -- maybe it has bottomed and it's starting to sequentially increase?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [24]

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Right.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [25]

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Okay. In terms of the margin at IPS, David, you, I believe, after that second quarter, which was a strong quarter, and we knew that wasn't probably sustainable in the near term. But in that conference call on the second quarter, I believe you stated that you thought that margins probably can still hold in at 8%, maybe not hit the 10% that we saw in the second quarter, but can hold in at the 8% sort of level. We have not seen that. We've seen 4% and 5% in the third and fourth quarter. Just wondering sort of an update on your sort of thoughts and thinking on sort of margins at IPS going forward here, from here?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [26]

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So the reason we didn't hit the percentage I thought we would is because we have been under a pretty extreme pressure on the API side of our business, which is really manufacturing and not really so much the fabrication side of our business. I think the fabrication side held up pretty nicely. And -- but the manufacturing of API pumps has, as you can imagine with the midstream market, has gotten really competitive with people trying to keep their shops busy and things like that, so the margins on that piece of the business only, almost only. I mean, there's some pressure on every job, but has taken our margins down.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [27]

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So how has the API business been sort of trending? Do you anticipate that ends up being a tailwind at some point in time in 2017? And do you think we can get into the sort of higher single digits in terms of margins relative to that?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [28]

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I think that business we're kind of climbing out of a low activity and the activity is picking up. And when it picks up, we'll -- it's not quite a seller's market; it's still a buyer's market. But so that's going to be under pressure, probably throughout this year. And then -- so I would think that we did a pretty good job overall where IPS' margins were only down 1% and I think that's an appropriate mix of what we're selling. And I -- so I think I would just stay with a consistent number.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [29]

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Okay. And on the Service Center part of the business, revenue off 25% in the fourth quarter here and yet your margins were flat year-over-year. First, number one, how are you able to sustain the margin? I'm assuming it's maybe a mix-type thing, maybe servicing is coming back? And number two, do you think that you can get more margin in the near term out of that part of the business?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [30]

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I'm sorry, but when you said margins were flat, were you talking about Supply Chain Services? Or are you talking about Service Centers?

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [31]

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No, Service Centers.

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [32]

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Yes, they were actually down 1% also, just to clarify that one point. But we feel -- we've all been under pressure. And I assume as orders start flowing in and people start doing better, then we'll all do a little better, and gross margins is -- cost of goods sold is the biggest expense we have. So again, I'm not quite sure we're out of the competitive nature of our business, so I think I would leave margins, again, for them, being around what they did this year. I think there's some upside to that, but I wouldn't count on it.

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Operator [33]

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And it appears we have no further questions at this time.

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Mac McConnell, DXP Enterprises, Inc. - CFO, SVP of Finance and Secretary [34]

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Thanks, Joe. Anybody else?

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Operator [35]

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And we do have another question from Joe Mondillo, once again.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [36]

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Sorry about that. I don't know what happened with my phone. Can you hear me all right?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [37]

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Yes. We can hear you now. You disappeared, but okay, we got you.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [38]

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All right. I don't know what happened there. But I did have 1 or 2 other questions. I just was wondering if you could update us on your strategy and venture, or with the Pump side of the business, trying to establish your own manufacturing capabilities to replace your -- the Goulds business. If you could update on how that's going and trying to take share and that whole process?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [39]

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Yes, so that's fun stuff. We're -- we had a very successful year on the -- on what we call our PumpWorks Industrial line of products. That's different than our PumpWorks610, which is our API stuff. So our API, which is big, large jobs of -- that business became soft and the midstream people were not building as many pipelines and stuff like that. So that piece of it is what I was referring to earlier, as being down and under a lot of pressure. The PumpWorks Industrial side is -- sold onesies, twosies. It's not always a big capital project. We sell Vikings, we sell Wildens, we sell our PumpWorks product. And that particular market, it's not quite as sensitive because the orders aren't big. And so our margins are okay in that side and the volume of business is down but it's just down because there's just a lot of customers doing less work. That particular part of the business is really up for us as it relates to PumpWorks though. PumpWorks Industrial has -- is taking market share every time it sells a pump. And we've replaced most of what DXP used to do with Goulds. And we feel really, really good about that, and we're going after the Goulds direct accounts. And to do that, we got to get on the manufacturers' authorized list, which we have many, many, many success stories in doing so, and so we feel very, very good about that. We also feel good about setting up some other distributors on that product line to start reaching more geographies and gaining more presence and quicker than us trying to open up our own store, which we're not very good at. And then hopefully, some of those distributors we set up and open up, they'll actually become acquisition targets in the future. So we think that's a really strong plan to increase our business with PumpWorks Industrial and it is working. And we have done what I'm talking about. It's not just an idea, we're executing that. And we feel really, really good about our growth at PumpWorks.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [40]

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And how significant do you think that will be to the gross margins given now that you're manufacturing some of these pumps that you used to pick up from Goulds?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [41]

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Right. So it's -- I'm going to be as transparent as I can. If it's us manufacturing it and DXP selling it to one of its existing customers, our margins are much higher. They're higher, they're great. And -- but if our margins are against a Goulds direct account, well Goulds is selling direct, and now, we're selling direct, and so our margins will be lower in that particular instance, but they're still very acceptable margins. If we sell to another distributor, well now, we're cutting the pie in 2, and so our margins get a little -- they get lower in that environment. So the more we sell direct to just the typical oil and gas customer that we used to sell, we have a lot of room to play with margins and we're doing really, really good at that. And we're doing really good against some of Goulds' direct accounts. We tend to -- my operational statement is we think speed kills. And what we mean by that is that we just can deliver faster, we can -- we'll be there faster. We'll do warranty faster. We'll do services faster. We'll do everything. And so speed kills competition. And so we feel good about that. So that wasn't a very clear answer on margin improvement because some of it will be increased and other parts of it will be just kind of normal.

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [42]

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No, I understand. It's a tough question to actually answer, so I appreciate that. But -- and 2 last questions, just in terms of the Vertex business that I believe you spun off or divested at the beginning of the fourth quarter. So you saw almost a fourth -- a full quarter without that business. Just wondering, the seasonality of that business, did the fourth quarter tend to be seasonally a weak quarter for that business? Or was there any seasonality in it at all?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [43]

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They were master distributors selling to other distributors. And I guess that the other distributors wanted to reduce their inventories towards the end of the year. Their fourth quarter might have been a little seasonal. But I don't remember it being...

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Mac McConnell, DXP Enterprises, Inc. - CFO, SVP of Finance and Secretary [44]

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Yes, I don't remember it being seasonal. If you look at -- I'm looking at the 2015 history, and it would appear that it was seasonal because it started off with a level of $9.3 million or $9.5 million of sales in the first 2 quarters, and then dropped to $8 million to $7 million. But I don't think that was seasonality. I think that was what was going on in the fourth quarter of 2015. So ...

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Joseph Mondillo, Sidoti & Company, LLC - Research Analyst [45]

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Right. Okay. Lastly, I don't know if you mentioned this. But in terms of the timing of the debt restructuring, is there any timing that you're sort of thinking about?

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [46]

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I think we would like to -- we don't want to scare everybody. So we're not -- we're going to try to do something sooner than later. But I still think that it -- I'm thinking sometime in the summer.

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Operator [47]

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And we have no further questions at this time.

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David R. Little, DXP Enterprises, Inc. - Chairman, CEO, President, Chairman of Sepco Industries Inc., CEO of Sepco Industries Inc. and President of Sepco Industries Inc. [48]

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Perfect. Thanks for everybody for joining us. We had a good quarter and we look forward to having a great year. Thanks.

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Operator [49]

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And that will conclude today's conference. We appreciate your participation. You may now disconnect.